“Yabeやべ! I’m screwed” Toyota Recall – The Deep Root of the Problem

Toyota President Akio Toyoda bows

CNN Money: Click Here

Reuters: Click Here

Yabeやべ (Oh shit)! I’m screwed.’ That’s what Akio Toyoda, the Toyota president, might have said to himself on February 5th when he bowed apologizing for the safety issues regarding its gas pedal.

According to CNN Money, Toyota Motor Sales USA is recalling 2.3 million vehicles to correct a problem that could cause the vehicles’ gas pedals to stick. This recall will definitely affect Toyota’s reputation and its sales globally.

Now, lets get to the question of ‘how did Toyota get in this mess?’ There are several reasons why this recall happened, however, there is one core reason that led to this tragedy of Toyota.

December 21, 2009, Toyota announced that cut auto parts costs by 30 percent. According to media, Toyota canceled contracts between its auto parts partners in Japan and made new contracts with much cheaper auto parts partners (mostly outside of Japan). In my opinion, Toyota’s pedal problem was caused mainly by the cheap auto parts it used.

I do not think Toyota was dumb enough to forget that by using cheap auto parts it’ll create some safety problems. Then, why did Toyota use cheap auto parts? If you look deeply into the core of the problem, you can easily find out that it was an inevitable decision. It is deeply related to current recession world-wide and the low exchange rate of yen per 1 US dollar.

As you see on the graph, the exchange rate had been falling for 5 years. The red line shows the declining trend of yen to US dollar. It has fell from 124yen
(highest) to 86yen(lowest). As yen to US dollar got lower, Toyota experienced difficulty in exporting its cars to US because the car price became expensive in US. With the low exchange rate, it really was hard for Toyota to compete against other car makers such as Hyundai. Hyundai is a car maker based on Korea, however, it has been lucky because of the high exchange rate of Korean Won to USD. It was possible for this car maker to provide cars at much lower price compared to Toyota. So, Toyota was losing in price competition.

Toyota’s Stock Price in Yen

So, Toyota had to cut down its auto parts price by 30% in order to survive in this price competition. However, this was too much price cut, which basically caused the safety issues of Toyota cars. As a result, Toyota was forced to recall its 2.3 millions of cars by the US Congress. Also, the stock prices of Toyota fell from 4250yen to 3250yen. Notice how it fell after Toyota’s recall announcement from Jan mid to Feb mid. 4250 yen to 3250yen is certainly a great loss to many investors.

In conclusion, Toyota’s pedal problem was caused by using cheap auto parts. It may have been bitter lesson for Toyota to not to use cheap auto parts to the degree it hurts the car’s safety. Looking at Toyota’s Stock Price graph, I think many Toyota investors would be whining because of their loss.


7 Responses so far »

  1. 1

    nancy408 said,

    Toyota & Honda dropped the ball on handling the recalls , they should have came forward with a full disclosure. Instead of waiting for a huge media blitz and tons of public pressure. But Toyota & Honda are not alone , I never seen so many car companies having recalls all at the same time. I had no idea my car which is not even a Toyota or Honda, was affected until I searched on carpedalrecall.com and found I had a bad Anti Lock control unit on my 2008 Pontiac G8 , So be careful

  2. 3

    harecon said,

    Great Post Sang, the use of detail and graphs was really good

  3. 5

    hyunsooblog said,

    Hey Sang nice post. I’ve got a similar post like yours too (I think you’ve already commented on it). Hopefully, Toyota can recover fast!

    • 6

      11kimsa said,

      I don’t think Toyota will recover that fast when there’s American media and congress trying to use this situation as much as they can. According to japanese media, Obama administration has GM motors to save and they will do ‘everything’ they can to save GM motors, which implied that Obama administration is ‘using’ this situation,

      anyways thank you for your comment.

  4. 7

    Kate said,

    Hi, you have valid points but there are some things you haven’t picked up on. The change of part manufacturers, announced in late Dec 2009, would not have affected the cars that have been recalled. The vehicles recalled would have been sold months, if not years before the recall. The parts changeover would take time as well, as automotive companies stock up on parts. Toyota is famous for it Just-In-Time initiative, which would mean that they only replace parts as needed.
    The second is that for most of the models were built in North America; vehicles imported from Japan were not part of the recall.

    But very well done and I agree with your main points – Toyota is losing money hand over fist and they do not make profit from their billions of sales (like BMW or Porsche, two of the most profitable car companies who have less sales volume). They should have done something to rectify this situation sooner and not had this massive problem on their hands.

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