Toyota Recall Messages Lost in Translation

On the face of it, Toyota Motor Corp.'s (NYSE ADR: TM) recall of more than 8 million vehicles appears to be a serious-yet-simple matter of a carmaker facing up to a long list of manufacturing errors. But an in-depth examination of the case reveals a much deeper cultural disconnect.

Like two people from two distinctly different cultures who find themselves locked in an uneasy marriage, the U.S. consumer and Toyota management are suffering from a failure to communicate.

And unless Toyota very quickly makes an all-out effort to close the communications gap, the Japan-based carmaker could find itself relegated to also-ran status, says Keith Fitz-Gerald, a recognized expert on Asian business who is also the chief investment strategist for Money Morning and The Money Map Report.

"If they don't get a handle on this [problem], it could be a deal killer," Fitz-Gerald said in a recent interview. "They're risking catastrophic damage to their brand for years to come."

Toyota is the world's largest automaker. For years, U.S. drivers have viewed Toyota's products as the standard bearer for quality. Its management approach, corporate culture and manufacturing techniques have been studied by rivals in the United States and abroad.

Yet the company now faces at least 30 class-action lawsuits, multiple investigative hearings before Congress, and competitors like Ford Motor Co. (NYSE: F) and General Motors Corp. (NYSE: GM) gleefully circling like sharks with blood in the water.

So what happened? How could one of the world's most admired companies find itself suddenly dashed on the rocks like a ship that's run aground?

Matter of National Pride

The latest blow to Toyota's sterling reputation came last Tuesday, when company officials announced they would recall 437,000 hybrid vehicles worldwide for braking problems, including its flagship hybrid, the Prius.

The Prius announcement boosted the number of Toyota vehicles recalled since October to more than 8.4 million, nearly a full year's production for U.S. carmakers, and one of the largest series of auto recalls in history.

"You have to understand the Prius is the best-selling car in Japan," said Fitz-Gerald, who owns one himself. "This now becomes a matter of national pride, not just another car recall."

The Prius recall was the last in a series that began in October, which included eight different top-selling models, due to a gas pedal problem. A second recall occurred because of friction that was causing sudden unintended acceleration.

The situation turned even worse when U.S. safety regulators on Jan. 21 told Toyota it would have to take the unprecedented step of suspending sales of the eight models while it rushed to find a fix. That stranded $2.5 billion in unsold inventories of cars and trucks at the automaker's dealerships.

Changing the Message

During the weeks leading up to the first recall, and in the following months, Toyota kept reassuring the public that it had identified exactly what the problems were and was doing everything in its power to fix them.

Initially, Toyota insisted the acceleration problems in 3.8 million vehicles stemmed from floor mats that can trap a gas pedal. But the company changed its tune in late January, when Toyota's safety staff in Washington called the National Highway Transportation Safety Administration (NHTSA) to let the agency know it had discovered a flaw with an accelerator pedal part.

The part - which costs $15 - was manufactured by CTS Corp. (NYSE: CTS), an Elkhart, Ind., supplier that the automaker had begun to use in 2005 during its fast-growth phase. That flaw, a mechanical glitch that can cause the pedal to become stuck, affects over 2 million vehicles.

As Toyota hemmed and hawed in public, repeatedly issuing statements that it was doing everything it could, the lines of communication got tangled, according to a Reuters analysis.

In one example, Toyota representatives told dealers on the morning of Wednesday, Jan. 27 that the company would be expanding its floor-mat recall by 1.1 million vehicles, but withheld the announcement from a jittery public until later.

When asked to comment on rumors of a recall that afternoon, Toyota spokesman Brian Lyons said it was "an unsubstantiated rumor." Later that night, Toyota's Washington office made it official when it filed the paperwork with the NHTSA.

"Our jaws dropped when we heard that (they were delaying the public announcement)," said one dealer, who said he thought the episode showed how the company was slow to come to terms with the stakes of the safety crisis.

Where Were Government Regulators?

A focus of the Congressional hearings to be held starting February 24 is sure to be whether Toyota has really identified all its problems.

In fact, safety advocates and lawyers for a Michigan woman killed in a high speed crash in 2008 argue that evidence suggests electronic throttle controls are at fault, not floor mats or "sticky pedals," according to a Reuters report.

Complaints about unintended acceleration soared more than tenfold from model years 2002 to 2007, after Toyota switched to an electronic throttle for the 2002 model year Camry, according to an analysis by Safety Research and Strategies.

And in late 2007, a team of number-crunching accident investigators known as CRASH at privately held insurer State Farm Insurance Co. had noticed a spike in accidents involving Toyota vehicles, including the top-selling Camry.

State Farm, the largest U.S. auto insurer, notified U.S. regulators of the pattern. "If we believe a vehicle played a significant part in causing damages, we go back to the manufacturer," spokesman Kip Diggs told Reuters. "We tell them: 'We believe your product is faulty and you need to pay us for the damages'."

But at least five probes conducted by the NHTSA found no problems with electronic throttle systems, even though complaints had grown steadily.

"That's the real issue," Fitz-Gerald said. "If these problems were discovered back in 2007, why wasn't the NHTSA doing anything about it?"

The answer could raise eyebrows all over Washington. Court and government records examined by Bloomberg News show that former regulators hired by Toyota helped end at least four U.S. investigations of unintended acceleration in the last decade, warding off possible recalls.

Christopher Tinto, vice president of regulatory affairs in Toyota's Washington office, and Christopher Santucci, both of whom previously worked for the NHTSA, helped persuade the agency to end probes involving 2002-2003 Toyota Camrys and Solaras, court documents show.

"Toyota bamboozled NHTSA or NHTSA was bamboozled by itself," Joan Claybrook, an auto safety advocate and former NHTSA administrator in the Carter administration told Bloomberg. "I think there is going to be a lot of heat on NHTSA over this."

Apologies Not Enough

Conducting a recall is bad for any automaker because it admits there's a defect in their product and repairs can be expensive.

But it goes deeper than that at Toyota. "(Toyota) has built itself on pillars of safety, quality and reliability," Rebecca Lindland, a forecaster at IHS Global Insight Inc. (NYSE: IHS) in Lexington, Mass. told Bloomberg. "A defect in their product is appalling to them, sort of unthinkable."

Despite all the criticism being leveled at his company, it took until Feb. 5 before Toyota's president, Akio Toyota, finally emerged from seclusion to apologize and address criticism. "I apologize from the bottom of my heart for all the concern that we have given to so many customers," said Toyoda, promising to beef up quality control.

The company followed up with a Super Bowl commercial that delivered an important message: "In recent days, our company hasn't been living up to the standards you've come to expect from us - or that we expect from ourselves," an announcer said.

What Toyoda failed to answer is how this happened. In a company founded on the concept of "kaizen," the ethic of constant, incremental improvement, it seems Toyota has lost its way.

In any case, Toyota's wild ride has brought the company to a crossroads. It has a chance to start to win back trust or it can lose even more face if it fails to be forthright during the congressional inquiry, which could open a second act of the crisis.

But Fitz-Gerald, who lives in Japan for part of every year, says Toyota's faltering approach to public relations is simply evidence of a communications gap, not a reflection of a company in denial.

"In his words to the American public, Toyoda is demonstrating absolute resolve to fix the problem, he just can't translate his words to the American psyche," he said. "He's absolutely committed to fixing the problem...but he fails to understand the American public doesn't give a damn if he's committed, they just want the problems fixed."

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