A Nice Problem for Toyota

Lexus Hybrid SUV Is 'It Car' for Celebrities; What Does That Mean for Its Future Plans?

May 16, 2005
Sales of some of Detroit's big sport-utility vehicles have skidded into a ditch. But at Lexus Santa Monica, general manager Don Mushin has a different kind of problem with Lexus's newest SUV model, the gas-electric RX400h.

Mr. Mushin says his challenge isn't how to sell hybrid RX crossover utilities, but whom to sell them to. Lexus Santa Monica has decided that running a waiting list is a recipe for unhappy customers.

"We decided not to take [waiting] lists," Mr. Mushin says, adding that "we saw what happened at Toyota dealers" that took waiting lists for the Toyota Prius. Long waits for the Prius have left a lot of Toyota customers dissatisfied. Mr. Mushin says that with his clientele – heavy with Hollywood A-listers – it was better for Lexus Santa Monica to identify loyal customers and offer them a shot at an RX400h as the vehicles came in.

"We have customers with three to 15 cars [purchased] with us," he says.

Salespeople at Lexus Santa Monica are in a rotation. When an RX400h hits the lot, they get 24 hours to identify a customer and sell the vehicle. Dustin Hoffman got Lexus Santa Monica's first RX400h, Mr. Mushin says.

"We've delivered 30 so far," he says. "Our allocation is 18 a month."

Nationwide, demand for the hybrid RX400h, which went on sale April 15 at a sticker price of $48,535, has resulted in as much as six-month waits at some dealerships, says Jim Press, executive vice president and chief operating officer of Toyota's U.S. sales operation.

The burst of interest in the hybrid RX shouldn't have come as a total shock to the industry. AutoNation Chief Executive Officer Mike Jackson predicted back in January that Lexus's clean-running, gas-electric luxury SUV would become a status symbol, and a huge hit. It looks like he was right. This creates some headaches for Toyota. But they're the kind of headaches a company wants to have.

Toyota may lose money on the hybrid RX, despite the premium customers have to pay to get it. Still, having your vehicle become the it car among A-list celebrities is priceless. As one Detroit executive observed, Toyota could legitimately finance any losses on hybrid vehicles out of its marketing budget.

Lexus spokesman Bill Ussery says Lexus has sold 2,885 RX400hs through May 12. As more vehicles leave the port, waiting times should shorten as customers who put down deposits at several dealerships get an RX400, take back their deposits at other dealers and allow other buyers to step up. Currently Mr. Ussery says average waiting times for the RX are moving down to about 90 days.

'DAYS TO TURN' BY FUEL TYPE

How long does it take dealers to turn over inventory of a vehicle? Depends what kind of fuel it uses.

Fuel Type/Average Buyer Age/Days to Turn Fuel Type/% of Total
Diesel/45/53/3.10%
Flexible/45/97/2.60%
Gas/46/65/92.70%
Hybrid/50/16/1.60%

Toyota's U.S. sales executives did manage to increase the share of RX400h production shipped to America. Lexus dealers should get about 28,000 hybrid RXs this year, about 4,000 to 6,000 more than originally planned, Mr. Ussery says.

But Toyota's hybrid production volumes are still limited, mainly by the supply of hybrid drive components. Among the obvious questions: 1) how far will Toyota press this hybrid business, and 2) what kinds of investments in new factories will that require?

The answers appear to be, 1) pretty far, and 2) big ones, including some substantial moves in North America.

Toyota has already said it expects to sell a million gas-electric hybrids a year by early in the next decade. "I think, personally, by 2030 everything will be a hybrid," Mr. Press says, adding that his definition of hybrid is broader than just a Prius-style, gas-electric car. Hybrids could be diesel-electric, or even cars equipped with fuel cells that use hydrogen to create electricity. Toyota's plan is that when (or if) fuel cells become viable, the same electric-drive technology used in other kinds of hybrids will be used in fuel-cell cars. Effectively, the fuel cell will replace the petroleum-fueled engine.

"In my mind, if everything isn't a hybrid, there's something wrong," Mr. Press says.

But that's a long way off. Soon, Toyota will offer gas-electric versions of the Lexus GS sedan, the Toyota Highlander mid-sized crossover, and the Camry midsized sedan. Soon, Toyota is expected to announce that hybrid Camrys will likely be produced at its factory in Kentucky. California and Michigan are among the states competing to get new Toyota hybrid-car factories. "We're studying hybrid applications for the Tundra and Sequoia," Toyota's large pickup and SUV models, Mr. Press says. Hybrid versions of those vehicles won't come until they are redesigned in the next two to three years. In the meantime, Toyota's Sequoia isn't the leader of the pack in terms of mileage in the large SUV segment. The Chevy Tahoe averages 17 miles per gallon in combined city/highway mileage, according to the government. The Sequoia averages 16 miles per gallon.

Toyota's success – symbolized by the frenzy for its hybrid vehicles and its outsized profits – is a big worry for Detroit's Big Two, General Motors and Ford. It's a concern for Toyota, too. Toyota's chairman, Hiroshi Okuda, made waves earlier this month when he suggested Toyota might raise prices to help Detroit. He and his aides have had to scurry around since, clarifying that Toyota plans to compete as always without trying to manipulate prices.

Mr. Press, during a dinner with reporters last week, says Toyota wants "win-win" relationships among the industry's big players. "Obviously, when other companies are having trouble we want to be careful," he says. "We don't want to step on toes."

But Mr. Press observes that when Toyota was investing in hybrid technology during the 1990s, a lot of rivals dismissed the effort. "We invested in hybrids," he says. "Another company bought a humongous SUV company. You make your decisions and you live with it."

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