Recalls dent Toyota image

Vehicle callbacks, probe into handling of defects could hurt No. 2 carmaker's reputation.

Christine Tierney / The Detroit News

Toyota Motor Corp. CEO Katsuaki Watanabe bowed deeply before the cameras on July 20 in a humbling moment for the mighty Japanese automaker.

Toyota has come under intense scrutiny as prosecutors in Japan investigate its handling of vehicle defects. Separately, the government told Toyota to review its policy on recalls and respond to the Transport Ministry by Friday.

Ritual apologies are common in Japan, where executives are expected to convey their regret for corporate shortcomings.

It's unusual, however, to see executives from Japan's leading industrial company on the defensive.

"That was a very big deal in Japan," said Daniel Baum, a Tokyo-based auto analyst.

Just as Toyota is poised to pass General Motors Corp. to become the world's largest automaker, a surge in recalls and the investigation in Japan risk tarnishing the company's sterling reputation for quality.

Watanabe, a former purchasing manager who became CEO a year ago, senses the danger. Toyota has grown into the world's richest and second-largest automaker by offering cars and trucks renowned for their reliability.

"I take this seriously and see it as a crisis," Watanabe said at the company's midyear news conference. "The world-class quality that we've achieved is our lifeline."

As Toyota's expansion turns up pressure on other automakers, rivals are quick to seize on any sign that the formidable Japanese carmaker may be over-reaching.

Industry experts also question whether Toyota can maintain its torrid growth pace without compromising quality.

If the trouble is limited to the recent revelations and recalls, Toyota will ride out this bumpy stretch with little or no damage to its image, analysts say. That's if no more bad news trickles out.

For a company as large as Toyota, which will build close to 9 million vehicles this year, some defects and recalls are inevitable.

But last year, Toyota's recalls in the United States were more than double 2004 levels, even as total industry recalls declined.

This past month alone, the Japanese automaker has recalled more than 1 million vehicles worldwide.

Problems range from trim parts that can come loose and fall near the gas pedal of Toyota Highlander and Lexus RX sport utility vehicles to faulty engine parts in Echo compacts.

Signals are mixed

By other gauges, Toyota's quality is still top-notch, although competitors have narrowed -- in a few cases closed -- the gap.

"Toyota does exceptionally well, both in terms of design and defects, and they do better on defects," said Neal Oddes, director of product research and analysis at J.D. Power and Associates.

He said Toyota had shown improvement in both J.D. Power's initial quality study and in its vehicle dependability survey, which rates three-year-old cars. "Even though they're experiencing recalls now, their quality both in the short term and long term continues to improve," Oddes said.

Toyota officials say their warranty costs -- the cost of repairing vehicles under warranty -- also show that quality is improving.

But the investigation in the southern island of Kyushu was disturbing because it raised the specter of a cover-up.

"The danger is, people will think, 'This is what Mitsubishi did,'" said Andrew Phillips, Tokyo-based analyst for Nikko Citigroup Ltd., referring to a spate of vehicle defects concealed by managers at Mitsubishi Motors.

"At Mitsubishi, it was systematic," he said, while police in Kyushu have said they do not suspect a widespread cover-up.

In the Kyushu case, prosecutors are looking into whether three Toyota quality-control managers were negligent in their response in the 1990s to reports of a steering defect. The problem is suspected of being the cause of an accident that occurred in August 2004, when the driver of an 11-year-old Toyota Hilux Surf sport utility vehicle struck another car, injuring five people.

Two months later, Toyota recalled 330,000 Hilux Surf SUVs built between December 1988 and May 1996.

Because the automaker uses the same components across a wide range of vehicles, the problem eventually led to recalls of more than 1 million vehicles worldwide.

Toyota says its managers acted correctly, and it is cooperating with the investigation. According to local media reports, the automaker said it had received only five reports of steering problems by 1996 and had strengthened the relay rods in the steering systems.

The case highlights the pressure on auto executives dealing with reports of problems. Recalls are costly and damaging to a brand's reputation, but downplaying problems can be extremely risky.

The years-long cover-up of vehicle defects at Mitsubishi led to criminal convictions and nearly ruined the carmaker.

In Japan, Baum said, automakers may be tempted to avoid the bad publicity of recalls and alert only dealers of problems that need fixing. "What they have is six-month checkups, and there are a lot of things they can do in the guise of half-yearly checkups," said Baum.

"There are a lot of things they can hide."

Toyota owns all of its Japanese dealers.

Baum, an analyst with consulting firm HSLD International, says the current case is unlikely to undermine Toyota's hold on the Japanese market -- where its share exceeds 40 percent. "This is the first slap on the wrist for Toyota," he said. "If the steering problem is all they've got, I think they've got it contained."

Piling on safeguards

In recent years, Toyota has worked hard to introduce new quality-control processes in tandem with its rapid growth.

As the company builds more plants and absorbs thousands of new workers and managers, it has revised its training methods.

Assembly directions are now depicted in diagrams that can be understood by workers in Princeton, Ind., truck plant as well as those in Toyota's new factories in China.

Last fall, Toyota established a training facility at its Georgetown, Ky., plant patterned after the Global Production Center in Japan to teach standard production methods to new U.S. hires.

In June, Toyota stressed the importance of quality by placing responsibility for quality with Executive Vice President Akio Toyoda, grandson of the company's founder. Toyota brought back the head of its European operations, quality expert Shinichi Sasaki, to assist him.

Nikko Citigroup analyst Phillips says the age of some of the recalled vehicles leads him to suspect that Toyota's quality suffered in the early 1990s. At that time, the strength of the Japanese yen was eroding the profitability of Japan's automakers.

In a recent report, Phillips advised investors that, while the rising recalls were "clearly a negative," they reflect tighter controls.

"Over the past couple of years, they have become a lot stricter," he said.

"They've gone back with a finer-toothed comb and some of these things come up."

And they're causing headaches for Toyota many years later.