Toyota Took Short Cuts in Drive to Top

A flood of recalls in the U.S. shows Toyota compromised on quality control in an overzealous drive to cut costs and expand sales during its climb to the top of the world auto market.

Recalls for gas pedals prone to sticking and faulty floor mats that can entangle the accelerator are a devastating blow to an automaker that had prided itself on a reputation for quality.

The safety doubts have also forced Toyota to suspend U.S. sales and production of eight models including the Camry, America's top-selling car, and announce recalls in China and Europe.

The huge number of recalled vehicles - topping five million, when accounting for models being recalled more than once - stems from the auto industry's drive to use the same parts across a range of models to cut costs, some analysts say.

Even a small defect can set off a recall numbering millions of cars.

At its peak, Toyota Motor Corp. sold 9.4 million vehicles around the world in 2007, adding more than three million vehicles in annual sales over five years.

"The past few years, Toyota has been expanding too rapidly," said Christopher Richter, auto analyst at Calyon Capital Markets Asia in Tokyo. "Maybe they should have gone a little slower."

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Embroiled in a public relations disaster, Toyota is hoping drivers will ultimately view its unprecedented suspension of sales and production as a responsible step.

"We didn't want to spare even a moment after we found a problem so our customers don't have to worry," company spokesman Hideaki Homma said Thursday.

Homma said the company had learned its lesson and was making quality checks more thorough under an initiative spearheaded by President Akio Toyoda to put customers first.

Toyoda, grandson of the company's founder, last year replaced Katsuaki Watanabe, a cost-cutting expert who oversaw Toyota's dethroning of Detroit-based General Motors Co. as No. 1 in global vehicle sales.

Still, it remains unclear how quickly the problems can be solved.

When Toyota recalled 4.2 million vehicles in November, it said it was because floor mats were interfering with the pedals. That may have been an issue, but now the company is saying last week's recall of 2.3 million vehicles is linked to worn pedal mechanisms that increase friction in certain conditions and cause the accelerator to stick sometimes.

Sean Kane, president of Safety Research and Strategies Inc., a Massachusetts-based car safety investigation and advocacy group, said he's certain there is no single cause. He said he's logged thousands of stuck gas pedal complaints.

Toyota says the same problem gas-pedal part, manufactured by supplier CTS Corp., based in Elkhart, Indiana, is used in European-made vehicles.

Colin Hensley, a manager at Toyota's European operations headquartered in Brussels, said recalls will be carried out in Europe but the number of vehicles involved isn't known yet.

Toyota said Thursday it was recalling an additional 1.09 million vehicles in the U.S. for problem gas pedals and floor mats. Toyota also announced a recall of 75,500 RAV4 sport utility vehicles in China.

The problems in the U.S. - Toyota's biggest market - are a major embarrassment for a company that has consistently topped consumer-survey rankings and counseled manufacturers around the world about efficient "just-in-time" and exemplary production methods.

Analysts said automakers may rethink their production and procurement methods.

"Even a small thing needs to be fixed, and you are going to get into massive numbers really quickly," said Richter.

Automakers could switch to using more than one supplier to reduce the cost of recalls by keeping down the numbers of cars involved, said Tatsuo Yoshida, analyst with UBS Securities.

"Toyota is going to have to become more cautious," he said. "The most important test is whether Toyota can come out of this, preserving its image as an ethical company."

But Ryoichi Saito, auto analyst at Mizuho Investors Securities Co. Ltd., thinks the trend toward standardizing parts is irreversible as global alliances become more common.

"Toyota's problem could happen at any of the automakers," Saito said of big recalls. "To survive cutthroat global competition, Toyota must sell in volumes and save on costs."

In another blow Thursday, Fitch Ratings placed Toyota's "A+" rating on watch negative, meaning it could be downgraded.

"The recalls and sales and production suspension cast a negative light on Toyota's reputation for quality, just as the company emerges from an unprecedented downturn in the auto industry," said Jeong Min Pak, a Fitch senior director.

"This could hamper the company's potential sales and profitability recovery, especially in the U.S. market," she said.

The eight models, whose sales have been halted in the U.S., accounted for 57 percent of Toyota's U.S. sales last year, meaning that a one-week stoppage affects 20,000 vehicles, according to Fitch.

Toyota had already expected to stay in the red for the fiscal year through March, because of the global slump and the rising yen. But it had been optimistic about reducing losses on the back of a gradual market recovery.

Toyota had planned to sell 2.19 million vehicles in North America this year, up 11 percent from 2009, riding on the success of some of the very models like the Corolla and Camry, which are being recalled.

Analysts are unsure how such predictions will hold up amid the recalls and production suspensions.

Toyota shares slipped 3.9 percent in Tokyo trading to close at 3,560 yen ($39).
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