Toyota Recalls and PR Management Crisis

September 17, 2010

For decades Toyota Motor Corporation (TMC) has been one of the most praised automakers in the United States particularly for their unwavering reputation for producing reliable, dependable and safe vehicles. This reputation in the US has been enjoyed by Toyota since the mid sixties, when the first really popular car sold by Toyota, Corona, and later Corolla, was introduced to the American customers[i].

Since that time Toyota has been building up its business success based on three main pillars:

  • Focus on quality of their product in both design and implementation phases
  • Toyota Production System (TPS) that has been widely recognized and admired by other auto-manufacturers and businesses from other industries for its built-in processes of running efficient production, eliminating waste, and identifying and correcting problems promptly[ii]
  • Design and build the vehicles based on most innovative and advanced technology

All these foundational principles have been serving Toyota well over the years and allowed it to achieve the status of not only the biggest auto manufacturer in the world, surpassing the long-standing position of GM in that capacity, but also the most profitable carmaker.

However the end of 2009 and the beginning of 2010 have been marked as one of the darkest periods in the automaker’s history, when not only the safety of their vehicles, but also the business reputation, integrity, and trustworthiness of the company had been called into question.

It all started with the horrifying crash on August 28, 2009 when a family of four died in a 2009 Lexus ES 350 which accelerated out of control to the estimated speeds in excess of 100 mph. The phone call placed by one of the occupants in the vehicle indicated that the car “had no brakes”. 

This event eventually gave a rise to prolonged investigation by National Highway Traffic Safety Administration (NHTSA)[iii]; excessive coverage in the media, with Los Angeles Times and ABC TV network at the helm of the investigative, often biased, reporting; heightened scrutiny from the lawmakers culminating in Congressional Hearings  at the end of February 2010, where the top Toyota executives, including  its President Akio Toyoda,  were summoned to  testify on the issue of handling the safety problems of unintended acceleration;  and rise to allegations of possible cover up of the problem by the company. And this safety recall debacle is not over for Toyota even up to this day.

In addition to the moral impact of the ongoing investigations and recalls that was mentioned above, there are very tangible financial consequences for the company resulting from:

  • Loss of revenue due to the production and sales halt in January 2010 –estimated $895 Million in lost sales over recall[iv]
  •  Loss in paid civil fines mandated by the government for “failing to report known safety problems as it is required to do under the law” – $16.375 Milliion[v]
  • Loss through the exuberant legal fees paid to the hired defense attorneys – undisclosed
  • Loss through the decline in the stock prices of the company – 1 year change of about 9%-$11 Billion
  • Loss in sales from the customers who turned away from Toyota products because of the improperly handled safety concerns – unidentified
  • Yet to be quantified losses that may result from the settlements in civil and criminal cases brought up against the company in the wake of the recalls- by some estimates could be above  $10 Billion[vi]

We don’t include the actual cost of the pedal repairs and floor mats replacements in the above list because these costs are a part of the normal expenses associated with safety recalls and would have to be paid in order to remedy the problems anyways. However by Toyota estimate it warranty payments to fix the recall problems could be around $1.12 Billion.[vii]

What we are trying to convey is that improper handling of the problem has caused significant extra costs to the company, and could have been minimized, if not completely avoided, if the company had taken more open, cooperative, and proactive approach to the situation.

There are still many factors that would not allow us to give comprehensive analysis of the company’s mistakes in handling the unintended acceleration safety issue at this point. Mainly because some of the documents requested by the government and courts have not been presented for review yet or have not been made public for the reasons of containing proprietary information.

 However we can analyze already some of the major missteps by Toyota which can be deduced from the open information presented by Toyota and other parties involved.

The very first and most obvious flaw in Toyota’s response to the situation was virtual absence of any communication from the company in the weeks following the report of the fatal accident on August 28, 2010. The first news release regarding the accident investigation was published only on September 14, 2010 – more than two weeks after the accident.  The news release had expression of sympathy to the family and friends of the victims, and preliminary information from the law enforcement investigators about the improperly installed all-weather floor mat as a possible cause of the stuck accelerator pedal. In the public eye it definitely looked like a “too little, too late” response. Arguably, this non-responsiveness by Toyota Motor Corporation at the onset set the stage for the ensuing suspicious and even hostile perception of the company by the media, the government, Toyota owners, and the public at large. Given lack of information and even simple acknowledgement from the company, it was a wide open field for speculations of all kinds. As we can see in the retrospect, this lack of leadership in managing public relations and perception backfired and was held against the company later on, when the situation got under the scrutiny from all possible angles.

From this response we may infer at least two problems that existed in the company at the time:

  • Lack of understanding by the company top executives of the potential gravity of the situation and its negative repercussions
  • Absence of  the clearly developed policy and procedures for managing public relations in situations involving high-profile issues of consumer safety

The second grave mistake by the company was rooted in the aforementioned lack of openness in their communications once the communication channels had been established under the pressure of media inquires and government investigations. The Toyota’s position could be rationalized by the fact that they really did not have conclusive evidence about the causes of unintended acceleration even when the investigation was underway. They might have had some complaints from the customers, but due to the complicated multi-faceted technical nature of the problem they did not have sufficient data and properly conducted tests to conclusively isolate the root of the problem. Especially that now it is evident that there were at least two possible causes for the unintended acceleration: improperly installed floor mats, and mechanical design flaw in the accelerator pedal itself.

Nevertheless, even under these circumstances the company should have acted in more open, straightforward manner by providing all the information, even if inconclusive, they might have on the issue from their internally collected data. By trying to withhold some pieces of the evidence from the public Toyota has given rise to the attitude of distrust and has blown a significant damage to its public image.

