Impact of Toyota Recall on Corporate Reputation
Michiharu Sakurai
Visiting Professor of Accounting
Josai International University
Tokyo, Japan
In the 1990’s, I presented my paper on target costing in Brazil; once in Rio Grande (1993), andanother in Sao Paulo (1994). In those days, I was very often invited to make presentations byresearchers in such countries as the Brazil, the USA, Germany, the United Kingdom, Italy, andIndia because quite a few professors were very much interested in my paper (Sakurai, 1989,
pp.39-50) on target costing as it originated in Toyota and my extensive experience with Toyota
production systems and management methods.
Participants in this conference room may not know what target costing is. Target costing is atool for strategic cost management. It was originally developed by Toyota and the Toyota group forcost reduction in the 1960’s and 1970’s. The concept of target costing, which focuses on reducing
costs before production starts, was not known in the Western manufacturing environment. Target
Costing became a sort of “secret weapon” for drastic cost reduction in 1980’s and 1990’s for suchassembly-oriented industries as automobile, home appliances and others, and is now widelypracticed. To a certain extent Target Costing may be related to Toyota’s current problems,
although in an ambiguous way, which I will discuss later.
Today’s theme, however, is not costing but reputation. If there are some who have interest in
target costing, refer to my book written in English entitled Integrated Cost Management,
Productivity Press, 1996 (Sakurai, 1996, pp.37-68) and its translation into Portuguese publishedin Brazil (Sakurai, 1997, pp.49-75). Toyota and its group has developed many new management
concepts and tools as total production maintenance (TPM), Kanban system (JIT), target costing,lean management, the Toyota way and others. The quality of Toyota products is now regarded asvery high by a majority in the world. Toyota became a point of Japanese pride by showing that we
could compete, and even dominate, in world markets.
I have come back to Brazil once again, and my theme also relates to Toyota. However, my
feeling is quite different from that of the last visit. At the last presentation, in spite of my poor
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English, my presentation was welcomed by a hearty cheer. But I am, in fact, gloomy this time. I
will frankly discuss the Toyota recall issue from the standpoint of corporate reputation.
Concretely, I will talk about real discussions now happening in Japan, as well as the real cause of
the quality problem, and the status of the Japanese economy and society. Finally, I will sketch out
possible countermeasures to regain reputation of Toyota1.
Before talking about the topics I had better outline my intention of this paper. Toyota has nevertrumpeted their quality. The image of Toyota quality is mainly a creation of secondary messaging
such as Consumer Reports, the J.D. Power surveys, and other sources that evaluate automobile
quality. This is not to say that Toyota does not believe that they are the best and act like it, butthey are extremely careful to make only modest public statements. From this aspect, Toyota’s
reputation has been given by the environment. So, the question of what can change the reputation
is interesting. In this paper I will outline different types of fact that are connected with thecurrent issues at Toyota. First, the engineering facts including facts revealed by Toyota aboutsome of the specific issues. Second, the public discussion of quality as it related to Toyota.

１What was the Toyota Recall Problem? Engineering facts.

On August 28 2009, a Lexus ES350, driven by a California state trooper crashed, killing him
and three members of his family. The cause of the crash was a floor mat, made by Toyota, whichslipped forward while he was driving, and which entrapped the gas pedal and prevented it fromreturning to the zero point, or top position. The car crashed at an intersection at 180 km (111
miles)2 per hour. Toyota’s examination of this accident was published in 2010 (Toyota recall datacollection team, 2010).
In eight types of the 3.8 million Lexus cars sold in the US and Canada, if the floor mat is
installed inappropriately at any time, such as by a customer cleaning the mat, the pedal may
come into contact with the pedal and may lead to an accident—that was the reason Toyota gave
regarding the accident. Basically, the pedal on these cars was designed to come close to the floor of
the vehicle so anything with a height of more than about 15 mm. under the pedal could come into
contact with the pedal. It was discovered that around 100 similar events had been reported to the
US authorities (Weekly Toyo Keizai, 2010, pp.56-62). It is likely that many drivers encountered1

I acknowledges Mr. Mitsuru Ohno, General Manager at Toyota CSR & Environmental Affairs Div. and Mr.
Satoshi Kato, Group Manager at the same Div. for supplying me with valuable data.
2
According to the Toyota recall data collection team (2010, p.10), after the crash accident was highly
publicized, it was found that the crashed Lexus was on loan, and the floor mat for a different Lexus model
was installed in the ES350 in which Mr. Mark Saylor was killed. There is also an article reporting that the
speed of ES350 was at 190km per hour at the time of crash (Weekly Toyo Keizai, 2010, p.60).

