Toyota Experiencing Quality Problems

One Wall Street Journal headline shouts Toyota Sales Halt Raises Quality Questions and a WSJ blogger opines that this incident could be a crippling blow to Toyota’s mystique. Certainly this episode is one of the darkest in Toyota’s history. The scope of the shutdown is staggering and includes 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. Clearly, it is hard times for Toyota, which has lost more than $7.1 billion in the past two years. In addition to the immediate financial impact there is a concern that Toyota’s reputation for quality will suffer long-term damage.

It is well known that a reputation for quality allows companies to charge premium prices. High quality also leads to lower costs and greater efficiency, both of which are negatively impacted by quality problems. In addition, a reputation for quality means lower advertising and marketing costs and free word of mouth promotion. In terms of customer loyalty, Toyota was No. 1 last year in the U.S., according to R. L. Polk & Co. It remains to be seen where Toyota will come in this year. It’s doubtful that they will remain on top.

This being said, I am unwilling to write Toyota off as dead. Their action demonstrates a commitment to quality that is sharp contrast to other automobile manufacturers, who often fight prolonged legal battles before agreeing to recalls. And keep in mind that Toyota’s production shut down is voluntary and unprecedented. It shows that Toyota leadership is willing to sacrifice short-term profitability (and even to take huge short-term losses,) to defend the integrity of their brand. It just may be that the current crisis will be viewed in retrospect as yet another boost to Toyota’s reputation. Only time will tell.