Toyota: A Case Study on the need for trust in the automotive industry Page 1

Toyota Motor Corporation: A case study on the need for investor and public trust in the worlds largest and most profitable automotive corporation

John Greenlaw Quinnipiac University Investor/Corporate Communications April 26, 2010

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Abstract The reputation of the largest car manufacturer in the world has been tested in a crisis involving an overwhelming number of recalled cars and limited company transparency. The Toyota Corporation, which brands its business on having the safest cars in production, now faces scrutiny because of over 8.5 million recalled cars for widespread safety problems and delayed communication to stakeholders. Product recalls and unsatisfactory investor and consumer communications are the main reasons for Toyotas recall crisis. This recall situation is considered a crisis because of the loss of consumer and investor trust in the Toyota brand. This loss of trust is made evident by public discourse and stock valuation. It is necessary for Toyota to rebuild and improve its relations with its stakeholders to improve its brand image.

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Table of Contents I. Case Study ..............................................................................................................................4 1. Crisis Overview ......................................................................................................................4 1.1 Factors of Crisis ..............................................................................................................4 1.2 Problem Statement ...........................................................................................................5 2. Toyota Corporation Background ............................................................................................5 3. Identification of the Crisis ......................................................................................................6 3.1 Violated Trust ...................................................................................................................6 3.2 Communication Confusion ..............................................................................................6 4. Significance of the Crisis .......................................................................................................7 4.1 Toyotas Reputation .........................................................................................................7 4.2 Toyotas Crisis Financials................................................................................................7 5. Future Outlook .......................................................................................................................8 II. Appendix ..................................................................................................................................9 III. References ..............................................................................................................................13

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I. Case Study 1. Crisis Overview

In August of 2009, a fatal highway car crash came to the attention of the Toyota Motor Corporation. While driving a Lexus ES350, an off-duty highway patrolman and his family were involved in a car crash and killed. From the 911 call made by the victims before crashing, the reason behind the accident was uncontrollable acceleration. Ironically, this was not the first time an uncontrollable acceleration problem was brought to the attention of the Toyota Corporation

1.1 Factors of the Crisis

The number of deaths linked to Toyotas uncontrollable acceleration problem in the United States since the year 2000 has risen to 52, according to safety regulators in the automotive industry. (Hurst) Although this uncontrollable acceleration problem has recently surfaced into the public eye, this problem has also occurred in the past. Since 1986, Toyota has been ordered to recall all affected cars by the National Highway Traffic Safety Administration (NHTSA) because of speed control problems due to defective vehicle components. Since 1986, Toyotas unwanted acceleration has reappeared during production testing and consumer usage in 2003 through 2007. Between 2003 and 2008, NHTSA investigated Toyotas accelerator issues. Toyota internally dealt with accelerator problems in production and testing. Problems that were brought to the attention of Toyota by NHTSA were deemed isolated incidents in production. NHTSA and Toyota ignored hundreds of complaints from consumers due to the ambiguous significance of the variety of complaints received. NHTSA closed its investigation of the accelerator issues in February of 2004 due to a lack in findings. Between 2004 and 2006, NHTSA revived its investigation and concluded that the culprit of the unwanted acceleration problem was the positioning of the front floor mats. By this time in July 2007, the first of many accelerated deaths (52 deaths to date, March 2, 2010) occurred when a Toyota Camry accelerated out of control (at speeds of 120 mph) and killed the driver. Toyota settled this wrongful death suit out of court for an undisclosed amount. NHTSA conducted an engineering analysis of Toyota vehicles. This analysis was the spark that led to the 55,000 car recall, with the conclusion that the floor-mat was at fault for accelerator problems (Steinmetz). Since the 55,000 car recall in August of 2007, there have been more than 8.5 million Toyota cars recalled due to widespread safety problems (see appendix C & D). Toyota temporarily suspended production of various models of affected cars on January 26, 2010 in an effort to correct plausible accelerator issues. However, it was not until February 5, 2010 when Toyota President and CEO, Akio Toyoda, apologized to the public and promised a dedication to quality control. (Toyota recall timeline) Akio Toyoda also testified and apologized in front of a United States House Committee regarding the widespread recall and announced Toyotas full cooperation with U.S. government officials. Perhaps this apology was too late as dozens of deaths were associated with Toyotas unwanted acceleration problem.