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this design element and either changed to different floor mats or removed their mats or attachedthem to the floor of the vehicle so they would not slip forward.
Toyota took external action on the mat problem on September 29, 2009, approximately one
month after the crash by announcing a recall. On October 5, 2009, Toyota sent direct mailings toadvise the owners of target type cars to remove the floor mats from their vehicles. At the sametime, however, a Toyota executive insisted that there was no design defect in the car (The Nikkei,2010). The National Highway Traffic Safety Administration (NHTSA), however, took a different
view, arguing that there might be some problem in the pedal as well as the speed control systemof the car as well.
The controversy finally reached a point, on November 25, 2009, when Toyota announced thatthey would take voluntary remedial measures. Instead of removing the pedal, Toyota decided toshorten the length of the existing pedal to prevent it from being entrapped by the floor mat, or insome cases, to exchange the existing pedal with one of a different design. This had the effect ofmaking the pedal higher off the floor of the car. Toyota also announced that we would adopt asystem that would automatically release the accelerator if both the accelerator and brake pedal
were depressed hard at the same time. The number of target cars affected by this new measureballooned to over 4.26 million. Note that the thick all-weather type mat which had caused thecrash had been installed only in Lexus cars sold in the US and Canada based on specific anddifferent preferences of North American purchasers. This appears to be a design issue which had
not been encountered previously.
Toyota came into the spotlight again on January 21, 2010 with a different case which was
generally not distinguished from the first case in news reports, but treated as an extension of thefirst case. Toyota made an announcement that the gas pedal might not return on some vehicles,
even if it had not been entrapped by the floor mat. The automaker recalled some 2.2 million ofeight types of their top selling cars in the US, including the Corolla and Camry. Note that thisrecall does not include the same vehicles as in the first set of recalls. This recall is a different
issue with the gas pedal failing to return to top position, evidently due to excess friction. The basic
issue is that with electronic fuel systems the designer attempts to mimic the feel of the oldmechanical cable system by adding specific amounts and types of friction to the pedal linkage.
One of the materials in the system turned out to develop a slight stickiness after several years ofuse in some environments. Most pedals do not have this problem and the environmental factorsthat lead to the stickiness in some circumstances has not been determined.
A third event occurred in February 2010, more than 50 owners of new Prius hybrid cars
reported possible malfunctioning brake controls in their cars to the US Department ofTransportation. On February 5, Toyota’s President Akio Toyota, held a late-night press conference－ 75 －

at which he suggested that the ABS (Anti-lock Brake System) in the Prius brake controller mighttake some time (a few extra milliseconds) to react while driving on slippery road surfaces.
Following this, Toyota announced a recall of some 400,000 vehicles worldwide for four types ofcars, including the Prius to reset the allowed time. This issue involved a setting in the softwarethat controlled the amount of time that wheel slip was allowed before starting an automatic assist.
It is mainly regarded as a customer comfort issue since it does not appear to have any impact onsafety as understood in purely rational senses. However, this, of course, is a key element of thereputation concept, that it is owned by the customer not the engineers.
Of the three issues described here, none have been actually experienced by more than a handfulof Toyota drivers (less than 1000 total reports for all three issues). So, at the level of immediate
experience these problems can have almost no direct impact on the reputation of Toyota to mostconsumers. Most of the impact will be from secondary information such as news reports.
Having concluded that the defects in issue 2 above, were due to a malfunction of the gas pedal
and other parts, Toyota embarked on large-scale improvements to these recalled vehicles. The
suspicions of some US critics, however, were raised, since they believed that the true cause of theaccident was within the electronic control system of the engine, and that Toyota was hiding thisfact. In response to these suspicions, President Akio Toyota attended a public hearing on
February 24 (25 in Japan), 2010, to answer questions from the US House of Representatives
Oversight and Government Reform Committee.
At the hearing, Akio stated the following three points: First, he apologized for any lack of focus
on customer needs that had resulted from his company’s too rapid business expansion. Second, he
regretted not giving the authority to their US affiliate to independently announce a recall: fromnow on, their US affiliate would be able to conduct a recall whenever they needed to. Third, no
defects had been found so far in the electronic throttle control system (ETCS). What was revealed
during the two-day public hearing was the problem with the ETCS issue, which had led to thewidespread view in the US that the ETCS was the possible cause of sudden acceleration3.
On April 5, 2010, US regulators decided to impose a civil fine of 16.375 million dollars(approximately 1.5 billion yen) on Toyota for their alleged delay in making public the defects that
led to the recall. Toyota has agreed to pay though Toyota denies NHTSA's allegation that it3

