Toyota's Tylenol Moment
By Alex Taylor III, senior editor January 28, 2010: 1:30 PM ET


NEW YORK (Fortune) -- In the midst of its biggest recall ever, Toyota is grappling with an existential crisis.

By suspending production and sales of eight models in the U.S. and recalling millions of vehicles, it is putting its business on hold for an indefinite amount of time while it attempts to correct its twin problems of sticky accelerators and faulty carpets.

This is an especially difficult dilemma for the company, because it has built its reputation not on looks or performance or great deals, but upon quality and dependability.

For guidance -- and perhaps inspiration -- Toyota should do some research on the Johnson & Johnson Tylenol recall of 1982.

That year, seven people in the Chicago area died from taking Tylenol capsules poisoned with potassium cyanide. The case remains unsolved, and no suspects were ever charged.

But Johnson & Johnson (JNJ, Fortune 500) didn't wait around for the authorities to act. It stopped production of Tylenol and issued a nationwide recall of 31 million bottles already in circulation with a retail value of over $100 million.

The murders stopped, and J&J's actions led to changes in packaging -- those annoying seals on everything from aspirin to milk -- as well as federal anti-tampering laws. Through its prompt action, J&J was able to actually enhance the value of the Tylenol brand by making product safety one of its attributes.

Toyota has a much tougher job ahead of it. That's because the problems in its cars are not the result of a crazed individual but are systemic to the product development process. Fixing the system that allowed the defects to occur will be complex and expensive.

The twin accelerator and carpet problems have been widely blamed on Toyota's pell-mell expansion over the last several years in its effort to pass General Motors and become the leader in worldwide sales.

But the accelerator problems seem to lie instead with a parallel effort that accompanied expansion: an almost paranoid drive to cut costs by using cheaper materials.

Last month, for instance, it was reported that Toyota had "requested" its suppliers to help in reducing parts costs over the next three years to compensate for slowing sales. That's a huge number, and a "request" from a big customer like Toyota is more like an order.

Cutting individual part costs can have a telling effect on their quality. Meanwhile, Toyota also moved more parts-buying overseas, away from familiar Japanese suppliers and into unfamiliar foreign ones. That may look good on the books, but it can lead to unreliable sources.

Just put an old and new Toyota side-by-side. You'll see the corner-cutting impact from the surface down, and it isn't pretty.

The 2009 RAV4, one of the models under the current recall, on the surface appears to be a better overall value than its predecessor. But take a close look at something like its instrument panel, and you'll see it has been noticeably cheapened by stripping out popular options and using inferior materials. And those are just the parts of the car that are visible to the customer. More cost-cutting may be hidden from view.

To ensure that it doesn't face any more embarrassing recalls, Toyota is going to have to look through all its new models' parts lists for potential problems caused by cost-cutting and find a fix. And it will have to rethink the way it is designing future models to avoid running into the same issue .

Toyota will be hard-pressed to match J&J's performance. The drugmaker developed tamper-resistant packaging in a matter of weeks. Toyota has been stumbling so far in coming up with a robust accelerator fix; one dealer describes the current one as a Rube Goldberg solution that is hardly representative of the kind of work usually done by Japanese engineers.

Another advantage J&J had the willingness of its CEO, James Burke, to step forward and accept responsibility. He became a national hero in a matter of weeks. Toyota's top executives are traditionally more reticent and like to stay in the background. It must be noted though that current president Akio Toyoda has shown himself willing to break with the past.

But the biggest difference between Toyota and Tylenol may be money. J&J spent $100 million two decades ago to clean up its mess. Toyota may have to invest billions, and that's a big bill to win back the trust of customers.

http://money.cnn.com/2010/01/28/auto...cnn=yes&hpt=C2

ANALYSIS
Toyota's image ills long-term: experts

By HIROKO NAKATA
Staff writer
Toyota Motor Corp.'s accelerator pedal problem isn't likely to have much of an impact on its bottom line this year, but the damage to its image will undermine it in the long term, analysts said Thursday.



"The impact on Toyota's business performance will be limited," an auto analyst at a Japanese securities house said on condition of anonymity. "But Toyota's image of safe and high quality is damaged."

The world's top automaker said Thursday it will recall an additional 1.09 million vehicles in the United States to rectify potential problems with gas pedals and floor mats.

The announcement came a day after Toyota said it would suspend U.S. sales of eight models — including the top-selling Camry — because the accelerator pedals could get stuck.

Analysts were forecasting a rebound in earnings for the business year to March 2011 because the failure of U.S. rivals General Motors Co. and Chrysler Corp. were expected to boost Toyota's sales in the North American market.

That scenario is no longer likely, they said.

In 2008, Toyota became the world's biggest automaker in production terms after going all-out to chase GM for the title. But that achievement, signaling GM's first fall from the top in 77 years, may have come at a dear price.

"We projected that Toyota would take advantage of the opportunity," said Shigeru Matsumura, an auto analyst at SMBC Friend Research Center. "But it is likely that Toyota won't be able to recover that much."

Analysts said Toyota is highly likely to lower its 2010 sales target in North America after projecting an 11 percent surge to 2.19 million units earlier in the business year.

The recall and production halt are also likely to encourage its rivals, U.S. and Japanese alike, to compete even harder.

On Wednesday, in a bid to lure its customers, GM launched an incentive campaign aimed at owners of Toyota vehicles.

Toyota is already in red ink. The automaker said in November it expected a ¥350 billion group operating loss and a ¥300 billion group net loss for the business year ending in March.

Analysts agree that one thing that could help Toyota out is the yen-dollar exchange rate. A weaker yen could help Toyota offset any fall in sales and shore up its overseas profits, they said.

As for the cause of the latest recall, many analysts say the accelerator defect might be deep-rooted in the company's internal operating system. When the carmaker expanded overseas production in the previous decade, its priority was to meet rapidly growing demand, the unnamed analyst said.


As a result, quality control suffered at the expense of faster production, the analyst said.

"Toyota wasn't perfect like everyone else after all," he said.

Toyota said the flawed pedal was supplied by a parts maker in North America. The parts maker, CTS Corp., said Thursday it is ready to supply Toyota with replacements.

"But Toyota is responsible for the design problem," said Toyota spokesman Hideaki Honma, "because we conducted the quality check and go-signed."

Japanese drivers aren't affected by the recall, but it could affect drivers in areas other than the United States.

The component that was used in all but the latest European models is the same one used in the U.S., Honma said.

Federal vehicle safety records reviewed by The Times also cast doubt on Toyota's claims that sticky gas pedals were a significant factor in the growing reports of runaway vehicles. Of more than 2,000 motorist complaints of sudden acceleration in Toyota and Lexus vehicles over the last decade, just 5% blamed a sticking gas pedal, the analysis found.

That argument was given more weight Friday when the manufacturer of the suspect pedals insisted its products had been unfairly blamed...

"The problem of sudden unintended acceleration has been reported to have existed in some Lexus vehicles and Toyota vehicles going back to 1999, when CTS did not even make this product for any customer," the company said.

Toyota began using CTS-made pedals in the 2005 model year.

Toyota : moving forward... even when you don't want to.