It should have been a great time to be running a great company. Last June, Akio Toyoda won his heart’s desire and took the top job at Toyota, the car giant that had been founded by his grandfather in pre-war Japan.
Toyota had overtaken General Motors to become the world’s biggest car company. It had stolen a technological march on its rivals with the fast-selling Prius hybrid. And its famed internal discipline, enshrined in the Toyota Way, would stop it falling prey to the complacency and arrogance that had laid Detroit low.
By early last year, however, Toyota was going downhill fast. Sales fell sharply as the credit crunch began to bite and Katsuaki Watanabe, who had presided over Toyota’s rapid expansion, announced the unthinkable: after eight years of growth and record profits, Toyota had made a loss of 437 billion yen (£3.1 billion). Watanabe, 67, had to step down and Toyoda, 53, was appointed president.
He couldn’t have known it, but he was walking into a storm. In the past few weeks, Toyota’s reputation for peerless quality — its greatest asset — has been shredded. What started as a small problem with throttles sticking open has snowballed into a crisis affecting 8m cars that will cost about £1.3 billion to fix.
And as Toyota struggled to design, produce and deliver a fix for this problem, it received another bombshell — reports in Japan and America of inconsistent braking in the latest version of the much-fêted Prius. Toyota may have to recall 270,000 of the hybrid vehicles, and last week there were rumours of other glitches.
Aaron Bragman of IHS Global Insight, the industry analyst, summed up the mood: “What started out as notable recall has turned into a fully-fledged media and marketing disaster.”
After a fortnight of sending more junior executives to face the media, Toyoda finally stepped into the spotlight on Friday. He said that he was “deeply sorry” about the recall and acknowledged that Toyota “faced a moment of crisis”. The group’s quality control must be improved, he said, and he had set up a special committee for this purpose. He would chair it himself.
Toyoda sensed the coming crisis months ago. In October, he told reporters in Japan that Toyota was “grasping for salvation”. He referred to a book by the American business commentator Jim Collins — How the Mighty Fall, a study of large companies that fall into decline. Toyoda said that the carmaker had been through the three stages described by Collins: hubris born of success; undisciplined pursuit of more; and denial of risk.
Toyoda agreed with the company’s critics that it had grown too big, too quickly and become distant from its customers. He emphasised the importance of quality and his desire to improve Toyota’s image by building more exciting cars “sprinkled with passion and emotion”.
This was something new for Toyota, which built an intensely loyal customer base, especially in America, by offering practical, ordinary cars. For years the company was a byword for quality and reliability. It is routinely at the top in motor-industry customer satisfaction surveys.
That reputation is now under strain. Rivals General Motors, Ford and the fastgrowing Hyundai have mounted sales campaigns in America directed at concerned and disillusioned Toyota owners.
John Wormald of Autopolis, the automotive consultancy, said: “People don’t buy Toyotas for sexy design or great performance. They buy because they won’t let them down. If that is now in question, it takes away one of the main reasons for purchasing a Toyota.
“This won’t be fatal but it will be costly. There is damage to the brand which is real but difficult to quantify and then there is the cost of the enormous recall and the effect it will have on the resale value of the cars affected.”
Until five years ago Toyota didn’t have to deal with safety recalls. But, evidently, its quality standards have slipped since then and so, it seems, has concern for its customers. The company was slow to respond when it was first alleged that sticking throttle pedals had caused hundreds of accidents.
The first cases in America last October were attributed to incorrectly fitted floormats that could obstruct the movement of the throttle pedal. By mid-January it was clear that there was a wider problem with the pedal itself. Condensation and wear could make it hard to depress or reluctant to return. If the latter, the engine revs could soar and the car speed up, apparently out of control.
The company’s engineers started work on a remedy but its management was overtaken by events when the National Highway Traffic Safety Administration ordered the suspension of production at five Toyota factories and instructed dealers not to sell, and hire companies not to rent, the affected models. Ray LaHood, the US transportation secretary, suggested that cars awaiting recall should not be driven until they had been rectified.
How did Toyota, which invented the highly efficient production system used by virtually all the world’s car companies, get into this mess?
