Toyota's Troubles Are Just Beginning

Last week, Toyota (NYSE: TM  ) said it would recall 2.3 million vehicles in the U.S. to fix sticking accelerator pedals. On Tuesday, the Japanese automaker ordered dealers to suspend sales of eight models that may be affected.

I wish I were surprised by this news. I'm not. Toyota warned in November that as many as 4.2 million vehicles could be affected by an accelerator pedal problem. Of those, 1.7 million are subject to the present recall, Bloomberg reports.

It's a stunning turnabout. In late 2008, Fools wondered aloud whether Ford (NYSE: F  ) would be dismantled in bankruptcy. Yesterday, the automaker reported its first annual profit since 2005 as its once-mighty Japanese rival struggled to allay the fears of concerned customers.

Toyota's reputation for quality, once on par with premium names such as FedEx (NYSE: FDX  ) and Procter & Gamble (NYSE: PG  ) , is waning. Last month, The Los Angeles Times published an expose in which it found that the automaker had a surprising history of obscuring defects in some of its vehicles. The stock has suffered since and is down by more than 15% from last weeks' high. Honda Motor (NYSE: HMC  ) is down by 6% over the same period.

Taken for a ride
To me, the sell-off in Toyota shares is well deserved. I'm among those who've been on the business end of the company's stiff-arms. Our Sienna minivan's system for preserving and regulating run-flat tires has failed repeatedly, costing us thousands.

What's frustrating is how Toyota has chosen to deal with the issue. The local dealer denies there's a problem of any kind with the vehicle, even though there's extensive evidence that older Sienna models like ours suffer when equipped with run-flats.

Toyota won't be as lucky with this recall. There are too many cars involved, too many dealers likely to be affected, too much media coverage, and too severe a problem.

Don't think this is over, Fool. It's only just beginning.

But that's my take. Now it's your turn to weigh in. What will it take for Toyota to recover its reputation? Would you short the stock now? Would you buy? Make your voice heard using the comments box below.

FedEx and Ford are Motley Fool Stock Advisor selections. Procter & Gamble is a Motley Fool Income Investor pick, and the Fool owns shares of it. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. The Motley Fool is also on Twitter as @TheMotleyFool. The Fool's disclosure policy is feeling Scottish today but left its kilt at the dry cleaner.


Read/Post Comments (9) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 29, 2010, at 2:46 PM, catoismymotor wrote:

    Being the biggest does not always equal to being the best. GM is the perfect example. Toyota has now fallen into this trap. You think you can relax when you are at the top. But you need to fight harder to stay up there.

  • Report this Comment On January 29, 2010, at 3:00 PM, Optimyst wrote:

    The sell off is very well deserved. In fact, I'm really surprised it hasn't dropped more. And what puzzles me even more, is that Ford stock is dropping way further than Toyota! After recording two straight quarters of profit and positive cash flow, and everyone assuming some Toyota customers will move over to Ford. It makes no sense.

  • Report this Comment On January 29, 2010, at 3:55 PM, BobMichigan wrote:

    Finally people are looking at this company with a realistic eye.

    It has been an open secret in the auto industry that the Japanese companies fix "individual issues" in warranty rather than do recalls. It is a culture thing, where they do not consider it lying to deny an issue is they do not KNOW it is an issue. Our definition of the word "know" is far different than theirs.

    All this talk about Toyota's size has nothing to do with this. The Tread act resulting from the Ford/Firestone debacle requires the automakers to compile and turn over warranty information. Suddenly these issues are becoming "known" to Toyota.

    Now they are suddenly fair game for our shark lawyers, who have been hurt badly by the GM and Chrysler bankruptcies. They are in for a hard ride.

    Don't be fooled by the pedal fix, this issue goes far deeper.

    Get in any Ford, GM, or pretty much any vehicle not made by Toyota or Honda with electronic throttle control. Step down on the gas and just touch the brake pedal and the throttle automatically goes to about 25%

    Even a completely stuck gas pedal cannot runaway on a new Chevy.

    Toyota and Honda did not want to offend the "tuners" who like to smoke their tires.

  • Report this Comment On January 30, 2010, at 11:11 AM, TURI57 wrote:

    Bob... I copied and paste a peace of your comment...the part about the Ford and GM pedals not sticking... I hope you don't mind...interesting.

  • Report this Comment On January 30, 2010, at 11:30 AM, TURI57 wrote:

    WALL STREET 1/29/2010.

    TOKYO—Toyota Motor Corp.'s massive recall comes at a time when Japanese manufacturers across the board, known for their attention to detail and craftsmanship, are facing a sharp spike in customer complaints, accident reports and product recalls at home.

    The number of incidents rose dramatically after the introduction of a new law in 2007 requiring Japanese companies for the first time to report all accidents involving their products that result in death or major injury. In the past, it was left to the company's discretion to disclose accidents. A series of high-profile product safety scandals spurred a change in regulation.

  • Report this Comment On January 30, 2010, at 11:30 AM, OneLegged wrote:

    My Tundra (ZERO problems so far in 81,000 miles) has a throttle by wire. That is, there is no mechanical connection between the throttle pedal and the fuel delivery to the engine. In other word there is no throttle cable. I can't help but wonder if the problem they are having with sticking throttles is electronic and not mechanical.

  • Report this Comment On January 30, 2010, at 5:25 PM, catoismymotor wrote:

    US News & World Report: Toyota Shows How Giants Stumble

    http://finance.yahoo.com/news/Toyota-Shows-How-Giants-usnews...

  • Report this Comment On February 01, 2010, at 2:45 PM, PSU69 wrote:

    I opened an office in Tokyo with a pal from Toyota. I worked with Toyota in Koln. I met TRD people and sold products to them in CA. Our 2001 Toyota Celica GT-S has been flawless (parked next to my Porsche). They will work thru this hassle. I am considering shorting them just due to the mob mentality as this will panic some folks. If it drops enough, I will buy a bunch.

  • Report this Comment On February 07, 2010, at 12:14 PM, HammerMack wrote:

    Japans Toyota,to big to fast,when Toyota expanded so much Toyota was not able the keep the same quality control.To many knew assembly lines.Building on this large of scale is knew to Japan..I would wait to see what happens the next few months.The best is jet to come.I would short Toyota.

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