SPECIAL REPORT-Deadly airbags backfire on firm that crossed 'dangerous bridge'

Mon Jan 13, 2014 11:33am EST

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By Ben Klayman and Yoko Kubota

DETROIT/TOKYO Jan 13 (Reuters) - At a New Year's party thrown by Honda in 1985, Juichiro Takada, heir to a family woven-cloth business that had branched into car seatbelts, divulged a decision. His company, Takata Corp, would steer clear of mass-producing automotive airbags.

The newest idea in car safety, cushions that inflated within thousandths of a second after an accident, was just too risky. One mistake could ruin the company he inherited from his father.

"We cannot cross a bridge that is so dangerous," Takada told Saburo Kobayashi at the party. In his 2012 memoirs, Kobayashi, who was leading Honda's new airbag program in the mid-1980s, wrote that he wanted Takata to make airbags from its sturdy textiles. Somehow, in a fateful gamble, Takada changed his mind and crossed that bridge.

Within a few years his company was not only making airbags, it had branched out into making the high-explosive pyrotechnic devices that inflate them, employing technology that borrows from rocket engines and is worlds removed from woven cloth. The bet paid off spectacularly. Airbags evolved from a pricey option to standard equipment on millions of cars, and Takata became one of the top three manufacturers worldwide.

Nearly three decades later, Juichiro Takada's worries seem prescient. After a series of accidents and at least two deaths allegedly caused by faulty airbags, last year Takata's car-company clients ordered the largest airbag-related recall in history. Takata took a charge of $300 million. Juichiro's son and heir, Shigehisa Takada, gave up family operating control of the company for the first time, ceding the president's post to a Swiss executive.

The tale that emerges from interviews with industry officials, chemical engineers, former U.S. safety officials and former Takata employees - as well as reviews of documents filed with U.S. regulators - is one of a company that lost its grip on quality. It's a classic case study in how a lapse in quality-control rigor can prove extraordinarily costly to even a well-regarded, successful company.

Takata has acknowledged to U.S. safety regulators that it improperly stored chemicals and botched the manufacture of the explosive propellants used to inflate airbags. It also has conceded to Reuters that, in at least one case, it kept inadequate quality-control records, which meant that hundreds of thousands of cars had to be recalled to find what might have been only a small number of faulty airbags, a decade after they were made.

The company says it has now resolved the quality issues, and its major customers, including Honda Motor Co and Nissan Motor Co, say they continue to use Takata airbags and stand behind the company. Takata's share price has rebounded after dropping almost 15 percent the day of the big recall announcement on April 11. It has gained 78.5 percent from its low on that day, as Takata's earnings expectations and Japan's broader stock market both improved. But the lasting impact on Takata remains unclear.

"Takata has been partnering in complete cooperation with our customers and will continue to do so with complete transparency," Takata spokesman Hideyuki Matsumoto told Reuters.

When the North American International Auto Show opens in Detroit this week, the hundreds of cars on display will contain thousands of airbags: up to 10 of them in some vehicles, mounted in the steering wheel, dashboard, doors and other places. They'll get scant attention compared to advanced styling, high-tech engines and other visible features, even though the sophistication of airbags rivals that of any other piece of automotive technology. Takata's troubles, and how they arose, shed light on the complexity of a key car component that millions of drivers now take for granted.

AIRBAG TYCOON

When he died at 74 in 2011, Forbes magazine listed Juichiro Takada as Japan's 29th richest person, worth some $900 million. His airbags and seatbelts had made him wealthy and likely saved thousands of lives.

Ashley Parham, an Oklahoma all-state cheerleader who dreamed of becoming a schoolteacher, wasn't one of them.

In May 2009, days after she graduated from Carl Albert High School in Midwest City, the 18-year-old drove to pick up her younger brother from football practice. Her 2001 Honda Accord bumped another car in the school parking lot.

The car's eight-year-old Takata airbag exploded out of the steering wheel, in what Honda later described as an "unusual deployment" in documents filed with NHTSA in August 2009. Parham bled to death after a piece of metal shrapnel sliced open her carotid artery, according to the autopsy report.

Police Chief Brandon Clabes told Reuters that emergency-room doctors who treated Parham initially "thought she might have been shot" before retrieving shards of metal from her neck and chest. Clabes said his department conducted "an in-depth accident and criminal investigation" and "matched those pieces of metal up with the airbag."

The parking-lot incident, he added, "was just a minor traffic accident ... that most people just walk away from with no injuries at all."

Honda had already informed American authorities it had a problem with some of its airbags, which were supplied by Takata. Just six months earlier, it had recalled in the United States 4,000 Accords and Civics, 2001 models, because degraded explosives in the airbag inflators could blow up more violently than expected, spewing metal parts into the car, according to documents provided by the automaker to NHTSA.