I own a Mercedes-Benz S-class now, but before that, used to drive Toyota’s Celsior (Japanese version of
Lexus). When I drove the Benz for the first time on a highway (Tomei Expressway) four years ago, the car
dropped its speed suddenly from 100km/h to 40km/h. Fortunately, I avoided a fatal accident, but the reasonof sudden speed decline was unclear when I asked the dealer. After a while, the dealer informed me that the
speed decline happened because I had changed the genuine Benz keychain to a different one, and that thechanged keychain caused speed decline when it hit the leg while driving. The dealer warned me not tochange the genuine Benz accessories to other products from now on. I did not blame the manufacturer
Mercedes Benz, just like most Japanese people would not do, but took it as my own responsibility.
Nevertheless, it is difficult to judge whether to be blamed is a bug of accessory or the responsibility of user.

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violated the Safety Act or its implementing regulations. Toyota agreed to this settlement in order
to avoid a protracted dispute and possible litigation, as well as to allow it to move forward
fully-focused on the steps to strengthen it’s quality assurance operations. This will also allow
drivers to focus on delivering safe, reliable, high quality vehicles for customers and responding toconsumer feedback with honesty and integrity.

２．What were the true reasons of Toyota recall problem? Reputation facts.
Toyota’s recall problem can be looked at from three angles. One is the large volume of recalledcars. The second is the investigation into the cause of the malfunctions. The third is theclarification of causes that led to the recall and malfunction. Each problem, seen from these three
angles, is discussed separately below.

1）Toyota was not the only maker to recall vehicles
Nowadays, only Toyota is in the spotlight for recall problems, but what about recalls by otherautomakers? Let’s look at the status of recalls by major automakers after October 2009, according
to Yamazaki (2010, p.16). The number of recalls by major automakers, mainly in Japan and theUS, is shown in Table 1.
Table 1: Recalls by Major Japanese and US automakers after October 2009
Name of

Number of target

manufacturer

vehiclesToyota Motors

8.5 million

Reason(s) for recall
Gas pedal height, Gas pedal return, brake control
of hybrid cars

Nissan Motors

860,000

Brake pedal, fuel system

Honda

1.5 million

Air bag, brake-related problem

GM

1.3 million

Power steering-related problem

Ford

4.5 million

Vehiclespeed

controlsystem,brake-related

problem of hybrid cars
Regarding recalls by Japanese automakers other than Toyota, Honda announced a recall ofsome 450,000 vehicles, including the Odyssey minivan in the US and other areas on March 16,
2010. Honda conducted a recall for a brake-related problem in spite of no evidence that a brakemalfunction had caused any accidents. Nissan Motors recalled some 540,000 vehicles, including
the Titan pickup truck, mainly in the US, due to a malfunction of the brake pedal. How about US－ 77 －

automakers? On March 2, the same day as Nissan announced its recall, General Motors (GM)
recalled some 1.3 million vehicles, including small-size cars, due to the risk of problems with
controlling the power steering system.
One of the aspects of this issue is that Toyota has been successful at selling extremely large
volumes of a narrow range of vehicles. They have, by far, the highest average sales per model of
all manufacturers except Honda. This has many implications; in this case, it means that errors indesign will be extremely widely dispersed. If we add to this the effects of several decades ofmethods such as Target Costing, which leads to replication of good solutions across brands, wehave a situation where Toyota’s specific type of success has lead to possible engineering “facts”, or
weaknesses such as recently observed.

