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 world‘s largest and most profitable automotive corporation

John Greenlaw Quinnipiac University April 26, 2010

Toyota: A Case Study on the need for trust in the automotive industry Page 2

Abstract The reputation of one of the largest car manufacturers in the world has been tested in a crisis regarding an overwhelming number of recalled cars. The Toyota Corporation, which claims to be a top competitor for having the safest cars in production, now faces scrutiny because of recalls of vehicles for widespread safety problems in recent history. Product recalls and unsatisfactory investor communications are two main factors behind the crisis which ultimately lead to a lack of consumer and investor trust and a devaluation of the Toyota Corporation.

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Table of Contents I. Case Study ..............................................................................................................................4 Problem Overview ......................................................................................................................4 1.1 Factors of problem ..........................................................................................................4 1.2 Problem Statement ...........................................................................................................6 1. Toyota Company Background ............................................................................................7 2. Identification of the Problem ..............................................................................................8 3.1 Violated Trust...................................................................................................................8 3.2 Ongoing Confusion ..........................................................................................................9 3. Significance of the Problem ...............................................................................................10 3.1. Reputation ......................................................................................................................10 3.2. Financials .......................................................................................................................10 4. Future Outlook ...................................................................................................................11 II. Appendix ................................................................................................................................12 III. References ..............................................................................................................................16

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I. Case Study 1. Problem Overview
In August of 2009, a fatal highway car crash was brought to the attention of Toyota Motor Corporation. While driving a Lexus ES350, An off-duty highway patrolman and his family were involved in a car crash and were killed. From a 911 call made by the victims, the alleged reason behind the tragedy was ―uncontrollable acceleration;‖ however, this was not the first time this ―uncontrollable acceleration‖ problem had surfaced into the public‘s eye.

1.1Factors of the Problem
As of March 2, 2010, the number of deaths linked to possible unintended acceleration in Toyota vehicles in the United States since the year 2000 has risen to 52, according to safety regulators in the automotive industry. (Hurst) Toyota is not unfamiliar with issues ―uncontrollable acceleration‖ problems. Since 1986 Toyota has been ordered to recall cars by the National Highway Traffic Safety Administration (NHTSA) because of ―speed control‖ problems due to defective car models. Since 1986, ―unwanted acceleration‖ problems have reappeared during production testing and consumer usage in 2003-2007. During roughly five years of NHTSA investigations regarding accelerator issues (2003-2008), Toyota internally dealt with what were considered ―isolated incidents‖ in production pointed out by NHTSA. NHTSA and Toyota disregarded 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

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2004 due to a lack in findings. After two more investigations, between the years 2004-2006, performed by NHTSA, it was said to be problem with the positioning of the front floor mats. At this point in 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 (~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 to date (March 2, 2010) 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 Toyota‘s full cooperation with U.S. government officials.

(Timeline Appendix B)

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1.2 Problem Statement
The brand of Toyota has been seriously damaged. The Toyota Corporation, which claims to be a top competitor for having the safest cars in production, now faces scrutiny because of recalls in recent history. The Toyota recalls visibly 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 price has fallen 15%. (Toyota Recall) The result of Toyota‘s recall is a $21 billion dollar loss in market share (Shunk). The factor of this drop in valuation can be summarized as a lack in faith in the Toyota Corporation by consumers and investors. Any time there is a product recall, there is something obviously malfunctioning in the product a respective company produces. In this case, Toyota not only recalled a product that was defective and causing fatalities, but they did so in a massive-scaled effort after several years of failed investigations. Due to the fact that the recall effort was carried out after problems started to arise, the public saw it as Toyota‘s lack of commitment in their safety sector. Although this may create 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 the recall crisis. Due to a lacking of trust in the Toyota product and substandard investor communications, there is a lacking trust in the Toyota Corporation, which ultimately affects its stock price and investor involvement.

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2. Background Information
The Toyota Motor Company was founded in 1935 by Japanese inventor, Sakichi Toyoda. Toyoda was the owner of Toyota Spinning and Weaving Co. and only created an automotive division in his company after he sold a patent for a power-loom to a UK company, Platt Brothers and Co., Ltd in 1929. In 1933 the Toyoda had created an automotive division in his company and started production in the following year. In 1937 Toyota Motor Company was becoming globalized and multiple production plants were was 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. Toyota has found great success in their efforts to take part in globalization. Toyota produced 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 as Toyota‘s. 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.

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3. Identification of the Problem 3.1Violated Trust
Toyota Motor Corporation‘s 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 into Toyota vehicles were the catalyst behind the recall crisis Toyota faces. 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.‖ In addition to selling a dangerous product, consumers and investors can become distrustful in the recent news 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 potential for company devaluation. By not saying anything, company transparency with the public is instantly crowded. It makes investors and consumers wonder why Toyota did not fully disclose information regarding potentially life threatening vehicles before people started to become victims. Toyota‘s responsibility as an automaker is tainted and the trust of consumers and investors must be earned back.

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3.2Ongoing Confusion
It is an extremely hard task to put the last several years of Toyota‘s recalls in perspective. It is even more confusing to understand what exactly is being recalled in each respective recall. During the first few years of Toyota‘s 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 in fact dying behind the wheel. Only after the recalls became a crisis did top tier management offer signs of condolences and insight as to what was going on from within. Due to the lack of transparency in the Toyota Company, the public was left in the dark. Opinions of the Toyota Company‘s 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). Also, there is also the possibility that owners and investors may not receive letters of product recalls due to changes in address and the purchase of Toyota vehicles from third party sellers. Solution must be made to ensure proper, widespread communication is executed to ensure effective messages and corporate transparency.

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4. Significance of the Problem 4.1 Reputation
In times of corporate crisis, not only does the stock price become devalued, but more consequently, the Toyota brand does as well. When evaluating the significance of Toyota‘s problem, one must realize that the stock price is a fleeting, temporary figure that fluctuates based current, disclosed information about a company. The reputation of the Toyota Company, however, is based on history, legacy, and Toyota‘s 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; however, it can be reflected in the stock price.

4.2 Financials
The reputation of the Toyota Corporation is severely tarnished by recalling a figure of 8.5 billion vehicles, which may be evidence for the $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). On top of Toyota‘s 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).

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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. However, the Toyota brand, regardless of how valuable, will still be forever tarnished due to a lack of recall communication and transparency. The tarnished reputation of Toyota not only affects customers but also stakeholders in the company. Since 2004, brand consultancy Interbrand has consistently rated it 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. Toyota‘s reputation needs not to be rebuilt, but to be strengthened and proved committed to the stakeholders of the Toyota Company to gain the trust of investors and consumers.

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II.

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

.
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.

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* March 2007: NHTSA opens investigation into pedal entrapment in some Toyota vehicles. That leads to recall of 55,000 floor mats in September. * 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.

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* 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. * 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. C.

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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

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