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After Record Fine, Toyota Extends Car Discounts. But Will It Continue to Drive Sales?

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toyota recalls

For risk managers and others looking at the Toyota recalls as an ongoing lesson in corporate crisis response, seeing the daily headlines about the automaker’s woes is — both figuratively and literally — like watching a car crash.

Sure, in some ways, Toyota has handled the situation adequately, and its rebounding stock price and recent sales suggest that the immediate damage could have been worse. Then again, the company dragged its feet in addressing safety concerns publicly, and all the fines, recalls, class-action lawsuits, Congressional hearings and public scorn suggest that the long-term reputational damage could very well be lasting. This isn’t something that consumers will ever forget.

Especially not now.

Because on Monday, the National Highway Traffic Safety Administration hit Toyota with a record $16.4 million fine, which is more than an order of magnitude larger than the watchdog’s previous highest penalty, a $1 million slap on the wrist to GM for faulty windshield wipers. The $16.4 million figure is also the largest allowed under civil law, according to NHTSA.

Said Transportation Secretary Ray LaHood:

“We now have proof that Toyota failed to live up to its legal obligations,” said Secretary LaHood. “Worse yet, they knowingly hid a dangerous defect for months from U.S. officials and did not take action to protect millions of drivers and their families. For those reasons, we are seeking the maximum penalty possible under current laws.”

On Forbes.com, Ned Douthat advises Toyota to just pay the fine rather than try to fight the regulator’s decision.

Now, Toyota is faced with the choice of contesting the fine in court or simply paying the fine in order to get the episode behind in.  In comparison to the potentially lengthy and expensive legal battle, the nominal $16.4 million fine may be an attractive option.  However, in paying the fine the prestige of the Toyota brand may be forever damaged, as they would be admitting fault in hiding a very serious safety issue in their vehicles and thus endangering millions of drivers.  The number of incidences of stuck accelerators is still relatively small, but the recalls have affected some 8.5 million vehicles.  Furthermore, if Toyota admits fault and accepts this fine, it may open the litigation flood gates to hundreds of class action and personal injury lawsuits related to the stuck accelerator issue.

Amanda Bronstod of Law.com delves deeper into the idea that accepting the fine as handed down will be troublesome for Toyota, as it factually “validates the legitimacy of our allegations that Toyota has been misleading the federal government and consumers.”

With that damned-if-you-do, damned-if-you-don’t decision looming, Toyota also announced on Tuesday that it would extend its sales discount program. The program was successful in March and finally gave the company some positive headlines, but at least one industry expert seems skeptical that even this price-cutting measure will continue to push vehicles under the once-impeccable-but-now-tainted Toyota banner.

Last month’s incentive program helped Toyota “scoop up bargain hunters and loyalists” to achieve a 41% gain in sales over March 2009, said James Bell, an analyst with auto information company Kelley Blue Book.

But the increase was not as robust as it might seem, as results were tempered by the low sales in the same month a year earlier, he said.

“The question now is how many of those bargain hunters and loyalists are left. You have a finite number of people in the auto market at any one time,” Bell said.

Historically, Toyota has been among the stingiest automakers when offering incentives, helped by its historically high resale values and a reputation for building reliable cars, he said.

Last week at the International Auto Show, a Toyota rep spoke on the situation, specifically noting his thoughts that “people don’t buy a car they don’t trust just because you give them a good price.”

We’ll see, I guess.

For more on the risk management angle of the Toyota troubles, check out our past coverage. Morgan also covered “Toyota’s Total Recall” in the April issue of Risk Management.

Toyota’s Woes Continue

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Another week and the fallout continues to spread from Toyota’s recall controversy.

In Minnesota, a man imprisoned for vehicular homicide in a fatal Toyota crash sought a new trial, claiming that, in light of the unintended acceleration recalls, he was wrongly convicted for a mechanical malfunction that wasn’t his fault. A prisoner in Portland, Oregon has made similar claims in what is sure to be new trend in courts around the country.

Meanwhile, lawyers have begun to jockey for position in what is assumed to be a lucrative, and perhaps historic, class action lawsuit for all involved (J.P. Morgan recently put the total recall price tag for Toyota at $5.5 billion), internal company documents revealed that Toyota was aware of the unintended acceleration problem in 2002, when Camry owners began to complain about the issue.

