Toyota Motor's (TM) once-solid image has taken some hits in recent months, but the company's decision to not only recall but halt production and sales of eight popular models will cause serious damage that won't easily be fixed. Toyota made the announcement on Jan. 26 after research into reports of unintended acceleration in certain models traced the problem to faulty accelerator mechanisms, which resulted last week in a recall of some 2.3 million cars in the U.S.The lengthy list of vehicles involved include some of Toyota's best known models, such as its Camry and Corolla sedans, perennially some of the best-selling vehicles in the country. Toyota said it plans to halt production beginning Monday at five North American plants in Kentucky, Texas, Indiana and Canada.
Toyota's move is consistent with its manufacturing philosophy that allows workers to stop manufacturing if they find a defect during during assembly, says Art Wheaton, an analyst who follows auto-industry issues at Cornell University's ILR School.
Tens of Millions on Repairs Alone
The immediate economic impact on Toyota is likely to be huge, Wheaton says, "It's difficult for a company to say, we want to take eight of our best selling models and stop making them for a while, and tell all of our dealers not to sell them." Toyota is likely looking at a bill on the order of tens of millions of dollars to repair affected vehicles and other costs associated with the recall and work stoppage.
Wheaton believes the long-term implications of the recall won't be as dramatic. Still, he says, the company's reputation has been damaged on two fronts -- quality and safety, two issues that have been at the center of the Japanese make's appeal to consumers. But the recall also affects Toyota's integrity, since it has made numerous announcements regarding the issue, starting in September, when it then blamed a problem with unintended acceleration in some of its vehicles on poorly designed floor mats.
Toyota has taken numerous steps to solve the same basic problem, Wheaton says, and "that hurts their reputation."
Dealers Left in the Lurch
Further unknown is the impact sales and production stoppages will have on dealers. John McEleney, who owns a Clinton, Iowa, Toyota dealership, told The Associated Press the sales stoppage affects about 60% of the inventory on his lot. He expressed hope Toyota would find a fix soon, since his business pays interest on unsold inventory.
"Short term, it's going to be difficult," said McEleney, who is also chairman of the National Automobile Dealers Association, a trade group. "It will certainly set us back, but I think the impact will be very short-lived."
At its website, the NADA posted a message advising its members that the organization is seeking clarification on the situation for its dealers. In the meantime, dealers should check whether they have a specific type of business-interruption insurance that would provide reimbursement due to losses caused by an independent supplier.
The problem part was supplied by Elkhart, Ind.-based CTS, and manufactured at the company's plant in , according to a report Toyota made to the last week.
The complete list of models involved include: the 2009-10 RAV4; the 2009-10 Corolla; the 2009-10 Matrix; the 2005-10 Avalon; certain 2007-10 Camry models; the 2010 Highlander; the 2007-10 Tundra; and the 2008-10 Sequoia.
Toyota is also wrestling with whether to recall 2 million additional vehicles sold in Europe "due to similar defects with the accelerators that we encountered in the U.S.," a Toyota spokeswoman said Monday. From Toyota's vantage, this debacle must seem like a being in the middle of an unavoidable crash and having to watch it unfold in slow motion.
What Is Your Risk Tolerance?
Answer the question "What type of investor am I?".View Course »