Takata's Exploding Liabilities

The recall of 40 million airbags appears increasingly expensive.

Airbags are finely calibrated devices. Inflate them too little and the result can be serious injury. That's a lesson Japan's Takata should ponder when considering its own safety cushion.

The company, whose faulty airbag inflators have led to the deaths of 10 people, set aside as much as 93 billion yen ($825 million) to cover the recall of about 40 million of the devices. That provisioning reduced the value of Takata's net assets by 40 percent at one point, but it doesn't look as if it's going to be enough.

The Hangover

Takata's book value would surge if it wasn't storing up so much cash for recall payments

Source: Company reports, Bloomberg data

Take the cost price of $30 per inflator quoted in Takata's report into the recall: That would require 137 billion yen just to buy parts -- and if you've ever had your car serviced, you'll know that's just the tip of the iceberg.

Koji Endo, an analyst at Advanced Research Japan, told Bloomberg's Ma Jie that each recall job comes to about three times that amount once service costs are included, at between 8,000 yen and 10,000 yen. Other estimates run higher: Scott Upham, chief executive officer of consultants Valient Market Research, puts it at $130 apiece, or about 15,000 yen.

Or look at Daimler, which on Tuesday made its own provisions to cover the costs of replacing Takata airbags. The German carmaker is setting aside 340 million euros to recall 841,000 potentially affected vehicles, or about 52,000 yen each.

If Takata faced costs on that scale, it wouldn't just be left with a deflated safety cushion -- its viability would be at risk. Throw the remaining 64 billion yen in provisions plus Takata's 145 billion yen of net assets at the problem and the company would still need to find another 191 billion yen to pay the bill, even at Endo's estimate of unit costs. Upham's estimate of a $5.2 billion cost to replace all the inflators is well above the $3.9 billion value of Takata's gross assets. Start extrapolating from the amount that Daimler is setting aside, and things get really out of hand:


Costs from Takata's product recall could dwarf the value of the company

Source: Company reports, Advanced Research Japan, Valient Market Research, Bloomberg data

To be sure, these are back-of-the-envelope calculations, and product recalls on this scale can be tricky to get a handle on. Over the course of 2015, the National Highway Transport Safety Administration reduced its estimate of the number of cars affected in the U.S. from 34 million, to 32 million, to 23 million. Then last month, it added an extra 5 million, and Takata's report estimates there are another 20 million outside the U.S. Almost 5 million cars had been processed in the U.S. by late December, according to the NHTSA.

On top of that, there's the question of how the costs end up getting split between Takata and the 12 car manufacturers affected by the recall -- an issue that will no doubt be subject to years of negotiation, arbitration and perhaps litigation. Maybe extrapolating from Daimler's provisioning this week is unfair, even as a ballpark estimate. It wouldn't be surprising if the bill for putting new airbags in a Mercedes-Benz was a bit higher than it would be on a Honda Civic.

So Takata can be forgiven for a little imprecision in the numbers. A little.

An Airbag Saved My Life

Takata's price-book ratio just keeps dwindling

Source: Bloomberg data

The problem is that companies facing trouble on this scale need to provide as much clear information as possible. That's not happening.

Look at the amounts being provisioned by Takata's customers. Add the 340 million euros from Daimler to the 12 billion yen that Subaru maker Fuji Heavy has set aside and the 11 billion yen from Mazda, and you have an amount that already exceeds the 64 billion yen left in the warranty pot. It's possible that Takata has already paid out a slice of those amounts, but if so it hasn't told shareholders.

The company is now valued at just 28 percent of its net assets, suggesting the market has a pretty grim idea of where all this is headed. If Takata thinks that level of pessimism is excessive, it should try to reassure its long-suffering investors by giving a more detailed accounting of how many repairs it's booked, how much the work has cost, and how much more it expects to spend.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    David Fickling in Sydney at dfickling@bloomberg.net

    To contact the editor responsible for this story:
    Paul Sillitoe at psillitoe@bloomberg.net

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