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(Timeline of Events Appendix B)

1.2 Problem Statement

As a result of the ongoing vehicle recalls, limited communication with stakeholders, deaths linked to Toyota vehicles, and a late apology from the CEO, the Toyota brand has been seriously damaged. The Toyota Corporation, which claims to be a top contender for having the safest cars in production, now faces scrutiny because of this compounding crisis. The Toyota recalls significantly hurt the Toyota brand, as can be seen in the valuation of Toyota stock (appendix A). Since the first large-scale recall on January 15, 2010, the stock valuation has fallen 15% (Toyota Recall). The lowest points of Toyotas valuation were during February and March of 2010 when the most recalls occurred worldwide. The result of Toyotas recall is a $21 billion dollar loss in market share (Shunk). This drop in valuation can be summarized as a lack of faith in the Toyota Corporation by both consumers and investors. This massive product recall points out a serious flaw in Toyota products and its communication efficiency. When deaths are linked to recalls, stakeholders lose trust and are hesitant of the brand responsible. Toyota not only recalled products that were defective and causing fatalities, but they did so in a massive-scaled effort, after several years of failed investigations and ignored customers. Due to the fact that these recalls were executed after malfunctions and deaths occurred, Toyota appeared to be abandoning their mission; To attract and attain customers with high-valued products and services and the most satisfying ownership experience in America. Although the depreciation in Toyotas stock during this crisis may have created a buying opportunity to some investors, it may also turn other investors away from investing with the Toyota Corporation due the unpredictable future that may yield from a recall crisis. Due to the Toyota product recalls and substandard investor communications, there is a lack of trust in the Toyota Corporation, which ultimately affects its stock price and investor involvement.

2. Toyota Corporation Background

The Toyota Motor Company was founded in 1935 by Japanese inventor, Sakichi Toyoda. Toyoda was the owner of Toyota Spinning and Weaving Co. After Sakichi sold his patent for his power-loom to a UK company, Platt Brothers and Co., Ltd in 1929, he created an automotive sector within his company. In 1934, his company started the production of automobiles. In 1937 Toyota Motor Company was becoming globalized and multiple production plants were being established in Japan. In 1964, the Toyota Corporation reached North American soil and plants were established in Canada. In October of 1973, the Toyota Corporation established itself in the United States. Consumers in the United States found Toyota cars attractive due to the 1973 Oil Crisis, due to Toyotas fuel efficient models. Toyota has found great success in their efforts to take part in globalization and grasp a large market share of the worldwide automotive industry. Toyota produces a full line of cars, trucks and SUVs and in 1988, Toyota created Lexus, which is a full line of luxury vehicles built with the same care and quality that Toyota prides

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itself on. In 2004, Toyota became a leader in the hybrid and green vehicle industry producing the Prius and several other hybrid versions of their previous models. The current president and CEO of the Toyota Motor Corporation is Akio Toyoda, the grandson of founder Kiichiro Toyoda. The management of the Toyota Corporation has strong ties and is heavily influenced by the tradition of the Toyoda family. Safety and consumer dedication have always been key components to Toyotas business model and have helped Toyota retain a loyal customer base.

3. Identification of the Crisis 3.1 Violated Trust

The Toyota Motor Corporations image and brand is severely damaged as a result of the widespread recalls that flooded the media and opinions of the public, consumers, and investors. The malfunctioning parts installed in Toyota vehicles were the catalysts behind the recall crisis Toyota endures. Consumers are reassured by Toyota of the quality and engineering that goes into each vehicles; however, the massive recalls that Toyota has issued makes the Toyota mission statement look hypocritical; To attract and attain customers with high-valued products and services and the most satisfying ownership experience in America. There is nothing attractive about the frustrations and worries associated with product recalls. Consumers and investors have become with the fact that Toyota has agreed to pay a record $16.4 million fine for failing to properly notify federal authorities about a dangerous pedal defect. This leaves the possibility in the minds of that public that perhaps Toyota knew about the faulty product, yet neglected to inform the NHTSA or other appropriate government entity because of the impending company devaluation. By withholding information, company transparency with the public is neglected. Toyotas communication with government entities, such as the NHTSA, and stakeholders was non-existent before the large scale recalls. Lack of communications, especially when people are being affected by a companys product creates distrust. Investors and stakeholders question why Toyota did not fully disclose information regarding potentially life threatening vehicles before people started to become affected negatively. Toyotas responsibility as an automaker is tainted and the trust of consumers and investors must be earned back.

