Autos January 28, 2010, 2:33PM EST

Is Toyota's Reputation Finished?

Toyota's image as the highest-quality automaker may have been permanently tarnished after recall and sales stoppage

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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.