Autos

Is Toyota's Reputation Finished?


By Alan Ohnsman and Makiko Kitamura

(Bloomberg)—Toyota Motor Corp., the world's largest carmaker, fell in Tokyo as it expanded a U.S. recall by more than 1 million vehicles to 5.35 million, adding to concerns its reputation for quality may be permanently tarnished.

The shares dropped 3.9 percent to 3,560 yen, capping a fifth day of declines, the longest losing streak since May 2009. The stock has dropped 15 percent since Jan. 21, when Toyota announced a separate recall of 2.3 million U.S.-built vehicles after finding a pedal flaw linked to unintended acceleration.

Toyota's "reputation for long-term quality is finished," said Maryann Keller, senior adviser at Casesa Shapiro Group LLC in New York, a strategic adviser to the auto industry. "People aren't going to buy Toyotas, period. It doesn't matter which model. What's happened is sufficient to keep people out of the stores," she said in an interview yesterday.

The carmaker said late yesterday it's expanding a record 4.26 million-vehicle recall announced in November to include 1.09 million additional U.S. autos, to fix accelerator pedals at risk of being trapped by floor mats. Losing its reputation for quality would undercut Toyota's decades-long campaign to promote reliability and safety that helped it become No. 2 in U.S. sales.

Toyota's market capitalization has fallen to about 12.3 trillion yen ($136 billion) from about 12.9 trillion yen on Sept. 15, when it notified U.S. dealers to inspect how floor mats are installed on models after four people were killed in an accident. Today's trading volume of 38.6 million shares was a record for the stock, according to data compiled by Bloomberg.

Models Added

The company said Jan. 26 it would suspend the U.S. sale and production of eight models involved in the Jan. 21 recall. Those models account for more than half its deliveries in the country and include its top-selling Camry and Corolla cars.

"We don't know how long the sales halt will last, which makes the stock unattractive," said Hiroichi Nishi, an equities manager at Nikko Cordial Securities Inc. in Tokyo.

Models that were added yesterday to the November recall are 2008-2010 Highlander sport-utility vehicles; 2009-2010 Corolla compact cars; 2009-2010 Venza wagons; and the 2009-2010 Toyota Matrix hatchback. General Motors Co.'s 2009-2010 Pontiac Vibe, a version of the Matrix, is also to be recalled, said Martha Voss, a Toyota spokeswoman.

"This is going to have severe ramifications for Toyota," said John Wolkonowicz, an analyst at IHS Global Insight in Lexington, Massachusetts.

Rivals Gain

Toyota's rivals may benefit from the recall. Hyundai Motor Co., South Korea's largest automaker, rose 4.1 percent in Seoul to 113,500 won, the highest level in more than three weeks. Honda Motor Co. gained 3.3 percent in Tokyo, while Nissan Motor Co. advanced 2.8 percent. Earlier today, Fitch Ratings placed Toyota's A+ credit rating on watch negative.

In the U.S., General Motors Co. said yesterday it will offer sales incentives for the 2.3 million owners of cars recalled by Toyota on Jan. 21. Ford Motor Co. plans to offer $1,000 in rebates to Toyota and Honda customers in a bid to make them switch to its models, said Robert Parker, a spokesman.

Two Toyota recalls in three months compounded concern that quality may have slipped after a decade of North American expansion. The company's 1,460 U.S. Toyota and Lexus dealers and hundreds of North American suppliers are awaiting word that engineers have found a solution for the pedal defect.

While Toyota City, Japan-based Toyota is aware that its reputation for quality may be endangered, "this is a customer safety issue," said Irv Miller, U.S. group vice president for corporate communications.

'Months of Wrangling'

Miller said he didn't know whether the decision to halt production was made by President Akio Toyoda. "He is certainly aware of the issue," Miller said.

Toyota's decision to suspend production and sale of eight models "follows months of wrangling with federal safety officials, and stark disagreements with them over what was causing unintended accelerations," the Washington Post reported earlier.

Along with the Camry and Corolla, the Jan. 21 recall covers the Avalon sedan, the Matrix, the RAV4, Highlander and Sequoia SUVs; and Tundra pickups. The Pontiac Vibe is also included.

