Picture of the Day: Toyota -- Moving Backward

Um, Toyota? The idea was for you to get us to take your cars. Not the other way around.

A couple weeks back, I offered a tongue-in-cheek welcome to Tesla Motors (Nasdaq: TSLA  ) , as it joins the ranks of publicly traded automakers who've undergone the trial by fire of navigating a car recall. This morning, though, Toyota Motor (NYSE: TM  ) gave Tesla an object lesson in just how far it still has to come to play in the majors:

Tesla's recall is so small that it literally doesn't register on any scale showing the size of Toyota's latest gaffe. Citing a range of problems newly discovered -- problems with fuel pumps, problems with the brake fluid -- Toyota this morning announced it must recall 740,000 Lexus, Avalon, and Highlander models in the U.S., 599,000 cars in Japan proper, and another 190,000-odd cars in Europe and elsewhere around the globe.

But even this doesn't tell the whole story. Weighing in at 1.53 million units, today's recall represents only a small fraction of the 10-million-plus automobiles Toyota has already had to recall this year, for problems ranging from sticky gas pedals to poorly designed floor mats.

The price of failure
It's hard to overestimate how bad this fiasco is for Toyota. Already this year, the company has said recalls related to its various "issues" alone will cost it $2 billion in charges to earnings. But the damage goes further. For millions (at this rate, we'll soon have to say "tens of millions") of potential car buyers, their most recent experience with Toyota will be the fright of receiving a recall letter in the mail, the frustration of having to arrange for rides to and from the shop to get their cars fixed, and the lost wages of hours spent away from the office. Not the kinds of things you want shoppers thinking about as they ponder the purchase of their next car.

And the hit to Toyota's hard-earned reputation for quality won't stop there. For years, Toyota has striven to assure the dominance of its Prius hybrid electric drivetrain, inking deals licensing its technology to Ford (NYSE: F  ) , Nissan -- the list goes on. But if Toyota loses its reputation for having "the best tech," this could encourage Toyota's rivals to develop their own hybrid systems, hurting sales volumes for Prius-compatible parts, driving up the cost of production -- and driving down Toyota's profit margin.

Far from moving forward, Toyota looks to me like it's slipping downhill.

At least that's my take on the latest recall. But maybe you see something different in today's chart? Take the Foolish Rorschach test. Tell us about it below.

Ford Motor is a Motley Fool Stock Advisor selection, but Fool contributor Rich Smith does not own shares of any company named above. The Motley Fool has a disclosure policy.

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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 October 21, 2010, at 4:34 PM, pkarasin wrote:

    Just in case you didn't know. Ford has issued licensing deals with Toyota that they use in their Prius. You make it sound like Toyota is the only automaker to develop hybrid technology.

  • Report this Comment On October 21, 2010, at 5:19 PM, james27613 wrote:

    US car makers have done better over the years to make up for the lower quality cars they used to produce.

    With the economy the way is has been over the last 20 years, people will keep their cars longer.

    Toyota gained market share, the amount of defects has increased, same for the big three when they were the top sellers.

    Important to note that the parts made for any car are mostly outsourced worldwide so defects will increase.

    I own two 1999 Fords, one taurus wagon 190K miles and one sable with 133K miles, all purchased used for about $12K in 2000.

  • Report this Comment On October 21, 2010, at 7:57 PM, bellrunner wrote:

    If you think Toyota just now discovered these problems with their vehicles that are 4 and 5 years old ..... I have some swamp land I would like to sell you in Florida..... Come on now.... Now that Toyota no longer have the safty inspectors on their payroll they are having to come clean....Expect more recalls from Toyota.... They can not do it all at once.

  • Report this Comment On October 22, 2010, at 5:14 AM, kariku wrote:

    Maybe you're right ... but I'm willing to take a risk. The market doesn't react as much anymore to the recall news, Toyota lost $20B in market capitalization while the recall damage was estimated at $2B, and the stock is at 52 weeks low. I put $600 in naked calls that cost pennies now. Upside potential is huge, risk is ... well, $600 :-)

  • Report this Comment On October 22, 2010, at 10:38 AM, baldheadeddork wrote:

    What happened to John?

  • Report this Comment On October 22, 2010, at 11:21 AM, baldheadeddork wrote:

    I've said this probably every time Toyota's quality problems have come up, but this is another example of why this going to be a lot worse than most people are expecting.

    I think most observers think that if Toyota comes out with a new Camry or whatever, it means their quality problems are over. New car = no old mistakes, right?

    No. An all-new car is never all new or even mostly new. An engine and transmission will be used for a decade or more with only minor changes to displacement and tuning. Nearly all of the parts remain the same. Steering, brake and suspension components can be used for longer than that with only minor external revisions to allow fitting on different models. There are roughly 10,000 individual pieces and parts in an average car. In a mid-cycle refresh only a few hundred of those will change, and in an "all new" model you're still going to have at least 70-80% carryover. No automaker can afford to redesign every seal, every valve spring, or every throttle assembly every time they roll out a new model.

    And this is the problem for Toyota. For the last decade they've relentlessly squeezed the suppliers of those seals, springs and assemblies to bring their costs down. It's the Ignatio-Lopez purchasing philosophy that destroyed quality at Volkswagen and Ford in the 90's, but Toyota was convinced they were smarter than that. It's obvious now that they aren't. There's no excuse for a valve spring to break on something as mildly tuned as a Camry engine, and no reason for brake seals to fail unless you cut a corner on the rubber compound. All of this is known science, and you only get close to the edge when you skimp on the ingredients you need to make a quality part.

    The problems this creates for Toyota are three-fold. First, as I mentioned above it will take years to eradicate these compromised parts from their new products. It took Ford nearly a decade to recover from their bout of Ignatio-Lopez fever, and VW still hasn't made it back. (They don't want to, but that's another story.) And eradicating them is going to add to the R&D costs of each new model.

    Second, when these common components fail it's going to affect a huge number of vehicles. High seven and eight-figure annual recall totals for Toyota are going to be the norm for the next 3-5 years, maybe longer.

    Third, the nature of these shared components means it's likely the recall costs are going to be very large. Toyota will be lucky to get out of the valve spring recall at $1500 a vehicle. Replacing the brake master cylinder is another labor-intensive job that requires expensive parts.

    None of this is going to sink Toyota, but it is going to put them at a competitive disadvantage for the foreseeable future. For years everyone talked about the "UAW pension tax" on Ford, GM and Chrysler vehicles. I don't know if it's going to become the conventional wisdom, but going forward there is going to be a "recall tax" on Toyota's and it's going to be a substantial amount of money per vehicle when you add up all costs.

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