Having discussed the causes of the Toyota public relations management crisis in the initial phases of the situation, we now want to move to the present situation and how the company eventually stepped up in their attempts to do damage control and restore the goodwill of their customers, investigators, and the public at large. 

On February 5, 2010 Toyota Motor Corporation President Akio Toyoda spoke at a press conference in Japan and announced that he “would personally take a lead toward improving the quality around the world by establishing a global quality task force”[viii] The highlights of his plan were as follows:

  • Improve Quality Inspection Process
  • Enhance Customer Research
  • Establish an “Automotive Center of Quality Excellence”
  • Support from Outside
  • Increased Communication
  • Improve regional autonomy

Other initiatives of Toyota include SMART Business Process for Quick Evaluation of Unintended Acceleration Reports as was announced on April 8, 2010[ix] And as part of this process Toyota also established rapid-response Swift Market Analysis Response Team (SMART) to respond quickly to customer reports of unintended acceleration in the U.S.”[x]

It is remarkable to notice that one of the bullets in Toyota’s plan for global quality task force is Increased Communication. As has been stated all throughout this analysis, the lack of communication has initially been the cause of the situation getting out of control in the first place.

 And the latest update in this continuing issue is the written testimony of James Lentz, President and COO of Toyota Motor Sales, U.S.A., Inc, submitted to the Committee on Energy & Commerce, Subcommittee on Oversight & Investigations on May 20, 2010.[xi] In the testimony that gives progress report on steps taken by Toyota to become a more responsive, safety-focused organization since the Congressional hearing at the end of February 2010 Mr. Lentz mentions that “Toyota has appointed a new Chief Quality Officer for North America… to act as the “voice of the customer” in this region. North America now has a greater say on recalls and other safety related issues that affect vehicles sold here in the United States. In fact, our Chief Quality Officer has a direct line to Mr. Toyoda when it comes to ensuring our customers’ safety.”

All these steps demonstrate that Toyota has been significantly improving not only technical aspects of dealing with the safety issues, but, no less importantly, the public relations management processes within the organization. This instills the hope that Toyota has learned from its past mistakes and will be better prepared to effectively handle crisis situation in the future whether it is concerned with the technical aspects of business or the company’s public image in any other situation.

As additional recommendation based on the findings of this analysis we would suggest that Toyota adopt and implement the best practices for effective crisis management suggested by the experts in the field of public relations:

  • Develop formal policy and internal communication procedures that can be activated the moment the crisis occurs
  • Communicate quickly and as accurate as possible under the circumstances. Do not delay initial communication until all fact-finding is complete. Give immediate acknowledgment of the issue and reassurance that the company is working  on the solution
  • Establish direct and candid relationship with the media through issuance of timely news releases, answering media inquiries, conducting live press conferences, utilizing internet communications for frequent updates
  • Adopt the policy of honest of and full disclosure of the company’s findings
  • Always follow up and, where appropriate, make amends to those affected xiii

As a matter of fact, we have reasonable assurance that Toyota will be able to take advantage and benefit from these recommendations as we read Bloomberg-Businessweek quote Toyota Motor Corp. President Akio Toyoda saying that “scrutiny from inside and outside the company has been a “good lesson” and he expects the carmaker to emerge stronger after recalling millions of vehicles worldwide.”[xii]

[i]  Toyota History in the US http://www.toyota.com/about/our_business/our_history/u.s._history/1950s_&_1960s.html

[ii] Toyota Vision and Philosophy. Toyota Production System

http://www2.toyota.co.jp/en/vision/production_system/

[iii] National Highway Traffic Safety Administration (NHTSA), Information on Toyota Safety Recalls and Investigation

http://www.nhtsa.gov/Vehicle+Safety/Additional+Information+on+Toyota+Recalls+and+Investigations

[iv] Bloomberg-Businessweek, February 9, 2010

http://www.businessweek.com/news/2010-02-09/toyota-recall-cost-to-exceed-2-billion-lawyers-say-update2-.html

[v] Information on Toyota Recalls and Investigation at NHTSA site

http://www.nhtsa.gov/Vehicle+Safety/Additional+Information+on+Toyota+Recalls+and+Investigations

[vi] Fox News Online

http://www.q13fox.com/news/kcpq-031510-priuslawsuit,0,2383406.story

[vii] Bloomberg-Businessweek, February 9, 2010

http://www.businessweek.com/news/2010-02-09/toyota-recall-cost-to-exceed-2-billion-lawyers-say-update2-.html

[viii] Toyota Corporate News Release, February 5, 2010

http://pressroom.toyota.com/pr/tms/toyota-motor-corporation-president-153566.aspx?ncid=12036

[ix] Toyota Corporate News Release, April 8, 2010

http://pressroom.toyota.com/pr/tms/toyota-announces-smart-business-156380.aspx

[x] Toyota Corporate News Release, April 16, 2010

http://pressroom.toyota.com/pr/tms/toyota/electronic.aspx?fid=99485&id=E3C18559

[xi]Written testimony of James Lentz, President and Chief Operating Officer Toyota Motor Sales, U.S.A., Inc, submitted to the Committee on Energy & Commerce, Subcommittee on Oversight & Investigations http://pressroom.toyota.com/pr/tms/written-testimony-of-james-lentz-158931.aspx

[xii] Adapted from Anne Lawrence, James Weber, “Business and Society. Stakeholders, Ethics, Public Policy” 13-th edition, page 447

[xiii]Bloomberg-Businessweek, May 21, 2010

http://www.businessweek.com/news/2010-05-21/toyota-chief-executive-considers-recall-crisis-good-lesson-.html