Quality on the Line: The Fallout from Toyota's Recall

The recall, which affects more than nine million vehicles worldwide, poses operational, marketing, ethical, legal, political and strategic challenges to the firm at a time when the entire industry is struggling, according to Wharton faculty and auto experts. "It's a huge threat to their reputation," says Wharton management professor John Paul MacDuffie, co-director of the International Motor Vehicle Program. Toyota's insistence on quality is exemplified by its policy allowing individual workers to shut down an assembly line -- at enormous cost -- if they notice a quality defect, he notes. "Now, Toyota is having to stop the line at the corporate level in a big way."

The recall comes amid allegations that Toyota has had indications for years that some of its models were prone to rapid, unexpected acceleration. Initially, the company said the problem appeared to be related to gas pedals becoming trapped in floor mats, and it issued a first recall. However, following continued complaints -- including reports of fatal accidents late last year -- the company became the subject of increasing pressure from the National Highway Traffic Safety Administration and ordered a second recall this month. On February 1, Toyota announced it has found a way to fix the accelerator problem and is ordering new parts for dealers to repair recalled cars.

During a meeting with reporters on February 3, U.S. Transportation Secretary Ray LaHood urged owners of recalled vehicles not to drive them until they are repaired. (He later modified his statement to say that he encouraged drivers "to contact their local dealer and get their vehicles fixed as soon as possible.") He also said he plans to speak directly to Toyota's chief executive, Akio Toyoda. "We're going to keep the pressure on," he said.

Wharton management professor Larry Hrebiniak says Toyota has not been aggressive enough in coming forward to calm consumers' fears. "This is a very serious issue, and they know it is going to hurt them and their quality image so they are trying to downplay it." When a business makes a mistake, he notes, it is best to be upfront because delays and uncertainty only make matters worse in the long run. He cites the famous case of Johnson & Johnson, which acted swiftly to remove all Tylenol products from store shelves following the deadly 1982 tampering case. The company's strong response restored goodwill toward Johnson & Johnson and helped it retain market share. In the case of Tylenol, he adds, the company had no time to plan a strategy to meet the problem.

"What bothers me most is that Toyota had clues there were quality problems -- not only general quality problems, but that there was an accelerator problem," he says, adding that the company should have been able to take that information early on and develop a proactive approach, rather than reacting to regulators and bad press, according to Hrebiniak.

Cost-cutting Operations

Toyota is famous for its cooperative relationships with suppliers that not only take into account cost, but also encourage both sides to work together to innovate and create better vehicles. The supplier of the gas pedals that are the focus of the recall, CTS Corp. of Elkhart, Indiana, insists its parts, which were manufactured in Canada, were made to Toyota's design specifications.

MacDuffie notes that in recent years, as the company grew rapidly, it initiated a program to reduce costs by working with suppliers, called Construction of Cost Competitiveness in the 21st Century, or CCC21. He also points out that Toyota -- and all leading manufacturers -- have increasingly moved toward using more virtual or digital prototypes, rather than physical ones, to speed development time. The combination of a shortened product development cycle, cost cutting initiatives focused on component design, and digital as opposed to physical testing could have been factors in the acceleration problem.

According to MacDuffie, Toyota acknowledged nearly three years ago that it may have "pushed the edges" too fast in product development. It has since slowed its product development time frame and reintroduced more physical prototyping into its process. These changes may not have come soon enough to forestall the current problem.

Takahiro Fujimoto, an IMVP-affiliated researcher and professor of economics at the University of Tokyo, says the company did grow quickly in recent years, while at the same time the complexity of auto manufacturing increased. "Toyota faced excessive or overwhelming complexity that even its strong capability could not handle adequately," Fujimoto writes in an e-mail. "At the same time, simultaneous pressures came from volume over-extension, possible quality arrogance caused by its long track record of quality excellence, collapse of demand in the U.S. (particularly luxury sales due to the financial crisis), plus other mistakes and some bad luck -- creating something like a chemical reaction."

Wharton management professor Michael Useem says the recall will not lead the company to alter its famed lean production system, because it "runs too deep in the Toyota culture and has been too successful and too effective." Although Toyota is in the midst of a "public relations debacle," it is likely to recover more quickly than other automakers in the same situation might, Useem predicts. "I would anticipate Toyota is going to get through this with a weakened reputation -- but since the company made great cars for a great price for 50 years, they are on a much better platform for restoring the luster of their reputation because the platform was so strong to begin with."

Increasing Complexity

Matthias Holweg, director of the Center for Process Excellence and Innovation at the Judge Business School at the University of Cambridge in England (and also an IMVP affiliate), analyzed recall records from Europe and the United States for the past 10 years and found that Toyota has performed above average. "I'm a bit surprised that people are jumping on this particular recall with such energy," he says.

Holweg notes that Audi faced a similar problem with its models in the 1980s. "The interesting thing about Audi is that it was never proven that the accelerator stuck to the floor, but the handling of the issue became a marketing disaster, and Audi was forever known for sudden acceleration. That's why this Toyota case is so sensitive."

However, Holweg suggests massive recalls like the one currently underway at Toyota may become more common in the future as a result of two trends in manufacturing. First, car manufacturers are increasingly using the same components and platforms across many different models in order to gain scale and cost advantages. If one part is bad, he says, the number of vehicles affected will be much larger than in the past. Fujimoto adds that parts commonality is the top cause of recalls in Japan, according to a government analysis. "Carryover parts are quality-proven as individual components," he says, "but when they are used in a wide range of different vehicles, they may become causes of quality problems. It is a double-edged sword."