2）The cause of the malfunction—Was there a problem in the ETCS?
In the fatal Lexus ES350 accident in August 2009, which killed a California state trooper andhis family, the Toyota designed floor mat slipped forward and trapped the gas pedal at a highacceleration point, which killed a California state trooper and his family members. The floor mat
was not the correct one for the model and was not correctly installed. The problem with the floor
mat itself could be viewed as a mechanical problem. Since the thick all-weather type floor mat
which caused the accident was installed only in Lexus cars sold in the US and Canada, theJapanese public saw the problem differently than did American TV viewers.
In the public hearing on February 24, 2010, the US authorities made it clear that the focus ofattention was not a mechanical problem, but a systemic defect in the ETCS. The Chairperson,
Edolphus Towns Jr. of the US House of Representatives Oversight and Government Reform
Committee, commented that there was widespread public concern regarding reports of sudden
unintended acceleration in Toyota motor vehicles, and the Secretary of Transportation, Ray
LaHood, announced that the NHTSA was conducting a technical review of the possibility thatelectromagnetic interference with the ETCS was causing sudden unintended acceleration. These
comments indicated that the focus of investigation was shifting from a mechanical problem inparts to a problem with the ETCS.
Meanwhile, Dr. Jeffrey Liker, a professor at the University of Michigan who researched Toyota’s
electronic control system, suggested that three misunderstandings were behind the Toyota recall
problem (Liker, 2010, p.112). First, the media gave the wrong impression that the problem ofsudden unintended acceleration was unique to Toyota cars. Vehicles manufactured by GM, Ford
and Chrysler had also suffered accidents due to similar problems, and a long series of lawsuits
had been filed concerning these accidents. Second, many media reported that the cause of thecrash could be traced to the electronic control system although there does not appear to be any－ 78 －

evidence of this. At this point, however, it is not proven that the ETCS was the reason for thesudden acceleration of the Lexus. For safety, the system has two separate types of CPU (central
processing unit) installed, and two sensors are attached to the brake pedal. Therefore, the system
is designed to cause no accident unless both CPUs malfunction at exactly the same time. The riskof this happening is statistically very slim; but even if the two CPUs do malfunction at the sametime, the system is designed to cut off the fuel supply and the car will come to a halt. Third is aview that indicates a problem in Toyota’s production system, but the cause of the recall is nottraceable back to Toyota production lines. Dr. Liker suggests that what should be in question isthe design, rather than the manufacture, of cars.
According to Dr. Liker, the US government’s critical attitude towards Toyota is adding to thebackground of growing misunderstanding on the part of the public (Liker, 2010, p112). Unlike theRepublican Party, which is more pro-industry, the Democratic Party wants to make it clear thatthey support consumer rights. Taking on a top automaker is an easy way of winning public
support. Ford has recalled as many as 4 million vehicles, but Toyota, a company with the world’s
top-class share and a strong safety image, is an easier target, Dr. Liker suggests.
In contrast with Dr. Liker’s comments, Dr. Kent Calder (Director of the Reischauer Center for
East Asian Studies at Johns Hopkins University in the US) explains that the reason the Toyota
recall problem has become such a major issue is not because of Japan-bashing, or people anxious
to make political capital out of it, but because it was linked to consumer safety. In the 1990s, theDemocrats and labor unions worked together to bring auto issues into the public eye, but different
political dynamics are at work in the Toyota recall case, Dr. Calder says. The White House is not
actually capitalizing on this recall. He has the impression that the US itself is not adopting apartisan strategy, but that some US congress members who were close to domestic or Korean
automakers were leading the severe criticism of Toyota.

3）Were there problems with management quality?
Were Toyota’s recall problem tied to problems with management quality? Let’s look at the sevenmain criticisms or arguments of Toyota.

