Toyota-GM Seen Bringing Era of Big Recalls as Scrutiny Rises

Apr 10, 2014 3:34 am ET

(Updates with closing share price in sixth paragraph.)

April 10 (Bloomberg) -- Recall first, ask questions later.

After Toyota Motor Corp. and General Motors Co. -- two of the largest carmakers -- were criticized for dragging their feet before calling back defective models in recent years, automakers are accelerating safety actions. Recalls recently climbed to records in Japan and China, while in the U.S., the 2014 pace is well ahead of last year’s, when the tally rose to the highest since 2004.

Toyota, roiled by a crisis over unintended acceleration in 2009 and 2010, yesterday issued its second-biggest recall announcement ever at a time when GM is facing condemnation for its handling of faulty ignition switches tied to at least 13 deaths. U.S. regulators are probing GM over the way it dealt with flaws it first saw as far back as 2001, a sign of intensifying scrutiny of safety practices in the auto industry.

“Since the Toyota fiasco in 2009 and 2010, there’s already been a tendency for automakers to be more cautious,” Ashvin Chotai, managing director of Intelligence Automotive Asia, said by telephone. “They are recalling when they previously wouldn’t have -- that’s already occurring.”

Bank of America Corp.’s Merrill Lynch cut its rating on Toyota to neutral from buy and cited quality-related expenses as among the reasons the carmaker’s quarterly earnings may trail analysts’ estimates. Analyst Kei Nihonyanagi said yesterday’s recall may reduce operating profit by about 70 billion yen ($686.5 million).

Toyota fell for a sixth day in Tokyo, dropping 2.4 percent at the close of trading for the longest stretch of declines in 19 months. The shares have dropped 17 percent this year while the benchmark Topix Index has slipped 12 percent.

GM Parallels

Regulators have drawn parallels between GM’s long-delayed actions and Toyota’s recall of 10 million vehicles for unintended acceleration more than four years ago. The Toyota City, Japan-based company admitted last month as part of a settlement with the U.S. Justice Department that it had concealed information about those defects.

Toyota, the world’s largest automaker, recalled more than 6 million vehicles yesterday for five potential safety hazards. The problems involved almost 30 models and included cables that could prevent airbags from deploying and windshield-wiper motors that may break down and cause brake lamps to stop working.

“We sincerely apologize to our customers for the inconvenience and concern brought by this recall announcement,” the company said yesterday in an e-mailed statement. “Toyota has rededicated itself to strengthening its commitment to safety and quality. In part, that means refocusing on putting customers and people first, by listening better and taking appropriate action.”

Toyota Recall

Some of the 6.39 million vehicles Toyota recalled yesterday are being called back for more than one fault, pushing the tally to 6.76 million. Several of Toyota’s top sellers -- such as its Camry and Corolla sedans and RAV4 sport utility vehicles -- were included in the recalls.

Total recalls in the U.S. this year through yesterday have already exceeded 12 million vehicles -- more than half of last year’s 22 million -- according to the U.S. National Highway Traffic Safety Administration data.

Toyota surpassed 1 million recalled models in the U.S. this year even before yesterday’s announcement, as had Nissan Motor Co. Honda Motor Co. is at about 900,000, and Chrysler Group LLC, after an April 2 recall of sport-utility vehicles, is about 738,000, according to the data.

The latest Toyota recall included 2.3 million in North America, 1.77 million of which were in the U.S., according to the company.

U.S. Tally

Last year’s U.S. recall tally was the most since 2004’s 30.8 million, according to NHTSA. In that year, GM recalled 10.7 million vehicles, including 3.66 million pickups for faulty tailgate support cables, according to the Center for Auto Safety.

This year, GM has already recalled more vehicles -- 6.07 million -- than any other automaker did in the U.S. in all of 2013 or 2012. Toyota recalled the most U.S. vehicles in each of the last two years -- 5.29 million in 2013 and 5.33 million in 2012.

“It’s always better to err on the side of caution,” Jessica Caldwell, an analyst with car-shopping site Edmunds.com, said in an e-mailed statement. “Given the sensitivity around auto safety in the last five years, it should be no surprise that we see as many recalls as we do today.”

Biggest Recalls

Yesterday’s recall by Toyota was smaller than the 7.43 million vehicles it called back in October 2012 to fix power- window switches. Ford Motor Co. called back more than 14 million vehicles in 2009 for a faulty cruise-control switch that could cause a fire, according to the U.S. Transportation Department’s website.

