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Toyota's reputation under fire

Jan 27 2010 12:15

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Tokyo - A string of safety problems has put Toyota's hard-won reputation at risk as critics question whether the company sacrificed its legendary quality to become world number one.

Toyota's unprecedented decision to suspend sales of eight models in the United States due to possible defects will undoubtedly hit its earnings, but the impact on its brand image could be even more serious, analysts said.

In 2008 Toyota ended General Motors' 77-year reign as the world's largest auto maker but the road has been a bumpy one for the Japanese giant, long lauded for its vehicles' safety and reliability.

The company expanded rapidly over the past decade to meet strong demand, particularly in overseas markets such as the United States.

But it was battered by the global economic crisis that erupted in 2008, sinking $4.9bn into the red in the year to last March.

And now executives are scrambling to reassure consumers after recalling millions of vehicles in the United States due to accelerator problems.

"Toyota took the path of expansion although it reversed it recently. The current problems reflect strains caused by that," said Yasuaki Iwamoto, an auto analyst at Okasan Securities.

"As Toyota vehicles are popular in America and elsewhere, Toyota had a responsibility to supply them. But the flip side is that a product defect endangers its brand image."

Investors alarmed

The firm said it would stop producing the eight models, including the Corolla and Camry sedans as well as the RAV4 and Highlander sport utility vehicles, for a week at five North American plants due to the sales suspension.

"This could be pretty devastating to Toyota's bottom line," said Rebecca Lindland, director of auto research at IHS Global Insight, an advisory firm. "It's not just a simple matter of replacing a part that's wearing out."

News of the suspension alarmed investors, who sent Toyota shares sliding 4.3% to ¥3 705.

The models affected accounted for 70% of the maker's brand sales in the United States in December, Lindland noted.

Yet while the safety issues could have a long-term effect on the company's image, many Toyota drivers are "incredibly loyal", she added.

"Toyota has built up decades of goodwill. Where it will hurt them is with the younger buyer - people under 45 - who don't have a lifelong devotion to the company," she said.

The Japanese manufacturer has long prided itself on rigorous safety controls but it is in this area that it has been bedeviled by a series of problems.

Deep in financial trouble

Last week it recalled 2.3 million cars and trucks because of the accelerator problem. The move was separate to a recall of about 4.2 million vehicles that began last year due to a risk of loose floor mats jamming the pedals.

Toyota is also believed to be considering a recall of as many as two million vehicles in Europe due to the accelerator problem.

The 2009 recall, Toyota's largest yet, came after a California Highway Patrol officer and three members of his family were killed in a fiery crash when the accelerator pedal of their Lexus became entrapped in the floor mat.

In November Toyota denied there was any cover-up over safety problems after US authorities accused it of misleading consumers.

But even before the quality issues came into focus, Toyota was in deep financial trouble.

The group's global sales fell 13% in 2009 to 7.81 million vehicles, reducing its lead over Germany's Volkswagen, which aims to overtake its Japanese rival by 2018 as the global number one.

Toyota, bracing for a $2.2bn annual loss in the year to March 2010, has slashed thousands of jobs, exited Formula One racing and turned to Akio Toyoda, the grandson of its founder, to rescue it from its biggest crisis.

"Toyota's operating performance is not good right now compared to competitors like Nissan or Honda," said Tatsuya Mizuno, head of Mizuno Credit Advisory.

"Toyota invested very aggressively to expand its production capacity and maybe did not focus enough on quality. The speed of expansion might have been too rapid," he said.




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