Toyota's Additional Recall of Prius

Osaka - Sunday, February 7, 2010

Nikkei, specialized in economy/business and politics, reported on February 5 that Toyota decided to perform recall its hybrid vehicle of Prius in the U.S. and Japan totaling 270,000 cars due to brake problem. Toyota will soon officially report to MLIT (Ministry of Land, Infrastructure, Transport and Tourism) of Japan and Department of Transportation of the U.S., and to officially announce recall in Japan in a few days. Nikkei also reported on February 7 that Toyota decided to recall Prius sold to approximately 60 other countries and regions totaling 30,000 cars. The new Prius has been launched aggressively in emerging countries and therefore the number of countries and regions is that the new Prius are sold is 1-1/2 times that of the older Prius.

There had been over 70 claims from Japanese customers that under certain situation brakes of Prius does not function as expected, and Toyota is to revise control software, the root cause. Toyota is now investigating whether similar problem in other hybrid vehicles or not. In addition, Toyota also had started recall of other models such as Corolla in the U.S. due to accelerator pedal failure, which resulted in recall of 4,450,000 million worldwide.

1. How and why Toyota finally decided to perform recall of Prius?

Mr. Akio Toyoda, Toyota's president discussed over phone on February with Mr. Lahoud, Secretary of Transportation of the U.S., in which he clarified that Toyota will put safety measures as its first priority. Toyota's stance had been that brake problem is not of the structural defect; however, it finally decided to perform recall from comprehensive judgment of impact on many factors including financial performance and brand.

The Prius that is to be recalled was launched in May 2009. Improvements have already made for those produced from January 2010 thus 170,000 cars marketed in Japan and 100,000 cars marketed to the U.S. will be recalled. Toyota also is thinking of starting to recall and/or voluntary recall in other countries and regions.

2. What is the problem and how recall is to be performed?

It is that brake does not function as expected under certain circumstances attributing to trouble in control software of ABS (Anti-block Brake System) that is designed to minimize skidding when road is slippery after rain etc. The software will be revised at Toyota's dealers.

Other hybrid vehicles such as SAI and Lexus HS250h launched after the new Prius also adopts the same brake system. Toyota may well decide to recall the control software for these models, too.

3. How the brake failure came into light?

Toyota had some claim from a few customers in the autumn of 2009, and started to investigate in earnest then the claim soared in the end of the year. At the press conference held on February 4, Toyota emphasized that the reason for realizing and coming up with countermeasures took time is "sufficient time was required to investigate root cause, and they did not mean to hide claims they had from customers".

4. What is the possible negative effect of the additional recall?

With additional recall of total of 4,450,000 cars worldwide attributing to accelerator pedal problem, following are a just a few possible negative effects on Toyota.

1) Deterioration in Toyota brand and its reputation.

Toyota's reputation and brand as "role model of high quality product manufacturer with extreme high productivity" is likely to go down. Toyota's continuous improvement for LEAN production of high quality products had been studied and implemented as role model in other companies of various industries such as Panasonic (for V-shaped recovery) and production division of a pharmaceutical giant to name a few. With recent worldwide recall due to quality problem, its reputation and brand that have been built over so many years would have get negatively effected, which Tobak recently discussed this in his blog article "Can Toyota Avoid Brand Disaster?" (2010), and many readers left comments.

2) Negative effect on EV car sales.

Prius is mostly sold in Japan as the image leader model that drives its environment /EV car strategy. Prius recall is surely to have negative effect on sales.

3) Further be behind in financial performance recovery.

With negative effect of Prius recall, Toyota's bottom line may remain in red, and with negative effect to its sales, its may further delay in recovery compared to its competitors.

Toyota is already behind recovering its financial performance, as mentioned in the previous article Japanese Manufactures Drastically Recovering with External Demand, and the additional Prius recall may well make Toyota further delay in recovering its financial performance. According to Nikkei's article on February 5, Toyota announced on February 4 that its consolidated bottom line (GAAP) for fiscal year ending March 2010 is expected to be 80 billion yen (vs. -436.9 billion yen for previous year), even though it was originally expected to be -200 billion yen, attributing to automobile sales recovery and cost reduction. However, this estimation does not include negative effect of Prius recall.

Sales is expected to be 18.5 trillion yen which is -10% from previous year but is +500 billion yean from original estimation. Consolidated sales unit have been increased by 150,000 units from the original plan to 7.18 million units.

Toyota is to declare 170 - 180 billion yen for worldwide recall cost attributing to accelerating pedal problem, which is the reason that operating profit is expected to be -20 billion yen although it is to improve by 330 billion yen from the original plan. It is by reduction in corporate tax and earnings from dividend that Toyota expects to return to black for the bottom line.

5. What is the biggest challenge for Toyota?

Toyota, that has become the largest automobile maker in the world by drastic globalization, faces challenge of combining globalization and quality assurance. The following are the risks that Toyota has in performing recalls, all of which are about this challenge.

1) Recall system has not been established in all countries and regions.

Although most of the accelerating pedal and brake problem recalls are to be done in western countries, recalls are also to be done in the Middle East and Latin Americas as well. In some cases in these countries, recall system has not been established in such countries, and therefore Toyota needs to be flexible in performing smooth recalls.

2) Relationship with Toyota and software learning level are not uniform worldwide.

For both recalls software will be revised at Toyota's dealers, which means relationship with Toyota and of software learning level of local dealer staff are key, but both varies from country/region to country/region. Therefore, Toyota needs to investigate method of software distribution and announcement to customers meeting local situation and needs, and compose manuals accordingly. With globalization, much countermeasures and procedures are required to fulfill smooth recall.

3) Risk also lies in component procurement.

With worldwide sales doubling in 10 years at 2007 (at the peak) to 8.43 million units, Toyota's business partners of suppliers also diversified, meaning higher risk in high quality components to assure high quality. In fact, some experts point out that one of the root cause of problem since last autumn lies in difficulty in quality control under such situation.

6. What Toyota has already done as countermeasure?

Toyota already established a global quality committee led by President Toyota, being fully aware of the difficulty of embedding DNA of "quality first" mindset and culture in all parts of such a large global organization. Toyota is to challenge combining globalization and high quality, the requirement to be competitive in globalizing business environment, and recover its brand, reputation and financial performance. President Toyota clarified his stance of continuing with its global strategy of "local production with high local content".