Like Its Cars, Toyota's Woes Aren't Stopping

First, here's the good news on Toyota (NYSE: TM  ) : On Thursday, they announced that they expect to declare a profit of 80 billion yen (about $881 million) for the fiscal year ending March 31, up from a 437 billion yen (about $4.8 billion) net loss in the year prior. Of course it is still less than rival Honda's (NYSE: HMC  ) fiscal year forecast of 265 billion yen ($2.9 billion), roughly double from the prior year.

Toyota's profit is despite the bad news, which is ... oh, where do I start?

Let's just say that the list of bad news is a long one, thanks to the company's poor handling of a variety of safety and durability problems with its products. Toyota's recent attempts to shoot itself in the foot are nothing short of spectacular, and it's getting worse by the day. I can barely write fast enough to keep up.

Thursday morning, for instance, brought news that the U.S. National Highway Traffic Safety Administration (NHTSA) is opening an investigation into brake problems on the new-for-2010 Toyota Prius. Apparently, the brakes sometimes kinda sorta fail to work when the car is going over rough surfaces, like potholes or bumps. At least four crashes are blamed on the problem in the U.S.

Toyota says that they found the problem, and a fix has been included in new cars sold since late January. And because the problem is related to a system unique to hybrids, they're checking their other hybrid models for similar issues.

That's all well and good. But really, the brakes aren't Toyota's real problem.

It's not the crisis, it's how you respond
As everyone who has ever read a book about the Watergate scandals will tell you, crises themselves aren't usually what do permanent damage to reputations. It's the responses to crises that show the world who you really are, for good or bad.

And Toyota's responses to crises in recent years -- engine sludge problems, that whole "unintended acceleration" thing, and now the brake issues -- have been slow, guarded, late, and seemingly incomplete.

Consider this: Toyota said, on Thursday in Japan, that they've known about the braking problem for weeks and have already implemented a fix on the production line. But on Wednesday -- just one day earlier -- they had said they were still "studying" the braking complaints and hadn't yet found a cause.

Memo to Toyota management: Folks, you can't be doing that.

How "protecting" a reputation can kill it
I get why Toyota management doesn't want to go public with reports of quality and safety problems. It's pretty simple: What's the first word most Americans think of when they think of Toyota? I bet its quality. Toyota's vehicles have been the darlings of Consumer Reports for ages. They may be boring, and I don't think they're particularly fun to drive for the most part, but they seem to stay screwed together and problem-free for years and years -- and lots of people buy them with that expectation.

Put another way, quality is the essence of what Toyota's selling. I think that's why they're so reluctant to send PR folks out to blow holes in their quality image in front of reporters.

Other car companies have (mostly) learned from bitter experience -- like Ford's (NYSE: F  ) adventures with Firestone tires on Explorers several years ago -- that prompt action to contain a story is the best way to go. The procedure should be: The company has some phone calls with regulators, they identify the problem, a press release goes out on some Friday afternoon announcing a recall, and it gets fixed, no big deal.

Big consumer-facing companies like Kraft Foods (NYSE: KFT  ) and Johnson & Johnson (NYSE: JNJ  ) -- heck, most companies -- surely have the same standard procedure: If something bad should come up, get out in front of the story. Disclose everything you know and take corrective action right away.

Toyota hasn't been doing that, and it has blown up on them big-time. Worse, now people might be starting to ask, What else are they hiding?

Whatever it might be, they'd better figure it out soon -- and tell us all about it.

Fool contributor John Rosevear owns shares of Ford Motor Co., which is a Motley Fool Stock Advisor recommendation. Johnson & Johnson is a Motley Fool Income Investor selection. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (16) | Recommend This Article (25)

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  • Report this Comment On February 04, 2010, at 5:57 PM, Milligram46 wrote:

    I have posted here since late 2007, early 2008, that the only difference between Toyota and General Motors was that Toyota had a big pile of cash under them and consumer goodwill. How things have changed in three years.

    Manufacturing over capacity at 32%.

    Reputation and product quality in free fall.

    A management structure clueless.

    Over reliance on profits on gas guzzling trucks and SUVs.

    Over segmentation resulting in too many models and parts, 17 different unique Toyota models alone, soon to be 18.

    Management structure that has scaled with corporate growth.

    Sales based more on spawning salmon returning to the show room and writing car loans to anyone with a pulse.

    GM?

    No - Toyota in 2010. Worst of all, as the above story indicates, its not the crisis, its how you respond. Toyota has known about these issues since 2004, the government has known since 2007. Instead of responding they tried to cover it up.

    The Ford Fusion hybrid recall today is a sharp contrast to what Toyota is doing with the 2010 Prius.

    Toyota has over 100 complaints on brake failures on the Prius. Fifteen reported car accidents attributed, three injuries. They quietly made a change to the programming on Priuses last month, but made no effort to recall or TSB the issue on the 270K vehicles on the road. That is unacceptable in any circle.

