What Really Happened to Toyota

We've had runaway Lexuses and horrible accidents. We've had Priuses that wouldn't stop and Corollas that wouldn't steer. We've had smoking guns, and we might have more.

And we've had lots and lots of that special flavor of executive hubris that industry-watchers have come to associate with Toyota (NYSE: TM  ) .

Now, car shoppers who would have been slam-dunk Toyota buyers just a few months ago are making other choices. A mid-February snapshot of the U.S. auto market by researchers at TrueCar.com showed a steep drop in Toyota's market share compared to January, with the bulk of those lost sales going to archrival Honda (NYSE: HMC  ) and surging Ford (NYSE: F  ) .

Even Consumer Reports, arguably the biggest single external force behind Toyota's U.S. success in recent years, could be turning its back: The magazine's annual Top Picks list, which has routinely featured four or five Toyota products in past years, had just two for 2010. Recommendations on all of the models affected by the unintended-acceleration problems have been "suspended" until the issues are resolved.

For years, Toyota has been considered the very paragon of reliability, the maker of cars and trucks that just worked. They weren't necessarily exciting or fun to drive, but they got good mileage, did their jobs without fuss, and lasted a long time. That was an appealing formula, and it took Toyota -- briefly, at least -- to the very pinnacle of its industry.

Then everything started to fall apart. What happened? And can Toyota turn it around?

What really happened
Akio Toyoda, Toyota's CEO and the grandson of its founder, spoke to the House Oversight Committee on Wednesday. He occasionally stumbled; how can he be "absolutely certain" that the acceleration problem isn't an electronics issue, when his own engineers haven't figured it out yet? But on the whole, I think he took exactly the right tone -- emotional, serious, and contrite:

Toyota's priority has traditionally been the following: First; Safety, Second; Quality, and Third; Volume. These priorities became confused...We pursued growth over the speed at which we were able to develop our people and our organization... You have my personal commitment that Toyota will work vigorously and unceasingly to restore the trust of our customers.

As I see it, that's the whole thing in a nutshell. The company grew and grew, and one day, it got to the point where it could see the top of the mountain -- the pinnacle long occupied by General Motors, then the world's largest-selling car company. GM had been stumbling for decades, and Toyota saw an opportunity.

So the company went for it. Toyota threw massive resources into marketing, and it seemed to build new factories and launch new models as quickly as possible. The company wanted to get those sales figures up just as quickly as possible, it seemed, before GM -- which in recent years has been slowly, slowly turning itself around -- could recover its footing and start to surge ahead.

But all that emphasis on growth came with a price. Long-standing, meticulously quality-obsessed processes -- The Toyota Way, it had been dubbed -- got compressed. Corners got cut, as we're now learning. The products -- and customers -- suffered.

And until yesterday, the company's executives reacted just about as badly as a company could react, first with denials, and then with arrogance. Longtime customers started to explore alternatives, and found that they were pretty good. Sales fell. Congress got involved.

And here we are.

The only way out
Toyota isn't the first company to suffer the consequences of overexpansion. Business history brims with examples: Starbucks (Nasdaq: SBUX  ) , Gap (NYSE: GPS  ) , Bank of America (NYSE: BAC  ) ... the list goes on and on. But Toyota's problems can't be solved by closing a few stores and enduring several quarters' worth of bad numbers. We are well beyond the retrench-and-move-on stage.

So what can Toyota do? And how will this mess end? I can see events going one of two ways:

  • The steamroller returns. Toyota uses its CEO's performance as an effective PR springboard, the vehicle problems get convincingly addressed, resonant apologies are made, a few executive heads roll, and the company comes out swinging with big incentives and a massive advertising campaign. Lawsuits continue for a while, but the media turns its attention elsewhere. Within a few months, Toyota reclaims its market share, and the fuss is largely forgotten.
  • The train wreck continues. Toyota's PR efforts continue to stumble, more revelations come to light, criminal investigations gain steam ... and the company comes out swinging with big incentives and a massive advertising campaign, which falls flat. Toyota falls to perennial also-ran status in the U.S. market and loses immense prestige at home.

