PAYING FOR A SCREW-UP
Toyota knew how to run a textbook recall. When Toyota
launched its Lexus brand in 1989, the long-awaited LS400 was
hit by a series of glitches, including a tail lamp prone to
overheating. The recall threatened to kill the luxury brand in
Toyota suspended production and ramped up output of
replacement parts. Its California-based sales arm sent
representatives out to pick up every one of the 8,000 LS400s
that had been sold and provide owners with a free loaner while
repairs were under way. The cars were returned washed and with
a full tank of gas.
Lexus dealers and customers were impressed by the attention
and the brand went on to outsell BMW and Daimler AG in the U.S.
market over the next two decades.
That record of success made Toyota dealers deeply loyal --
and rich. It also drew investment from listed dealership groups
that bet Toyota franchises would continue to outsell and
out-service the rest of a wildly cyclical industry.
As of end September, 2009, Houston-based Group 1 Automotive
drew 39 percent of its new-car sales revenue from its Toyota
stores. At Fort Lauderdale-based AutoNation it was 21 percent.
For Bloomfield Hills, Michigan-based Penske it was 20 percent.
"Toyota is struggling with being the largest automaker in
the world. It certainly has issues, but you have to give them
credit. They face reality. They deal with it," AutoNation CEO
Mike Jackson said in September, before the first of two massive
In part because Toyota had kept a tight lid on the number
of its dealerships, the franchises remained far more profitable
than U.S. car dealerships. In 2008, during a recession, the
average Toyota dealership sold four cars a day. The average
Ford dealer sold one.
In a pep talk last month partly aimed at its dealers,
Toyota pledged to contain the damage to its brand from the
recall announced in September for the risk that floor mats
could trap accelerator pedals.
"A product recall is an opportunity to reconnect with
customers in ways we haven't before and to re-prove ourselves
in their eyes," Inaba said on Jan. 12 in a speech in Detroit.
But four days later -- a Saturday -- Toyota's safety staff
in Washington called NHTSA to let the agency know it had
discovered a flaw with an accelerator manufactured by CTS Corp
(CTS.N), an Indiana supplier that the automaker had begun to
use in 2005 during its fast-growth phase.
The problem: the CTS-built accelerator -- a $15 part --
could become stuck in some cases due to wear and moisture,
Toyota had found. The bigger problem: the flaw affected over 2
million vehicles and the automaker had not yet fully figured
out a way to fix it quickly.
On Tuesday, Jan. 19 Inaba, Toyota U.S. sales chief Jim
Lentz and others were summoned to Washington. NHTSA officials
say they said they wanted prompt action. Toyota's executives
called back several hours later to say that they were launching
The announcement on Thursday, Jan. 21 looked bad for
Toyota. But the situation turned dire the next Monday. U.S.
safety regulators told Toyota it would have to take the
unprecedented step of suspending sales of eight models while it
rushed to find a fix.
In one stroke, Washington stranded $2.5 billion in unsold
inventories of cars and trucks at the automaker's dealerships.
Worse, the negative publicity was driving away shoppers in the
last week of the month, typically the peak for showroom
Toyota rushed to keep dealers informed with daily updates
and conference calls. But frustrations were starting to boil
The lines of communications also got tangled. Sometimes
Toyota's California-based sales arm seemed not to know what its
Kentucky-based manufacturing arm was doing or what its
Washington regulatory team had heard in the fast-evolving talks
with NHTSA. Sometimes it spun the other way.
In one example, Toyota representatives told dealers on the
morning of Wednesday Jan. 27 that the company would be
expanding its floormat recall by 1.1 million vehicles. Toyota
had determined that five additional models including the 2010
model-year Corolla, Venza and Matrix were at risk of having
their accelerators held open by floormats stuck underneath
But the move had not been announced to an increasingly
jittery public and would not be for hours, a gap that made some
dealers immediately uneasy. "Our jaws dropped when we heard
that," said one, who said he thought the episode showed how the
company was slow to come to terms with the stakes of the safety
When asked to comment that afternoon, Toyota spokesman
Brian Lyons said talk of the recall was "an unsubstantiated
rumor." Just before 8 o'clock that night on the East Coast,
Toyota's Washington office filed the paperwork making the
expanded recall for floormat risk official.
In a similar move that has prompted criticism and drawn at
least one lawsuit in California, Toyota quietly fixed a problem
with the brakes on the Prius for vehicles still on its Japanese
assembly line in January.
But consumers were not informed that Toyota had found the
flaw or developed a fix for the software controlling the Prius
brakes until safety engineer Yokoyama told reporters in Tokyo
on Feb. 4.
Analysts say Toyota's wild ride has brought it back to a
crossroads. It has a chance to start to win back trust the
old-school way but it also faces the risk that the
congressional inquiry will open a second act of the crisis.
"The damage to the reputation has been done," said Jeff
Hess, a professor of marketing at California Polytechnic State
University and former auto industry analyst with J.D. Power.
"It's not about the message now. It's about hundreds of dealers
and millions of customers."
Sean Kane, founder of Safety Research & Strategies and an
expert witness who has been called to testify in the upcoming
congressional hearing, said Toyota has to confront the
possibility that it has problems with unintended acceleration
in its vehicles that go beyond models that have been recalled
and beyond the fixes it has described.
Back in Toyota City, there was evidence of the quiet
resolve the automaker will need a lot more of in the weeks
"The difficulty when a company -- any company -- becomes
big is that employees become detached from the problems," said
one Toyota manager, who like most others asked not to be named.
"When you can't do anything about this, that's how companies
fail. But our job is to drill this sense of crisis into as many
employees as possible."
(Additional reporting by John Crawley in Washington,
Soyoung Kim, David Bailey, Bernie Woodall and Nick Carey in
Detroit, Chang-ran Kim, Chikafumi Hodo, Nobuhiro Kubo in
Tokyo, Yuriko Nakao in Toyota City, Japan, Tim Gaynor in
Georgetown, Kentucky, Steve Gorman and Sue Zeidler in Los
Angeles, editing by Jim Impoco and Claudia Parsons)