Takata's Tricky Protection Racket

Carmakers can't afford to let the ailing company go bankrupt. That gives potential rescuers leverage.
At Closing, April 20th
3682.00 JPY

Ever hear the one about the $290 million company that was too big to fail? It's happening right now in Japan.

Customers of Takata, whose airbags are subject to the largest automotive recall in history, are holding talks with the company this week, people with knowledge of the situation told Bloomberg's Craig Trudell, Masatsugu Horie and David Welch. The discussions are meant to hammer out how the cost of repairing tens of millions of defective devices will be split between the carmakers that buy the airbags and five groups considering a rescue of the ailing business.

Anyone who's ever bought a faulty product might be tempted to ask, why should the automakers pay a cent?

Takata designed and built the airbags in the face of concerns from its own engineers about the development and testing process. What's more, clients have set aside more money to deal with the mess than Takata itself: 267 billion yen ($2.7 billion) from Honda, 340 million euros ($381 million) at Daimler, 12 billion yen from Subaru and 11 billion yen from Mazda. Against that 328 billion yen liability pile from just four customers, Takata has never had more than 93 billion yen provisioned.

Safety Cushion

Takata's provisioning for the costs from its airbag recall is already starting to deflate

Source: Bloomberg

The problem for the automakers is that if Takata puts a gun to its head, they're going to end up getting hurt. The company has about a fifth of the global airbag market, and switching suppliers isn't as simple as just getting a new off-the-shelf product. Each device is carefully engineered to the car in which it's fitted, so the logistical challenge of finding replacement parts without interrupting fast-moving global supply chains is colossal.

There's a worry beyond that. Should Takata fail, the airbag industry will end up even more concentrated. Sweden's Autoliv won almost half of orders for front-seat airbags in new cars last year and is producing tens of millions of units to replace Takata's faulty ones. If these sorts of problems can result from a defect at one company with a 20 percent market share, how would carmakers cope with the failure of a supplier with 40 percent, or 50 percent?

The need to keep Takata alive for the sake of its customers is the trump card for the parties bidding to take over the remnants of the business. But it's going to be a hard needle for those groups and Takata's adviser Lazard to thread.

For one thing, the strategy sounds uncomfortably close to that of the protection racketeer: "Nice supply chain you have there. Awful shame if anything happened to it." Bidding parties will have to ensure that carmakers get enough upside from any recovery in Takata's fortunes that they don't feel they're simply writing a check to its new owners and getting nothing in return.

There appear to be gripes already. Honda has pushed back on an idea to set up an independent legal fund that Takata, the new investors and automakers would all pay into, according to one person familiar with the proposal. An agreement to share costs and profits outside certain limits might prove more appealing, but would prove a hard pill for any commercially minded buyer such as the shortlisted KKR to swallow, given the potentially long tail of liabilities.

Sold for Scrap

Takata's price-to-book ratio assumes the company's worth only about a quarter of its net asset value

Source: Bloomberg

Some of the other bidders come with problems. Two of the five listed groups -- Autoliv and Key Safety Systems -- are already among the biggest airbag makers and would present the same issues of market concentration that would result from an outright bankruptcy. That leaves the offer from closely held Flex-N-Gate and the joint bid from Bain Capital and Daicel. Both of those candidates are in the parts business, but neither is as yet a major player in the airbags market 1 .

The biggest challenge to any deal is more fundamental still. To date, none of Takata's customers has tried to recoup costs incurred as a result of the recall. But any white knight riding in to save Takata would be out of its mind to buy the company without being 100 percent confident that such rights wouldn't be invoked -- and no one knows at this stage what the costs could amount to. Jefferies estimates the bill could ultimately run as high as 1.28 trillion yen.

That liability doesn't go away if someone buys Takata, so somehow the company, its takeover bidders and more than a dozen customers are going to need to reach an agreement about how it might be apportioned in advance. Next to that, replacing 100 million airbag inflators sounds like child's play.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
  1. Daicel makes airbag inflators but not the airbags themselves.

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

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net

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