As you can see, I think the incentives and marketing blitz are coming either way. Well-wired Detroit pundit Peter De Lorenzo hinted on Wednesday that Toyota is preparing a $2 billion effort for this spring. I will be surprised if he's wrong -- that is exactly how I would expect Toyota to respond.

Can Toyota do it?
But will such a plan work? Toyoda's tone was a good model for the attitude his company needs to have going forward, but success will depend on how events play out from here. It's long past time for the company to seize the initiative and -- to put it in PR terms -- start driving this story instead of reacting (badly) to it. Toyota's started to do that. But there are still major pitfalls ahead.

As for Toyota stock, if the company manages to pull off the steamroller thing, there might be a nice bounce to ride. However, that will depend on what the true cause of the sudden acceleration problems turns out to be. If it's a problem with the cars' electronics, as some have theorized, that could be very expensive to fix -- easily hundreds of dollars per vehicle. Multiply by millions of affected vehicles, and that's enough to be a sizeable drag on earnings, which could mute any stock price rebound.

Of the two possibilities I outlined above, I'd say that success is a slightly more likely outcome as I write this on Thursday morning -- more likely than it was a day ago, thanks to Toyoda's as-good-as-could-be-expected performance. But personally, I'm still not anywhere near confident enough of that outcome to recommend a buy. Plenty of shoes could still drop.

Read more about Toyota's ongoing crisis:

Toyota may not be a value-priced steal just yet, but there are other great values out there now.

Fool contributor John Rosevear owns shares of Ford. Ford and Starbucks are Motley Fool Stock Advisor picks. Try any of our Foolish newsletter services free for 30 days. The Motley Fool's disclosure policy never steers you wrong.


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  • Report this Comment On February 25, 2010, at 12:43 PM, langco1 wrote:

    nothing happened to toyota .this is just a case of politicions putting on a show for taxpayers and looking for their payoffs.business as usual...

  • Report this Comment On February 25, 2010, at 1:43 PM, Jazzenjohn1 wrote:

    I tend to think Toyota had such a long history of quality and profit that executives feared ever having an incident that would reflect badly on Toyota, so much so that when the quality started slipping about 5 years ago, it was far easier to simply hire ex NHTSA employees to derail investigations and blame drivers. The perception of high quality allowed them to get away with it far more than other automakers would have been allowed.

    They also have a history of finding defects and hiding them while making changes to future models, like they did with the Sienna. They discovered a trim piece that came off and jammed the accelerator pedal down. Instead of having a recall and fixing the cars that were out there they hid the defect and designed a new trim panel that wouldn't trap the pedal. That left several years worth of Sienna's out there with a known defect they wouldn't fix. How many other defects are hidden?

    If Toyota is honest about addressing the unintended acceleration issue they will put a brake override in all models that have an electronic pedal for all the past cars, not just the next model year of the Lexus.

  • Report this Comment On February 25, 2010, at 2:03 PM, Milligram46 wrote:

    So for those looking at TM as a two bagger, I strongly suggest you look at this data:

    http://www.forbes.com/feeds/prnewswire/2010/02/24/prnewswire...

    Toyota market demand is down 23%. The impact of the recalls has had a halo effect on non-recalled vehicles and has spilled over to Lexus.

    The only other car makers to see this kind of one month decline? Saab and Pontiac AFTER the annoucements that they were dead brands walking.

    From the story...

    Other vehicles affected by the suspension were RAV4, down 34%, Corolla down 26%, Highlander and Sequoia each down 25%, Tundra down 22%, Camry down 19% and Avalon down 17%.

    Equally, market demand for the three models that were included in the floor mat recall but not in the pedal recall are also down. Compared to the 2010 average prior to Jan. 26, market demand for Venza is down 27%, Prius down 23% while Tacoma is down 8%.

    This data is a predictor of the new normal. If the new normal is Toyota sales down 20% after this was done, considering industry wide they are down 40% as it is, and Toyota sales declined 21% from 2008 to 2009, this would be a devesating "new normal." The storm mentions that Matrix demand is down 40%, however it is next to impossible to buy a Matrix seeing how there is technically, no new inventory remaining (GM dumped the inventory off their books with factory to dealer incentives, what remains is almost exclusively dealer owned, not floor financed, and would have to be titled as a used car, even if it was new).