Carmakers often take years to recall vehicles. Toyota said it first identified one of the five problems in yesterday’s recall back in 2007. The one that came to light most recently emerged last year, it said.

Toyota last month admitted wrongdoing and agreed to an independent monitor who will assess its safety reporting practices as part of a $1.2 billion settlement related to its handling of unintended-acceleration problems. Attorney General Eric Holder said it was the largest criminal penalty ever imposed in the U.S. on an automaker.

Toyoda Setback

For Akio Toyoda, president of the company and grandson of its founder, persistent recalls are a setback to his efforts to restore the company’s once-sterling reputation for quality. He’s pledged to improve and speed up the company’s processes, forming a global quality group that he chairs. The automaker said previous decision-making related to safety was too dependent on executives in Japan and that it has given regional operations more autonomy to make fixes.

Lawmakers last week brought up Toyota’s shortcomings during its unintended-acceleration crisis as they pressed GM Chief Executive Officer Mary Barra on the company’s handling of flawed ignition switches. The largest U.S. automaker is being fined $7,000 a day for failing to fully answer NHTSA’s questions about the flawed part in cars including the Chevrolet Cobalt.

‘Pretty Lacking’

“If this is the new GM leadership, it’s pretty lacking,” Senator Barbara Boxer, a California Democrat, told Barra during one of two days of hearings last week. “I am very disappointed, really as a woman to woman, because the culture you’re representing here today is the culture of the status quo.”

Toyota and GM aren’t alone in facing challenges with cars in need of fixes. A surge in new models, increasingly complex technology and heightened regulatory scrutiny are behind the increase, according to a study released last month by financial advisory firm Stout Risius Ross Inc.

Automakers’ issues extend beyond the U.S. market. In Japan, auto recalls reached a record of almost 8 million vehicles in the fiscal year that ended March, the nation’s Transport Ministry said yesterday. They climbed to a record in China after the country introduced recall laws.

The increasing use of standardized parts across vehicle lineups also raises the risk of larger recalls. Carmakers including Toyota also are pressing suppliers to make common components that they can put into various models.

Denso Corp., Japan’s largest parts maker, for example, has developed air-conditioner units that it says go into small compacts and larger luxury cars. Volkswagen AG, Europe’s biggest automaker, uses standardized components such as electronic systems and axles as part of its plan to base Audi, Skoda and Seat vehicles on a common platform it calls MQB.

‘Huge Impact’

“The scale of one component has become much larger, and that means one incident could result in huge impact,” Masahiro Akita, an analyst with Credit Suisse Group AG in Tokyo, said by telephone. “There is some conflict because the more scale you have, the more difficult it is to control the quality.”

In yesterday’s Toyota recall, about 3.5 million of the vehicles -- more than half in North America -- were called back to replace spiral cables that may prevent driver’s-side airbags from deploying. Models involved include RAV4, Corolla, Yaris, Highlander, Tacoma and Camry that were produced from April 2004 to December 2010.

Toyota is also recalling 2.32 million vehicles to inspect and, if needed, replace the front seat rails on three-door models. Toyota will also fix noisy and potentially unstable steering column brackets, replace windshield wiper motors and engine starters.

Takaki Nakanishi, a Tokyo-based analyst for Jefferies Group LLC, lauded Toyota for getting ahead of its problems.

“This is Toyota being more active in calling back vehicles to ensure quality,” said Nakanishi, who has a hold rating on the company’s shares. “The number is big, but the faults are minor and not critical.”

Factory Freeze

Toyoda, 57, has instituted a three-year freeze on new car plants to tilt the company’s priorities to quality and efficiency after its 2009-2010 recalls.

Still, yesterday’s recall was the second major safety- related campaign by Toyota this year. A global recall of 1.9 million Prius hybrids in February covered more than half of the models sold since it debuted 17 years ago. The company said it would update software to fix glitches that could cause the cars to lose power or shut down and stop.

Recalls have done little damage to Toyota’s earnings. The company has forecast that profit for the year ending March 31 will surge to a record 1.9 trillion yen ($18.6 billion). Toyota also has set a target of selling an unprecedented 10.32 million vehicles in 2014 after leading GM and Volkswagen AG in global auto deliveries for a second straight year in 2013.

“The carmakers have set the bar much lower to announce recalls,” Credit Suisse’s Akita said. “Rather than hiding it and creating problems later on, it’s much better to announce at earlier stage and deal with it properly. Compared to 20 to 30 years ago, they are getting more and more serious.”

--With assistance from Alan Ohnsman in Los Angeles, Jeff Green in Southfield, Michigan and Jeff Plungis in Washington.