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ent Stories, Regulation & Legislation Toyota Recall: Five Critical Lessons

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Toyota Recall: Five Critical Lessons
Posted by Michael Connor

January 31, 2010

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by Michael Connor
Toyota Logo_2Toyota s announcement of a technical fix for its sticky gas pedals

wh

ich can lead to sudden acceleration problems - is not likely to bring a quick en
d to the company s current recall nightmare.
Having already halted sales and production of eight of its top-selling cars in t
he U.S. - and recalled more than 9 million cars worldwide, in two separate recal
ls Toyota faces the prospect of billions of dollars in charges and operating los
ses. The Toyota brand, once almost synonymous with top quality, has taken a heav
y hit.
While all the facts are not yet in, it s clear that Toyota s crisis didn t emerge full
-blown overnight. Fixing the problem and ensuring that something like it doesn t
happen again will require an all-out effort, from assembly line to the boardroo
m. Even then, there are no guarantees. Maintaining a good corporate reputation
in the 21st century is tricky business indeed.
Toyota s case offers a number of valuable lessons for other business people and co
mpanies to consider. Here, for starters, are five:
Aggressive growth can create unmanageable risk. Toyota s desire to supplant Genera
l Motors as the world s number-one car-maker pushed it to the outer limits of qual
ity control.
The evidence that Toyota was expanding too much and too quickly started surfacing
a couple of years ago. Not on the company's bottom line, but on its car-qualit
y ratings,
writes Paul Ingrassia, a Pulitzer Prize-winning former Detroit bureau
chief for The Wall Street Journal.
Ingrassia, who has just authored a new book on the auto industry, notes that in
2005 Toyota recalled more cars and trucks than it sold; by 2007, Consumer Report
s magazine stopped automatically recommending all Toyota models because of quali
ty declines on three models.
One wonders if, when accepting management s plan for aggressive growth, Toyota s boa
rd of directors exercised appropriate diligence to ensure that growth could be a
chieved without betting the entire franchise. Were quality control and safety p
art of the discussion? Maybe gaining market share wasn t worth the trade-off. Qu
ick tip to directors of other high-growth-oriented companies: read up on Merrill
Lynch s experience with dominating the sub-prime mortgage market.
Get the facts quickly and manage your risks aggressively. One of the more troubl
ing aspects of Toyota s recalls (there have been two) has been the company s differi
ng accounts of the source of the problem. The current recall, covering 4.1 mill
ion cars, involves potentially sticky gas pedals. Late in 2009, Toyota also rec
alled 5.4 million cars whose gas pedals could get stuck on floor mats. Plus, To
yota says there are some cars affected by both problems. (For an interesting te
chnical analysis of some of the issues involved, go here.)
Uncertainty is not an asset, especially when lives could be at stake. A Los Ang
eles Times investigation, for example, casts doubt on Toyota s explanation, quotin
g one auto safety consulting group as saying, "We know this recall is a red herr
ing." (Read Toyota s position here.)
And the questioning is just beginning. A U.S. Congressional committee headed by
Rep. Henry Waxman has already requested copies of emails and other documents fro
m both Toyota and the National Highway Traffic Safety Administration, which regu
lates Toyota with regard to the recalls. Congressional hearings are scheduled
for Feb. 25.
In cases such as this, investigators almost always start with two time-worn ques
tions. What did you know? And when did you know it? Answers to those question

s provide the groundwork for analysis of a company s response and handling of a pr

oblem. Were employees encouraged to flag safety issues to senior management? W
ere sufficient resources devoted to investigating the problems? When did the b
oard become aware of the situation and what did it do about it?
Companies generally can t predict when crises might occur. However, good internal
risk assessment programs can help identify those areas of the business where ma
nagement should be on the alert. Robust risk management programs help a compan
y address problems as they pop up on the internal corporate radar screen
and bef
ore they explode in public.

Your supply chain is only as strong as your weakest link. The reality is that au
to companies make hardly any of their parts. They assemble cars from parts made
by others. In this case, the offending gas pedal assembly was made for Toyota
by a company called CTS of Elkhardt, Indiana.
It s far from certain how much blame the parts supplier deserves.
ys Toyota s acceleration problems date back to 1999, years before
ing parts to Toyota. (And the replacement gas pedal parts Toyota
as a fix for the problem will be made by CTS, suggesting a degree
in the supplier.)