  • Report this Comment On February 25, 2010, at 2:11 PM, TMFMarlowe wrote:

    Jazzenjohn1:

    "I tend to think Toyota had such a long history of quality and profit that executives feared ever having an incident that would reflect badly on Toyota,"

    I tend to think so too. Thanks for reading.

    John Rosevear

  • Report this Comment On February 25, 2010, at 2:16 PM, TMFMarlowe wrote:

    Milligram46:

    And HMC and F sales are up -- check out truecar.com's data. It's an interesting mid-month snapshot.

    The full-month sales numbers -- out next week -- are going to be very, very interesting.

    John

  • Report this Comment On February 25, 2010, at 3:19 PM, Milligram46 wrote:

    @TMFMarlowe

    All the data I've looked at have suggested that three biggest winners in this are Honda, Ford, and Chevrolet, or Honda, Chevrolet, and Ford depending on who's data you go with. Surprised not seeing Hyundai as a benefactor, but as you said, when the data comes out next week pop some popcorn, it is going to be entertaining.

    Of course with Honda being the big winner, those claiming that this is all about driving domestic sales and hurting Toyota manufacturing, it kind of smacks in the face of that believe. I've written here on the Fool since 2007, when I first called out Toyota for its business practices I've said that Honda, not Toyota is probably the best run car company in the world, when I look at the entire picture, quality, engineering, industrial design (current Acura front ends and the Crosstour front end not withstanding), customer service, and fiscal management.

    Honda and Ford in particular have worked hard at maintain values (Honda) and/or reinvention (Ford). Those beliefs for Honda, which didn't focus on growth for the sake of growth, and Ford, which got back to basics of building well designed cars and standing behind them, are going to reap benefits.

    One concern I have for Honda is an increased segmentation of the their product line, and the very poorly executed second generation Insight. Right now I see these as bumps, not pending disasters. Does the world REALLY need a hatchback Accord? And why are they keeping the Ridgeline, their well executed but failed foray into pickup trucks, on life support? And finally, what is up with those King Authur shields on the Acura product line!

  • Report this Comment On February 25, 2010, at 3:44 PM, wasmick wrote:

    Just think, it'll only take a few more years of these types of blunders on Toyota's part for them to become GM....

  • Report this Comment On February 25, 2010, at 3:51 PM, wasmick wrote:

    Just think if Toyota continues this level of incompetence for a few more years soon they'll be GM.

  • Report this Comment On February 25, 2010, at 3:51 PM, wasmick wrote:

    mistaken dual posting...sorry

  • Report this Comment On February 25, 2010, at 3:52 PM, TMFMarlowe wrote:

    wasmick: I don't *think* it'll get that bad, but stranger things have happened -- GM's fall itself would look mighty strange from the perspective of 1970.

    Thanks for reading.

    John Rosevear

  • Report this Comment On February 25, 2010, at 4:44 PM, Milligram46 wrote:

    Here is the bigger picture on why Toyota's cookies are really in the fire, and the future of Toyota.

    In 2009 we saw a global shift in the automotive economy. We saw the bankruptcy of GM and Chrysler, the end of Pontiac and Saturn, a surging Hyundai, a reborn Ford, and a fallen darling in Toyota.

    But additionally we saw a shift in the largest car economy in the world. With the global banking collapse we saw the United States fall from number one to number two, Japan fall from number two to number three, and China move to the number one spot.

    Now I know what some of you are thinking, wait until the bottom falls out of China Milligram46!!! Even if the rate of newly minted middle class citizens China drops from four million a month to two million a month, the auto industry there is going to enjoy its huge growth. Come on, its simple GDP, 1.2 billion people versus 300 million people. It is destiny, and Japan will never be number two again and the United States may tickle number one in the next 3 to 5 years, but will eventually fall behind, forever. Additionally India's car economy, which is much younger than China, will also continue to grow with one billion people.

