New Kid on The Dock

At first, it sounded like a major marketing disaster in the making. Last December, only three months after the highly touted Lexus LS400 luxury sedan had been introduced in the U.S., Toyota announced the recall of all 8,000 cars it had sold at that point. The news sent a shudder through Lexus' spanking new North American dealership network. "My first reaction was, 'Oh, my God, here comes trouble," ' says Ken Meade, owner of Lexus of Lakeside in suburban Detroit.

What happened next, however, might be called Zen and the Art of Automobile Maintenance. Toyota had taken its sweeping action on the basis of just two consumer complaints, one about a defective brake light and the other concerning a sticky cruise-control mechanism. "The company didn't run and hide," recalls Meade. "They stepped right up" and made changes in all 8,000 cars. Lexus owners did not even suffer the inconvenience of a trip to their dealership: within a few weeks, their cars were picked up, repaired and returned to them. To serve 10 Lexus owners in Grand Rapids, 150 miles away, dealer Meade flew in technicians, rented garage space, fetched the cars, fixed them, washed them and sent them back home.

"We saw it as an opportunity to cement our relationship with the customer right from the beginning," says Dave Illingworth, general manager of Lexus in the U.S., which picked up the undisclosed cost of the recall operation. That assiduous concern has paid off in spectacular fashion: from a cold start one year ago, Toyota's luxury division in July swept past both Mercedes-Benz and BMW in the vital U.S. auto market. Although Mercedes retook the lead during August, the Lexus performance sent shock waves through the global auto industry. BMW and Mercedes have seen their U.S. sales dip 29% and 19%, respectively, over the past three years at an estimated loss of $1 billion each in revenue in that market.

Toyota's fast trip to the top came courtesy of just two models: the $38,000 LS400, a four-door sedan powered by the first Japanese V-8 engine to hit the U.S. market; and the $21,300 ES250, a smaller, six-cylinder sedan. The bulk of sales have come from the LS400, a model that Car and Driver magazine rated as better than both the $63,000 Mercedes 420SEL and the $55,000 BMW 735i in terms of ride, handling and performance. Up against the industry's pedigreed names, Lexus has created virtually instant brand loyalty, a feat unprecedented in the luxury-auto market. Charles Ruffner, a tax attorney in Miami, is a Lexus convert after owning four Mercedes-Benz over the years. "The Lexus is the best car I've ever had," says Ruffner, who describes the Mercedes as "Teutonic and utilitarian, like driving a Jeep," and its dealers as "arrogant."

One of the biggest surprises for Ford and General Motors was that 35% of Lexus buyers traded in a luxury American car to make their new purchase, something no one, not even Toyota, expected to happen so quickly. While sales of Lincolns and Cadillacs have been strong this year, the quick loyalty switch is worrisome news. "It's already a nightmare for European and American luxury carmakers," says John McElroy, editor in chief of the Detroit trade publication Automotive Industries. "Right out of the box, Lexus made a car that was more technologically advanced than anything it competes with."

The Lexus owes its allure to 300 subtle technological innovations that add up to a remarkably quiet and smooth ride, even at speeds of up to 150 m.p.h. in the LS400. The Lexus' computerized engine-control system, for example, retards the engine's r.p.m. just before a gear shift, which reduces the lurch common to many automatic transmissions. The car bristles with luxuries as well: a steering column that automatically adjusts to different drivers, heated seats and an optional telephone mounted in the steering wheel.

The Japanese push into the luxury market began with Honda's introduction of the Acura Legend in 1986 in the European and U.S. markets, but the trend has accelerated markedly in the past year. Nissan introduced its Infiniti line of cars in the U.S., featuring the opulent V-8-powered Q45 and the smaller M30, and is adding a new car this month. Another Japanese manufacturer, Mitsubishi, plans to introduce a luxury car next year.

The next marketplace ripe for Japan's "luxmobiles" is Europe. The Lexus went on sale in Switzerland and Britain earlier this year, and in 1991 will hit Germany, France, Italy, the Netherlands and Sweden. In an interview early this year, BMW chairman Eberhard von Kuenheim accused Toyota of "dumping" Lexus in the U.S. market at below-market prices, and declared, "Europe is not willing to destroy its own industry" by giving Japan free access. Toyota calls that charge "groundless and meaningless," but spokesman Yoshiharu Tateishi says, "We are fully aware of the trade friction, and our approach will be modest and prudent."

Von Kuenheim's concern stems at least in part from a fact that U.S. car manufacturers learned painfully in previous decades: Japanese automakers, according to a recent M.I.T. study, assemble their luxury cars in a mere 25% of the man-hours -- 16.9 for each auto -- that their European competitors need. Japan has gained a huge advantage by applying flexible automation to the task of building well-crafted cars, while Europeans do a greater portion of the work by hand.

For now, both BMW and Daimler-Benz, the maker of Mercedes, are flush with profits, thanks in part to the booming German economy. BMW aims to produce a record 520,000 cars this year, up 1.6% from 1989. Both companies proclaim their readiness to take on the Japanese luxury cars, but their fear is showing. "The Lexus is not a Mercedes, but as a portent of what they are able to do, it is more worrying," says John Evans, a British spokesman for Mercedes. "You ignore the Japanese at your peril."

Such concerns have spawned a heated debate in Europe about how to prevent layoffs and plant closures like those that occurred in the U.S. as Japanese automakers gobbled up 23% of the American marketplace. As a result of formal and informal quotas imposed by France, Italy, Portugal, Spain and Britain, the Japanese share of the European car market has remained steady at around 10% for the past four years. At one extreme are France and Italy, whose draconian protectionist policies have limited Japanese cars to 3% market shares. At the other is West Germany, whose laissez-faire stance has allowed the Japanese to capture 15% of that market. Lexus, which is moving cautiously into the protected European market, plans to sell only 2,500 autos on the Continent this year.

Most Europeans believe a "transition" period is necessary to give their automakers time to improve their productivity, but the countries disagree over how long this should go on. France's Minister of European Affairs, Edith Cresson, says liberal policies will result in the "murder of the European car industry" and argues that the Community should impose a 10-year transition period, starting in 1993, during which Japanese imports would be kept at current levels. The European Commission, which is negotiating a deal with the Japanese, is pushing for a five-year transition.

For the Japanese, the venture into luxury cars is a long-term experiment that will determine the industry's direction in the 1990s. Lexus' success is the product of a lengthy exercise in product development, even by Japanese standards. Toyota spent six years and more than $1 billion developing the auto, and built 450 prototypes -- three times the usual number -- to get the product right. The firm spent two years just deciding on the type of leather interior to use, and top management pondered for three years before approving the car's styling.

One question that Toyota management might be pondering now is whether, with prices up at the pump because of the gulf crisis and consumers about to give more thought to automobile fuel efficiency, Lexus' gas-hungry V-8 (18 m.p.g. in the city, 23 on the highway) may soon prove a sales liability. So far, that has not been a problem, and Lexus meanwhile is preparing yet another challenge to the world's luxury carmakers: a $30,000 luxury coupe that will roll into dealerships next spring to compete with the Acura Legend, Cadillac Eldorado coupe and Lincoln Mark VII.

CHART: NOT AVAILABLE

CREDIT: TIME Chart by Steve Hart

CAPTION: NUMBER OF CARS SOLD IN U.S.

Jan.-Aug. 1990