- The Washington Times - Wednesday, February 10, 2010

Even before Tuesday’s global recall of its Prius hybrid vehicles, Toyota Motor Corp. had gone from the proverbial “best of times” as the world’s largest automaker to some all-too-real “worst of times.”

One of the flagships of invincible “Japan Inc.” in the 1980s, Toyota already had halted North American sales of many popular vehicles, shut down its U.S. factories and recalled more than 8 million vehicles worldwide.

A company whose success had relied on a sterling reputation for quality now faces a series of U.S. congressional hearings, sparked by sticking accelerator pedals that caused sensational accidents resulting in multiple deaths. Some U.S. officials have said they are suspicious about Toyota’s actions, and U.S. unions and Toyota’s American rivals smell blood in the water.

But many auto analysts say that this five-alarm corporate conflagration, which students and business managers in MBA programs will be examining for decades as a case study, was predictable and foreshadowed.

Recalls and quality problems had been on the rise since 2005, especially with gas-pedal issues. And in its bid to become the world’s largest auto company, the Japanese automaker had veered away from “the Toyota Way” that had won the company such success and reputation.

“Toyota is suffering from trying to get too big, too fast,” said Paul Ingrassia, a Pulitzer Prize laureate who covered the auto industry for the Wall Street Journal.

The latest blows

The bad news for Toyota turned worse Tuesday as its recalls spread beyond the gas-pedal issue and to models that had not been affected by it.

The Japanese company announced a global recall of nearly a half-million Prius and other gasoline-electric hybrids to modify software in the vehicles’ anti-lock-brake systems.

The National Highway Traffic Safety Administration has received 124 complaints about the Prius braking system from U.S. consumers, four of whom reported crashes resulting in two minor injuries.

In the U.S. market, nearly 15,000 Lexus HS250h and 133,000 Prius models will be affected, joining 220,000 vehicles in Japan, where the Prius is the No. 1-selling car, and more than 50,000 in Europe.

“We will redouble our commitment to quality,” said Akio Toyoda, the grandson of Toyota’s founder who became president in July. “I would like to apologize again to our customers who are worried about Toyota’s quality and safety.”

Meanwhile, Moody’s Investors Service said Tuesday that it placed Toyota’s Aa1 unsecured, long-term debt rating on review, pending a possible downgrade.

The multiple recalls and the expanding problems with Toyota vehicles could have “longer term impacts,” potentially reducing Toyota’s market share and pricing power in markets around the world, Moody’s said in a statement.

Mr. Toyoda announced Tuesday that he will travel to America soon to “rally” the company’s workers and their suppliers and to “explain the situation” to U.S. regulators.

Transportation Secretary Ray LaHood said Tuesday that Toyota’s executives have pledged to him that they are taking the safety issues “very seriously”

Enter Uncle Sam

The imminent involvement of Congress will further complicate matters for Toyota.

On Feb. 24, the House Oversight and Government Reform Committee will begin a series of Toyota-related hearings on Capitol Hill, and skepticism already is in the air. The hearing, originally scheduled for Wednesday but delayed by the snowstorms battering Washington, is titled, “Toyota Gas Pedals: Is the Public at Risk?”

In a memo to committee members, the panel’s investigators cast doubt on what Toyota has said are the causes of sudden acceleration in several of its vehicles.

They cited “a growing body of evidence that neither Toyota nor [the U.S. Transportation Department’s National Highway Traffic Safety Administration] have identified all the causes of … sudden unintended acceleration in Toyota vehicles.”

On Feb. 25, a separate hearing about “the Toyota recall” is scheduled for the House Energy and Commerce Committee, headed by Henry Waxman, a liberal California Democrat and a longtime crusader on consumer-product safety.

The executive branch, which oversees U.S. regulatory agencies, also has become much more involved in recent days.

“We’re going to hold Toyota’s feet to the fire,” Mr. LaHood pledged last week, saying he will tell Mr. Toyoda “how serious this is and … make sure he understands.”

Toyota’s reputation

Last week, Toyota began shipping parts to fix the millions of cars it has recalled. That’s the easy part, said one expert in crisis management.

“Fixing Toyota’s damaged reputation among concerned consumers and disappointed dealers will take much longer,” said Brian Dobson, a public relations specialist who has helped corporations manage crisis situations. “It takes years to build a brand, but poor response to crisis can damage a brand in days or hours.”