Global Insight estimated Toyota may lose 20,000 vehicle sales a week as long as it ceases selling and producing the eight models.

U.S. sales of the affected Toyota vehicles totaled 998,744 in 2009, according to researcher Autodata Corp. of Woodcliff Lake, New Jersey. Global Insight's Wolkonowicz said the models accounted for 70 percent of Toyota-brand sales and about 56 percent of overall U.S. sales when Lexus is included.

Toyota's Largest Market

Stopping sales of some models will cut Toyota's offerings as U.S. consumers begin returning to dealer lots after last year's slump. Toyota posted a 32 percent gain in December U.S. deliveries, topping the industry's 15 percent increase, and will report January totals on Feb. 2. On Feb. 4, Toyota will release earnings for its fiscal third quarter ended Dec. 31.

Wolkonowicz said the fallout for Toyota may not end soon. The U.S. was Toyota's largest market through 2007, contributing half or more of global operating income. Toyota trails only GM in U.S. sales and surpassed the Detroit-based automaker's global total in 2008.

"This is the biggest crisis in the auto industry since the bankruptcies of GM and Chrysler," he said. "Toyota is not going to be able to contain this problem in a short period of time."

Quality Surveys

The automaker retained the top spot in June in J.D. Power & Associates' survey of initial quality and topped Consumer Reports magazine's annual survey of automotive brand perceptions this month. Still, Toyoda already was under pressure to improve quality since he took the helm in June, and the latest setbacks may add to the strain as competitors including Hyundai narrow Toyota's lead.

Toyota continues to investigate the pedal-related flaw reported last week and doesn't yet have figures on any related accidents, injuries or fatalities, said Brian Lyons, a spokesman. The company is aware of at least five deaths related to the floor mat-related recall from November, he said.

Last week's recall involved a potential flaw in pedal parts made by CTS Corp. that could, "in rare instances, mechanically stick in a depressed position or return slowly to the idle position," according to Toyota.

Pedal Fixes

Toyota said in a statement late yesterday that pedals using a revised design "are now in full production at CTS to support Toyota's needs." The company is also working with CTS to test modifications to existing pedals that will be available "as quickly as possible."

Toyota accounts for about 3 percent of annual sales at Elkhart, Indiana-based CTS, according to the company.

"This is a very rare occurrence, incidents of sudden acceleration, but because Toyota's had made multiple actions related to it, the perceived image is they don't have a handle on it," said Jake Fisher, senior auto engineer for Consumer Reports. "They've been trying to be proactive, but that's probably not what consumers will draw from this."

Bill Visnic, senior editor at consumer researcher Edmunds.com, said shoppers may not differentiate between the Toyota autos on the recall list with those still available on showroom floors.

"It's definitely going to put a damper on the entire atmosphere around a dealership," he said. "This is a real test of the strength of the brand."

'Scary' News

At Santa Monica Toyota in suburban Los Angeles, General Manager Billy Rinker said he received about 15 customer calls early yesterday about the recall.

"I don't think they lost" the reputation for quality, Rinker said of Toyota. "Toyota wants to be as perfect as possible, so they are fixing it."

News of the recalls was "scary," said Prius owner Caroline Schkolnick, 51, of Beverly Hills, California, who was having her car serviced in Santa Monica. She reported no problems with her hybrid, which was covered by the November floor-mat recall, and said she isn't worried about the pedals.

"There were mistakes and I respect them for fixing them," Schkolnick said.

Toyota may be "overreacting" in suspending sales and production, said Mickey Anderson, president of Performance Auto Group in Omaha, Nebraska, which owns three Toyota stores and two Lexus outlets.

"Probably, that's the right thing to do," Anderson said. "While this will be a burden for Toyota and the dealers, it is absolutely the most proactive way to take care of the customers."

To contact the reporters on this story: Alan Ohnsman in Los Angeles at aohnsman@bloomberg.net; Makiko Kitamura in Tokyo at mkitamura1@bloomberg.net


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