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Toyota's reputation takes a pounding

Image: Akio Toyoda
Toyota President Akio Toyoda speaking last week to reporters in Tokyo, where he expressed regret over a fatal crash in California.  "Four precious lives have been lost," Toyoda said. "I offer my deepest condolences." A floor mat in one of the Japanese automaker's vehicles is suspected as the cause.Itsuo Inouye / AP

It can take years to build a reputation. Now Toyota has to wonder and worry how quickly an image can be shattered.

This should have been a great year for the Japanese maker, which knocked down king-of-the-hill General Motors in late 2008 to become the world’s best-selling automaker. But Toyota hasn’t had much time to celebrate. The carmaker has been plagued by a variety of setbacks, including slumping sales, under-utilized assembly lines and multibillion-dollar losses.

But perhaps most worrisome of all are signs that the company’s vaunted quality has been slipping. Long hailed as the industry benchmark, some key Toyota products have suffered quality snags in recent years. That includes the new Tundra pickup, which Toyota had hoped would finally give it a foothold in the full-size truck market, the last segment controlled by the Big Three.

On Wednesday, The National Highway Traffic Safety Administration said it has launched a probe into Toyota's 2000 and 2001 model year Tundra pickups after authorities received complaints alleging that "severe frame corrosion" caused brake system failures or spare tire separation.

While the company insists it is getting its quality control sorted out, last week’s recall of 3.8 million Toyota and Lexus-badged vehicles certainly doesn’t help on the image front. The recall is meant to replace floor mats that can unexpectedly snag the accelerator pedal, making it difficult to slow a vehicle down. It was ordered after a California state trooper and three family members  were killed in a related accident involving a Lexus.

Company President Akio Toyoda, the scion of the founding family who took over this year in a management shake-up, offered his condolences to the victims' family last week and warned that the company was in a "near rock-bottom crisis."

The automaker could be in for an even worse time if it can’t find a way to shut down attorney Dimitrios Biller. He’s the former national managing counsel who oversaw the company's National Rollover Program from 2003 to 2007. Now he's a whistle-blower claiming the Japanese giant has been hiding potentially damning evidence that should have been provided to owners who’ve sued the company over allegedly defective products.

Top image, 2005 Toyota Prius. Bottom image, 2007 Toyota Camry. Both car models are on the recall list.

Toyota has tried to place a gag order on Biller and to paint him as a disgruntled former employee with a history of suing his employers. But last week, a federal judge in Texas issued a temporary restraining order to keep the carmaker from destroying any evidence regarding the crashworthiness of its vehicles.

Some observers suggest Biller could become the Ralph Nader of Toyota, a reference to the longtime consumer advocate who shattered GM’s reputation back in the 1960s when he revealed safety problems with the small Chevrolet Corvair.

“He very well could be, and depending on how the media handles this, this could incite something very negative” in terms of public perception, says George Peterson, chief auto analyst with AutoPacific Inc., a California-based consultancy. “Their image will hinge on how they handle things. If they try to hide things, this could hurt them.”

Even if the storm over the recalls and rollover lawsuits blows over, there’s no question that Toyota is in for a rougher time than it’s had in years.

While AutoPacific data shows that the Toyota brand has one of the highest consideration levels — the percentage of motorists who would consider purchasing its products — its U.S. sales are off by nearly a third since the recession began at the end of 2007. In turn, that has forced the automaker to ramp up incentives, something it normally avoids whenever possible. According to the research service Autodata, Toyota's various North American brands have been spending almost $2,000 a vehicle on rebates such as zero-interest loans and other incentives, nearly as much as Ford.

“I think everyone expected Toyota to walk on water during this recession,” says Peterson, “but this recession has spotlighted that they have weaknesses, after all.”

The decline of the U.S. market has been particularly troublesome and was the primary source of Toyota Motor Co.’s worldwide loss of $4.4 billion for the fiscal year that ended on March 31. Another big loss is expected for the current year.

Toyoda — who has a penchant for motor sports — is well aware of the fine line between winning and losing, but the executive has repeatedly cautioned, in recent months, that a turnaround will “take some more time.” (The company started out in the textile business, but changed the spelling of the company name when it began building cars.)

One reason for Toyoda's caution is the breadth of the trouble facing the company. While quality may be the word consumers are most likely to associate with the brand, productivity is the term you would most likely hear from competitors, many of whom have worked to copy the company's vaunted manufacturing systems.

Yet the most recent Harbour Report, an annual measure of factory floor productivity, found that Chrysler had tied the Japanese maker and GM was coming up close behind. After emerging from bankruptcy proceedings heavily influenced by the federal government, those two makers have shed their least efficient operations and, along with Ford, have won major union concessions that could let them leapfrog their Asian rival when it comes to productivity.

The troubles with the Tundra only underscore Toyota’s perilous situation. The automaker spent $1.5 billion to build an all-new plant in San Antonio, Texas, to produce the truck, twice the original budget. But it’s running at a fraction of planned capacity. Indeed, slumping sales forced Toyota to put on hold what was to be the newest of its expanding production network in North America, a partially completed facility in Tupelo, Miss.

All is not doom and gloom, of course. After an unexpected slump in demand when fuel prices fell sharply early this year, a new, third-generation version of the Prius hybrid has been gaining market share rapidly. So has the new Venza, an entry-level crossover vehicle.

But for much of the past decade, Toyota has been used to setting goals and then exceeding them. Now, Toyoda and his management team are forced to rethink even the most basic corporate fundamentals.

“Every company faces these sorts of problems,” says Peterson, “but Toyota’s have hit all at once.”

Getting to the top might seem to have been relatively easy. The challenge is going to be staying there.