3.2 Communication Confusion

During the first few years of Toyotas series of recalls, the NHTSA found no problems with Toyota cars despite consumer complaints. After engineering analysis of select Toyota vehicles, the floor-mats were said to be the reason behind accelerator discrepancies. Soon thereafter, there were said to be problems with the actual accelerator unit. Meanwhile, the Toyota Corporation was recalling a growing, outstanding number of cars and people were still dying as a result of faulty engineering. When these problems became a reoccurring topic on the news and in online discourse, Toyotas top tier management became concerned publically. Top tier management offered signs of condolences and insight on the recalls from an internal

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standpoint. The timing of their response was late and perhaps public opinion was already etched in stone. Due to the lack of transparency in the Toyota Company, the public was left in the dark. Consumers were confused with what was wrong with their cars during the recall. Investors were confused with what the financial implications were as a result of the recalls. Opinions of the Toyota Companys communication were far below par than that of that of a successful globalized corporation. The lack of corporate communication made it seem as if Toyota was only recalling cars because government agencies were mandating it. Mizuno Credit Advisory director Tatsuya Mizuno reportedly told Business Week that Toyota has wasted too much time without doing anything, adding that the automaker used to have foresight for taking action but is now, very far behind the curve(Shunk). There is also the possibility that owners and investors may not have received letters of product recalls due to changes in address and the purchase of Toyota vehicles from third party sellers. The limited communication and information Toyota released confused consumers and investors alike.

4. Significance of the Crisis 4.1 Toyotas Reputation

In times of corporate crisis, not only does a company become devalued, but more significantly, a companys brand does as well. When evaluating the consequences of Toyotas crisis, one must realize that the stock price is a changing, temporary figure that fluctuates based current, disclosed information and reputation of a company. The reputation of the Toyota Company, however, is based on history, legacy, and Toyotas past commitment to the automotive industry and its publics. Reputation is not a fleeting valuation of the company, but rather a characteristic of the company etched deep within the business model. Stock can rise in a day, but reputation can take years to establish. Since reputation is partially reflected within the valuation of a company, not all hope is lost for the Toyota brand. The Toyota reputation may be damage, but it is not destroyed.

4.2 Toyotas Crisis Financials

From this crisis, Toyota experienced a $21 billion dollar loss in market share since the January 15, 2010 recalls. As a result of Toyota manufacturing defective products, selling them to consumers, being responsible for accidents, injuries, and deaths; and initiating a widespread recall, Toyota takes a hit to its reputation and suffers financially. Toyota projects that its net loss will swell to $5.5 billion during the current financial year. Sales, which fell 21% in the year just ended, are projected to fall a further 20%, to $166 billion. Toyota will also cut its dividend to investors (Rowley). In addition to Toyotas lost revenue and sales, JP Morgan's Kohei Takahashi expects Toyota to lose $5.5 billion total, in recall-related costs and litigation settlements (Benton). Toyotas stocks also fell 15% after the first announcement for a major recall on January 15, 2010 (appendix A).

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5. Future Outlook
Although Toyota has been expected to have lost $5.5 billion in recall related costs, Toyota has also done a good job cutting costs over the past several months. As a result, analysts have tagged Toyota stock (TM) a "buy/medium risk" rating, describing the issue as "attractive for long-term investors," which shows a potentially upwards financial outlook for the Toyota Company. The Toyota brand, regardless of how valuable, will still be forever tarnished due to a lack of recall communication and transparency. People will never forget the news coverage, massive recalls, and the lack of communication that Toyota provided. The tarnished reputation of Toyota not only affects customers but also stakeholders in the company. Since 2004, brand consultancy Interbrand has consistently rated Toyota the most valuable automotive brand in the world and evaluated its value at $31.33 billion in 2009. The brand is so valuable because, in addition to a loyal customer base, Toyota's brand value reflects a long-standing corporate commitment to a simple and powerful business model built on product quality and safety first and growth and sales second. However, in the last few years, Toyota's commitment shifted to growth and sales and product quality and safety suffered as a result. Toyota President Akio Toyoda has publicly acknowledged this focus shirt from quality to quantity, and denounced the company's misguided strategic focus the automotive industry (Mittal). One must question how Toyota can prove to stakeholders that its original business model is being fulfilled. Toyotas reputation needs not to be rebuilt, but rebranded and strengthened. There is nothing wrong with a company to admit that they were wrong. Toyota, as a company, could have handled itself better during this crisis. Full disclosure and concern for consumer safety should have been the number one priority from the start. The late timing of the CEO apology shows strong evidence that Toyota was withholding full public disclosure on this issue and tried to handle the situation internally. The fact of the matter is that trust needs to be rebuilt between Toyota and its stakeholders. In order to rebuild trust, Toyota needs to improve on what caused this crisis in the first place; communication with all stakeholders, including consumers and investors. Surely product recalls can put a significant dent into a companys reputation, but as always, actions speak louder than words. To recover, Toyota must rebrand their mission and commit itself to it. There is a lot of room to learn and grow for Toyota. Luckily, stakeholders opinions of companies that rebrand and recover after a crisis can be very forgiving.

