Toyota's recall of nearly 1 million cars on Tuesday no doubt cheered its competition in Detroit by raising concerns about the carmaker's vaunted quality. Or does it?
The defect in question is a faulty steering component that could cause drivers to lose control of their cars. The company, which is offering to service all 986,000 cars affected, said in a statement that no accidents have yet been reported. The recall spans 10 models, which are primarily sold throughout Japan and Europe. In fact, more than half of the affected vehicles are in Toyota's home territory, though 170,000 American Prius cars, of a total 268,000 sold since its introduction in 2000, are included.
This is hardly the first time that Toyotas have been recalled. In 2005, Toyota (TM) recalled nearly 800,000 American pickup trucks and SUVs with suspension flaws. That followed a 2002 worldwide recall of 400,000 subcompacts with brake-fluid problems.
OPPORTUNITY KNOCKS. But despite the critics' finger-pointing, many analysts contend the event is more of an opportunity than a liability for the growing company.
Indeed, in recent years, recalls have shifted from a public-relations headache to a customer-service opportunity. Insiders say that unless a manufacturer hides vital information or vehicle defects lead to fatal crashes -- as they did during Ford's (F) Firestone scandal in 2000 and 2001 -- brands even stand to benefit from well-managed recalls.
"First of all, well-handled recalls have absolutely no impact on future sales," says Mark Hass, the former deputy managing editor of the Detroit News and now CEO of the automotive public relations firm Hass MS&L. "Recalls are really customer-relationship issues these days, not marketing. They're an opportunity to build customer loyalty, brand loyalty."
ON THE CASE. Despite the high number of vehicles affected, analysts expect this recall to go largely unnoticed by unaffected potential Toyota buyers. "It's almost like once there's something as sensational as the Explorer rollovers, which were so huge, with congressional hearings, et cetera, that it sucks the oxygen out of the room for the next one," adds Hass.
Instead, Toyota can benefit from the recalls, Hass and others say, by being as transparent as possible and providing prompt, courteous assistance to recall customers -- a play the manufacturer has accomplished in the past by including extras such as servicing older vehicles that it wasn't required to by law.
Analysts also note that recalls from Toyota and other large manufacturers are likely to go up, as is the overall number of vehicles affected. "This is just the reality of the industry these days," says Joe Barkai, program director for automotive research with the manufacturing insights division of IDC, a Framingham (Mass.) global market-research firm. "When you consider the enormous pressure to get to market in less and less time -- down to 20 months from four or five years a decade ago -- it makes a lot of sense. There's just less time to discover these issues."
AHEAD OF THE PACK. Barkai contends the most effective way to measure a manufacturer's performance isn't the frequency of recalls or the number of vehicles affected. Rather, Barkai studies the amount manufacturers pay in warranty costs relative to their revenues. By comparison, Toyota outshines its major American competitors, spending a mere estimated 1.5%, vs. the domestic average of 2.5%. At the extreme end of the scale, General Motors (GM) spends 3%.
Indeed, Toyota still largely exceeds industry averages for initial quality in surveys conducted by organizations such as J.D. Power & Assoc. In Power's 2005 Vehicle Dependability Index study, Toyota maintained an 18% margin over the industry average. It's the only manufacturer besides BMW with two cars on Edmund's top 10 list of vehicles with the best residual value. And in Consumer Reports' annual car issue, published in March of this year, Toyota outranks Ford and Chrysler for long-term reliability.
In admitting the fault, Toyota executives pointed to its internal mantra, kaizen, the Japanese term that means continual improvement. Ernest Bastien, Toyota's vice-president of vehicle operations, says the problem had already been addressed on the assembly lines, and that the company had come forward without being urged to by the National Highway Traffic Safety Administration.
SHOCK ABSORBERS. "Nothing is more important than protecting our brand image," says Bastien. "Our institutional view is that any time there's a problem, a change is made right away." Bastien also noted that Toyota was developing new supplier-valuation programs and making advances in early-warning electronic diagnostics.
Unless Toyota starts mishandling recalls, sales sag, or publications stop issuing praise, those snarky smiles will most likely fade from Detroit's face. After all, as Barkai points out, "Toyota is better structured to fix these types of problems. They're very good at executing decisions, everybody falls in line. For domestic manufacturers, it still takes a long time to learn those lessons."
At the market close on May 31, American depositary shares of Japan-based Toyota Motor were down 80 cents at $107.02, or 0.44%. The sharpest drop-off came after the minutes were released from the latest Federal Reserve meeting, indicating the possibility of another interest rate hike in June.
Vella is a reporter for BusinessWeek Online in New York
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