In fact, CTS sa
CTS began supply
has announced
of confidence

Nonetheless, (if) you are outsourcing for your entire vehicle line, [and] the out
sourced component is defective, the recall and the embarrassment is much greater
, iconic car company critic Ralph Nader told Toronto s Globe and Mail last week. The
overall message is that quality control [means] daily vigilance, Nader said. You
can't coast on your reputation because it can fail very quickly.
Supply chain monitoring is a critical factor for companies that rely on third-pa
rty suppliers. That s increasingly true for a broad variety of industries, not jus
t automobiles, as business grows ever more global. Smart companies will know th
eir suppliers and their respective strengths and weaknesses.
Accept Responsibility. This is one area where Toyota seems to be doing a good j
ob, albeit maybe a year or more too late.
Toyota's National Ad on Recall - January 31, 2010
Toyota's National Ad on Recall - January 31, 2010
Two decades ago, when Audi encountered a safety issue similar to Toyota s, Audi to
ok the position that it was the driver s fault, David Cole, Director of the Center f
or Automotive Research, told Design News. Coles says that reaction ultimately h
urt Audi s reputation.
Toyota seems to be avoiding the appearance of passing the buck. When pressed by
the New York Times about problems that might have been caused by supplier CTS,
for example, Toyota spokesman Mike Michels said: I don t want to get into any kind
of a disagreement with CTS. Our position on suppliers has always been that Toyot
a is responsible for the cars.
Accountability matters enormously. Johnson & Johnson s 1982 recall of its painki
ller Tylenol, following the deaths of seven people in the Chicago area, has earn
ed it a permanent place in the annals of crisis management. But that recall ste
mmed from the deadly act of an outsider (who has never been caught), not any pro
blem with the product itself, as is the case with Toyota.
Take the Long View. The three leading factors burnishing corporate reputation t
hese days are "quality products and services, a company I can trust and transpar

ency of business practices, writes public relations executive Richard Edelman, wh

o last week released his corporate Trust Barometer survey for 2010.
That s unfortunate news for Toyota, given the hand that it s currently playing. But
the company doesn t have much choice. By one estimate, auto industry recalls con
servatively cost an average of $100 per car - suggesting that Toyota might be on
the hook for at least a one billion dollar charge. That doesn t include lost re
venue to Toyota and its dealers from the production shutdown. And competitors a
re already trying to woo customers away and capitalize on Toyota s misfortune. Di
sgruntled investors and Wall Street analysts will make the company aware of thei
r feelings; class action lawsuits are almost a certainty (one lawyer is already
searching for Toyota customers as clients).
Reputation can be easily lost and Toyota s reputation is indeed threatened but it s
highly unlikely the company will collapse completely. And that may be one of th
e one of the biggest lessons for other companies as they study how Toyota emerge
s from this recall crisis. The reality is that Toyota is positioned for recover
y about as well as it could be owing, in large measure, to the reputation for qu
ality products and corporate responsibility it has developed over the last two d
ecades. That reputation is a valuable asset, and one that Toyota will undoubted
ly be citing and calling upon, in the weeks and months ahead.
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Tagged as: Accountability, Akio Toyoda, Center for Automotive Research, Consumer
Reports, Corporate Responsibility, CTS, David Cole, Design News, Ethics, Growth
, Henry Waxman, Johnson & Johnson, Los Angeles Times, National Highway Traffic S
afety Administration, Paul Ingrassia, Ralph Nader, Recall, Reputation, Responsib
ility, Richard Edelman, Risk, Risk Assessment, Risk Management, Supply Chain, Th
e Wall Street Journal, Toronto Globe and Mail, Toyota, Transparency, Trust Barom
eter .

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Last reply was January 7, 2013

Stocks Start the Month Higher; Toyota Begins Fixing Pedals

February 1, 2010
[...] Toyota Recall: Five Critical Lessons [...]

Toyota Recall: Five Critical Lessons | Business Ethics | Business Ethics Wisdom

February 11, 2010

[...] Read the original: Toyota Recall: Five Critical Lessons | Business Ethics
[...]

Maxwell Pinto

March 9, 2010
I drive a Honda, i.e. a car which is produced by one of Toyota's main competitor
s. Therefore, I have no reason to favour Toyota. Toyota has been producing cars
and trucks of good quality for years but that does not give Toyota the right to
mislead customers who complained about the accelerator/ gas pedals and other mat
ters. Passing the buck and delaying solutions is inadvisable - what we need is a
n approach similar to that adopted by Johnson and Johnson in the eighties or Map
le Leaf Foods, a few years ago.
Hopefully Toyota and the world will learn from this: You can fool some people al
l the time or all the people some of the time, but you cannot fool all the peopl
e all the time! That being said, we all make mistakes and crucifixion is not nec
essarily the answer, otherwise most of the inhabitants of this world would be lo
ng dead. So let's hope Toyota solves these problems, compensates victims fairly
and moves on in a positive manner.

mruthyunjaya HS

September 29, 2012

Hopefully Toyota and the world will learn from this: You can fool some people al
l the time or all the people some of the time, but you cannot fool all the peopl
e all the time! That being said, we all make mistakes and crucifixion is not nec
essarily the answer, otherwise most of the inhabitants of this world would be lo
ng dead. So let's hope Toyota solves these problems, compensates victims fairly
and moves on in a positive manner.

Ygurt Billbobagins

January 7, 2013
I drive a Honda, i.e. a car which is produced by one of Toyota's main competitor

s. Therefore, I have no reason to favour Toyota. Toyota has been producing cars
and trucks of good quality for years but that does not give Toyota the right to
mislead customers who complained about the accelerator/ gas pedals and other mat
ters. Passing the buck and delaying solutions is inadvisable - what we need is a
n approach similar to that adopted by Johnson and Johnson in the eighties or Map
le Leaf Foods, a few years ago.

..