    Consumer Reports editors reported to Ford a brake pressure drop off, not a failure on the Fusion hybrid they were testing. No accidents, no injuries, no NHTSA complaints. Ford changed the software and announced a recall for all 2010 models.

    THAT is how a recall should be done - not waiting until the bodies pile up like a bad scene from the movie Fight Club.

  • Report this Comment On February 04, 2010, at 10:16 PM, btukwh wrote:

    The biggest difference between Toyota and GM is that Toyota makes cars people want to buy. With a very few exceptions GM doesn't.

    Ever see anyone drooling over the new Impala, Cobalt, or dozens of other crummy rental lot GM cars? Me either.

    Stock price of Toyota and GM will tell the story in a couple of years.

  • Report this Comment On February 05, 2010, at 12:57 AM, Milligram46 wrote:

    Cobalt is in its final model year, being replaced by the acclaimed Cruze, a true world car, and the same platform at the Volt.

    The Impala is the last W-Body car GM builds, and the Epsilon I and II replacements, the Chevrolet Malibu and Buick LaCrosse have received high praise, and the Malibu is considered better than the Camry in build quality, ride, handling, has a better safety rating, gets better MPG, and is on the Consumer Reports recommend list.

    Five years ago no one was supporting a chubby over a Ford Five Hundred either. You need to stop living in the past. I sure don't see people getting all excited over a Toyota Corolla, Scion xD, Toyota Matrix, etc. etc.

  • Report this Comment On February 05, 2010, at 8:33 AM, TMFMarlowe wrote:

    btuwkh: But will people still want to buy them? After all, modern Toyotas are boring unromantic appliances for the most part, whose sole big selling point was the whole Consumer Reports halo. If that halo gets busted... I don't see a whole lot of people rushing to buy a RAV4 over something like an Escape, say, once Toyota's quality rep is taken out of the equation.

    For me, looking at where things are going in the US auto market, that's the big question: How badly will these events damage that halo?

    Thanks for reading.

    John Rosevear

  • Report this Comment On February 05, 2010, at 10:15 AM, Milligram46 wrote:

    I've thought about btuwkh comment above more and I agree with TMFMarlowe about the boring appliances.

    Here is my list of "cool" Toyota products (since they did bring up the drool factor above since 2000:

    Lexus IF

    Toyota FJ Cruiser

    (chirping crickets after that)

    Now for General Motors:

    Chevrolet C6 Corvette (heck the C5 for that matter too)

    Chevrolet Camaro

    Pontiac Solstice (defunct - sigh)

    Saturn SKY (defunct - sigh)

    Pontiac G8 GT/GXP (lives on as Caprice in 2011, ya!)

    Chevrolet Volt (started production last week)

    Buick Enclave

    Chevrolet Equinox (press wetting themselves over it)

    Chevrolet Cobalt SS (2.0L 260 HP 5-speed manual with limited slip and Brembo brake version)

    Cadillac CTS, CTS Wagon, CTS-V

    I don't think anyone could argue with the above list as representative of "cool" vehicles. Also noted they call out the fleet duty Impala above, when the Zeta Platform based Caprice comes next year (cousin of G8) with a lot of potential buyers hoping and praying they will be able to get one (and not just police/livery duty versions).

  • Report this Comment On February 05, 2010, at 12:19 PM, TMFBreakerRob wrote:

    Just wanting to add more confusion here....

    With regard to the statement "The biggest difference between Toyota and GM is that Toyota makes cars people want to buy. With a very few exceptions GM doesn't.".....keep in mind that GM is number one in the US market and Toyota is not. That indicates to me that a lot of people like GM products.

    Oh! Toyota is #1 in the world and GM isn't?

    True, but look at the markets where they both compete on a significant scale on equal footing:

    US: GM over Toyota

    Europe: GM over Toyota

    Rest of North America: GM over Toyota

    South America: GM over Toyota

    China: GM over Toyota

    India: GM over Toyota

    Hmmm....what's wrong here? Ah-ha! This is it!:

    Japan: Toyota over GM. Attaboy Toyota! You beat GM in your home market thanks to the Japanese government running interference to highly restrict imported cars! LOL

  • Report this Comment On February 05, 2010, at 1:42 PM, ButterflyOne wrote:

    I like my Avalon and think it is pretty cool. I've driven Ford and GM cars and they don't compare. I think Toyota will fix their problems and the company will move on. Personally, I think there are some cultural issues involved with the way they have poorly handled the recall, but if they face up to it now instead of trying to 'save face', it'll turn out ok for the company as a whole.

  • Report this Comment On February 05, 2010, at 2:27 PM, rocketboy2000 wrote:

    regardless... toyota is looking like a good stock buy right now. 20% depreciation on two weeks... this will pass and toyota has truck loads of cash on hand.

