As Prepared for:
Bob Carter
Lexus Group Vice President and General Manager
Toyota Motor Sales, U.S.A., Inc.
Morgan Stanley Global Automotive Conference
New York, NY
Good afternoon. I'm pleased to be here and to represent Toyota Motor Sales at this conference. Now, I realize that lunch is a tough act to follow, so, I'll do my best to be brief, to be interesting and to leave a favorable impression.
So let me start by getting the disclaimers out of the way. Our standard disclosure is on the screen right now, and if you are a good audience, I won't make you sign the forms our lawyers sent with me. The other disclosure is that my responsibility at Toyota primarily involves the luxury market and the Lexus side of the house, so I can't speak in great depth about our overall business. Other than that, we're going to have a great time together. I plan to cover three areas that are of great interest to you:
- Our company's first quarter results
- Our outlook for the industry and Toyota
- And the incredible boom that's going on in today's luxury market.
Let's start with overall TMS highlights for the first quarter of 2006. Sales for Toyota, Scion and Lexus totaled 544,851 vehicles -- our best ever first quarter in 49 years of doing business in America. That's up 7.4% and gives us a market share of 14.2%. Camry is still the No. 1-selling passenger car in the nation and the 3rd best selling vehicle overall.
Lexus is the best-selling luxury brand and has been since the turn of the century. In fact, Lexus sales are up 7.8%, so I'm putting in for a bigger bonus!
Scion is continuing its strong growth with sales up 10.3% in the first quarter. More importantly, the new brand is doing a fantastic job of attracting new, young buyers to the Toyota family. Four out of 5 are new to Toyota and the median age of Scion owners is 31, the lowest of any brand in the industry.
As a result, Scion is serving as an excellent "gateway" into the Toyota family and is giving us the opportunity to create lifetime customers by moving buyers into Toyota and Lexus products as they progress through life. We're already seeing early indications of that, with over half of Scion owners replacing their vehicles with a Toyota, another Scion, or a Lexus.
So all in all, we had a good first quarter and we're on track for another record-breaking year in 2006. We plan to grow sales this year by 5 to 10 percent, thanks to an incredible flow of new products, including an all-new Camry and an all-new Lexus LS sedan, our luxury flagship. In all, we plan to introduce 12 new or updated vehicles this year, plus an additional 10 Toyota and Scion special editions, for a total of 22 fresh vehicles in all.
OK, so Toyota is doing well, but what about the overall industry?
Well, the industry is coming off its third best year in history and first quarter sales were 1.1% ahead of last year. There's some serious re-structuring that will undoubtedly cause some pain, but overall, the industry has remained quite healthy. As a result, we're cautiously optimistic and projecting annual industry sales of about 17.0 million this year, up just a hair over last year (SAAR thru Q1 = 16.9). That's not only a solid year, but would make 2006 another "top three" year in automotive history.
What's more, we think it's just the beginning of even better times to come. For the long term, we believe a new boom in our business will put annual sales of 20 million within reach during the next decade, and that the whole industry will benefit from the rising market tide.
So, where's this new boom coming from? Well, as we see it, from several powerful forces aligning and converging in the next few years. Forces like population growth, immigration and economics.
Consider this. First, people are living longer and driving longer. At 78 million strong, baby boomers are alive, and well, and living to an average age of 77-plus. This generation grew up in the muscle car era. They love the freedom that automobiles provide and they won't give them up any time soon. CNW Research notes that 7 vehicles, more than half of the 13 cars the average American buys over a lifetime, are purchased AFTER the head of the household turns 50. When you realize that 60% of the U.S. population will be 50 or older in the next five years, and they control half of ALL consumer spending (more than $2 trillion a year), you understand what a truly enormous opportunity lies ahead.
And that's not all. The best part is this economic juggernaut is still in first gear. Baby Boomers won't reach the height of their spending power until 2009. So hang on, we're in for a wild ride.
Adding to the favorable climate is the maturing of Generation X. They already buy more than a fifth of all new cars and are entering their family years when they'll need bigger and more varied vehicles.
