Toyota's Recall Isn't ACompany Killer

By James Brumley | February 03, 2010 AAA

It seems as if most news media are getting good mileage out of the recently announced Toyota (NYSE: TM) recall to replace faulty accelerators in many of the company's vehicles. Headlines like "Massive Recall Could Dent Company Reputation" and "Toyota's Troubles Are Just Beginning" come across almost a little bit giddy with smugness. (Thinking about buying a new car rather than fixing the old one? Read Your Car: Fixer-Upper Or Scrap Metal?)

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Before anybody else falls into the "hate Toyota" trap, though, let's look at the numbers and similar recalls. It seems too many interested parties are drawing conclusions without foundation.
Putting It In Perspective
First and foremost, yes, it's bad. I don't want to come across as dismissive, particularly since the sticking accelerator problem can cause serious accidents. At the risk of sounding calloused, though, this is nothing we haven't seen - and nothing other automakers haven't survived - before.

Take Ford (NYSE: F), for instance, and not that long ago. In October of last year, Ford recalled 4.5 million cars to replace a faulty cruise control deactivator, which was shown to be a fire hazard. That brought the total number of cars recalled for this specific problem up to 16 million - the largest single recall ever in automotive industry history.

Did Ford implode? No. In fact, Ford returned to profitability - even before the last round of recall was announced - for the first time since 2005.

Honda, Too
But what about a comparable "Asian quality" automaker? After all, Ford is American, and American quality stinks! (A myth, by the way.) Well, guess what? The venerable Honda (NYSE: HMC) doesn't have a spotless track record, either. Honda had to recall 20,000 Civics due to a wheel defect in 2007, and then it had to recall just under 500,000 more last year because of an airbag risk. Did a tarnished quality reputation put Honda out of business? Nope. Like Ford, Honda returned to profitability shortly after the case.

Don't hear me wrong - none of the recalls help a top or bottom line, nor do they improve customer goodwill. Let's face facts, though - the recalls are forgotten faster than most of us care to admit.

The Numbers
If the history and survival of auto recalls don't erase most of your Toyota concerns, maybe the raw numbers will (this is the kind of comparison most media sources should be drawing, but aren't).

The total estimated cost to Toyota to replace all the faulty accelerators varies widely. Some analysts suggest the repairs alone will cost the company $200 million, while the shutdown of plants in the meantime can cost approximately $500 million per month (and it will be about a month when it's all said and done) in operating revenue. Others say the total cost could run up to $1 billion. Either way, it's a big number - but not a killer.

See, Toyota has been generating in excess of $200 billion in revenue in bad years. In good years, the number can get closer to $300 billion. It's true that the company took a $4.3 billion loss in 2009. But in 2007 and 2008, Toyota earned $13.9 billion and $17.1 billion, respectively - at least enough to absorb a $1 billion charge. It would still best be avoided, but it is an affordable expense.

For Comparison
Consider the 2001 Firestone tire replacement/recall that Ford undertook. It cost the company $3 billion at a time when Ford's annual top line was running in the $120 billion to $140 billion range, and annual income was anywhere from a $5.4 billion loss (2001) to a $22 billion profit (1998).

No, it wasn't any fun for Ford at the time. But it was a bigger hit than the one Toyota faces now, and Ford had less of a cushion to work with then.

Clearly, Ford survived it to fight another day; the tire recall is a foggy memory for most. And before anyone points out that the tire problem isn't an actual comparison since it wasn't a Ford-specific quality problem, you're right. It was, however, one of the more expensive problems that affected the products sold by the automaker. Just for the record, though, Ford was guilty of - yet still survived - mechanical recalls and the reputation damage that resulted.

I could go on and on. All the major manufacturers, including Volkswagen, the company formerly known as General Motors that is now owned by Fiat (OTCBB: FIATY) and DaimlerAG (NYSE: DAI) have undergone similar harsh circumstances. They've all survived equally expensive and embarrassing recalls. None were shut down because of them.

It Takes More To Ruin A Reputation
Chalk it up to forgiveness or forgetfulness, but I suspect Toyota's recall will only be a footnote in less than a year. Yes, it's a little more shocking when it comes from a quality-oriented name like Toyota. But let's not lose our minds in the meantime. History has shown it takes a little more than this to completely ruin a reputation. (Don't get taken for a ride. Learn the pros and cons before the salesperson makes a pitch. For more information, refer to Car Shopping: New Or Used?)

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