The technical service bulletin went to every U.S. Toyota dealership in late August 2002 after some customers reported their vehicles were speeding up unexpectedly.

“Some 2002 model year Camry vehicles may exhibit a surging during light throttle input at speeds between 38-42 mph,” the bulletin states. “The Engine Control Module (ECM) calibration has been revised to correct this condition.”

Since the National Highway Traffic Safety Administration (NHTSA) was apparently aware of the issue as well, some critics, including Clarence Ditlow, the head of the nonprofit Center for Auto Safety, have suggested that both Toyota and the NHTSA are guilty of a coverup.

“The government is really hiding this information from the consumer,” Ditlow told CNN. “They’re in a conspiracy with the auto industry to keep these out of the public’s sight.”

Some analysts have questioned the seriousness of this document, however. Matt Hardigree of the automotive blog Jalopnik wrote that the CNN article may be misleading.

[The document] just shows there was a problem with electronics on one year of the Camry, which Toyota identified and repaired. The engine affected, the 1MZ-FE, isn’t even offered in the Camry anymore. The change to a new platform and new engine lineup would have drastically changed the ECM between the sixth-gen Camry and the current seventh-generation 2007-2010 Camry. Claiming the 2002 TSB [technical service bulletin] is related to Toyota’s current sudden unintended acceleration problems is sort of like claiming a screen recall on an iPhone is related to a recall on a first-generation iPod click-wheel.

While lawyers to try to figure what what Toyota knew and when, the recall problems continue to plague the automaker’s business and have been blamed for plant shutdowns in France and the UK. In February, Toyota’s sales in the European Union fell 20% as compared to the same time last year, despite the fact that overall auto sales in the EU were up 3%.

Finally (for now), Toyota was also forced to respond to owner complaints that recalled cars were still experiencing acceleration problems after they had been repaired by dealers. The company pledged to replace the pedals free of charge at the owner’s request. The operative phrase being “at the owner’s request”  as an internal memo cautioned dealers “not to solicit pedal replacement.”

As the crisis at Toyota rages on, stay tuned to the Monitor for the latest news and updates.

Toyota’s Troubles

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As Toyota prepares to announced yet another recall — this time, the Prius — some are beginning to question the car manufacturer’s business model.

The “Toyota Way” is the company’s long-standing philosophy that, among other things, places an extreme emphasis on maximizing efficiency by minimizing waste. Some have even said it acts almost like a religion amongst Toyota’s 316,000 employees. There is even a Toyota-approved way of turning corners when walking around the company’s numerous hallways (you must do say at a 90 degree angle). Think that’s bad? Toyota also demands that their employees never walk around the office with their hands in their pockets. A recent NPR news article quoted Tadao Wakatsuki, who worked at the auto giant for 45 years:

“If you walk around with your hands in your pockets, you’ll be told to take them out. If you drive to work, you file a report describing the route you take and the risks. If you drive to your hometown, you report exactly where you’re going to stop for a break. I would say there’s no freedom at Toyota.

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It’s totalitarian.”

Totalitarian to say the least. But was Toyota’s strictly-enforced mission to cut waste and drive efficiency taken too far, ultimately sacrificing quality and safety? In the wake of the recall of more than eight million cars, some think it was. The world’s number one car maker has taken a hit — not only in terms of revenue, but also in terms of reputation. Historically, car recalls have tainted the manufacturer’s image for years, sometimes forever, steering once-loyal car buyers towards other manufacturers. MSNBC lists the top 10 biggest vehicle recalls in history. The following are the top five:

Ford – Number of vehicles recalled: 7.9 million
Year of recall: 1996 The company warned that the ignition switch on the recalled vehicles could overheat and smoke or catch fire. Ford recalled most of its models built between 1988 and ’93, including the Aerostar, Bronco, Crown Victoria, Escort, F-150 pickup, Mustang, Tempo and Thunderbird.
General Motors – Number of vehicles recalled: 6.7 million
Year of recall: 1971
The engine mounts on these vehicles were found to potentially break, letting the engine move around, which could cause the mechanical linkage to jam the throttle. This affected a variety of Chevrolet models from 1965-’69, including the Chevrolet Bel Air, C-10 pickup, Camaro, Caprice, Chevy II, Impala and Nova. At the time GM used unique engines for each of its brands, so only the Chevrolets had the engine that used the affected mounts.
General Motors – Number of vehicles recalled: 5.8 million
Year of recall: 1981 A key bolt attaching the front suspension to the car could break, which would cause the suspension to collapse suddenly. This has obvious potential for negative outcomes, especially if the vehicle was being driven at the time it failed. The company recalled its mid-size cars built between 1978 and ’81 to replace the defective bolts. It included the Buick Century and Regal, Chevrolet Malibu and Monte Carlo, Oldsmobile Cutlass, and Pontiac Grand Prix and LeMans.
Toyota – Number of vehicles recalled: 5.4 million
Year of recall: 2009 Toyota estimated it recalled about 5.4 million vehicles in the U.S. over problems with vehicle floor mats, which they found could entrap the pedal causing unintended acceleration. The recall was initiated in 2009 and expanded in 2010.