    So what! Toyota is the largest car company in the world.

    Well lets look further at that. Lets start with the third largest car economy in the world, Japan. Japan's government protected car economy is well known. Just three percent of all cars sold in Japan come from non-Japanese manufacturers. That's it. It is a closed market. Toyota is by far, the largest producers of car in Japan, and one of the most admired brands ever exported, possibly THE most admired brands. Closed, protected or market or not, any company would kill for this kind of reputation.

    But Toyota has two huge problems in its home market, and neither are going to go away, and neither are related to quality.

    The first problem is the graying demographic of the Japanese population. Japan's population is in decline. It is no longer growing. There is a shrinking market of car buyers, and those available buyers are getting older. This is clearly seen in Toyota's industrial design of their vehicles today. So in their home market, Toyota's available slice of all available customers is getting smaller. So what, Toyota rules! Ahhh, but Toyota is in a closed market, competing against Japan's best, and not exactly with a strong reputation among the young car buyers for performance halo vehicles. Japanese kids don't drool and dream of owning a Prius. They dream of the Skyline and the GT-R and the WRX Si, which are Nissan and Subaru products.

    The second country I want to focus on is the second largest car economy in the world. The United States. Unless you've been living under a rock, or far up the Denial River, you are aware of all that is going on with Toyota. How bad is it? Well three different customer surveys and industry analysis is indicating, really bad. Opinion on Toyota has turned so sour in the last 30 days, the only other car makers that have seen similar drops is Pontiac, Saab and Saturn AFTER the announcements they were dead brands walking. In a KBB survey, 27% of people who were looking to buy a car said they were no longer considering a Toyota, 49% of them said they would never buy a Toyota again. That is devestating data. This is reinforced by sales data and customer market demand data.

    Remember. Toyota sales declined 21% from 2008 to 2009 due to the new normal in a post economic meltdown world. That 21% decline actually was better than industry average, so don't get defensive! But how bad is it? Toyota didn't even sell 100,000 units in January 2010. That hasn't happened since, wait for it, 1999! Sure, February will look worse on paper due to a shorter number of selling days, but the sales ban on Toyota lasted only five calendar days. It was lifted on February 1, 2010 - and all the early data indicates that sales remain in free fall. Worse, buyers aren't deferring purchases. They are buying Honda, Ford, Chevrolet, and Hyundai products according to a third survey. So Toyota could be looking at a 20% line in the sand decline a year after a 21% line in the sand decline, and this after investing over three billion with a b dollars in building five new factories in the United States in Canada. Before this crisis hit, and before the NUMMI closure (which happens next week) Toyota was at 32% over capacity for global prodcution. That would make a Detroit bean counter weak in the knees on how to solve. Toyota can be thankful that American hatred of the UAW is stronger than the questioning of their reputation, otherwise the wails of closing NUMMI, which will cause the loss of 4,600 jobs directly and projected another 45,000 jobs indirectly, would be deafening. For what its worth, those 45,000 additional jobs that will be going away are largely a ripple effect and non-union workers, but ordinary citizens like you and me. So Toyota has declining sales in the new normal in the United States.

    This leads to the third market. China. Now in China Japanese cars are not revered. They are not looked up too. They are borderline maligned because Japan is seen as a competitor to regional and global growth, and those Chinese citizens sure do hold a grudge over World War II, occupation, medical experiments, comfort women, rapes, mass murders and other Japanese attrocities.

    VW was one of the fist kids on the block into China, arriving in 26 years ago. General Motors arrived, quietly in 1999. Something odd happened in 2005. GM outsold VW, despite VWs longer time in the market.

    Well sure you moron, when VW sells 12 cars in a year to Chinese farmers, its not hard for GM to sell 13. Humpf, China - what market?

    But that growth curve continued, and now General Motors has left VW, and every other importer in the dust to be the largest importer of cars in China, and the growth has been nearly a hockey stick since they arrived in China. WHAT? WHY???

