Toyota's Getting That Nixon Look

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"We now have proof that Toyota failed to live up to its legal obligations. Worse yet, they knowingly hid a dangerous defect for months from U.S. officials and did not take action to protect millions of drivers and their families."
-- U.S. Transportation Secretary Ray LaHood

Knowingly hid a dangerous defect for months.

Think about that for a second. And remember: It wasn't the Watergate burglary that sank President Nixon, but the subsequent cover-up.

LaHood's words on Monday came with a bombshell announcement of an unprecedented $16.4 million fine against Toyota (NYSE: TM  ) , for concealing information related to the unintended-acceleration problems in several models. That's the largest fine ever assessed against an automaker by the U.S. government -- and there may be more to come.

Why it could get even worse
LaHood also noted that there are two investigations still ongoing, and more fines are possible -- and that was followed up on Tuesday with news that the House Energy and Commerce Committee was ramping up its own investigations. Congress is currently digging into some 70,000 pages of documents turned over to the government by Toyota, with another round of hearings likely to follow.

Speaking of Congress, another bomblet got dropped on Wednesday night, when several media outlets obtained a copy of a couple of emails included in that 70,000 pages, emails that suggested that Toyota's U.S. arm knew about the sticking accelerator pedals -- but was constrained from telling regulators about the problem by executives in Japan.

Not a good week for Toyota, to say the least -- and it's not over yet.

So much for putting it behind them
I had started to think that things were looking up for Toyota. Sales were up -- juiced by incentives, to be sure, but they were still leaving rival Honda (NYSE: HMC  ) in the dust -- and there was reason to believe that they might finally be starting to recover from their recall-induced publicity nightmare earlier this year.

But then the Feds went and ripped the wound right back open on Monday. And if Congress holds another round of hearings, this time with a serious charge -- cover-up! -- on the table, the resulting publicity could be devastating for Toyota.

Yes, devastating, in a way that the publicity around the original safety defect wasn't. Even a huge, embarrassing recall, like Dell's (Nasdaq: DELL  ) recall of overheating laptop batteries a few years back, or ConAgra's (NYSE: CAG  ) infamous peanut butter recall, or even Ford's (NYSE: F  ) giant recall of problematic cruise-control switches, is not generally a world-ending event for a consumer-products business. The products get recalled, better safety measures get implemented, the lawsuits get settled, the late-night comedians make their jokes, and then everyone moves on.

That could have been Toyota's fate here. Not so long ago, Toyota's corporate reputation was one of the finest in the world. According to a 2008 Harris Interactive poll, Toyota sat 10th, directly in between two great companies: 3M  (NYSE: MMM  ) and Berkshire Hathaway (NYSE: BRK-B  ) .

But that's gone now, maybe for good. Go back to LaHood's quote for a second. The Secretary of Transportation is saying that one of the world's largest carmakers knew that several of their products had a life-threatening safety defect -- putting millions of customers at risk -- and chose to hide that information.

Specifically, they chose to hide that information so that their reputation for "quality" wouldn't be at risk.

That's bad, folks. Really bad.

The upshot
Toyota has two weeks -- from this past Monday -- to pay the fine or file an appeal. Either course of action seems fraught with danger. If they just pay the fine, hoping (again) to start putting the scandal behind them, that could be construed as an admission of guilt in the (many) ongoing lawsuits against the company. That could get very expensive -- in more ways than one.

But contesting it will lead to a court battle, almost surely amplifying the ongoing PR damage, and could lead to allegations of "stonewalling." And those allegations might well hold water, at least in the court of public opinion, given the emails released on Wednesday.

Toyota's on a hot seat right now. And it isn't likely to cool off any time soon.

More recent coverage of the ongoing global automotive shakeout:

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

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  • Report this Comment On April 08, 2010, at 5:38 PM, plange01 wrote:

    toyota obviously paid off the right politicitions so its time to leave them be...

  • Report this Comment On April 08, 2010, at 8:51 PM, mountain8 wrote:

    Does anybody understand the relativity of this?

    From what I've been researching I have yet to see how many have been killed or injured from this. Estimates run from 399 dead, bunches injured to 145 killed per year. Probably a stat we will never get a true number for. Toyota knew about this problem for 5 years (at least).

    The point is with Toyota, it took 5 years of complaints, hundreds of deaths, and thousands of injuries before anybody did anything about it.

    Toyota admitted that it was growth and income statements that they thought of rather than safety. I think that is typical for most businesses.

    Now the crux... If Toyota is typical, how many businesses out there don't give a d#$^%# about good business practices that have consumers in mind. Think about it. Toyota knew about this problem and covered it up no matter how many people suffered. 'Cause that's how they do business. We can probably say that about most businesses and Congress for that matter.

    The question becomes: "HOW MANY BUSINESSES ARE OUT THERE COMMITTING CRIMINAL ACTIONS THEY ARE HOT TO COVER UP? HOW MANY POLITICIANS? Or maybe, are there any businesses out there that are honest?

    This is an election year. Please vote. And please, VOTE NO TO INCUMBANTS. Don't know if that will save our country, but it's a start.

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