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In 2010, Toyota recalled 2.3 million vehicles over problems with the gas pedal after the company found that an accelerator mechanism may not spring back up with enough pressure. About 2.1 million vehicles overlap in these two recalls, leading to a total recall so far of about 5.6 million vehicles for unintended acceleration. The final tallies won’t be known for a long while. The vehicles involved include Lexus-brand vehicles and the Toyota Camry, Tacoma and Tundra.

Ford – Number of vehicles recalled: 4.5 million
Year of recall: 2005 The automaker said the cruise-control mechanism on these vehicles could overheat and smoke or catch fire. The company recalled most of its full-size trucks, including the 1994-’96 Bronco, ’97-’02 Expedition, ’94-’02 F-150 and F-250, ’98-’02 Navigator and the short-lived 2002 Lincoln Blackwood pickup truck.

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  1. Ford –– Number of vehicles recalled: 7.9 million. Year of recall: 1996. The company warned that the ignition switch on the recalled vehicles could overheat and smoke or catch fire. Ford recalled most of its models built between 1988 and ’93, including the Aerostar, Bronco, Crown Victoria, Escort, F-150 pickup, Mustang, Tempo and Thunderbird.
  2. General Motors — Number of vehicles recalled: 6.7 million. Year of recall: 1971. The engine mounts on these vehicles were found to potentially break, letting the engine move around, which could cause the mechanical linkage to jam the throttle. This affected a variety of Chevrolet models from 1965-’69, including the Chevrolet Bel Air, C-10 pickup, Camaro, Caprice, Chevy II, Impala and Nova. At the time GM used unique engines for each of its brands, so only the Chevrolets had the engine that used the affected mounts.
  3. General Motors — Number of vehicles recalled: 5.8 million. Year of recall: 1981. A key bolt attaching the front suspension to the car could break, which would cause the suspension to collapse suddenly. This has obvious potential for negative outcomes, especially if the vehicle was being driven at the time it failed. The company recalled its mid-size cars built between 1978 and ’81 to replace the defective bolts. It included the Buick Century and Regal, Chevrolet Malibu and Monte Carlo, Oldsmobile Cutlass, and Pontiac Grand Prix and LeMans.
  4. Toyota — Number of vehicles recalled: 5.4 million. Year of recall: 2009. Toyota estimated it recalled about 5.4 million vehicles in the U.S. over problems with vehicle floor mats, which they found could entrap the pedal causing unintended acceleration. The recall was initiated in 2009 and expanded in 2010. In 2010, Toyota recalled 2.3 million vehicles over problems with the gas pedal after the company found that an accelerator mechanism may not spring back up with enough pressure. About 2.1 million vehicles overlap in these two recalls, leading to a total recall so far of about 5.6 million vehicles for unintended acceleration. The final tallies won’t be known for a long while. The vehicles involved include Lexus-brand vehicles and the Toyota Camry, Tacoma and Tundra.
  5. Ford — Number of vehicles recalled: 4.5 million. Year of recall: 2005. The automaker said the cruise-control mechanism on these vehicles could overheat and smoke or catch fire. The company recalled most of its full-size trucks, including the 1994-’96 Bronco, ’97-’02 Expedition, ’94-’02 F-150 and F-250, ’98-’02 Navigator and the short-lived 2002 Lincoln Blackwood pickup truck.

The Toyota recall may continue to climb in the ranks as the company continues to issue new recalls. As was the case with the other automakers on this list, it will take a lot of time to repair, not only their bottom line, but their image as well. For Toyota, time may or may not heal the financial and reputational wounds the company has suffered.