The Size Of Toyota's Problem Moves Toward $10 Billion

The odds that one car company could have three unrelated large recalls of three different sets of vehicles within a month are probably 1,000-to-1. But, that is what will happen Toyota (TM) if ABC News reports are correct.

“The National Highway Traffic Safety Administration will open an investigation into a possible flaw in the steering systems for the 2009-2010 Corolla, likely to lead to another massive recall for Toyota,” the network reported. A recall of the models in question could affect 500,000 cars.

The size and scope of Toyota’s problem is now well beyond what it anticipated when it announced its earnings for the last quarter. The company said it would set aside $2 billion for the costs of the recall of eight million vehicles with accelerator problems. Toyota later recalled some 2010 models of its Prius hybrid. In the meantime., about $3.2 billion in class action suits have been filed against the company in the US. That number will almost certainly rise sharply.

The NHTSA investigations and class action lawyers may well find that some of Toyota’s management or engineers had knowledge of product defects well before the recalls. At a company of Toyota’s size it is impossible that some of the problems were not discussed in-depth before the firm’s customers were told to bring their cars in for repair. Tobacco and drug companies have learned the lesson of “who knew what when” the hard way. Toyota is get the same instruction.

Toyota has almost certainly under-estimated the number of sales it will lose. The company said it would probably cut production this year by 100,000 vehicles. Toyota sold over seven million vehicles worldwide last year. The crisis of confidence in Toyota’s products could undercut sales by a multiple of the 100,000. Toyota will almost certainly have to lay-off some workers, at least temporarily as public investigations of the recalls cause demand to shrink.

The problems at Toyota are greater than the company has admitted, if the management at the firm has admitted the seriousness of the situation to itself. By the time Toyota is finished with its trouble, the cost in lost sales and legal settlements could reach to $10 billion. The issues are that unprecedented

Douglas A. McIntyre

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