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  • A Few Thoughts on Toyota's Recall Problems 1 comment
    Mar 2, 2010 12:57 PM | about stocks: TM, F, DDAIF

    Toyota (TM) is currently engaged in a recall of certain car models totaling in excess of eight million vehicles worldwide. The recall campaigns address problems related to the accelerator pedal. To put the size of the recall into perspective, Toyota sold 6.7 million vehicles worldwide in the trailing twelve months. While direct recall costs could be in the billions of dollars, lost sales due to brand damage may “cost” far more.

    As the majority of recalls have been in the U.S., American media and politicians have weighed in heavily on the company. Amid a lot of noise, we offer three observations:

    1) Massive recalls not uncommon in auto industry: At one point or another, nearly every major brand has had to deal with product recalls. Ford, for example, recently completed a series of recalls affecting 10+ million vehicles. General Motors just this week announced it will conduct a safety recall of 1.3 million cars. While this is no consolation to the people directly affected, as investors we are well-advised to consider the big picture. Recalls are a part of the automotive industry. The irony is that the current focus on Toyota likely makes their new cars the safest around.

    2) The political factor: It is hard not to consider politics as a major factor shaping the Toyota debate in the U.S. Toyota has nearly doubled U.S. market share from 9% in 2000 to 17% in 2009. This has been largely at the expense of General Motors, Chrysler and Ford (F). With the U.S. government a significant owner of the former two companies, the objectivity of congressional investigations into Toyota may be compromised. Media hype does not help. Neither does the fact that the industry remains in one of its most severe downturns, with GM and Chrysler briefly undergoing bankruptcy procedures last year. The issue, however, is compounded by the fact that Toyota is also a big employer in the U.S. As all politics is ultimately local, it will be interesting to observe congressmen opinions relative to the presence of "domestic" companies versus Toyota in their respective congressional district or state. Although politics always introduces an element of uncertainty, end-customers are likely to be the ultimate arbiters of the future presence of Toyota on the U.S. market.

    3) The price of growth: "Quite frankly, I fear the pace at which we have grown may have been too quick." These are the words of Akio Toyoda, Toyota's President and grandson of the company founder, as part of his testimony to House Committee on Oversight and Government Reform. The testimony is an interesting read, as it highlights the response to a major problem by a world-class organization such as Toyota. In the wider context, it is instructive to pause and contemplate the implications for other fast-growing companies. Investors often are willing to pay high multiples for nominal growth without considering the costs of growth. Be it genetically-modified food or asset management, growth at the expense of human health/returns most likely won't generate value in the long-term.

    Disclosure: No positions
    Stocks: TM, F, DDAIF
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  • JKM
    , contributor
    Comments (41) | Send Message
    I am shocked that we have not seen even one downgrade on TM given all of the data that has come to light over the past month.
    2 Mar 2010, 02:09 PM Reply Like
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