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Toyota: The New Japanese Word for "Toast"?

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If you've paid attention to the news at all in recent days, you've probably seen some of the stories: Toyota (NYSE: TM  ) , long seen as the world's automotive "quality" king, a safe and shining global brand whose reputation was on par with companies like 3M (NYSE: MMM  ) , Procter & Gamble (NYSE: PG  ) , and Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) , has been forced to recall millions of vehicles because of a potentially dangerous problem.

The problem, in a nutshell, is something called "unintended acceleration." There have been a number of accidents as a result of this, including one last August in which a runaway Lexus killed an off-duty California Highway Patrol officer and his family.

To add insult to injury, Toyota has been ordered to stop selling eight models in the U.S. and a number of other countries until changes can be made.

The company, which said for months that the problem was because of incorrectly-placed floor mats, is now saying that the culprit is a part used in the gas pedal assemblies on several cars, that it has a fix, and that dealers are on the case. Assuming that the company has correctly identified the problem -- not necessarily a safe assumption, for reasons I'll get to -- that's good news if you own one of these vehicles.

But it took the company an awfully long time to get to this conclusion, and the repercussions are likely to drag on for months, maybe years -- several class-action lawsuits have already been filed. And some of those plaintiffs allege that the problem isn't a gas pedal issue, but is rather linked to a bug in the software used in many Toyota models.

It's a bad, bad dent in the company's once-lustrous PR armor. But is this the end of Toyota?

How bad will the fallout be?
Toyota still has an awful lot of goodwill in the U.S. -- because of its reputation for quality, and because it is widely seen as the "greenest" of major car companies, thanks to the distinctive Prius. But that goodwill is under unprecedented assault -- as my fellow Fool Tim Beyers pointed out the other day, a number of Toyota quality issues have come to light in recent months, and there's some suggestion that the company has been trying to cover up troubles in some models for a while.

The near-term signs aren't good: While key competitors Ford (NYSE: F  ) , General Motors, Nissan, and Volkswagen reported impressive year-over-year sales gains for January, Toyota's fell 16%, to the lowest monthly levels since 1999. Archrival Honda (NYSE: HMC  ) experienced a small decline, mostly because of falling truck sales -- but still reported soaring profits, which surely did nothing to lighten the mood at Toyota HQ.

Meanwhile, Toyota's foot-dragging is coming under scrutiny from another corner: U.S. Secretary of Transportation Ray LaHood said yesterday that his department is "not finished with Toyota" and will be watching the recall and repair efforts very closely.

Worse, Congress is getting involved, with upcoming hearings intended to examine, among other things, whether Toyota has in fact correctly identified the source of the problem. While these hearings are unlikely to result in business-breaking penalties, they will serve to keep the issue in the news for weeks -- and maybe months.

The upshot
Much as many American-car partisans might like Toyota to die a painful death, that's awfully unlikely. But its  recently-inherited title of "world's biggest automaker" is in real jeopardy, with GM already talking about reclaiming it in coming months.

Whether this crisis represents an opportunity to buy Toyota stock is another question, one that's not yet simple to answer. The stock, which traded in the low $90s as recently as a few weeks ago, is about $73 as I write this -- but I'm not sure we've seen the worst of this particular crisis yet. Toyota's financial health is better than that of most major automakers, but if sales declines continue, things could get really ugly. 

Still, as I said, the company isn't going away. The odds of this being seen in retrospect as a painful bump on the road seem a lot higher than the odds of this being the beginning of a permanent decline, and in that sense, this crisis might have created a good time to buy.

What do you think? Is Toyota stock radioactive -- or an intriguing buy? Leave a comment below and let me know.

Fool contributor John Rosevear owns shares of Ford. Berkshire Hathaway and 3M are Motley Fool Inside Value choices. Berkshire Hathaway and Ford Motor are Motley Fool Stock Advisor recommendations. Procter & Gamble is a Motley Fool Income Investor pick. The Fool owns shares of Berkshire Hathaway and Procter & Gamble. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.