①

Slow to react
Johnson & Johnson announced the recall of their painkiller Tylenol in 1982 when potassium

cyanide planted in the product led to fatalities, even though the cause of death was not fully
known when the recall was announced. A rapid decision to recall products is often viewed as
successful risk management. Japanese corporate managers, however, have a tradition ofrespecting group decision-making, so their responses to problems are often slower than their US－ 79 －

and European counterparts. Toyota’s response to the recall problem was no exception. All the
media, not only in other countries but also in Japan, found fault with Toyota’s slow response to
the problem.
Why was the response so slow? One reason may be that Toyota had been using ETCS
successfully in Japan since at least 2003, without any malfunctions serious enough to become apublic issue. Another reason is that, since the automaker’s recall involves cars, and Toyota has
deeply established practices that mandate very thorough and careful engineering analysis. Theirengineering analysis is much slower and more thorough and careful than US or European
engineering practices. The end result is that they act much faster since they usually arrive at abetter and more consensus-based conclusion, so significant time is needed before Toyota canactually determine that a defect exists. Then, the cause of problem is investigated, and the results
publicized. This is an extremely well known facet of Japanese engineering, and Toyota is anextreme example of this, even in Japan. Thus, much time is needed to review the situation, whichmakes the situation entirely different from the case of medicine recall’s like Tylenol where it was
clear that a defect existed. If Toyota had provided a swift conclusion to the August 28, 2009
accident, which was not reported correctly on the TV news, would it have been the right choice? It
may be unclear what should be regarded as truly useful information for customers.

②

Did Toyota prioritize cost cutting over driver safety?

Surprisingly, there have been few complaints that Toyota has been neglecting customer
satisfaction. Nevertheless, the argument does exist. Some critics claim that Toyota is not on the sideof their customers. From the perspective of safety science, Professor Masao Mukaidono of Meiji
University claims that Toyota has not been truly on the customers’ side, since the realization of
failsafe devices (meaning that all systems should be set up always to work on the “safe side” if avehicle is malfunctioning or being operated erroneously) in cars is extremely difficult. As this type ofproblem can happen to any automaker, it is important not to ignore any possibility and to leaveroom for open-minded consideration, according to Professor Mukaidono. Mr. Yoshihiko Sato (2010,
p.129), head at VPM Engineering Laboratory, regretted that Target Costing is not practiced as itshould be in the US. Meanwhile, some academics like Dr. Paul Dholakia, Associate Professor at Rice
University, take the view that Toyota’s long-term prognosis is promising and that it can be a
textbook example of how consistent prior customer satisfaction can insulate the brand, even if it
falters, referring to the results of a survey of 455 people across the US 4.
4

In the survey, respondents are asked if they would like to purchase Toyota when they purchase a new car, on
the scale of 1 to 10 points (10 being the highest purchase intention). Among the owners of Toyota vehicles,
the average answer was 8 points, while it was 4 points among the owners of other brand cars. The survey
was conducted from February 20 to March 2, 2010.

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Was Toyota’s poor quality control at overseas factories a cause?

③

Mr. Masakazu Tanaka, at the Institute for Technologists, the ex-Director for Production
Research Department of Toyota Motors, criticizes Toyota’s lack of quality control overseas (2007,
pp.106-115). Toyota has been outsourcing production to a parts maker (CTS) in the US, and theparts manufactured by CTS were also installed in Toyota vehicles sold in Europe and China as
well as North America. According to Mr. Tanaka, who was engaged for many years in improving
Toyota’s production system at the front lines of production, this kind of system—pursuing “theworld’s best optimized procurement,” whose downside has been revealed by the malfunction of thegas pedal—runs counter to authentic Toyota thinking.
Not everyone agrees with this view. Mr. Satoshi Hino, Director of Monozukuri (craftsmanshipin English) Management Institute Imagine, does not believe that the excessive adoption ofcommon parts at Toyota expanded the scale of the recall (2010, pp.116-123). Instead, he suggeststhat the real cause of the problem is the failure to both unify parts and guarantee quality. Dr.
Takahiro Fujimoto (2010, p.94) at the University of Tokyo, a leading researcher in the field ofautomobile-related manufacturing, holds similar views. He suggests that there is no single
answer to the question as to whether the adoption of common parts has a positive or negative
impact on vehicle quality. He also points out that, rather than the introduction of common parts,
the problem was because Toyota was facing the issues of complication of product design,complication of global product mix, complication of production base network, rapid expansion of
production volume and other factors, all at the same time. Therefore, Toyota’s supply of humanresources for quality control might not have been able to tackle all these issues, particularly atoverseas bases, Dr. Fujimoto suggests.
Was Toyota’s lack of corporate governance a cause?

