Toyota Penalty for Hiding Safety Defects More Than Just a Fine

April 19, 2010 — federal safety regulators said that Toyota agrees to pay a record $16.4-million fine for hiding safety defects related to sudden acceleration, but will stop short of accepting full legal responsibility for purposely withholding safety information. The National Highway Traffic Safety Administration announced April 5 that it would seek to penalize Toyota the maximum amount it is allowed by law to levy. This is by far the largest penalty ever levied by the NHTSA. The previous largest federal penalty paid by an automaker was $1 million, levied against General Motors in 2004 for delaying a windshield wiper recall.

logo-nhtsa-lgThe penalty is the largest the government could assess under a 2000 auto safety law enacted after a massive recall of Bridgestone/Firestone Inc. tires. Consumer advocates have pressed lawmakers to increase the penalties, arguing that they fail to act as a suitable deterrent. Without the cap, government lawyers said Toyota could have faced fines up to $13.8 billion.

“By paying the full civil penalty, Toyota is accepting responsibility for hiding safety defects from NHTSA in violation of the law”, a senior Transportation Department official said.

Even if Toyota does not formally admit guilt, federal officials said, paying the sizable fine would indicate that the automaker broke the law, and Plaintiff attorneys have said they plan to use the fine as evidence in litigation. Toyota faces scores of personal-injury and class-action lawsuits alleging that safety defects in its vehicles have caused crashes, injuries, and fatalities.

“In the court of public opinion, paying the fine speaks volumes. But at the end of the day, the fines are simply background noise in terms of the civil litigation,” said Richard Arsenault, a plaintiff’s attorney in Alexandria, La. “What’s really important are the facts that were the catalyst for the fines.”
Toyota said it agreed to the fine to avoid a lengthy legal battle but denied the government’s allegation that it broke the law. In a statement, Toyota acknowledged “that we could have done a better job of sharing relevant information within our global operations and outside the company, but we did not try to hide a defect to avoid dealing with a safety problem.”

Toyota's Reputation

logo-toyota-lgHow did Toyota’s gold-plated reputation for engineering excellence and customer satisfaction take such a beating? Part of the problem can be explained by Toyota’s drive for bottom-line performance, rather than the car-making efficiency and attention to detail that made the company famous and is credited with changing late-20th-century manufacturing worldwide. The combination of cost-cutting and rapid expansion under the previous three presidents may be the end to decades of reputation building that put the Toyota brand above all other major automakers.

In 2005 company President Katsuaki Watanabe (2005-2009) boasted about having squeezed more than $10 billion from global operating costs in the previous six years. This focus on cost cutting came at a time when Toyota was experiencing excellent profit growth and increased global market share. At the time, the company’s top U.S. executive, Jim Press, warned his bosses in Japan that vehicle quality was slipping.

“The root cause of their problems is that the company was hijacked, some years ago, by anti-[Toyoda] family, financially oriented pirates,” Press charged in a recent interview with Bloomberg News. Once the highest-ranking American at the company, with a seat on the board of directors, Press left in 2007 to join Chrysler as vice-chairman and president, but departed from there after last year’s bankruptcy. The financial pirates, he said, “didn’t have the character necessary to maintain a customer-first focus.”

The Toyoda family elders handed the rains to Hiroshi Okuda (1995-1999) when Tatsuro Toyoda was stricken with a stroke and the company’s fortunes were thought to be waning. Okuda and his team turned things around embarking on one of the most aggressive overseas expansions in automotive history. Between 1995 and the end of 2009, Toyota roughly doubled, to 50, the number of overseas plants and manufacturing facilities in North America, Asia, and Europe. In conjunction with this rush in rapid expansion, Takashi Araki, a project manager at parts maker and Toyota affiliate Aisin Seiki, told BusinessWeek in 2003, “The pressure is on to cut costs at every stage”.
By the end of Fujio Cho’s reign (1999-2005) Toyota had further slashed costs by making the entire development process cheaper and faster — trimming parts, production costs, and time to market. And during the credit bubble years through 2007, sales and share prices soared. But it was during this time that Jim Press warned his bosses that quality was slipping and that regulators were stepping up their scrutiny.

The global financial crisis and recession, along with the increasing attention of the National Highway Traffic Safety Administration, and others, combined to tarnish the reputation of the once venerable company. In June 2009, Akio Toyoda succeeded Watanabe, and said it had been an annual goal to boost global sales by as many as 700,000 vehicles a year, more than three times the previous increase. In February of 2010, he further stated before a congressional committee, “I fear the pace at which we have grown may have been too quick….Priorities became confused, and we were not able to stop, think, and make improvements as much as we were able to before”.

New Vehicle Sales

But will this tarnished reputation for quality and customer satisfaction affect it’s bottom line?

In monetary terms, the NHTSA penalty is largely symbolic, given Toyota’s balance sheet. The company had cash assets of $23.6 billion as of December 31, 2009 and as of April 24, 2010, has reported an operating profit of as much as $500 to 800 million for the year ended March 31. (In February they forecast an estimated $300 million loss for the same time period.) The last quarter of 2009 saw Toyota realize a profit of $1.7 billion (after experiencing net losses for a year up to the last quarter of 2009).

November of 2003 Toyota had a market capitalization of $110 billion—more than that of GM, Ford, and DaimlerChrysler combined. (As of March 2010, despite its troubles, Toyota is valued at $132 billion.) But, Toyota’s credit rating was cut by Moody’s Investors Service (April 21, 2010) because it expects profit at the carmaker to stay at “a low level” through at least 2012.
Toyota sales figures for February 2010 showed an almost 9% decline, with the other major automakers reporting double-digit percentage increases over sales a year ago. For January, Toyota’s monthly sales fell 16% from a year ago, dropping to less than 100,000 for the first time since 1999.

In response to the sales numbers lagging from the recent heralded recalls, Toyota has created incentives the likes of which they have never before imagined. The carmaker in March started offering no-interest loans, discount leases, and free maintenance for U.S. customers.

Despite continued profits, the penalty being paid by Toyota for its tarnished reputation is sluggish sales, more expensive credit, warranty repairs on more than 8 million recalled vehicles, at lease 180 consumer and shareholder lawsuits, and the erosion of one of their biggest selling-points — resale value.