Read/Post Comments (13) | Recommend This Article (18)

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 February 03, 2010, at 4:20 PM, spawn44 wrote:

    Toyota's stock was heading south long before this recall. They finally have real competion from the american automakers, which they never had before. My money would be on Ford to more than double before Toyota gains 50%.

  • Report this Comment On February 03, 2010, at 5:25 PM, djbruss wrote:

    Toyota stopped watching their back and stopped listening to it's customer base. They have taken a lot for granted of late because of the brillient reputation they had built or

    believed they had built to last forever.

    Funny thing about reputations - they remain quite fickle and can change in a heart beat.

    It's surprising Toyota did as good as they did for as long as they did in todays loosy economy.

    It's turning around and time this country takes back our jobs and ability to create great products of our own to use and export.

    Our country has gone the gamut, from agriculture, to manufacturng, to client service only, and recently to almost nothing at all.

    We need to go back to our history and take a good hard look at what it was that made us great, and it sure wasn't

    TOYOTA !

  • Report this Comment On February 03, 2010, at 7:32 PM, baldheadeddork wrote:

    I did a blog on this today, and I'd appreciate any comments from you, John.

    Toyota's goodwill is gone. It had been sinking before the recall thanks to a notable uptick in quality related problems over the last ten years, a decline in the overall value of their cars compared to the competition, and a buying experience that ranks Toyota in the bottom third of the JD Power buying survey. The unintended acceleration recalls were just the coup de grace.

    This matters because the golden reptuation allowed Toyota (and Honda) to sell cars with about half of the manufacuturer incentives as less admired brands. Even if the pedal shim and floor mat fix solve the unintended acceleration problem, Toyota is going to have to increase their incentives by hundreds of dollars per car at minimum. As GM, Chrysler or Ford will tell you, once you get customers hooked on rebates and subsidized financing it's hell to sell cars without them. If they get on that track - and I don't know how they get buyers back into their showrooms without a huge increase in incentives - it will negatively affect Toyota's revenues and profitability for years to come.

    That's the good option. The bad outcome is that the recalls don't fix the problem. If that happens the bottom is going to fall out. Toyota is probably too big to fail, but it's not too big to be the next Citigroup.

  • Report this Comment On February 03, 2010, at 8:15 PM, fadler1 wrote:

    The BIG THREE is now and will likely be forever, the BIG SIX. There will be problems whether it is 12.5MM units recalled by Ford for fires and cruise controlers or Toyota for accelerators. Toyota originated "zero defect" in the U.S. while cars made in the U.S. on Fridays had a fist of screws left under the seat. Now, Toyota, making cars in the U.S. suffers the same problems as U.S. auto makers but at $18 dollars an hour in benefits less than the U.S. makers not yet in bankrupcy. There is room for all of them but at much lower total wage packages since in the end, the U.S. consumer looks for "value" and "quality" and the labor cost has to get cost competitive with the rest of the world. It ain't rocket science tightening lug nuts and the pay will come down to where it has to and all the makers will make cars in the U.S. with U.S. workers and parts made all over the world. Protectionism is impossible now when the car maker buys their TV from China.

  • Report this Comment On February 03, 2010, at 8:31 PM, ChannelDunlap wrote:

    I bought today during after-hours. $73, in fact. The bad press seems to have really picked up lately, so acting on the "Greedy when others are fearful" principal, I took the plunge. It should prove to either be a really smart, or a really boneheaded move. Time will tell.

    Unlike the other comments here, I was unaware of any decline in Toyota's reputation. People still seem to think of them as a high quality vehicle, even after this recall. I fully expect to this to be a small bump on the road, and once they definitively resolve the issues, it will be back to being #1. At this point GM has a far worse reputation, still.