Toyota’s problems could reverberate throughout Japan’s manufacturing empire, said commentators in the world’s second-largest economy, whose meager growth over the past 20 years has largely depended on exports of high-value manufactured products.

“Toyota’s reputation for safety is in tatters, and it is inevitable that its image among consumers will suffer,” said the Sankei Shimbun, a business daily with a circulation of nearly 3 million.

“The discrediting of Toyota could even destroy the world’s trust in Japanese manufacturing, which relies on its reputation for high quality,” the Tokyo Shimbun said.

Apart from Toyota’s reputation, the company’s shareholders also have paid a steep price. Since the crisis went “code red” Jan. 26, when the company halted North American sales, the stock market value of Toyota has plunged more than $30 billion.

On Jan. 21, Toyota stock approached a 52-week high, closing near 4,200 yen, or about $47 per share, on the Tokyo exchange. It has since lost about 20 percent of its value, closing Tuesday in Tokyo at 3,375 yen, or less than $38 per share.

Rapid expansion

Toyota’s multiplying problems stand in stark contrast to its recent much-celebrated history. By any standard of measurement, Toyota’s ascent has been breathtaking since the late 1990s, when the firm embarked on a quest to become the world’s biggest automaker.

Every year, it seemed, a new barrier fell as Toyota’s U.S. market share has soared from 7 percent in 1997 to 17 percent in 2009.

• In 2003, the Toyota Camry became the best-selling car in the U.S., an annual position it has never since relinquished.

• In 2005, Fortune magazine declared: “By nearly every measure, Toyota is the world’s best auto manufacturer. It may be the world’s best manufacturer, period.”

• In 2006, Toyota raced past Chrysler to become the third-biggest seller of cars and trucks in the U.S.

• In 2007, Toyota captured second place in the U.S. market, replacing Ford, which had held the No. 2 position since 1931 — and several years before Toyota even began manufacturing cars in Japan.

• In 2008, as General Motors celebrated its 100th anniversary by temporarily averting bankruptcy, Toyota surged past the tottering giant to become the biggest automaker in the world by every measure: unit sales, total revenue, net worth and profit. GM had been the world’s biggest car manufacturer for 77 years.

And it looked like the competition in the world’s emerging markets was bending Toyota’s way as well. In 2008, Toyota moved past GM to become the No. 2 foreign seller in China, now the world’s largest auto market. Volkswagen holds the top spot there.

All told, Toyota reported a record-smashing profit of $16.7 billion for its fiscal year that ended March 2008.

That endless success soon ended, albeit not for reasons in Toyota’s control. For the fiscal year ending March 2009, which coincided with the deepest global downturn since the Great Depression, Toyota lost nearly $5 billion, the first companywide red ink in 59 years.

Recalls begin

But those very same years now look like the watershed years for Toyota and quality.

In 2005, for example, the number of vehicles Toyota recalled in the United States — 2.4 million — slightly exceeded its sales.

In 2004, the NHTSA first investigated reports of acceleration problems in Lexus ES 350 and Toyota Camry cars. In 2007, when Toyota’s U.S. sales peaked at 2.6 million, NHTSA again investigated reports that some Toyota cars accelerated unexpectedly.

Neither investigation led to recalls, but the company felt the first breeze in what has become the blizzard of quality-related woes. In 2007, Consumer Reports decided no longer to automatically give all its vehicles the highly coveted “recommended” label.

The acceleration problems became a national issue in August after a Lexus ES 350 driven by a California highway patrolman accelerated unexpectedly on a San Diego freeway, plunging out of control into a ravine and killing the driver and three family members.

That crash prompted Toyota in November to recall 4.3 million vehicles — at the time, the biggest recall in its history. Toyota explained that a design flaw caused the gas pedal to become trapped under floor mats.

In late December, however, four people died after a Toyota Avalon, whose floor mats were in the trunk, veered off the road and crashed near Dallas. That accident led to the Jan. 21 recall of 2.3 million Toyota cars and trucks, as well as the sales halt and plant shutdown.

Mr. LaHood said the government instructed Toyota to recall the vehicles.

“[We] told them, ‘You’ve got to do the recall,’” Mr. LaHood told a Chicago radio station. “They decided to stop the manufacturing.”

