Toyota’s Massive Recall Could Dent Company Reputation

November 26, 2009 Updated: November 27, 2009

WASHINGTON—Toyota Motor Corp.’s recent recall of a record 4.26 million vehicles to fix an accelerator problem will put a strain on its finances, but the repercussions over the company’s image and reputation could be even greater.

The recall is confined to North American cars, and aims to fix a gas pedal issue where the pedal could get jammed by the floor mat, causing the vehicle to accelerate endlessly. The recall was announced after four people died near San Diego, Calif. due to problems that may have been caused by a faulty accelerator in a Lexus ES 350.

The recall affects a host of Toyota and Lexus models sold in the United States and Canada, including the Toyota Camry, the best-selling vehicle in the United States.

“We are in the process of developing appropriate vehicle-based remedies that will help prevent accelerator pedal entrapment,” said Irv Miller, Toyota vice president of Public Affairs, in a statement.

In the meantime, the National Highway Traffic Safety Administration (NHTSA) has recommended all current owners of affected models remove the driver's floor mat to minimize risk of jammed gas pedals.

Separately, the company will install an automatic brake system in some vehicles as drivers reported sudden acceleration, the U.S. Department of Transportation announced on Wednesday. Both issues affect cars made by Toyota and its luxury marquee Lexus.

In another separate incident, Toyota this week said it would recall 110,000 Tundra pickup trucks due to frame rust that could dislodge spare tires, causing them to fall off the vehicle at high speeds creating hazardous conditions for other drivers.

A Costly Affair

The gas pedal recall—which involves the manufacturer installing a small gas pedal—could cost Toyota more than $200 million, estimated car industry research firm The Nikkei, Japan’s biggest business newspaper, said the recalls would cost tens of billions of yen, or hundreds of millions of dollars, without mentioning specific figures. Other analysts have pegged the price tag at between $500 million to $1 billion.

The company didn’t speculate on the cost of the recalls, which at this point is still hard to estimate. But spokesperson Hideaki Homma said in a Bloomberg interview that the cost won’t exceed the $4.9 billion the company has already reserved this year for warranties.

On Nov. 5, two California residents—Seong Bae Choi and Chris Park—filed a class-action lawsuit against Toyota alleging occurrences of unintended acceleration by their Toyota cars. They claimed that Toyota had not remedied the situation and are seeking additional plaintiffs.

Reputation Hit?

For Toyota, the recall couldn’t have come at a worse time.

The company recently overtook General Motors Co. as the world’s largest automaker by volume. But so far this year, global sales are down more than 25 percent due to a slumping auto market.

With consumers still reluctant to make large purchases, and facing the re-energized GM and Ford Motor Co., brand recognition and image are paramount in the post-recessionary sales environment.

Toyota is perceived as one of the world’s best in quality and reliability, but in recent years it has slipped a bit—last year it recalled almost 600,000 Corolla and Matrix cars, and in 2005 it recalled almost a million vehicles to fix a steering-related problem.

Some industry experts have wondered if Toyota’s rapid growth and expansion in overseas markets—and its quest to become the world’s No. 1 automaker—has come as an expense to its engineering and quality control.

To analysts, Toyota’s entire business is based on its reputation of quality—the company is not known for its aesthetic appeal, driving enjoyment, or sports car-like performance. Reliability concerns could dent the company’s sales.

The recalls could tarnish the company’s image of building reliable vehicles, and Toyota may not be done yet.

“More recalls may follow. Toyota has common parts and platforms across many models, so a defect found in one component has a broad impact,” said Advanced Research analyst Koji Endo in an interview with Bloomberg TV.

Cuts Bonus For Managers

Toyota announced on Thursday that it will cut bonuses for managers by as much as 20 percent as the automaker grapples with losses for a second straight year.

The cuts affect around 8,700 managers in Japan. The company’s top executives have already given up bonus compensation for this year.

Japanese workers typically receive bonuses twice a year, depending on company performance.