Ralph Nader, the consumer advocate who came to prominence in the 1960s with his book Unsafe at Any Speed, which attacked the safety of General Motors’ Chevrolet Corvair, believes that in the chase for profits, Toyota let its standards slip. In an interview with Automotive News, the trade journal, he said: “They expanded too fast and lost control of their quality control.”
Another problem was the sheer number of cars involved. Most safety recalls cover one type of car, perhaps with related models. To save money, Toyota standardises many components across several models.
The same suspect throttle pedal assembly is used in a dozen cars from the cheapest Aygo (made in the Czech Republic along with the mechanically identical Peugeot 107 and Citroën C1) to the Auris and Avensis from the British plant at Burnaston in Derbyshire, the iQ and Corolla made in Japan, and the large Camry and Avalon saloons produced in America. It is a Toyota design, made by two different suppliers: CTS Corporation in America and Britain and Denso in Japan.
Kits to fix the problem are now being produced round the clock in Japan and distributed to Toyota’s outposts throughout the world. Toyota GB’s commercial director Jon Williams said that UK dealers should be in a position to start modifying recalled cars from next Wednesday — all 180,865 of them.
The Prius brake problem, meanwhile, has been reported in America and Japan but not in Europe. The NHTSA is to open a formal investigation after four reports of crashes involving the 2010 Prius.
The reports describe an inconsistency in braking performance, particularly on bumpy and icy roads. It seems that the collection of energy during braking could be interfering with the operation of the anti-lock braking system (ABS). This could be a problem with the software in the Prius’s computer system. On Friday, Toyota said it was investigating complaints and considering a recall of the latest Prius model.
The company estimates the cost of the throttle pedal recall will be up to £1.3 billion. It expects to lose 100,000 vehicle sales. The group’s shares have dropped more than 20% in the two weeks since the recall was announced, and shares in dealer groups and suppliers in America have also suffered.
The debacle has also caused concern among financiers. Standard & Poor’s placed Toyota’s debt on credit watch, suggesting that it could be downgraded, saying: “Standard & Poor’s believes these developments may affect the company’s reputation for quality, weakening its competitive position.”
Finally, how well Toyoda handles the situation from now on will be critical if he is to establish himself as the right man to lead the family firm and regain the trust and reputation that made it the world’s greatest car company.
The Toyota recall in the UK will affect seven models: Aygo MMT (Feb 2005 to Aug 2009), Yaris (Nov 05 to Sept 09), iQ (Nov 08 to Nov 09), Auris (Oct 06 to Jan 10), Corolla (Oct 06 to Dec 09), Verso (Feb 09 to Jan 10) and Avensis (Nov 08 to Dec 09). Owners and keepers of the cars affected will be contacted in the next few days. Further information is available at toyota.co.uk/recall and Toyota GB Customer Relations on 0800 1388744.
The lessons from past recalls
PRODUCT RECALLS are surprisingly common in the motor industry. In Britain there are some 250 every year. Most are precautionary, to fix identified safety risks before they cause problems or accidents, and involve minor modifications. But there are some notorious cases that turned into crises for the manufacturers concerned.
In America in the late 1980s, Audi faced charges of unintended acceleration with its 100 model and although these were eventually proved unfounded, the marque lost all sales momentum in the US and languished as BMW and Mercedes reaped the benefit of an expanding premium car market.
Sales of the Ford Explorer SUV never fully recovered from the accidents attributed to failures of wrongly specified Firestone tyres. Arguments between the car and tyre company about who was to blame prolonged the agony and Ford chief executive Jac Nasser lost his job.
Conversely, the handling of the Mercedes A-class case is held up in business schools as an example of effective crisis management. In 1997, a group of car testers pointed to the serious instability of Mercedes’ first front-wheel-drive small car in a manoeuvre known as the “elk test”. All the early cars were recalled and production was stopped for some months. The car’s suspension was modified and Mercedes chose to fit electronic stability control as standard.
It was a costly remedy but it restored confidence in the Mercedes brand and the A-class was a sales success.
Japan's auto giant Toyota Motor president Akio Toyoda bows during a press conference at the company's Nagoya office
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