Toyota shows the world how not to get out of a hole!

One should immediately stop digging and never close your eyes to a problem staring you in the face if you really want to get yourself out of a particular hole. Translated into events of the day, if ever one needed an example of how not to do something and of complete management failure and arrogance then look no further than how Toyota took what should have been a straightforward problem to sort out and, by doing nothing, made it ten times worse. It is safe to say that the manner in which the world’s largest automaker has handled the accelerator and breaking problems that could potentially affect no less than eight million of its cars has been shameful in the extreme. Now, despite feeble attempts to hang its head in shame last week having completely failed to put customer safety and service reputation as the highest priority, Toyota will deservedly now be forced to pay a very heavy price for the failure of its management to promptly deal with a now out of control situation.

Having belatedly confirmed that almost eight million vehicles would now be recalled to rectify reported accelerator problems, it seems that Toyota Prius hybrid customers are still awaiting seemingly inevitable official confirmation from management that these too will need to be recalled to sort out reported braking problems. I have absolutely no idea how long Toyota may have known that a braking problem existed on the hugely successful Prius although may I please hope that is it not nearly as long as the UK Toyota spokesman told us last week that it had been aware of the possibility of an accelerator problem on other vehicles it had sold worldwide – that was, sometime during 2008!

While I accept that it may be easy for observers such as me to wallow in Toyota’s current humiliation, it is they that have dug themselves into what will no doubt be a very expensive hole to get out of. ‘If the cap fits, wear it’ and while there is nothing shameful in recalling vehicles to remedy a problem, be it caused by poor quality, failure of design or anything else, it seems to me that Toyota deserves all and more of the pain that it will suffer over the coming weeks and months. Product recalls are nothing new of course and is not reserved solely for carmakers, as we saw from a certain laptop manufacturer back in 2008, But apart from seeing the odd advertisement informing us that some product – a toy maybe or food product that has somehow been contaminated – has been withdrawn and the odd request to consumers to bring products they have purchased back, it is generally the carmakers that we most generally link to product recalls. GM and Ford have had many product recalls over the years and so too have French, German and British car manufacturers. Japanese car manufacturers too, despite the perception of their producing top quality products, have also been forced to make many recalls in the past. This includes Toyota, Nissan, Honda and others – indeed, we might pause here to remember that during 2000 Mitsubishi found itself under very intense public scrutiny as it was accused of a ‘cover up’ scandal, delaying necessary recalls and attempting to hide various problems. Today Toyota would do as well to take note of this as the unfortunate events at Mitsubishi in 2000 caused that company to report a Yen75.6bn loss for the year and to suffer a degree of contempt for a long time after that.

When a government is forced to get involved and literally force a car company to make an expensive recall one knows that the situation really is serious. It has occurred several times in the past and on one occasion, although I will not mention which particular Japanese carmaker it was, the government ordered the company to recall cars made over something like fifteen years. This was, as far as I am aware, the first time that cars that had possibly already been melted down for scrap had been recalled!

Seriously though what matters to the customer and to the public is not the nuisance of potentially having to take the car in to get the component part or whatever the problem is sorted. It is how quickly the company reacted to the problem and whether it put the needs and safety of its customer at paramount importance. In this case it seems that by delaying the inevitable recall Toyota has miserably failed its customers. Was it hoping perhaps that the problems that some customers had experienced were simply one-offs and that given time the problem would go away? Clearly, to many Toyota customers, this is now inevitably how the current situation will be seen. Will Toyota recover? I guess that it will although I suspect there will be an effect of this catastrophe on sales for maybe a year and more. How much will it cost Toyota? That is too early to say but despite suggestions from the company last week that even allowing for a product recall a return to profit to the year ended in March was still expected, I am bound to think that if this was to be so then there might also need to be a touch of financial engineering.

No use crying over spilt milk though – Toyota must face up to this mess with all speed. While it is probably too late to suggest that with a further damage limitation exercise further damage might be containable, the best thing that management can do is to drop the arrogance and accept that the way forward must be directed at alleviating customer fears and sorting the top line problem – a time for nothing less than humility, honesty and decency.

Howard Wheeldon is the Senior Strategist at BGC Partners