  • Report this Comment On February 03, 2010, at 9:33 PM, ATLGuy67 wrote:

    This is interesting to me. I own a Toyota 4Runner which I bought new in 2000. I found it interesting that my salesman handed me a survey where he check exceeds expectations on all attributes and told me to sign it. His reason was that he made very money in commissions because he gave me too good of a deal. He explained that he would get $150 bonus if he turned in a perfect post sales survey. My wife bought a Lexus and had a very similar strange experience. I found out from the Lexus dealership that these surveys get sent to J D Powers. My neighbor bought a Ford Expedition. She also got a survey, but it was completely anonymous and no strange pressure from her salesman. Some other people have told me similar experiences from Toyota. Some Japanese companies have a "business is war" attitude and will do almost anything to grow share. I am curious if anyone else has had a similar experience. I just think it seems very strange.

  • Report this Comment On February 04, 2010, at 8:29 AM, ecoloney wrote:

    I owned a Toyota once back in the early 80s and vowed to never own another one and haven't. Face it, they're mechanical and they break down and wear out just like anything else mechanical. It's their marketing that makes the difference in customer/owner attitudes.

  • Report this Comment On February 04, 2010, at 10:04 AM, BlindSkuirrel wrote:

    Blah, Blah, Blah - Media is out of control! I own a 2000 Ford Windstar. I recently recieved a recall notice (one of SEVERAL I might add) that basically stated the freak'n van could blow up without anyone even near it. Is any media reporting that one? It's beyond rediculous - let's ALL jump on the Bash-Toyota-Band-Wagon (LOL).

  • Report this Comment On February 06, 2010, at 2:25 PM, Jurisprude wrote:

    I am crossing my fingers like ChannelDunlap based on a few premises, in no particular order. First, safety problems/recalls are not uncommon in this industry, to wit: Ford rollovers; Ford tire issues (Goodyear I think?); Volvo having electrical defects in many 1983-1985 models; etc. In this litigious day it is not surprising that a company would not rush to admit liability, with regard to allegations of a "coverup." Consider food and produce recalls. (Is anyone still afraid of spinach?) I think TM's reaction has been reasonable based on what I have seen. Second, consistent with a fundamental principle espoused on this website, I believe in selecting companies that you understand (on some level) and in which you have confidence. Like any "long-term relationship" there are inevitably bumps on the road. Third and finally, as the owner of a 2005 Prius that I purchased used in 2007 at 55,000 miles now over 125,000, I could not be happier with my car. This is also consistent with Fool philosophy vis-a-vis the advantage(s) of buying a "pre-owned" vehicle, since my understanding is the TM recalls involve 2009 or 2010 models. Considering the "automatic" depreciation (sorry) of a brand new vehicle, financially it makes more sense (to me) to ride a horse already somewhat broken in.

  • Report this Comment On February 06, 2010, at 2:45 PM, TLassen wrote:

    "The BIG THREE is now and will likely be forever, the BIG SIX. There will be problems whether it is 12.5MM units recalled by Ford for fires and cruise controlers or Toyota for accelerators. Toyota originated "zero defect" in the U.S. while cars made in the U.S. on Fridays had a fist of screws left under the seat".

    Yep Toyota Camrys are built in Kentucky of the great US of A !

  • Report this Comment On February 06, 2010, at 2:50 PM, starbucks4ever wrote:

    "Is Toyota stock radioactive -- or an intriguing buy?"


  • Report this Comment On February 08, 2010, at 8:19 AM, HungryJap wrote:

    Here is what has occupied me these days when it comes to whether I should be long or short with Toyota. Everybody would agree that what made Toyota be world-famous was the quality. Now, the quality is in question. Is there anything else that can give their sales and thus stock price a boost?

    I don't see that those recalls going on have the same effects as the other routine recalls in the industry do because Toyota once climbed to the top (for just a quarterly sales) a few years back for the very reason, quality, and that reason only. The reputation was established thatToyota cars simply never get broken.

    It's true that those do not get broken alright despite of all those recalls. Those, however, did kill drivers and passengers.

    So, to me, buying Toyota stock now looks as if I bought tobacco companies under the Clinton administration.

  • Report this Comment On September 13, 2010, at 12:22 PM, aiyanalunette wrote:

    I recommend using NJ Toyota check them out at

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