④

There is a view that blames a lack of corporate governance at Toyota as a result of having
returned management to its founder family (The Economist, 2010, pp.10-11). In general,
dominance of a founder family is believed to lead to poor corporate governance. Based on lessons
learned in the past, however, it appears that the founder family members of Toyota, unlike thenon-founder family executives, have always frowned on the pursuit of short-term profits and thedecreased quality that often results.5
Another argument in this view is that the lack of an outsider perspective is another possible
5

There is one anecdote. It is said that, regarding the forecast of operating profit for 2008, Toyota had threepossible scenarios; 100 billion yen in the black, zero profit, or 150 billion yen in red. The vice president andpresident (at that time) were against showing a deficit, but the founder and the Honorary Chairperson
Shoichiro Toyota claimed that “Deficit is not good, but lying is worse” (Inoue and Ito, p.28). “Lying” here does
not mean to change the facts, but indicates that they should always show the figures closest to the severe
reality they are facing.

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cause of the Toyota recall problem (The Economist, 2009, p.11). This view argues that not one of
the 29 members of Toyota’s executive board has complete independence from the company6. Thereused to be only one non-Japanese executive on the Board, but he was headhunted by a US
automaker. In the 1990s, Hewlett Packard (HP) and Motorola recruited executive humanresources from third parties and restructured their company organization several times. As aresult, HP regained its performance. The editor of The Economist who reported on Motorola’s
restructuring efforts stressed the need to improve corporate governance by recruiting executive
human resources from outside. The other argument, focusing on the need for an outsider
perspective at Toyota, is fairly relevant, but it should also consider the fact that Japanesecompanies, including Toyota, choose some of their auditors (normally two to four auditors) fromoutside organizations such as universities7. In the current situation in Japan, it is not easy tojudge which is better: companies with a committees or companies that use an auditor system.

⑤

Is the Toyota recall problem indicative of a sinking Japanese economy?

Newsweek on March 15, 2010 posts a comment by Mr. Devin Stewart, Program Director andSenior Fellow, Carnegie Council for Ethics in International Affairs. In the article, he suggeststhat Toyota’s recall is a problem with its roots in Japanese politics, society and economy; and that
Toyota—which was Japan’s last fort, has now toppled (Stewart, 2010, pp.37-38). Downward
trends in Japan can be clearly observed here and there. Mr. Stewart lists the woeful state of thereigning Hatoyama Cabinet, the “Hikikomori” (withdrawing from society) phenomenon observed
among people in their 30s to 40s, what should be their most productive years; the extremely low
and declining birth rate, the low productivity of Japan’s agriculture, retailing business andgovernment, the rapid turnover of prime ministers—three since the Koizumi Cabinet in
2006—and Japan’s inability to ‘get a grip’ in the competition against China. Mr. Stewart’s list
contains a lot of unpalatable truths. This article, written by a foreigner, will be received withdisquiet by Japanese corporate managers. There is a similar argument focusing on the so-called“big firm disease” that is supposedly harming Toyota (Inoue and Ito, 2009, pp.30-33).
Nevertheless, few commentators find a direct link between trends of decline in Japan and the
Toyota recall problem.
6

Unlike other countries, Japanese corporate governance system primarily uses an “auditor system” unique toJapan, in addition to the Western committee system. Very few Japanese companies use the western-stylecommittee system with independent board members. Toyota is a typical example of most Japanesecompanies in using the auditor system. According to Corporation law, more than half of the all auditors
must be selected from third parties. Therefore, Toyota appoints four executives (auditors) from third parties.
7
From my past experience of serving as an auditor and an executive director for NTT DoCoMo and othercompanies as well as my current experience of working as an auditor for SRA Holdings, Inc., I believe that theJapanese corporate auditor system functions well unless the auditors do not decide their moves by looking at
the face of top management. From my experience, auditors consider the future of their companies deliberately,take into account the results of discussion done by the board of auditors and make good remarks.

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Was Toyota’s overconfidence in their quality a cause of the recall?

