What is the Lexus effect?
The Lexus effect, steamed or stir fried?
Japanese car manufacturers have managed to transform the automotive industry through innovation and lean processes. They have taken the best from the West and made it simpler, better, faster, cheaper. But things have not always been so rosy for them.
In his book Making and Selling Cars: Innovation and Change in the US Automotive Industry (2001), James M. Rubenstein explains in great details that, in the 90s, the equation for lean production often added up to [quality+productivity+low profits]. At the time, DCX, Ford and GM averaged $700 profits per vehicle, but Honda, Nissan and Toyota averaged $300. Whatever the average selling price was or whatever volumes were being sold, Japanese firms used to have lower profits because of higher staff, marketing, distribution, admin costs and intense currency fluctuations … but more importantly, because of the Lexus effect.
Rubenstein explains that the term refers to the history of the Lexus, first introduced by Toyota in 1991. The Lexus was a luxury vehicle with quality ratings topping the charts. But to reach such high quality, Toyota empowered engineers to overcomplicate design standards. For instance, Lexus did not range a convertible partly because the top-opening mechanism had to be opened 1,000 times at -30˚C. That is one heck of a quality test to ensure that Eskimos can drive convertibles one would argue.
The Lexus effect therefore means that high quality rapidly became expensive for the company and this issue quickly bounced back on street prices. Rubenstein explains that between 1985 and 1995, the average price of a Japanese car for US consumers jumped from $10,800 to $25,000 – suddenly making domestic cars more affordable. Consequently, Japanese manufacturers looked for improvements in quality and productivity that would yield cost savings and provide faster return on investment. It was all about Kaizen, cost-effectiveness, speed and economies of scale – the birth of optimum lean production.
Rubenstein illustrates such improvements through a new process of triage under which defects were categorised as those that consumers will see, those that they might detect and those that they will not find. By the start of the 21st century, the third type of defects would be allowed in the supply chain. They even went as far as setting cost savings targets so that profits would be made even if the Yen was undervalued.
From then on, optimum lean production turned the equation to [quality+productivity+high profits]. The Lexus effect marked the tipping point towards optimum lean production and is probably not acknowledged well-enough in the automotive industry, or for that matter, in any fast-moving industries where companies have to improve and react to competition in a blink. Do not overcomplicate processes – the simpler the better.
Now, if you are the proud owner of a Lexus, take it apart and check if you see any defects …