Parham's particular Accord wasn't included in the first recall. But two months after her death, Honda expanded the recall 100-fold, summoning back more than 500,000 cars globally. Parham's 2001 Accord was part of the larger recall.

It wouldn't end there. Six months later, on Christmas Eve, an airbag in another 2001 Honda Accord exploded after a collision with a mail truck in Virginia. Shrapnel from a ruptured airbag inflator allegedly severed blood vessels in 33-year-old Gurjit Rathore's neck, and she bled to death, according to a lawsuit filed by Rathore's family.

In both deaths, Honda and Takata settled with the families out of court and details were not disclosed.

THE BIG RECALL

Soon hundreds of thousands more cars were being recalled, then hundreds of thousands more. In addition to the two deaths, there were several other severe injuries allegedly linked to the airbags, including one woman who survived only by staunching a bleeding artery in her neck with her fingers. Several settlements took place.

The recalls would culminate in April of last year when 3.6 million Hondas, Nissans, Toyotas, BMWs and others from model years 2001-2004 were summoned back around the globe. In all, over the last five years, 6.5 million cars equipped with Takata airbags were recalled worldwide, more than half of them Hondas.

Takata and the automakers say the recalls were the result of a series of separate problems, and that they acted on each one as soon as they became aware of it.

Takata spokesman Matsumoto said the size of the recalls was set by the carmakers, based on Takata's records and analysis.

"The cases all had completely different causes that led to recalls," Matsumoto told Reuters. "If you ask me whether there was a causal relationship between them, I can only say that there wasn't."

As is common in automotive safety cases, many lawsuits have been settled confidentially and without trial. Thus the internal records of Takata, Honda and the other automakers have not been revealed in court, and engineers and executives were not summoned to testify. That makes it difficult to establish just how and when awareness of the faulty airbags unfolded inside the companies.

What no one disputes is that it took four years from Ashley Parham's death, and 12 years from when the car that her family claims killed her rolled off the assembly line, for the extent of Takata's quality woes to be revealed.

In August 2009, U.S. safety regulators at the National Highway Traffic Safety Administration asked Honda why the second, larger recall, announced weeks after Parham's accident, was not included in the smaller 2008 action. Three months later, NHTSA opened an inquiry into whether Honda and Takata recalled vehicles fast enough. By May 2010, NHTSA closed the probe, saying the companies had handled the recalls appropriately. In a statement to Reuters, the safety agency said it was satisfied with the responses of Takata and its automaker customers.

AN "UNUSUAL DEPLOYMENT"

Changes had been made at Takata's factories as far back as 2002. According to Honda, in November 2002 Takata assigned a plant employee to ensure that propellant chemicals were placed in dry storage before non-business days like weekends, after one of Takata's other automaker clients questioned how exposure to moisture might affect the chemicals.

Honda acknowledged in U.S. recall documents that an "unusual airbag deployment" had occurred as early as May 2004. In September 2009, Honda said the problem was not rediscovered until after Ashley Parham's fatal accident.

Her death led to a frenzy of activity at Takata, which hired a German engineering firm to investigate, said a former Takata insider with access to senior management who spoke on condition of anonymity. The investigation turned up different problems, some involving the chemical propellant, but the results were inconclusive, the former insider said.

Takata spokesman Matsumoto said, "The cases all had completely different causes that led to recalls."

Honda, in a statement, said: "The causes of the recalls were identified (by Takata), and we confirmed implementation of preventive measures."

Automakers insist on higher standards from airbag suppliers than for any other part of the car. Honda normally demands fewer than one defect in a thousand over the lifetime of a typical car part, according to Kobayashi, the former Honda executive who first tapped Takata to make airbags. For critical parts like brakes, the standard is often higher: one defect in 10,000 to 100,000 parts. But for airbags, where any fault can be deadly, the expected standard is one defect in a million parts - a threshold so high that tests cannot be designed to measure it and human inspectors cannot be trusted to verify it, Kobayashi wrote in his memoirs.

Another complicating factor is that even building airbags is potentially deadly: handling the explosives used in their inflators is inherently dangerous.

Most manufacturers - including Takata and its competitors - have experienced explosions and fires at their plants. The most dangerous work is carried out by robots guided by cameras, with human operators shielded by thick walls. Employees wear special shoes to make sure they do not produce static electricity.

FORTIFIED FACTORIES

One spark can be catastrophic, said Doug Hansen, a former senior project engineer with Rocket Research, a firm that worked with Takata to develop airbag inflators in the 1990s.