⑥

Dr. Takahiro Fujimoto at the University of Tokyo (2010, pp.92-94) claims that Toyota’s
overconfidence in their quality and ability to design cars is the root cause of the recall problem.
Nowadays, the complex nature of auto design is an inevitable challenge that faces all automakers
in advanced countries. Since Toyota is at the front line of this challenge, it is also in a position toexperience failure ahead of other automakers. Toyota, however, has a character that is muchdifferent from western organizations: it will not give up if it fails. Toyota’s internal culture has
always viewed failures as actions which are part of eventual success if people persist. When it
stumbles, it regains its foothold and keeps on running. This is how Toyota will revive itself. It isdifficult to provide proof the Toyota’s overconfidence is the fundamental cause of the recall.
Is corporate reputation not needed if the company engages in CSR?

⑦

In Japan, most companies engage in corporate social responsibility (CSR) activities very eagerly.
Toyota is no exception: for example, it donates 1% of its profits for social activities as part of CSR,
while also making constant efforts towards risk management, internal control and others. The
recall problem, however, did in fact happen. Why? One reason might be the delay in adopting theconcept of reputation management in Japan. If research on reputation management had also
included studies on internal control and risk management, issues such as the Toyota recall
problem might have been pre-empted. At least, people who have studied reputation management
will be well aware of the outcome caused by the slow response to the problem and how severely
the company will be criticized by society.

３ The effects on corporate value of damaging corporate reputation and its measures
A tarnished corporate reputation pushes down corporate value. In Western countries, when
discussing corporate value, there is a tendency to focus on shareholder value. Japanese corporate
managers, however, are more aware that the value of their corporation also greatly affects thecompany’s social and organizational values, as well as its economic values, including shareholder
value, and feel that a general decline in these values will eventually impact the company’s future
economic value8 (Sakurai, 2005, 2008), as shown in Chart 1 below.

8

According to the survey (Sakurai, 2010, p.2) by questionnaire to Japanese managers listed on the first parton Tokyo Exchange, those who support the argument that corporate value represents economic value was
11.5%, and a majority of Japanese managers (88.5%) support the idea that corporate value is social andorganizational value as well as economic value. 1062 surveys were sent to managers in planning, CSR, andintellectual capital departments and 124 replies were received. The survey was conducted from January 1 toFebruary 10, 2009.

－ 83 －

Figure 1

Racall issue of Toyota and decrine of corporate value

Toyota’s recall problem, taken as a whole, tarnished its corporate reputation, which then caused
a decline in Toyota’s social and organizational values as well as their economic value. How did thewhole range of the recall problem affect Toyota’s corporate value? I will discuss below what kindsof strategies have been planned by Toyota to improve their corporate value.

1）Effects on Toyota’ s economic value
The company’s economic value is shown by their stock prices, profits and the present value of
future cash flow. First, how did Toyota’s stock price react to the recall problem? See Figure 2.
Their stock price continued to fall after reaching a peak of 8,350 yen on July 2, 2007, and dropped
to an all-time low of 2,585 yen in December 2008, exacerbated by the collapse of Lehman Brothers
in September 2009. From this figure we can find two facts: one is that stock price had fallen before
the collapse of Lehman shock. Another is that downtrend after Lehman shock is very slight.
Figure 2 Stock price of Toyota over five years

Interestingly enough, Toyota’s flagging stock price, however, gradually began to rise after
Toyota President Akio Toyota attended the US public hearing in February 2010, hitting 3,705 yen
on April 14, 2010. Figure 3 below shows that the effects of the recall problem on Toyota’s stock
price were not overwhelming.

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Figure 3 Stock prices for several months

How did the recall problem affect Toyota’s profits? The effects on their profits from the recall
problem are also relatively small, as well as the effects on stock prices, compared to the impact on
their profits caused by the failure of their expansion strategy and the Lehman shock. See Table 1
below.
Table 1:

