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Toyota Recall – What is the fallout for Toyota?

January 28, 2010

The most tragic part of the sales suspension and recalls is that people had to die for us to get here.  Yet an unseen tragedy is developing before us.  Regardless of what is causing the issue and how much fault Toyota Corporate holds, those that will suffer most hold no fault at all.  Who are they?  Your local Toyota dealership.

The dealers will likely be caught in a Catch-22.  Right now, they are unable to sell their most popular vehicles, yet other profitable vehicles (typically hybrids) are still available for sale.  Additionally, any recall results in more service calls, a busy service staff, and guarantee reimbursement from the manufacture. Yet what is the long term impact?

Read more after the jump…

The most apt comparison is to the Audi 5000.  In 1986 60 Minutes ran a story about unintended acceleration in a small number of cases.  So what caused Audi’s unintended acceleration?  Pedal placement.  The pedals were placed slightly to the left of where North American drivers are accustomed and a number of drivers pressed the throttle confusing it for the brake.  Even when the fact that the issue was driver error and not a mechanical issue became clear the public backlash, in the United States, against Audi was immense.  What was the backlash like in Europe?  There wasn’t any.  European driver training techniques make this type of unintended acceleration extremely unlikely.

So while Audi continued produce excellent products and thrive in Europe, their reputation in the United States plummeted.    It took 15 years for their sales numbers to recover.

So where does this leave Toyota?  It is hard to say.  Toyota has a much larger market base and much stronger reputation than Audi did at the time of their difficulties.  Audi had to change the name of the 5000 to continue to sell it in the United States.  That fate is doubtful for the Camry.

The biggest threat for Toyota is the potential perception that they do not know what is causing the issue.  If they do not fully address the issue before the sales suspension ends, an additional recall could be devastating.  Overall, Toyota will likely pull through with no long term repercussions.  As a brand they are much larger than this issue, and two of their models (the Camry and the ever successful Prius) are almost brands upon themselves.  Long term, the world still looks bright for Toyota.

Short term, the situation may be more tenuous.  Dealers are celebrating after an exceptionally strong December 2009 (up 34% in volume over December 2008) but even a small hiccup (in this economy) can end up having long term residual effects.  Smaller dealers, in particular, will not be able to suffer another downturn.

Toyota corporate will have to take a huge loss.  Under-reported by the American press was that, last spring, Toyota had to request assistance from the Japanese government, just as American automakers did.  As a result Toyota’ bond rating has been downgraded multiple times and Fitch Ratings may be signaling intent to downgrade it again (they are currently an A- a downgrade would result in them being a BBB, which is still investment grade).  A downgrade of Toyota’s bond rating will result in more expensive loans, thereby possibly limiting future development or resulting in increased costs being passed on to customers.  Note – As of market close on 1/28 Toyota’s stock had fallen from 89.09 on 1/22  to 77.55.

The likelihood of drastic consequences (dealerships closing, major lines being cut) seems fairly limited at this point.  This, of course, is under the assumption that the issue is repaired in a prompt and final manner.  If, in the unlikely event, the issue continues with no foreseeable end it may be necessary for Toyota to undertake some fairly aggressive cost cutting measures (likely dropping a line) but more tragically it could result in the loss of dealerships, sales/service jobs, and factory positions.

In the end, the economic factors that result if Toyota acts slowly are rough but the loss of lives is a bigger tragedy.  Doing it right is more important than doing it fast.

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