  • Report this Comment On February 05, 2010, at 2:52 PM, PrebSon wrote:

    Let's not forget that Toyota pioneered the hybrid car. If not for their forsight, we wouldn't even have 270K hybrids on the road today. And yes, I still drool over the Prius, even with the safety issues. What's really shocking about these issues is not as much that they are surfacing as it is that it's Toyota that is having the problems. Recalls of American cars are never shocking in my experience.

  • Report this Comment On February 05, 2010, at 3:01 PM, TMFBreakerRob wrote:

    "regardless... toyota is looking like a good stock buy right now. 20% depreciation on two weeks... this will pass and toyota has truck loads of cash on hand." -- rocketboy2000

    Thanks for getting the discussion back on track.

    And...you could very well be correct. If I were thinking of buying some I'd probably wait a bit to see if all the bad news was actually out though. On the other hand, there are other companies out there that appeal to me more as an investment. Not putting down Toyota, there's just other stuff out there that looks more appealing to me.

    Different folks have different investing goals, risk tolerance and perceptions of the probable returns....

  • Report this Comment On February 05, 2010, at 3:05 PM, TMFMarlowe wrote:

    PrebSon: Actually, Honda "pioneered the hybrid car", at least in terms of bringing a hybrid to the US retail market. The Prius came along several years after the first Insight.

    FWIW, I'm not interested in buying Toyota stock, but if I was, I'd wait.

    Thanks for reading.

    John Rosevear

  • Report this Comment On February 05, 2010, at 3:58 PM, LoPhreaque wrote:

    I guess I'm living in the past. Or Toyota's past.

    My newest car is a 1997 4Runner and I have 3 Landcrusiers ('86, '95 & '96) in the driveway with over 600,000 miles between them.

    Yes, this represents some wrench time to keep them all running, but these are from an era where they were using mostly metal in the cars and they could be worked on by someone with moderate skill (that's barely me). For me, it is Fool-ish with my car budget for any number of reasons. (Ever calculated how much gasoline you can buy for the price of a new car???)

    As long as I can keep them running I'll be happy and won't have to buy anything, from anybody, new.

    Are my cars cool? That is in the eye of the beholder for certain. But a fleet of debt-free machines that will start and run and go almost anywhere is way better "cool" for me than something shiny in my driveway.

    On the other hand, I'm going to watch for some crazy sale prices and pick up a new or used (in my mind) perfectly good Toyota for a crazy good deal...

    David

  • Report this Comment On February 05, 2010, at 5:46 PM, TMFMarlowe wrote:

    LoPhreaque, I wouldn't mind living in Toyota's past... if someone dropped a clean '85ish Supra in my driveway, I'd be delighted. They have made some excellent cars.

    Thanks for reading.

    John Rosevear

  • Report this Comment On February 05, 2010, at 8:15 PM, Milligram46 wrote:

    +1 on the Supra!!!

    Also +1 on the Honda Insight two-door being the first hybrid you could buy, built by Honda.

    It is also a very common misconception that Ford bought their hybrid technology from Toyota, also untrue. Ford and Toyota agreed to joint licensing instead of arguing who invented the technology first and hurting the technology itself, and both car companies in the process.

    The Toyota hybrid system is also ineffective for applications in trucks and SUVs. For example the Highlander hybrid cannot be used for off-road purposes (water and electric motors don't get along) and can't tow more than 1,000 pounds, which when you think about it makes the "U" part stand more for useless than utility.

  • Report this Comment On February 09, 2010, at 9:17 AM, PrebSon wrote:

    TMFMarlowe,

    I beg to differ with your comment. When I say pioneer, I'm not thinking of just the US. Toyota first introduced the hybrid car in Japan in 1997. True, it came to the US a few months after the December, 1999 Insight introduction, but I still say that they are the ones who pioneered the modern day version of a hybrid electric system.

    I would also say that they popularized the concept, seeing as how the Insight sold so poorly that Honda eventually abandoned it then reintroduced it as a Prius clone. Too bad, I actually liked the original Insight. I thought it was attention-getting based on its lines and the gas mileage was much, much better than the Prius.

  • Report this Comment On February 17, 2010, at 7:36 PM, bigjohnson2 wrote:

    rumor has it that toyota abandoned its QC of its gas-powered models. seems like the hybrid models were not inspected properly, either. now, the president of the company or north american division(?) acts as though the 8 model recalls are just a minor problem. it remains to be seen if the recall is a minor problem.

    toyota apparently has plenty of cash. that's good. hopely, the company will increase inspections, redesign the faulty systems properly, insist it's suppliers know exactly what the changes are and maufacture the parts properly. the affected models will be continually produced and stored at the plants until the redesigned parts arrive. the alternative will be to slow the lines severely or stop them totally until the proper parts arrive and the lines are restarted. for efficiency, affected models in the storage areas at the plants will have to be fixed before shipment to dealers. all affected models in storage yards in the various countries, the dealer's yards, customers vehicles: field repair. ain't cheap!

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