Toyota's Recalls: A Tough Road Back

Like many Toyota owners these days, Bob Manke is suffering buyer's remorse. Even before Toyota (TM) recalled millions of cars to repair balky accelerator pedals, Manke, a retired finance director from St. Paul, Minn., was growing unhappy with his 2009 Camry. The dashboard makes a buzzing sound, he says, and the interior feels cheap. Manke plans to ditch the car this fall, possibly for a Buick Regal or a Volkswagen (VOW:GR) Jetta. It's not that he is afraid that the accelerator will get stuck and cause an accident. "I'm not a nervous wreck," Manke says. It's that he feels the overall quality of Toyota's cars has slipped. "Will I buy another one? No."

Winning back the Bob Mankes of the world will be tough. Toyota's most recent recall has affected eight of its most popular models. After years of being the benchmark for quality, Toyota has been losing its edge even as its rivals catch up. And while vehicle recalls are fairly common, those of this magnitude and seriousness tend to stick in consumers' minds. "Big recalls like this can kill a brand, and there's no way back in the short term," says Maryann Keller, an adviser with industry consultant Casesa Shapiro. "It takes years."

Do the Recall Right

Making matters worse, Toyota's handling of the biggest crisis in its history has at times seemed inept and plodding. Crisis specialist Michael S. Sitrick says companies should dispatch an executive to publicly state: "We're working around the clock to find a fix." In 2000, when Ford Explorers equipped with Firestone tires began rolling over, John T. Lampe, then Firestone's U.S. chief, went on TV to assure customers that his company would take care of them and give them new, reliable tires. By contrast CEO Akio Toyoda waited weeks before issuing an apology, and he did so only after being cornered by a reporter in Davos. Then Toyota executives contradicted one another. Shinichi Sasaki, the company's top quality officer, told Japanese media that Toyota had to be prodded to launch a recall; U.S. spokespeople maintained that Toyota was moving voluntarily.

By late January, Toyota began issuing apologies and promises to do better; its engineers concocted a fix for the accelerator pedals and began rushing it to dealers around the world. But by then the company had lost control of the story. That became painfully apparent when U.S. Transportation Secretary Ray LaHood, testifying before the House of Representatives on Feb. 3, suggested that Toyota owners should stop driving recalled models until they had taken them into a dealership for repair. LaHood reversed himself afterwards: "What I said in there was obviously a misstatement."

Toyota dealerships around the U.S. were soon fielding phone calls from panicky customers. "The comment scared a lot of people, and it caused a lot of grief at the dealership," says Joel Johnson, service manager at Toyota of Richardson in Richardson, Tex. "The phones were ringing off the wall. When a person of authority makes that kind of statement, people think it's gold."

Meanwhile, some safety experts are questioning whether Toyota's remedy will solve the pedal problem. LaHood said that his department is trying to determine whether the cause of the sticking accelerators is mechanical, as Toyota insists, or whether the electronic throttle system is the real culprit, as several class actions allege. He also said the U.S. government may seek civil damages over how Toyota handled the recall.

Toyota executives say that the company has not lost its ability to make safe, reliable cars. A few years ago, Toyota brass recognized that rapid expansion—the company doubled its sales between 2000 and 2008—was hurting quality. In 2006 the carmaker launched a campaign called Customer First to root out defects. But James Lentz, Toyota's U.S. chief, conceded at a press conference on Feb. 1 that "we need to be vigilant. We have to redouble our efforts to make sure this doesn't happen again."

Millions of Toyota cars currently on the road were engineered and manufactured before the company launched its quality crackdown. The risk is that more quality problems will emerge, forcing Toyota to announce another embarrassing recall. Already problems are cropping up with the Prius, Toyota's iconic hybrid. On Feb. 3 the Japanese government announced that it had ordered Toyota to test the brakes on its latest version of the Prius after getting complaints that they sometimes stop working momentarily at slow speeds and on slippery surfaces. In the U.S., according to the National Highway Traffic Safety Administration's Web site, owners of the 2010 Prius had filed 111 brake-related complaints by Feb. 3. By comparison, the Chevrolet Malibu got two complaints of any kind. NHTSA is now launching an investigation into problems with the Toyota.

All the bad news gives buyers another reason to look at other brands. TrueCar, a Web site where consumers can research car prices, says that from Jan. 1 to Jan. 25, the number of people showing interest in buying a Toyota fell 12%. TrueCar says Kia (000270:KS), Ford (F), and Honda (HMC) appeared to be benefiting the most from Toyota's troubles. Jesse Toprak, TrueCar's vice-president for industry trends, thinks Toyota may have to cut its prices for a while. "It's not like 10 years ago when Toyota buyers would just let this go," he says. "Would you buy a Toyota Corolla that went through this recall for the same price as a Honda Civic?"

Refocus on Quality

One area that Toyota will have to focus on is how it manages its relationships with suppliers. Toyota says it plays a big role in engineering parts made by outside firms. But in recent years the company has been demanding that suppliers make parts more cheaply. An executive at a major U.S. supplier says Toyota has insisted that his firm make each generation of parts 10% cheaper. Analysts say the scrimping, while understandable in such a competitive industry, has been showing up in Toyota's cars. Eric Noble, president of The CarLab, a California consulting firm, says even before the recall, consumer focus groups were saying that cars like the Chevrolet Malibu had better interiors than Toyotas.

Toyota says it will more closely monitor quality. However, the company may need to overhaul its design, engineering, and manufacturing operations, as Ford did after the Explorer fiasco. Ultimately, Toyota will have to decide if being the biggest car company on the planet is worth sacrificing the attention to detail that made it such a formidable competitor.

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