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II.

Appendix
A. Stock Valuation (Jan. 2010 Apr. 2010)

Late January and Early February of 2010 was the time of Toyotas largest recall worldwide. February 5, 2010 was when CEO Akio Toyoda apologized for the crisis.

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B. Timeline of Toyota Crisis (Aug. 2009 Feb. 2010) (Courtesy of Reuters Online) Following are milestones leading to the largest recall in Toyota's history, a series of events that has hit the automaker's reputation and results: * 2000: Toyota launches program known as "Construction of Cost Competitiveness for the 21st Century" with the aim of cutting costs of 180 key car parts by 30 percent, saving nearly $10 billion by 2005. * 2004: In cooperation with National Highway Traffic Safety Administration (NHTSA,) Toyota narrows the scope of investigations into unintended acceleration by eliminating incidents lasting more than a few seconds or those where the driver applied the brake. * 2006: Following a surge in global recalls, Toyota head Katsuaki Watanabe apologizes for "quality glitches." Toyota delays some new models by up to half a year. * March 2007: NHTSA opens investigation into pedal entrapment in some Toyota vehicles. That leads to recall of 55,000 floor mats in September.

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* Late 2007: Insurer State Farm tells NHTSA of a "significant increase" in Toyota-related accidents involving its policyholders. * September 2007: Former Toyota attorney Dimitrios Biller signs a severance agreement with the automaker. He claims he found "numerous" cases where the company concealed evidence from the courts and the U.S. government. Toyota "strongly disputes" this claim. * October 2007: Consumer Reports influential vehicle quality survey drops three Toyota vehicles, including a version of the Camry, from its recommended list. The verdict: "After years of sterling reliability, Toyota is showing cracks in its armor." * December 2007: Toyota's U.S. sales for 2007 hit 2.6 million units. It has displaced Ford Motor Co (F.N) as No. 2 in the U.S. market and is on the cusp of unseating General Motors Co [GM.UL] as No. 1 on a global basis. * June 2009: Akio Toyoda, 53, grandson of Toyota's founder, is named president, replacing Watanabe, 67. Toyota executive Yoshi Inaba is called out of retirement and dispatched to the United States to head operations in the automaker's largest market. * Nov. 26, 2009: Toyota recalls 4.2 million vehicles in the United States to address the risk that floor mats can come loose and trap the accelerator pedal. * Dec. 15, 2009: NHTSA officials meet Toyota executives in Japan seeking prompt action on safety issues. Toyota commits to improving its responsiveness. * Jan. 16, 2010: Toyota informs NHTSA that accelerator pedals made by supplier CTS Corp (CTS.N) may have a dangerous "sticking" defect. * Jan. 19: At meeting in Washington including Inaba and U.S. sales Chief Jim Lentz, NHTSA asks Toyota to take prompt action. Hours later Toyota tells NHTSA it will issue a recall. * Jan. 21: Toyota announces recall for about 2.3 million Toyota models to fix sticky pedals. * Jan. 25: NHTSA informs Toyota it is legally obliged to stop selling vehicles even if it does not have a remedy. * Jan. 26: Toyota halts U.S. sales of eight models involved in the recall, including its best-selling Camry and Corolla sedans, and says it will halt production for first week of February. * Jan. 27: At urging of NHTSA, Toyota recalls an additional 1.1 million vehicles due to the risk that a loose floor mat could trap the accelerator in an open position. That adds to the recall of 4.2 million vehicles announced in November 2009. * Jan. 28: Toyota meets with NHTSA to review its pedal fix. NHTSA says it has no objections to the fix. * Jan. 29: NHTSA opens investigation into CTS pedals. NHTSA asks CTS if it sold pedal to other carmakers and when it discovered reports of problems.