    There are three major reasons. The first reason is when GM entered the market. 1999. GM's quality improvement programs had begun in earnest about the same time. You see, Chinese buyers don't associate GM with the bleak years of the 1970's to 1990's. They associate GM with quality and haven't experience the misfortune that happened in GM home market.

    But General Motors can really thank their success to Sun Yat-sen. Who the heck is Sun Yat-sen, and why should I care? Well Sun Yat-sen is seen as the father of modern China. He is held in high esteeem in Chinese culture, and in a way that Americans really can't understand. Back in the 1930's Sun Yat-sen drove a car. He drove a Buick.

    And that is why General Motors didn't consider for one second as it faced bankruptcy to sell the Buick brand. You see, in China, not only is GM the largest importer of cars, Buick is the best selling brand. How strong of a seller? Buick in China outsells Buick in the United States 3:1. The 2010 Buick LaCrosse came from GM's Chinese design studio. The interior of the coming Regal is getting the same treatment. And this love of Buick isn't the blue hair set in China, these are the young, newly minted middle class citizens. For the Chinese, nothing on earth says, "I've entered the middle class," like a Buick in the drive way. Well the only thing that says it even more is a Buick in the drive way and a driver in your front seat while you read the paper in the back.

    General Motors has history on its side, and gasp, a reputation of quality. VW has a 26 year old beach head. Yes Toyota grew its China marketshare by 12% in 2009, but the slice of their pie is so small to begin with, it's easier to show growth at this point.

    So in the largest car economy in the world, and the fastest growing, and the one with the biggest long term growth, Toyota is an also-ran brand with a lot of cognitive bias against them. They are dealing with a deep pocket competitor well entrenched brand in VW, and a halo brand in GM's Buick.

    So lets recap in summary:

    Japan: Graying shrinking population in a closed market - long term there are going to be less people to sell cars to.

    United States: New normal resulted in a 21% decline in sales and an overall 40% decline in US car sales. Quality/safety hit could result in another 20% drop and not just a short term bump, but a new normal as those customers are fleeing to Ford, Hyundai and Honda - companies equated with quality and trust in the new normal world. To a lesser extent Chevrolet is benefiting, and fresh off having the only American cars on the Consumer Reports Best Bet list.

    China: Huge cognitive bias to deal with against well entrenched competitors, one with recovering quality and better fortunes in VW, and the other that understands the Chinese market apparently better than their own home market they are struggling to survive in.

    All of this shows very, very stormy seas ahead for the TM balance sheet, and shareholders beware.

    For that matter, I wouldn't put my money in any car maker, except maybe TaTa, given the commoditization of the industry, increased regulations, and the long term changes that are coming.

  • Report this Comment On February 26, 2010, at 2:13 AM, Milligram46 wrote:

    More bad Toyota news, at least the press isn't all over it:

    http://news.yahoo.com/s/nm/20100224/us_nm/us_toyota_raid

    Three Toyota suppliers were raided on Wednesday by FBI agents with sealed warrants. The raids are suppose to be part of an international anti-trust investigation started in Europe, and in cooperation with US law enforcement into cartel like behavior by Toyota and their supplier network. As if they don't have enough problems as it is.

  • Report this Comment On February 26, 2010, at 4:42 PM, Milligram46 wrote:

    Seriously, can Toyota get anything right?

    http://abcnews.go.com/Blotter/RunawayToyotas/toyota-testimon...

    I thought it was a great idea to expand the deal they made with New York lawmkers nationally. We'll pay for your rental car, we'll pick up your car if you're afraid to drive it, and we'll drop it off when the repairs are done. All on our nickel, not our dealer network.

    THAT is customer service.

    THAT is taking care of your customers

    THAT is doing the right thing given the scope and attention.

    But did they do it....NO. Instead they backpedal and say well gee, we didn't mean THAT. We just meant that many of our dealers (on their nickel) are doing this already, we don't have to do anything.

    If I owned a Toyota franchise - I'd be pissed, especially if I'm getting phone calls saying, "but Toyota said..."

  • Report this Comment On February 26, 2010, at 4:56 PM, Milligram46 wrote:

    Toyota STILL isn't managing this crisis well.