Then, in 2010, Generation Y, the second largest generation of all time, will start flexing its muscles by buying one of every four new cars. All throughout this decade, 63 million Gen Y consumers are reaching driving age and getting their licenses. These young consumers are not only smart and savvy; they have more disposable income than any previous generation.
One out of three high school seniors carries a credit card, and together, teenagers and college students now control $375 Billion in spending power. All of these positive generational trends will also be joined by another strong movement, immigration, because America remains the strongest beacon of hope and opportunity on the planet.
The overall impact of these forces converging together is just astounding. During the next 19 years, the population of the United States will increase by 70 million! That's equal to the population of California, New York, and New Jersey…COMBINED! In real terms, it means we are adding one new person to this economy every 14 seconds.
In fact, American Demographics magazine says growth in the next two decades is so strong that it will rival the growth America experienced right after World War II. And, of course, we know what happened when all those lonely soldiers came home from the war, don't we? That's right, they created the original baby boom!
So, we foresee a day in the not too distant future when another huge boom generation, let's call it "Gen Z" for now, will arrive on the scene and drive our business even higher.
Along with phenomenal demographics, market drivers are on our side, too. Our GDP and consumer spending are positive, jobs are increasing, and productivity is rising. Plus, many experts believe a new tech boom will further stimulate our economy as information technologies build out, mature, and become an even bigger part of our everyday life.
We're already seeing evidence of this with the iPodding of America. Digital music and video are now everywhere; in our pockets, phones, TVs, computers, Palm Pilots. We're even putting a hard drive in the dash of our new Lexus LS so owners can enjoy 2,000 of their favorite songs.
This "adoption phase" of the Information Age, coupled with coming revolutions in biotech and nanotech, create the potential for an extremely strong economy in the coming years. Or, as my boss likes to say, it will be a new "Golden Era" for our business.
Now, lest you think we're a bunch of Pollyanna's, we fully realize there are some potentially dark clouds on the horizon and we must watch and manage them carefully. Fluctuating gas prices, rising interest rates, inflation and the industry's restructuring, can all take some wind out of our sails.
But we remain confident that the underlying strength of our economy, phenomenal consumer growth, and ongoing technological advances, will create a much brighter tomorrow for the United States and our industry.
Okay, now let's talk about my favorite subject, the luxury market. Last year, the luxury market was responsible for 1.9 million very profitable sales. But that's just the beginning. We forecast sales climbing 26% to 2.4 million vehicles in the next six years.
This growth can be attributed to several sources. First, as I mentioned earlier, the boomers command great wealth, are driving longer, and are seeking rewards for their years of hard work. Second, Gen X consumers are starting to move into leadership positions and will seek vehicles that reflect their new position in life. Third, the Gen Y's are entering the business world and have much higher expectations about their cars than any previous generation.
According to a 2005 Maritz study, three out of the top 10 vehicles young buyers plan to purchase next are luxury vehicles, including Lexus.
Well, you've got to admire their spirit, they've got good taste.
And we expect many of them to become good customers when their paychecks catch up with their aspirations.
Along with these generational shifts, the luxury market is just on fire right now. Last year, the market for all luxury consumer goods in the U.S. totaled about $440 billion, that's bigger than the gross domestic product of Saudi Arabia. And, the trend is getting stronger every year. Luxury consumer goods are expected to jump 15 percent annually in America to $1 trillion in 2010, that's more than 100 percent growth in five years!
So, how is Lexus responding? Well, as we see it, the American luxury auto market continues to evolve into two distinct, major segments, mainstream luxury at the foundation, and a growing prestige segment at the high end. As we define it, prestige luxury vehicles range anywhere from $70,000-plus to the $1.2 million Bugatti Veyron.