The increasing level of complexity in cars is a second major problem that could also contribute to large recalls in the future, Holweg notes. Automobiles used to be primarily mechanical devices, but now they are also ruled by numerous sophisticated electronics overlaid on top of traditional mechanics. "And it is not always such a happy marriage between electronics and mechanical systems." As an aside, Holweg points out that safety and reliability may ultimately be improved with the development of an electric car, because the level of integration between mechanical and electronic systems would be reduced.

As for the current controversy, Holweg says he has no idea whether electronics play any part in Toyota's recalls. However, lawyers for crash victims allege the company has an underlying problem with its electronic components and argue that Toyota's plan to fix the gas pedals will not address this. Apple co-founder Steve Wozniak has gained attention with his own complaints that his 2010 Toyota Prius, which is not included in the recall, accelerates under certain conditions that indicate the problem is related to software, not a mechanical problem with the gas pedal.

James Lentz, president of Toyota Motor Sales U.S.A., has insisted that the problem is not related to electronics. Susan Helper, an economics professor at Case Western Reserve University and an IMVP research affiliate, says it is possible that floor mats, sticky gas pedals and faulty electronics may all cause unintended acceleration. She notes that it is difficult to isolate, reproduce and test all the conditions that could affect the many parts and systems in today's increasingly complex vehicles. "And perhaps that's why Toyota was slow to pick up on these reports," says Helper. "Maybe there was a little bit of arrogance, but some of it has to do with the newness of some of these systems. We have not had 100 years to study electronics the way we have with mechanics."

There are a number of things we still don't know, adds Helper. Toyota gets its accelerator pedals from two suppliers, Denso in Japan and CTS in North America. In both cases, the design specifications are set by Toyota. "It seems that the older, Denso pedal does not have these problems. How the two designs differ and why different designs were chosen is likely to shed light on the roots of the problem."

According to Helper, another question is why Toyota, unlike many other automakers, did not install "brake override" systems that allow a driver to stop a car with the footbrake even if the accelerator is depressed. Honda also has not installed this type of system. One argument for not adding a brake override system is that the driver maintains more ability to control the vehicle under certain conditions by being able to use the brake and accelerator simultaneously. However, Helper notes, Toyota has now announced it will switch to brake override in all future models.

Needed: A Grand Gesture

Aside from the mechanical and production issues, Toyota now faces major marketing challenges, according to Wharton faculty. Lentz appeared on NBC's "Today Show" on February 1 to explain the new fix for gas pedals, but the leadership in Japan has not been front-and-center in addressing concerns about the recall.

In addition to its about-face on floor mats as the only source of the problem, the company was accused of insensitivity when it first announced it would ship replacement parts to assembly plants to restart halted production before making them available to dealers for existing customers. Toyota has now reversed that decision.

Maurice Schweitzer, a Wharton professor of operations and information management, says Toyota needs to make a grand gesture to maintain its position in the market. He suggests the company should contact owners individually in order to get them into dealerships for repairs, and then compensate them in some way -- perhaps by offering a rebate for another free service. Offering cash toward a new purchase would be viewed as too self-serving, and straight cash compensation would come across as "cold," he notes. "They need to do something warmer, something that demonstrates caring. I think they can recover, but that window is closing. They will have to do something big and fast."

The recall is already having an impact on Toyota's business results. On February 2, the company reported a 16% decline in sales to a 10-year low of 98,796 vehicles. At the same time, General Motors' sales rose 14% and Ford's were up 25%.

Meanwhile, General Motors has added fuel to the fire by offering $1,000 discounts and zero-percent loans for Toyota owners. MacDuffie says General Motors' strategy is risky because, given the underlying industry trends mentioned above, it could well be forced to make its own major recalls. "No auto company is immune to a recall problem like this one." Volkswagen AG, Europe's biggest carmaker, has said specifically that it will not target Toyota owners with discounts.

Honda and Hyundai, Toyota's traditional rivals which compete largely on quality, are more likely to benefit, says MacDuffie. "The other beneficiary is Ford. [Its models] are getting positive quality ratings across their product line in Consumer Reports. It is the comeback kid, and it now has the quality advantage -- at least for the moment."

Lacking PR Muscle

As Toyota continues to grapple with the manufacturing and marketing issues accompanying the recall, it is also facing legal and political problems. In addition to lawsuits filed by individuals who claim they were harmed by Toyota products, the company also faces several class-action suits related to sudden unanticipated acceleration.

Meanwhile, Congressional committees are gearing up to launch their own hearings on the problem. Henry Waxman, chairman of the House Energy and Commerce Committee, and Bart Stupak, a subcommittee chair, have asked Toyota to provide documents showing that the computer systems on its cars did not cause the acceleration problem.

According to Schweitzer, Toyota must appear contrite during the hearings to avoid creating more bad feelings among consumers. "If I were advising Toyota, I'd tell them this is an opportunity to regain trust, to demonstrate unparalleled commitment to its customers." The company should show that it is "willing to do what it takes to make sure [its] customers are driving safe vehicles," he notes. "If they miss this opportunity, it will be very costly. The politicians will be trying to score political points by raking some [Toyota officials] over the coals and painting them as profit-hungry executives. It's going to be a tough crowd."

MacDuffie says the current crisis suggests that Toyota's public relations expertise does not match its overall strengths as a manufacturer. Despite some slippage in its quality performance, Toyota continues to win more top quality rankings than any other automaker, and its past performance on recalls is also strong, he notes. The greatest damage to Toyota's public reputation would be if, beyond this recall, the company reveals more problems associated with acceleration. "The other real possibility is that Toyota will take this opportunity to display its famed ability to focus intensively on a revealed problem, to get to its root cause, and to solve it permanently," he adds. "This would reinforce its image as a company that is capable of continuous learning in order to meet customer needs. For the sake of this company that has taught the world so much about better ways to make things, I hope it is the latter."

This article is reprinted with permission from Knowledge@Wharton.