"This unfortunately is a case that demonstrates that corporate fraud can kill," U.S. District Judge William Pauley said Thursday in federal court, according to Automotive News.
That was a strong statement by Judge Pauley and it was absolutely correct in regards to Toyota's (TM 0.57%) massive recall of 10 million vehicles worldwide in 2009 and 2010 because of unintended acceleration issues. To back up his statement Toyota will be slapped with a $1.2 billion fine, which is the largest penalty ever imposed against an automaker, according to prosecutors. Will that fine be as devastating to Toyota as it sounds? I don't think so, here are some things to consider.
Need some perspective?
To better understand how gigantic Toyota's 10 million worldwide vehicle recall was, consider this: That specific Toyota recall would be more than the 10 largest recalls of all automakers last year, combined. That's huge.
To better understand how impactful this $1.2 billion fine could be for Toyota, consider it nearly equals Ford's (F 0.79%) global pre-tax operating profit of $1.27 billion in the last quarter. In addition to the massive fine Toyota was handed this week, we can't forget that the company also settled lawsuits from car owners that equaled roughly $1.6 billion. The world's largest automaker also paid more than $66 million in penalties to the National Highway Traffic Safety Administration for not handling the recall as quickly as deemed necessary.
While these costs add up quickly, the fact is that Toyota is a much larger company than Ford and can better absorb the large fine. The $1.2 billion fine won't put much of a dent in Toyota's profitability when you consider it has nearly $60 billion in cash and cash equivalents.
Though it's the largest fine in automaker history, it will be far from a crippling blow to the world's largest automaker; however, there are more costs to consider than just dollars.
Hurt reputation
The automotive industry is insanely loyal and filled with difficult to change stereotypes. Just ask General Motors how its unique government bankruptcy tarnished its brand image even after the U.S. Treasury sold off its remaining stake in the company. Toyota has long been known for its vehicle quality and reliability, but this massive recall and how it wrapped up could have long-lasting damage for its brand image.
"Other car companies should not repeat Toyota's mistake," U.S. Attorney General Eric Holder warned in a statement released before a news conference today to announce the settlement. "A recall may damage a company's reputation, but deceiving your customers makes that damage far more lasting."
The last part of that statement is spot on. Covering up and misleading consumers in a very loyal industry could have a devastating impact for Toyota's sales going forward. Further, this isn't a one-time problem for Toyota. In addition to the massive recalls in 2009 and 2010, Toyota has also led all automakers with the most vehicles recalled in the U.S. for the last two consecutive years.
Going forward investors would be wise to watch if a company like Ford, with an improving image, can gain even more market share due to a more tarnished Toyota brand image.
