For a brand that prides itself on quality, this could be a crippling blow.
In an unprecedented decision, Toyota Motor, the world leader by sales, Tuesday said it was suspending sales of eight of its most popular models in the U.S. due to potential accelerator problems. The extraordinary step follows a recall last week of 2.3 million vehicles in the U.S. and an earlier recall of 4.2 million vehicles — both due to similar issues.
These are heavy blows for a company aiming to become profitable again and raise factory operating ratios by bolstering sales. In the past two years, Toyota’s losses totaled $7.1 billion, and its stated aim is to return to profitability in the year that starts in April.
That goal is now in doubt.
The company will also halt production of the eight models for a week from Feb. 1 at several North American plants. The models represented 57% of Toyota’s 2009 sales in the U.S. — its No. 2 market by volume.
The duration of the sales suspension isn’t clear, which indicates the fixes may not be quick. Questions also remain over whether the accelerator problem extends beyond the U.S. Toyota shares dropped over 4% Wednesday in Tokyo.
In the U.S., the longer term, and potentially more onerous, problem is the damage that Toyota’s woes could cause to its strong reputation for quality and safety. That led to higher resale values and brand loyalty compared with many other Japanese and U.S. makes — factors that feed into each other to create a virtuous cycle. Once that cycle is broken, restoring it is both time-consuming and expensive.
In terms of customer loyalty, Toyota was No. 1 last year in the U.S., according to R. L. Polk & Co. That means lower advertising and marketing costs — and free word of mouth promotion.
The full impact of Tuesday’s news may not be felt until owners sell or trade in their Camry or Corolla. Toyota also may have to put aside more reserves if the residual values of cars coming off leases declines. And Honda Motor and Hyundai Motor, which compete with Toyota in making fuel-efficient, quality cars in the U.S., will be more than willing to poach its customers.
Much will depend on whether Toyota handles its latest problem well. If it stumbles, the car maker will be known not just for lean manufacturing but also lean profits.
