New recall narrows Toyota’s recovery window

October 10, 2012

By Wayne Arnold

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

It may take just 40 minutes to replace the gizmo responsible for Toyota’s latest embarrassment, but with 7.4 million cars to fix, that’s 565 years of mechanic time. Actually it is neither the first nor the most serious of Toyota’s recent difficulties. But the Japanese automaker’s problems are beginning to look unending.

After battling back to profit after the global crisis in 2009, it was struck with a series of product faults. In early 2011, the devastating earthquake and tsunami crippled production. And violent anti-Japanese demonstrations in China over disputed islands cut its sales there in half last month as patriotic consumers switched to other countries’ cars.

Considering the succession of setbacks, it is testament to Toyota’s strength that it has soldiered on as well as it has. And while the latest product problem is extensive – it affects a broad range of worldwide models and is the largest recall since Ford’s faulty ignitions in 1996 – it is unlikely to sink the company.

Toyota’s quarterly profit is likely to be several times the cost of repairs. Say the bill comes to half the $2 billion set aside in 2010 to deal with faulty accelerators: it would swallow only about 26 percent of the company’s profit in the latest three-month reporting period. Toyota can still borrow 10-year money at roughly 1.5 percent and has $27.4 billion in cash. Toyota recently regained its position as the world’s best-selling marque, with vehicle sales rising 86 percent in the second quarter of this year. China, meanwhile, only accounts for about 12 percent of global sales.

Still, fresh quality issues could hurt Toyota in the United States. Sales there had been recovering nicely. But rivals such as South Korea’s Hyundai have narrowed the gap in terms of perceived quality, making it harder for Toyota to charge the premium required to justify making half its cars at home in Japan. The yen has risen 49 percent against the U.S. dollar in the past five years, and Toyota estimated that cost it $3 billion in its latest fiscal year.

Toyota is planning to shift about a seventh of Japanese production to India, Thailand and North America. That will help cut costs, but losing the “Made in Japan” label may only make it harder for Toyota to convince consumers that it can steer clear of alarming product glitches in future.

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