Toyota Skids Toward Brand Erosion

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Includes: F, TM
by: The Rational Walk

Toyota’s (NYSE:TM) recalls in recent weeks have attracted a predictable amount of attention given the number of impacted vehicles on the road. Rarely a day goes by when Toyota’s latest woes are not reported on the front page of The Wall Street Journal and on television news reports. For a company that has built its reputation on safety and dependability, the recalls are particularly damaging.

Building a Brand

It often takes decades for a company to build brand awareness and this is certainly the case for Toyota vehicles in the United States. While the company has been in business since 1937, it was not associated with high quality until the 1980s. In fact, the company’s cars were widely ridiculed during the 1960s and 1970s, particularly by Detroit auto executives who considered the United States market to be “owned” by the Big Three.

In recent years, the Toyota Camry has often been the best selling passenger car in the United States. Consumers who selected the Camry were not buying it for driving excitement but due to Toyota’s reputation for reliability and economy.

I purchased a 2003 Toyota Camry as a commuter car. The vehicle had all the excitement of a common household appliance, such as a toaster, but it never let me down. (It should be noted that the 2003 Camry is not part of the recall. I have since sold the Camry and purchased a Ford (NYSE:F) Mustang, which offers more “driving excitement”.)

Decades to Build, Days to Destroy

Unfortunately, what can take decades to build up, can be destroyed very quickly. This is particularly true if problems are revealed that destroy the salient qualities of the brand. In the case of Toyota, a recall related to safety and reliability harm the foundation of the brand. This is not a peripheral quality issue, such as a radio that breaks. The problems, while very rare, are potentially life threatening.

From this perspective, the problems are not unlike the famous case study involving the Tylenol cyanide poisonings in 1983. Johnson & Johnson’s (NYSE:JNJ) response to the incident has been widely praised as the model for crisis management. Indeed, the company’s prompt actions to prevent tampering in the future may have even strengthened the brand.

Of course, the main difference between the current Toyota recall and the Tylenol incident is that the car recall is likely due to a flaw in either Toyota’s engineering or the engineering of a sub-contractor, rather than the result of criminal tampering. This makes it even more critical for Toyota to take particularly forceful action to deal with the recall.

Toyota needs to rebuild the trust consumers used to have in its products. Conducting a recall is the bare minimum required to rebuild that trust. The company should consider taking additional steps to encourage consumers to stick with the brand. This might include giving away free services to consumers to encourage people to bring in affected vehicles for timely recall repairs. An extension of the factory warranty would also represent a forceful action.

Brands and Reputation are Fragile

Barron’s published an annual ranking of the world’s most respected companies this weekend. Toyota ranked #6 on the list but the survey was completed prior to the recent recall announcements. If the survey were to be taken again today, there is little doubt that Toyota’s ranking would fall. However, the extent of that fall is something that management should be able to influence with prompt action.

From an investment perspective, Toyota’s troubles illustrate the importance of selecting management that will protect the value of a brand. If one is paying for a significant amount of intangible assets when purchasing a business, it is critical to know that managers of the business are committed to protecting those assets. The power of great brands is indisputable and it is often worth paying for intangible assets that provide a business with a moat, but only if management can be trusted to protect the asset.

Disclosure: No positions

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Tagged: , Auto Manufacturers - Major
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