Toyota's Safety Crisis Snags Its Cash-Cow, Lexus

Toyota Motor Corp., struggling to recover from record recalls, may not be able to count on its Lexus luxury brand to bolster earnings after Consumer Reports called the GX 460 sport-utility vehicle a “safety risk.”

The designation, accompanied by a “don’t buy” recommendation from the U.S. magazine, may damp Lexus sales in the nation, which have risen even as Toyota’s total deliveries have fallen amid global recalls of more than 8 million vehicles.

“No one is going to purchase a car that has a ‘don’t buy’ rating,” said Koji Endo, managing director of Tokyo-based Advanced Research Japan. “Worse yet, this will deal a severe blow to the image of the entire Lexus lineup.”

Lexus had been largely unscathed by Toyota’s recalls, which led to U.S. congressional hearings, a rebuke by Transportation Secretary Ray LaHood and a proposed $16.4 million fine. While some Lexus models were called back because of floor mats that might trap gas pedals and cause unintended acceleration, none were involved in later actions to fix sticky accelerators.

Toyota, which halted sales of the GX 460 in North America yesterday, will stop selling the model in Russia and the Middle East, Toyota spokeswoman Mieko Iwasaki said today. The vehicle isn’t offered in other markets.

The automaker is testing all Toyota and Lexus sport-utility vehicles after the Consumer Reports rating, Iwasaki said. Toyota denied a Kyodo News report that it will recall the GX 460.

Operating Profit

Lexus sales in the U.S. jumped 18 percent in this year’s first quarter and accounted for 13 percent of Toyota’s total deliveries in the country. The most expensive Lexus models earn at least 10 times the operating profit per vehicle of a Toyota Corolla small car, according to Advanced Research’s Endo.

Consumer Reports, a nonprofit publication of Yonkers, New York-based Consumers Union, said April 13 that emergency driving tests indicated the 2010 GX 460 model may be prone to rolling over.

The GX’s rear end “slid out until the vehicle was almost sideways before the electronic stability control system was able to regain control” at a Connecticut test track, the magazine said. “In real-world driving, that situation could lead to a rollover accident, which could cause serious injury or death.”

Denied Request

The magazine denied Toyota’s request to let company engineers use the track to replicate the handling test, Bill Kwong, a Lexus spokesman, said yesterday. Toyota was told it is against Consumer Reports’ policy to let private companies use its facilities, he said. The automaker will try to duplicate the test at its track in Higashi-Fuji, Japan, Kwong said.

The Lexus division has been the top seller of luxury vehicles in the U.S. on an annual basis for 10 years in a row. The brand tied with General Motors Co.’s Cadillac for the top ranking in a University of Michigan survey of customer satisfaction, the school said in August.

“As Toyota’s quality issues are now affecting Lexus too, we think the cost to repair the dented brands is poised to rise,” Efraim Levy, a Standard & Poor’s equity analyst, said in report yesterday. “While we believe this news will further hurt the company’s sales and profits, we see a cash-laden balance sheet and expected industry growth in the U.S. and in emerging markets providing the wherewithal for Toyota’s comeback.”

Levy, based in New York, rates the automaker’s American depositary receipts “hold.” Toyota fell 0.8 percent to 3,710 yen in Tokyo. The shares have fallen 4.4 percent this year.

Resale Value

Lexus cars will have the highest average U.S. resale value among 2010-model vehicles in five years, according to a study by Irvine, California-based Kelley Blue Book released in December.

“Buyers who see the Consumer Reports rating may perceive this as a problem across all Lexus models,” said Tadashi Usui, an analyst at Moody’s K.K. in Tokyo. “In that case, because of Lexus’s high margins, we’ll see an impact more on profit than on sales.”

Toyota’s profitability is already being pressured by the cost of incentives the carmaker has introduced to bolster U.S. deliveries. Toyota started offering no-interest loans, discount leases and free maintenance for some models in March, helping the company raise sales that month by 41 percent from a year earlier. Toyota is extending the offers until May 3.

“These free-maintenance offers and such are not adding to Toyota’s bottom line,” said Takashi Aoki, who helps manage about $1 billion at Mizuho Asset Management Co. in Tokyo, including Toyota shares. “And what will happen when the incentive program ends?”

Shareholder Lawsuits

Toyota is facing at least 177 consumer and shareholder lawsuits seeking class-action status and at least 57 individual suits claiming personal injuries or deaths caused by sudden- acceleration incidents. The lawsuits will be combined in a federal court in Santa Ana, California, a panel of judges said earlier this month.

The uncertainty surrounding the legal cases will push Toyota to be especially cautious with its dividend payments and profit forecast for the fiscal year that began April 1, said Yuuki Sakurai, chief executive officer of Fukoku Capital Management in Tokyo, which manages about $7.5 billion.

“Raising the dividend is out of the question,” Sakurai said. “That would actually upset investors who think it wouldn’t be prudent.”

Toyota plans to announce its fiscal fourth-quarter and annual earnings on May 11 in Tokyo.

To contact the reporter on this story: Makiko Kitamura in Tokyo at mkitamura1@bloomberg.net

Toyota Motor Corp.'s 2010 Lexus GX 460 sport utility vehicle (SUV), is seen in this file photo provided to the media on April 14, 2010. Source: Toyota Motor Corp. via Bloomberg

April 14 (Bloomberg) -- Bloomberg's Mike Firn reports from Tokyo on Toyota Motor Corp.'s decision to halt North American sales of GX 460 sport-utility vehicles after Consumer Reports labeled the model a "safety risk," the magazine’s first such designation in nine years. The 2010 GX 460 received the designation and a "don’t buy" recommendation because emergency driving tests indicated it may be prone to rollover accidents, Consumer Reports said yesterday. (Source: Bloomberg)

April 14 (Bloomberg) -- David Champion, director of automotive testing at Consumer Reports magazine, talks with Bloomberg's Susan Li about concerns over Toyota Motor Corp.'s Lexus GX 460 sport-utility vehicles. Toyota has asked its dealers to temporarily halt sales of the 2010 GX 460 after Consumer Reports labeled the model a "safety risk," the magazine’s first such designation in nine years, and issued a "don’t buy" recommendation. (Source: Bloomberg)