    On Wednesday they said they were extending the recall services program in the Congressional hearings.

    On Thursday (see link above) they said they were not, and that it was on the local dealers to carry the load.

    Today they reversed course again (I'm willing to bet after the dealer network SCREAMED) and said we're sorry, we actually are going to do that.

    http://www.msnbc.msn.com/id/35608079/ns/business-autos/

    You are seeing a text book case of how now to manage a crisis. Really stunning to watch this.

  • Report this Comment On February 26, 2010, at 5:08 PM, TMFMarlowe wrote:

    Ready, fire, aim is not an effective crisis-management strategy.

    New article on Monday, I think. Enjoy the weekend, y'all.

    John

  • Report this Comment On March 08, 2010, at 2:06 PM, beaumont09 wrote:

    I'm not a Toyoda customer...I know Toyoda is a great company...But like any large company...It's all about supply and demand...When the demand is up...Toyda, like any company have their prduction problems, Its always "QUALITY." TOYODA HAS HAD PROBLEMS FOR A FEW YEARS, AND KEPT IT FROM THEIR CUSTOMERS. REPAIRS WHERE MADE ON YOUR VEHICLES WHEN YOU TOOK IT IN FOR SERVICE THAT YOU NEVER NEW ABOUT!

    nOW THAT IT HAS CAUGHT-UP WITH THEM...THEY WANT TO BLAME THE SAME LOYAL CUSTOMER THAT TRUSTED THEM FOR YEARS. THEY CAN'T ADMIT THEY HAVE A SAFETY ISSUE. WHY? BECAUSE OF MARKET SHARE AND PROFIT. THEY WANTED TO BE THE NUMBER 1 AUTO COMPANY IN AMERICA. "SO WHERE DOES THE LOYALITY LIE, AT THE EXPENSE OF THIER LOYAL CUSTOMERS. After tthis fieasko and cover-up I would never consider buying a Toyoda product. This is my opinion!!!

  • Report this Comment On March 08, 2010, at 2:10 PM, beaumont09 wrote:

    LAST COMENT TYPO: TOYOTA NOT TOYODA!!!

  • Report this Comment On March 08, 2010, at 2:26 PM, beaumont09 wrote:

    JOBS LOST AT TOYOTA WILL BE PICK-UP BY FORD, GM AND OTHER CAR MANUFACTURERS. THE DEMAND IS THERE, BUT WHO WILL PICK-UP THE PIECES?? AND AS FOR THE UAW...I'M AM NOT A BIG FAN OF THE UNION... ALTHOUGH THEY PLAY A BIG PART IN OUR STANDARD OF LIVING...BUT THE WORLD HAS CHANGED, IT A WORLD ECONOMY. I THINK THE UAW SEES THE WRITING ON THE WALL, AND ARE MORE WILLING TO COOPERATE WITH THE AUTOMOTIVE INDUSTRY. "FOR NOW" i HAD TO DEAL WITH THEM FOR OVER THIRTY YEARS...AND PROBALLY WILL NEVER BE A BIG FAN. UNIONS GIVE NOTHING BACK...THEY TAKE AND TAKE SOME MORE! THEY ARE A BUSINESS THAT BENIFITS THE TOP LEADERS! AT THE EXPENSE OF IT MEMBERS!!

  • Report this Comment On March 09, 2010, at 4:34 PM, wwide408 wrote:

    Toyota and others knew they were having issues and attempted to hide it. All Car Companies should have came forward with a full disclosures of what car were dangerous. Instead of waiting for a huge media blitz and tons of public pressure. I never seen so many car companies GM - NISSAN - TOYOTA - HYUNDAI having recalls all at the same time. I had no idea my car was affected until I looked on http://www.carpedalrecall.com and found I had a bad Anti Lock control unit on my 2008 Pontiac G8 , my co workers Ford Truck had a recall also. So be careful

  • Report this Comment On December 19, 2013, at 12:37 PM, seamuslowe53 wrote:

    My friend in Michigan found out about this while looking at cars in a Mitsubishi dealership, http://www.verhageautosales.com/. It's pretty crazy.

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