Toyota: The Real Beatings Begin

There has not been much news about the recalls of Toyota Motor (NYSE: TM) cars and trucks recently. The largest of these happened in the winter and involved more than 8 million vehicles worldwide. Toyota paid the Transportation Department a minor $16.4 million fine, the largest it could levy under current law. Analysts believe that Toyota has spent hundreds of millions of dollars on a series of recalls to repair steering and brake problems. But Toyota got a break when the government recently found that some of the problems were related to driver error and not faults in the design or manufacturing of its vehicles

Toyota’s fortunes in the US were not damaged. Its sales were up 10% during the first half, although industry sales rose 16%. Some analysts feared it was going to be much worse. Its reputation for quality, built over three decades, may have helped Toyota

Toyota is back in the news, and the period of relative calm has ended. The company said that” it has been subpoenaed by a federal grand jury in New York to submit documents related to problems with steering relay rods in the company’s vehicles, according to The Wall Street JournalThe world’s largest car company is about to find out just how badly it can be damaged by its recalls. Toyota already faces a bevy of liability suits by people who claim that faults with the company’s car designs caused them physical injuries. The number of  claims could rise to the level of those faced by the tobacco industry and Merck’s trouble with Vioxx. The Toyota mechanical problems did not kill many people, if it killed any at all, but the swarm of legal actions, some of which will be joined into class action suits, will almost certainly drive up the firm’s legal costs to extraordinary levels. It is too early to assess what the judgments again Toyota might be.

Toyota’s troubles  will also likely extend to its home market, China, and some European nations where it recalled hundreds of thousands of cars. The actions of the federal grand jury in New York could set a precedent for a growing array of government investigations and perhaps charges.

A recent JD Power study showed that Toyota’s reputation for quality cars has fallen. That has not done a great deal of damage to sales, at least not yet. But the legal tentacles which have at their core Toyota’s practice of profit over safety have reached the point where the company faces significant jeopardy.

Douglas A. McIntyre