Toyota Motor Corp. (TM) has built a reputation as a maker of safe and dependable vehicles. But the events of the past few weeks have dealt a significant blow to this once lofty standard, as it has had to deal with the worst recall crisis in its history. Indeed, the company has had several major vehicle recalls, and its stock price has been taking a beating, down about 20%, since most of the bad news started rolling in last month.
Toyota initially announced a recall of about 4.2 million automobiles at the end of 2009 due to gas pedals that could become trapped under floor mats. That problem was the cause of several crashes, including a few fatalities. Then, the company announced another recall of 2.3 million cars in the U.S. due to a problem with a sticking accelerator pedal. Apparently, the pedal could stay stuck in a partially depressed position or return slowly to the idle position. This problem has occurred in fewer than 20 cases, according to the company, and has never been linked to any accidents. Other recalls in China and Europe were announced in the following days. The recall affected some of the company’s top sellers, including Camry, Corolla, and Tundra. The company then suspended U.S. sales of eight models during the first week of February in order to fix the faulty gas pedals.
And as if things couldn’t get any worse, the company just announced that it is recalling 437,000 Priuses and other hybrid vehicles globally in order to fix brake problems. The problem is with the car’s regenerative brakes, which help charge the vehicle’s electric batteries. The Prius, the world’s top selling hybrid and Japan’s top-selling car, a first for a hybrid, is Toyota’s pride and joy. This recall has now tarnished this brand’s image as well, potentially opening the door for other competitors to take the lead in the hybrid market, including the Ford (F) Fusion.
All told, as of the timing of this report, the total number of Toyota recalls has swelled to more than 8.5 million vehicles worldwide. Toyota’s president Akio Toyoda has been criticized for being largely invisible in the couple of weeks after the company made its sticking accelerator pedal recall, and has been criticized by Japanese media for failing to come up with concrete steps to tackle the safety crisis and assure customers. In addition, the company’s recent problems have led Fitch, a ratings agency, to place the company’s credit rating of ‘A+’ on watch negative, indicating the rating could be downgraded. This would increase the interest rate Toyota pays on its debt, further hampering business prospects.
One of the main concerns for Toyota is whether these problems are short-term in nature, or whether they could significantly hurt business over the long term. Toyota recently announced that it could cost up to $2 billion to fix problems associated with the recalls. Thus far, it has struggled to reassure customers and minimize damage to its image. Toyota is fortunate that, at least up until now, it has had a loyal customer base, primarily baby boomers who have been buying Toyotas for decades. However, the onslaught of negative news can’t be helping to soothe these customers’ growing concerns. In addition, and maybe more importantly, recent troubles may impede the company’s ability to attract younger buyers that it wants so dearly. These are customers who could potentially buy Toyotas for decades to come.
One would believe that Toyota’s competitors would be expected to gain from its recent problems. For the most part, we agree with this assertion. However, we should note that other auto companies have had safety issues as well. Honda Motor Co. (HMC) recently announced that it was recalling about 646,000 units of its Fit/Jazz and City models because of a faulty window switch, after a child died when a fire broke out in a car last year. The company also just announced a global recall of about 950,000 vehicles for faulty airbags that were linked to one fatality and eleven injuries in the U.S. Ford Motor Corp. also announced that it plans to fix 17,600 Mercury Milan and Ford Fusion gas-electric hybrids because of a software problem that can give drivers the impression that the brakes have failed. Ford also completed a series of recalls last year dating back 10 years and affecting 14 million vehicles due to a faulty cruise control deactivation switch. So one should remember that quality concerns are evident at companies besides Toyota, and these companies have rebounded from the concerns.
We believe it will take time for Toyota to gain back the trust and confidence of most consumers. One thing that has likely changed forever, however, is the idea that Toyotas have superior quality than other brands. It will be tough to make this argument given what’s happened in recent weeks. Still, other companies in other industries have recovered from catastrophic events. For example, in 1982, seven Chicago deaths were traced to cyanide-laced Tylenol. Drug maker Johnson & Johnson (JNJ) responded by quickly recalling all Tylenol nationwide. This swift action, along with pioneering, tamper-proof packaging, won back most of its customers within a year. Although Toyota’s initial response to the crisis was slow, we believe that it can win back most customers in the long term with an overwhelming focus on quality, along with the introduction of innovative products that wow customers. But reputation is everything for an automaker, and right now, and in the short term, business will likely struggle to rebound from these concerns, even if the company shows that recent problems were isolated incidents.