‘The Toyota Way’

Today, with the benefit of the rearview mirror, analysts have concluded the coinciding of Toyota’s ever-rising global market share and the damage to its unparalleled reputation was not, in fact, coincidental.

Toyota achieved its peerless brand identity by relentlessly pursuing “the Toyota Way.” The principle of “kaizen” lies at the heart of the Toyota Way, which manufacturers of varied products around the world have been trying to emulate for decades.

Kaizen is most often defined as “continuous improvement.” It aims to achieve total quality management by improving local work environments and raising productivity. It empowers executives and factory workers, who are famously authorized by Toyota to stop the assembly line to quickly solve any problems.

However, transmitting the kaizen approach throughout its multipronged, overseas production empire was no easy task.

“Toyota is so big now,” Teruo Suzuki, general manager of Toyota’s human resources department, told Fortune in 2005.

“We make so many cars in so many different places with so many people. Our greatest fear is that as we keep growing, our ability to maintain the discipline of kaizen will be lost,” Mr. Suzuki said.

Historically, Toyota relied upon loyal Japanese suppliers that often were part-owned by Toyota. But in its bid to gain U.S. market share, Toyota supplemented its exports by pursuing what it called its “heartland strategy,” which emphasized local production of vehicles and parts.

The electronic gas pedals involved in the recalls were supplied the CTS Corp., which is based in Elkhart, Ind., and has a factory in Canada.

In Japan, Toyota purchases its gas pedals from Denso, a longtime “Toyota family” supplier whose pedals have not been linked to any recalls around the world.

Toyota has acknowledged its responsibility for the design problem in the CTS-produced pedals because it conducted quality checks and approved production.

Nevertheless, the episode suggests the difficulty Toyota has confronted in transferring its highly touted kaizen philosophy to foreign-based factories, especially considering how fast Toyota has grown.

In the U.S.

Toyota opened its first wholly owned U.S. factory in 1988 in Georgetown, Ky., where it has built Camry, Avalon and Solara cars. Toyota’s Princeton, Ind., plant opened in 1999, producing the Sequoia crossover, the Sienna minivan and the Tundra. A factory in San Antonio began operations in 2006 making Tundra trucks.

Mr. Ingrassia cites that last factory as one particular example in the firm’s global expansion spree as contrary to “the Toyota Way.”

“Toyota abandoned one of the shibboleths of its conservative culture: never building a new product in a new factory with a new work force,” Mr. Ingrassia noted. “But in 2006, Toyota started building its first full-size pickup truck at a new factory with a new work force in San Antonio, Texas.”

That truck, the Tundra, been recalled for the gas-pedal problem, and was also brought back to the dealer for potential corrosion of its frame.

But the company’s first venture into U.S. manufacturing is now causing it headaches familiar to U.S. companies — unions. In 1984, Toyota and GM built the New United Motor Manufacturing Inc. (NUMMI) facility in Fremont, Calif., as a joint venture.

The Japanese company manufactured Corolla sedans and Tacoma pickups in its only unionized U.S. plant. General Motors abandoned the partnership last year after its own finances imploded.

Now, the United Auto Workers union, which controls 17.5 percent of GM through its health care trust fund, is enraged over Toyota’s plans to close the plant April 1.

The NUMMI shutdown will idle about 5,000 UAW members, while putting at risk as many as 50,000 other jobs, said Harley Shaiken, a professor at the University of California at Berkeley who specializes in labor and the global economy.

“The closure would clearly be a disaster for California,” Mr. Shaiken said.

Besides the union, Toyota also needs to look over its shoulder at a surging Ford Motor Co., which has weathered the global recession and the collapse of credit markets.

Ford has raised its U.S. market share significantly in the past year, is winning quality awards, and returned to profitability in 2009 without taking any U.S. government support — a major selling point to a U.S. populace historically suspicious of state-run industries.

‘Days … are over’

Before the quality crisis erupted last month, Toyota had said its worldwide sales should increase 6 percent this year, rising from 7.8 million vehicles in 2009.

After halting U.S. sales of eight vehicles in late January, Toyota’s sales last month plunged 16 percent, dropping below 100,000 for the first time in more than 10 years.

After years of passing rivals it had been pursuing for decades, Mr. Toyoda offered a gloomy assessment of the firm’s short- and medium-term future in October.

“The days when you could classify Toyota as one of the [industry’s] winners are over.”

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