Autos

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

Takata Corp. and its would-be buyer Key Safety Systems Inc. must be hoping that bankruptcy will represent the end of the road for its faulty air bag problems. It's more likely that the journey has only just begun.

Take a look at the Chapter 11 bankruptcy petition of Takata's main U.S. subsidiary and you'll see why. Next to "estimated assets," a box has been ticked to represent "$1 billion to $10 billion." Next to "estimated liabilities," the box checked is $10 billion to $50 billion -- toward the high end of most estimates previously circulated for Takata's recall costs, and well in excess of the assets set against it.

Some 14 years after the first defective Takata air-bag detonator injured a passenger, the scope of this crisis is only now coming into focus.

Counting the Cost
The sum of Takata's net assets is dwarfed by the liabilities it may face
Source: Bloomberg, news reports
Note: Jefferies, Tokyo Shoko and worst-case scenario estimates are based on total recall costs, including those already incurred and sums spent by automakers. Valient and Takata bankruptcy estimates are based on future liabilities to Takata alone.

Takata says Chapter 11 proceedings could be over in the first quarter of 2018, but anyone expecting a quick and simple process needs to reckon with the history of other companies that filed for bankruptcy while facing faulty-product class actions. The 1985 bankruptcy of A.H. Robins Co., maker of the malfunctioning Dalkon Shield intrauterine device, took three years and resulted in the creation of a $2.74 billion trust to pay claimants. Dow Corning Corp. set up a $3.2 billion fund to resolve claims relating to its defective breast implants after a 1995 filing. Resolving the web of claims and liabilities relating to the bankruptcy of asbestos-maker Eagle-Picher Industries Inc. took most of the 1990s.

That slow process makes sense, given what happens in a Chapter 11 bankruptcy. Liabilities don't simply disappear: Indeed, recall obligations are treated as a claim of the U.S. government, ranking ahead of other creditors in the queue for payouts. Nor do class actions get cancelled: The main advantage of the process for companies is that a mass of tort cases can get distilled into a smaller number of claims. The best that Takata and its new owners can hope for is that the court carries out a "cramdown" to limit the size of some of these liabilities over the objections of creditors -- but that's a highly unpredictable process.

How much could it cost to fix all the faulty air bags? To take a few estimates: Scott Upham, president of Valient Market Research, estimates future recalls will eat up about $5 billion, with some $2 billion of that tied to Takata (as Gadfly's Shelly Banjo has written, Takata's automaker customers have a vested interest in keeping it going and can be expected to fund a slice of the costs).

Decline and Fall
Takata's share valuation has dwindled along with its bonds
Source: Bloomberg

Other estimates run higher. At the cost of $30 each that was cited in Takata's report into the issue, just buying the air-bag inflators for the subset of the 100 million affected cars globally that haven't been repaired yet could cost around $2 billion.

Jefferies Group LLC has put the total cost at 1.28 trillion yen ($11.5 billion), while Tokyo Shoko Research estimates 1.7 trillion yen; people familiar with the matter have told Bloomberg News that a worst-case scenario would run to $24 billion. Takata's bankruptcy petition, meanwhile, indicates a figure at least in excess of $10 billion. None of these estimates includes a cent for the people whose loved ones have been killed by the shrapnel from exploding air bags, or those injured.

In theory, Key Safety Systems' 175 billion yen takeover offer, combined with the 33 billion yen in equity on Takata's balance sheet at the end of March, would get you pretty close to Upham's figure. All the others, though, would involve either the automakers or Takata's new owners paying considerable additional sums into the bankruptcy process.

Takata's problem is the same that it has been ever since its air-bag inflators started malfunctioning in 2004: There's been no full accounting of the scope of its recall and potential class-action payouts. Until that happens, there can be no definitive resolution to its liabilities. Key Safety Systems and its owner, China's Ningbo Joyson Electronic Corp., should dig in for a long and costly fight.

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:
Katrina Nicholas at knicholas2@bloomberg.net