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

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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

Investor/Corporate Communications

April 26, 2010

 Toyota: A Case Study on the need for trust in the automotive industry
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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 Toyota‘s 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 Toyota‘s Reputation .........................................................................................................7

4.2 Toyota‘s 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 Toyota‘s ―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, Toyota‘s ―unwanted acceleration‖ has reappeared during production testing
and consumer usage in 2003 through 2007. Between 2003 and 2008, NHTSA investigated
Toyota‘s 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 Toyota‘s full
cooperation with U.S. government officials. Perhaps this apology was too late as dozens of
deaths were associated with Toyota‘s 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 Toyota‘s valuation were during February and
March of 2010 when the most recalls occurred worldwide. The result of Toyota‘s 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 Toyota‘s 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 Toyota‘s 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 Toyota‘s business model and have helped
Toyota retain a loyal customer base.

3. Identification of the Crisis

3.1 Violated Trust

The 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 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. Toyota‘s 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 company‘s 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. Toyota‘s 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 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 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 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).
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 Toyota’s Reputation

In times of corporate crisis, not only does a company become devalued, but more
significantly, a company‘s brand does as well. When evaluating the consequences of Toyota‘s
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 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. 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 Toyota’s 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 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). Toyota‘s 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. Toyota‘s 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 company‘s 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

Toyota‘s largest recall worldwide. February 5, 2010
was when CEO Akio Toyoda apologized for the crisis.

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-much-
wi_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--52-
deaths-alleged-in-Toyotas#ixzz0m9t5yWJM. Detroit News. Retrieved April 22, 2010,
from www.detnews.com/article/20100302/AUTO01/3020398/Feds--52-deaths-alleged-
in-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-21b-
in-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-have-
on-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