Let's take a closer look at each segment. Prestige luxury buyers typically look for status, craftsmanship, innovation and design in their cars, and they're willing to pay for it. The Mainstream luxury segment originally consisted of "Traditional" buyers, those who were mainly interested in performance, heritage, and status. When we introduced Lexus in the late 1980s, we positioned it as the "smart" choice and a "New Values" buyer began to emerge. These buyers generally are less interested in status and more concerned about quality, dependability, comfort, value and unsurpassed service. Seventeen years later, they've become the main portion of the mainstream luxury market.
Today, the "New Values" segment, led by Lexus, makes up about one million of the 1.8 million buyers. The Traditional segment, led by Mercedes and BMW, accounts for another 800-thousand.
The high-end Prestige luxury segment, piloted by Mercedes, is much smaller at 100,000 vehicles, but sales are highly profitable and have doubled in five years. This breakdown of the luxury industry clearly shows some excellent opportunities for Lexus to grow in the future.
Our plan is to increase our lead in the mainstream "New Values" segment, to expand further into the traditional mainstream area, AND, to go upscale with some new products that will appeal to prestige customers.
In fact, we've already started to move on all three fronts. Last year, we moved into the "Traditional" mainstream segment by launching two bold new "performance sedans", the new GS and IS. And they're both doing great. The GS is up 15% in the first quarter and the IS a whopping 897%.
This month, we're launching the world's first performance hybrid sedan, the GS 450h. It's the first "full hybrid" with a rear-drive powertrain, and it's quick. I'm talking about 339 horsepower that will rocket the GS from 0 to 60 in just 5.2 seconds. Believe me, the GS 450h will smash the myth that a hybrid vehicle can't be powerful and exhilarating to drive.
And, it's also responsible, getting an estimated 26 miles to the gallon in combined driving and producing 80 percent fewer smog-forming emissions than the average new car. We call it "performance redefined" because it adds a marvelous new dimension to hybrids.
As a result, our luxury hybrids offer 6 key benefits:
- Incredible power and acceleration
- better fuel efficiency
- 80% cleaner smog-forming emissions
- fewer greenhouse gases
- quieter performance than conventional vehicles
- legendary Lexus luxury throughout
At the same time we're going after performance-driven customers, we are also planning to expand our lead in the "New Values" segment with the launch of two fresh new vehicles.
The first is the new RX 350 SUV, the nation's most popular luxury vehicle. The new model includes 29 improvements and upgrades that make it faster, quieter, cleaner, and more fuel efficient than ever.
The second is the sleek, all-new ES 350 sedan that debuts next week. It's better in virtually every way than our original LS flagship sedan that set a new benchmark for luxury in 1989. The new ES is faster, quieter, and nearly as roomy as the early LS, plus it offers an impressive array of technology rarely found on a near-luxury car. Features like a six-speed transmission, push button start, and even water repellent glass to bead rainwater for better visibility. And the interior is unbelievably upscale in terms of its leather and wood as well as fit and finish. And you get all of this for just over 33 thousand dollars.
Both the new RX and ES will fully reinforce our smart luxury position and help us widen our lead in the larger "New Values" segment of the market.
We also plan to grow Lexus a third way, by expanding into the fast-growing prestige luxury segment. This move is about much more than just going after higher profit sales. The prestige market is the key to image development and overall luxury success. We learned that from visiting with America's top car collectors like Jay Leno, and by doing extensive interviews with executives from dozens of European prestige brands like, Givenchy, Gucci, and Prada. We discovered that these luxury icons make exceptionally high-end products to build their image, and then rely on mainstream luxury items for the bulk of their business.
The secret to success is setting the bar extremely high for prestige customers, and that's what we plan to do with Lexus. In fact, I'm going to give you a sneak peek at an exciting new prestige product we've got coming in just a few minutes.
So, we have some fantastic new products coming to market, but the hallmark of Lexus has always been, and will always be great products AND great service.
So, I want to spend a few moments telling you about the advancements we're making to improve customer care and the ownership experience. You know, I always like to talk about the fact that, at Lexus, we have a close partnership with our dealers. We provide great products, and they provide great facilities and people that create the best customer care in the business. That's a MAJOR differentiator for Lexus, and perhaps the most valuable asset of our brand.
