It's No Party Time for Toyota!

Eshna is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

If you think that champagne corks are popping after Toyota’s (NYSE: TM) recent coronation as the world’s largest automaker you cannot be more wrong. Right after the company made headlines with the news that it has surpassed General Motors (NYSE: GM) producing 9.75 million vehicles in 2012 against the latter’s 9.29 million Toyota finds itself in the midst of yet another recall disaster. Last week the company announced that it plans to recall 7.43 million vehicles across the globe. While this does not dent the company’s bottom-line by more than $55 million, it does dent the faith of the investors on the world’s largest automaker.

 The recall saga

Toyota’s recall woes date back to August 2009 when a Lexus ES350 crashed and caught fire in Southern California killing off-duty California Highway Patrol officer Mark Saylor and three of his family members. The company cited wrong floor mats to be the problem which was interfering with the gas pedals and recalled 4.2 million Toyota and Lexus vehicles to fix the same. This was the first time that the faith on the unshakable Toyota faltered and the CEO’s public apology to the Saylor family was a small measure to repair the face loss. The company desperately tried to cling on to the floor mat theory to explain the series of complaints that followed involving unintended acceleration only to suffer the next blow in 2009. On  Dec. 26, 2009 a Toyota Avalon crashed into a lake in Texas after accelerating out of control killing all four passengers. And guess what - the floor mats were found in the trunk of the car!

Over the next two years what followed were more and more recalls. Sometimes floor mats sometimes gas pedals unintended acceleration was becoming a menace for Toyota vehicles.  Promises made by the company to improve its quality control were falling short by miles. Between 2009 and 2010 Toyota recalled as many as 14 million vehicles across the world and President Akio Toyoda was made to appear before the US Congress to explain the safety concerns.

And just when it was thought that the worst is behind, the company announced the largest recall in the past 16 years in the automobile history and biggest since Ford’s recall of 7.9 million vehicles in 1996. The recall affects vehicles sold across the world under Toyota and Scion brands. The US alone would see the recall of 2.5 million vehicles while the figure for Europe would be 1.4 million. Australia, China, other parts of Asia, and the Mideast would all be impacted. The problem this time is a potentially defective power window switch on the driver’s side which poses a risk of fire. While it is a small relief that the models affected are all from 2009 or earlier vintage this to say the least puts the company under the scanner all over again.

 The bigger challenge - Europe

The impact of this news on the stock has not been alarming, but it has to be kept in mind that this is just not the time for a PR faux pas. The investors have already factored in growth in the US market. It is almost expected that the automakers will beat analyst estimates here. And Ford (NYSE: F), GM, Toyota have all lived up to expectations posting sales growth in the US well ahead of Wall Street estimates. GM has reported a 16% increase in units sold, Ford 22%, and Toyota 27%. So now the investor eye is on the ability of the players to stand up to greater challenges at hand like Europe for example. In 2012 a Japanese car maker made history by featuring in the full year top ten – being the first automaker from Japan to do so. And no it was not Toyota! It was the Nissan  Qashqai which moved into the 8th slot being the only car among the top ten to avoid a sales drop.

Again no mean feat where Europe’s choicest car brand Volkswagen posted declines in units sold for all its bestselling cars. Sale of VW Golf was down 11%, VW Polo 20%, and VW Passat 10%. Ford and General Motors both posted double digit declines for popular models like Ford Fiesta, Ford Focus, Opel Corsa, Opel Astra, etc. While Ford is assuring investors that it will break even in Europe by 2015 leveraging the restructuring plan along the lines of the US, GM has got former VW Manager Neumann as its new Opel Chief to achieve a turnaround. It is about time that Toyota too chalked out a strategy for Europe.

 Setback in China

The company has to improve its performance in China as well. The boycott of Japanese cars in China has already allowed the likes of Ford, GM, VW to gain further inroads. Toyota’s sales were almost 25% below expectations while the Ford Focus posted a 57% increase, meanwhile Chevrolet Sail and VW Passat both gained 41%. Now that sales of Japanese cars are improving, Toyota has a clear task at hand here.

Net-net, the expectation from Toyota would be to provide concrete news about its outlook for Asia or a game plan for Europe. The resurfacing of the recall saga once again dampens investor enthusiasm to say the least.

Tina De has no position in any stocks mentioned. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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