Toyota learns the dangers of being No. 1

At the end of the day you can say one thing about this whole Toyota debacle, they are doing the right thing.

Quality problems follow period of rapid expansion

When Toyota Motor Corp. (TM-N79.77----%) was on the brink of overtaking General Motors as the world's biggest auto maker in 2008, executives were busy sending out warning signals about the dangers of being No. 1.

Toyota is now witnessing the realization of those fears, caught in a mushrooming recall debacle affecting as many as eight million cars – a development many say underscores the difficulty of maintaining top-notch quality in a hasty expansion.

It may also be the manifestation of the “big-company disease” that Toyota President Akio Toyoda has vowed to quash since taking the helm last June, aiming to restore the company's solid foundation that he said was lost during a decade of rapid global growth.

Mr. Toyoda has not commented publicly on the faulty accelerators and floor mats since expressing regret for the deaths of four people in a crash linked to the problems in August last year.

“Toyota is the new GM in terms of experiencing quality glitches, overexpansion and the proliferation of new product models,” said Dennis Virag, president of Automotive Consulting Group.

“Toyota has been too aggressive and perhaps complacent in terms of focus on quality. They can't concentrate on the details with so many models.”

Toyota, Japan's largest company with a market capitalization of around $141-billion, produces dozens of models around the world and has more than 500 subsidiary companies.

Toyoda, who warned last year that his company faced the prospect of “capitulation to irrelevance or death“, citing a five-phase road to demise outlined by business scholar Jim Collins, has his work cut out for him.

The reason? Toyota's recent quality woes are not new.

As vehicle recalls mounted to more than a million a year, then-president Katsuaki Watanabe in 2006 assigned two executive vice-presidents to oversee quality improvements. One was tasked specifically to work closely with suppliers to catch design defects early.

The current recalls in North America and Europe involve accelerator pedals produced by CTS Corp.

Two years later, in 2008, Mr. Watanabe had said those efforts had borne fruit, and that recall cases had fallen dramatically. Indeed, the “back-to-basics” goal was one that Mr. Watanabe had promptly pledged when he took office as far back as 2003.

The latest recall, of unprecedented scale, throws the efforts back to square one.

Mr. Toyoda, the grandson of Toyota's founder, has outlined broad steps aimed at returning the company to profit and speed up decision making, but has yet to announce new plans to improve quality checks.

TOYOTA-BASHING

The level of attention on Toyota's woes – from consumer groups, media and the government – is also the manifestation of another major fear that Toyota has harboured: that public opinion could be unkind to those at the top.

In addition to the recall, Toyota has shut down sales of its best-selling vehicles in North America under pressure from the Obama administration to address the product safety issue, in an almost unheard-of intervention.

Unlike GM, Toyota has feared the backlash and shunned the spotlight as the world's biggest auto maker. As the Detroit giant – once the symbol of U.S. industrial might – faced bankruptcy last year, those worries had escalated.

Many industry watchers say matter-of-factly that Toyota's massive loss forecasts for this year were a deliberate attempt to prevent a potential bashing – a charge that Toyota denies.

Last May, Toyota projected an operating loss of a staggering ¥850-billion ($9.4-billion) for the financial year to March 31. It has since revised that to a ¥350-billion loss, but analysts expect it to end up at close to break-even.

“If I were the president, I would do the same thing,” said Toshiro Yoshinaga, an analyst at Aizawa Securities.

“As long as GM is sick, it wouldn't look good if Toyota turned a profit this year,” he said.
Many also see Toyota's handling of the current recall as an attempt to win over consumers' hearts.

Toyota said on Wednesday it would offer to replace floor mats or accelerator pedals on another 1.1 million vehicles across five models in the United States because many consumers had called asking for a remedy. A Toyota spokesman said there was in fact no known glitch in those models, and that the voluntary action was solely meant to appease worried drivers.

“Toyota is trying very hard to do the right thing and being bold and having large recalls to portray the fact that they are willing to stop at nothing and spare no expense so nobody gets hurt in their vehicles,” said Jake Fisher, automotive engineer at Consumer Reports.

Meanwhile, “challenger” GM has capitalized on Toyota's woes, saying it would offer incentives to U.S. consumers switching from Toyota cars.

But Mitsuru Kurokawa, an analyst at IHS Global Insight, said would-be Toyota buyers would not necessarily flock to U.S. brands, but rather to rivals such as Hyundai Motor.

“And if that happens, there's a chance that the criticism will then turn to Hyundai,” he said.

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