And thanks to our excellent dealers, I'm proud to say that Lexus, at 63%, has the highest loyalty rate among all luxury manufacturers AND the entire industry. That doesn't mean we're satisfied. We'll keep working hard to get that remaining 37 percent back into the Lexus family.
We're also leading in one of the most crucial elements manufacturers should focus on dealer profits. Lexus average dealer profits are the highest in the industry. Why is that important? Because strong profits mean dealers have the money to invest in superb customer care that will keep their owners happy and coming back. Plus, when the return on investment is very high, dealers' confidence in their Lexus franchise grows and they plow their own money back into the business to make it even better. As a result, during the past 3 years, Lexus dealers have spent nearly half their own profits, more than a billion dollars worth, on facility improvements.
Some are going all out. For instance, one of our dealers in California plans to spend $60 million alone on his Newport Beach dealership. Another dealer in northern California is building what can be described as the "Dealership of the Future". The goal is to create a warm and welcoming place where guests feel pampered and indulged while working in harmony with our environment. The new facility will have solar panels on the roof, energy-efficient lighting, and the latest in air conditioning technology.
And there's more, massage chairs with wireless headphones, a Lexus Oasis bar for refreshments, a VIP area offering manicures and pedicures, TWO children's play areas, and a parts shop, oops, I mean, parts boutique that will sell luxury items along with shock absorbers.
Our goal is to raise the ownership experience while making the best use of our customer's time. I mention these examples to illustrate that Lexus strongly believes in taking a holistic approach in the future, one that focuses as much on the care of our CUSTOMERS as it does on the QUALITY of our products.
In addition to the industry's best quality, this higher level of customer service from our dealers is the one of the most important differentiator we have from BMW and Mercedes and helps create a unique quality/value proposition that makes Lexus the "intelligent choice". That, plus our segment expansion plans is why we believe Lexus is perfectly positioned to prosper mightily from the booming luxury market.
And now, for the surprise I promised you. We plan to introduce our first high-end, prestige-level product next year and we're unveiling it tomorrow at the New York Auto Show. So, you'll be the first group, outside of our company, to see and hear about it.
I'm talking about, the "King Kong" of hybrids, the world's first, V-8, hybrid sedan. The LS hybrid will feature a new, 5-liter, direct injection V-8, matched with a powerful electric motor. Together, they produce over 430 horsepower and amazing torque that will rival the performance of some V12 engines.
Besides being the fastest Lexus, this new hybrid will be exceptionally clean and efficient. It's expected to carry a Super Ultra Low Emission rating and produce 80 percent fewer smog-forming emissions while delivering about 30 percent better mileage than its, big, V-8 competitors.
Beyond amazing performance and environmental responsibility, the LS hybrid will be chock full of incredible new technology:
- Intelligent park assist,
- Cabin AND body temperature sensors,
- Optional pre-collision camera
And since LS Hybrid uses electric motors, its noise, vibration and harshness level is about half that found in conventional cars, creating a super smooth, extremely powerful, and remarkably quiet ride.
We firmly believe this new flagship model will not only expand the definition of hybrids, but also propel Lexus into the prestige segment. We're also studying the production of more prestige luxury products. Vehicles like the LF-A super car "concept" we unveiled last year in Detroit. Our goal is that these products will not only be styling knockouts, but also employ the latest in technology from our global Formula One racing teams.
So, in a nutshell, our overall Lexus product strategy is to continually expand the boundaries of Lexus by adding new and unique elements to our core attributes of quality, dependability, comfort, value and an unsurpassed level of luxury. We're doing that by using more emotional styling for our vehicles, adding breath-taking hybrids, and developing prestigious high-touch, high-tech vehicles for the future. All of these elements will greatly broaden our appeal, give Lexus a much stronger point of difference, and lead to higher sales.
Well, by now, I hope I've made a solid case for your continued interest in Toyota. We are a strong company, with the right strategies, and the right people, to take full advantage of the changing world and the immense opportunities that lie ahead.
We're excited about the bright future and appreciate your continued interest, thank you.