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* Feb. 2: Toyota reports a 16 percent drop in January U.S. sales. Monthly U.S. sales drop below 100,000 for the first time in more than a decade and Toyota's U.S. market share falls to its lowest level since January 2006. * Feb. 2: NHTSA renews investigation into Toyota's electronic throttle control system. U.S. Transportation Secretary Ray LaHood says, "While Toyota is taking responsible action now, it unfortunately took an enormous effort to get to this point." Toyota says it will fully cooperate with NHTSA probe. * Feb. 3: LaHood warns recalled Toyota owners to stop driving, and then withdraws his remarks, saying it was a misstatement. Toyota says it is examining braking complaints about its 2010 model Prius hybrid. * Feb. 4: NHTSA opens investigation into at least 124 consumer complaints about brakes on Toyota Prius hybrids. * Feb. 5: After keeping a low profile for nearly two weeks, President Akio Toyoda appears at a news conference to apologize for safety problems. He announces plans to bring in a task force, including outside analysts to review quality. Toyota considers a recall for Prius braking issue. * Feb. 9: Toyota announces recall of nearly 500,000 new Prius and Lexus-brand hybrid cars globally for braking problems. Akio Toyoda says he may visit the United States in the third week of February.

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C.

D.

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III.

References

Benton, J. (2010, March 16). Toyota Recall: How Much Will It End Up Costing The Automaker?. Breaking News and Opinion on The Huffington Post. Retrieved April 2, 2010, from http://www.huffingtonpost.com/2010/03/16/toyota-recall-how-muchwi_n_500446.html Hurst, N. (2010, March 2). Ex-Toyota exec warned of safety, quality problems in '06 From The Detroit News: http://www.detnews.com/article/20100302/AUTO01/3020398/Feds--52deaths-alleged-in-Toyotas#ixzz0m9t5yWJM. Detroit News. Retrieved April 22, 2010, from www.detnews.com/article/20100302/AUTO01/3020398/Feds--52-deaths-allegedin-Toyotas Mittal, V., & Dholakia, U. (2010, March 11). Why Toyota will be all right: brand insulation | Viewpoints, Outlook | Chron.com - Houston Chronicle. Houston news, entertainment, search and shopping | chron.com - Houston Chronicle. Retrieved April 12, 2010, from http://www.chron.com/disp/story.mpl/editorial/outlook/6909344.html Rowley, I. (2009, May 8). Toyota's Loss Is Worse Than Expected - BusinessWeek. BusinessWeek - Business News, Stock Market & Financial Advice. Retrieved April 12, 2010, from http://www.businessweek.com/globalbiz/content/may2009/gb2009058_991777.htm Shunk, C. (2010, January 21). Toyota loses $21B in market share in one week, plans media blitz this week Autoblog. Autoblog We Obsessively Cover The Auto Industry. Retrieved April 10, 2010, from http://www.autoblog.com/2010/01/31/toyota-loses-21bin-market-share-in-one-week-plans-media-blitz/ Steinmetz, K. (2010, February 9). Toyota Prius Recall, Safety Problems: Previous Warnings TIME. Breaking News, Analysis, Politics, Blogs, News Photos, Video, Tech Reviews TIME.com. Retrieved April 14, 2010, from http://www.time.com/time/business/article/0,8599,1962218-1,00.html Toyota Motor Corporation (ADR): NYSE:TM quotes & news - Google Finance. (n.d.). Google. Retrieved April 10, 2010, from http://www.google.com/finance?client=ob&q=NYSE:TM Toyota Recall: (NYSE:TM) What Affect Will It Have On Brand And Stock? | News Briefs. (2010, February 10). Times of the Internet - The Web's Number One News Source Times News. Retrieved April 10, 2010, from http://www.timesoftheinternet.com/briefs/toyota-recall-nysetm-what-affect-will-it-haveon-brand-and-stock/ Toyota recall timeline - Autos - MSNBC.com. (n.d.). Breaking News, Weather, Business, Health, Entertainment, Sports, Politics, Travel, Science, Technology, Local, US & World News- msnbc.com. Retrieved April 16, 2010, from http://www.msnbc.msn.com/id/35240466/ns/business-autos