"That's why you build those plants out in the middle of nowhere," he said. "You set it up and it's got blast walls and concrete walls. You design around those things."

Takata's airbag plant in Moses Lake, Washington, is built on a remote former U.S. military air base where bomber pilots trained during World War II. The company's other North American airbag plant is in Monclova, Mexico. It shut down a third airbag plant in LaGrange, Georgia, in July 2005.

Takata's record on factory safety is generally supported by former employees and rivals. A former worker at the Moses Lake plant, who was highly critical of its management overall, said plant safety was "one thing they did well. They were always looking for safety suggestions."

In such a dangerous industry, Takata developed a reputation for innovation, becoming a pioneer in "non-azide" inflators, which replaced toxic explosives called azides with other chemicals that posed fewer problems once released into a car.

According to Honda, the Takata airbags were propelled with a blend that included ammonium nitrate, a common explosive that is also used to make fertilizer. Azides were phased out in the early 2000s, which meant Takata's new inflators were in high demand.

An ammonium nitrate mix generates gas more efficiently than other chemicals used by some rivals, leaving behind a smaller quantity of potentially dangerous solid slag, according to chemists interviewed by Reuters. But it also can be unstable, particularly if exposed to moisture.

Machines at Takata's factories packed the chemical propellant into wafers, which are then stacked inside the inflator, a device that shoots out hot gas to inflate an airbag within thousandths of a second after sensors detect a car crash. If the wafers crumble or break, they can burn too fast, creating a high-pressure explosion.

Where Takata now says it went wrong is in making those wafers. The company has acknowledged a list of problems to U.S. safety regulators. It failed to properly store propellant to shield it from moisture, which can cause wafers to crumble many years later. Some wafers were pressed together with too little force. In some cases, according to Honda, inflators were made with just six wafers, instead of the required seven.

A SURGE IN DEMAND

All the defective wafers were made between 2000 and 2002 at Takata factories in the U.S. and Mexico, the supplier and its carmaker customers say. It was a time when, according to the former Takata insider, the firm was under intense pressure from its customers to boost output to meet surging demand.

Takata said in a statement: "Production demands vary over time, but our company's commitment to delivering quality products never varies."

Honda did not address specifically the pressure that Takata was experiencing.

Honda spokeswoman Akemi Ando told Reuters: "Takata has been supplying airbags to fulfill Honda's order quantity while guaranteeing the quality of their components."

In the five years from 2000 to 2005, Honda's global production grew 37 percent to 3.4 million vehicles.

"You've almost got this perfect storm of an increase in the volume of cars being sold and very, very rapid implementation of technology," said Mark Johnson, an expert on supply chain management at Britain's Warwick Business school.

In documents filed with NHTSA, Honda and Takata cited another issue in last year's huge recall: faulty record keeping. Factory devices designed to automatically reject substandard wafers had a manual override control that could be switched off while the production machines were tuned up. Because of "human error," Takata said, the control was flipped off, but there was no record of when, which meant there was no proof of which wafers had passed the test.

All those factors led to the recall of millions of cars, including many built by manufacturers that never experienced the deadly explosions that hit 2001-2002 Hondas.

ON THE HORIZON

One question facing Takata and its customers is whether more recalls may arise. A case in the NHTSA database, filed by a plaintiff's attorney in Jacksonville, Florida, describes an accident in a 2005 Honda Civic, a vehicle not covered under previous recalls. The attorney wrote that "the driver-side airbag inflator ruptured and propelled a one-inch piece of shrapnel into the driver's right eye" and caused severe cuts to the driver's nose, according to the report.

NHTSA officials said in a statement they are aware of the complaint, "are monitoring the situation and will take action as warranted." Honda said no further recalls were needed at this time. "If Honda obtains any information on defects, it will prioritize customer safety and take necessary steps such as analysis and investigating the cause," said spokeswoman Ando.

Takata said it is supporting customers with detailed technical analysis and replacement parts as needed. "Our joint objective is to do all that is possible to ensure the safety and well-being of drivers and passengers," it said in a statement.

Exactly how the damage to its reputation might affect Takata's fortunes remains to be seen. Smaller makers of airbags and inflators in Japan, South Korea and China are challenging Takata and the other two airbag market leaders, Sweden's Autoliv and U.S. supplier TRW.

One thing is clear: Despite the deadly Takata accidents, airbags themselves do save lives - almost 35,000 in the United States alone since 1987, when they were phased in, according to NHTSA. (Reporting by Ben Klayman in Detroit and Yoko Kubota in Tokyo. Additional reporting by Paul Lienert. Edited by Peter Graff and Paul Ingrassia.)

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