Toyota’s financial settlement of accounts (Unit: Million yen)March 2006

March 2007

March 2008

March 2009

March 2010

Revenues

21,036,909

23,948,091

26,289,240

20,529,570

18,950,973

Operating

1,878,342

2,238,683

2,270,375–461,011

147,516

1,372,180

1,644,032

1,717,879–436,937

209,456

profit
Net income

According to Table 2 below, in March 2009, the pattern of steady increases in Toyota’s revenues,
operating income and net income suddenly reversed. As one cause of their decreased operating
profits for FY2009, in their official statement, Toyota reported a loss of 1,480 billion yen due to theeffects of the reduced number of vehicles sold and product composition, plus a loss of 760 billion
yen due to the influence of exchange rate fluctuations. Most major Japanese critics, however,agree that the fundamental cause of financial loss was because Toyota had failed in its global
expansion strategy of achieving sales of 10 million vehicles worldwide.
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The number of vehicles sold by Toyota in the US for FY2010 ending in March (estimated) showsa huge increase, jumping by 40% year-on-year. It is seen that effects on sales from the recall
problem appear to be reducing. Some critics also suggest that US public opinion against Toyota issettling, and people have re-acknowledged the Toyota brand. Nevertheless, leaving aside
short-term performance, the impact of the recall problem on Toyota’s long-term financial
performance will be more damaging than expected.
So, how will the recall problem affect Toyota’s short-term profits? Their budget for fixing the
problems identified in the recalls amounts to 100 billion yen for this fiscal year, and Toyota
expects decreased sales in Western countries and other locations. According to Takahiko Ichiji,
Toyota’s Managing Director, he expects a loss of 70 to 80 billion yen due to the effects of the recall.
Considering the above, at this point, the direct impact of the recall on Toyota’s financial
performance for fiscal 2010, ending in March, can be projected to be a loss of around 170 to 180
billion yen. The financial performance from the new Prius hybrid car is not included in the above
figure, as the cause of the Prius brake malfunction is still not fully known.

2）Toyota’s strategy for improving their social value
The Toyota Myth was seriously damaged by the upheaval caused by the recalls. Although thefacts are not yet known, some critics accuse Toyota of not taking appropriate measures despite
being aware of the defects and the misleading reports. In the auto industry, a high reputation has
a major impact on both premium prices and the prices of second-hand cars. Several experts,
including Mr. David Cole, Chairman of the Center for Automotive Research in the US, foreseethat the Toyota Quality Myth will be difficult to regain (David Cole, 2010). So, what kind ofstrategy is Toyota adopting to improve their quality, and to rebuild their formerly high reputation
for quality?
Toyota confirmed that it would accelerate its company-wide strategy for quality improvement at
the first meeting of their Special Committee for Global Quality, held on March 30, 2010. Steve St.
Angelo, Vice President of Toyota’s US production arm, a chief officer for Toyota’s North American
quality control, stressed that Toyota also needs to promote educational activities to make known
the proper use of their vehicles. The Toyota President reconfirmed in his speech of April 1, 2010that customers safety is their first priority, providing good products at affordable prices comes tothe second priority, and volume and profit comes to the third. This statement is very significant,since it is based on Toyota’s fundamental stance of stressing user safety. More specifically, toreflect customers’ views on design in a more assured manner, Toyota has set up a special division
within their Technology Department. In addition to the Advisory Board, Toyota has decided toinvite outside quality experts to provide evaluations and advice on quality. They plan to disclose－ 86 －

the results of these evaluations to the public.

3）Toyota’s strategy to improve their organization value
Toyota’s recall problem also revealed problems in their organization. Although Toyota’s in-house
employees can manufacture high quality products, some critics argue that Toyota’s reluctance tooutsource was the basis of their competitiveness. The fast pace of their global expansion andincreased number of production bases, however, will create more problems than can be coped withby their Japanese employees. Specifically, there is also a view that since around the period when
Toyota North America President Jim Press and Toyota Motor Sales USA Vice President Jim
Farley moved to other companies, there was a faltering of communication between Toyota
headquarters and Toyota North America(Weekly Toyo Keizai, 2010, p.61). How will Toyota copewith these problems?
Toyota stated in its FY2010 global corporate policy, announced on April 1, 2010, that “all of us
will be working closely to regain customer trust.” This statement is intended to focus theemployee’s minds, shaken by the recall problem, on the goal of regaining the trust of theircustomers as soon as possible.
Toyota will embark on a large-scale restructuring of their organization, including their
Japanese group companies such as Daihatsu and Hino Motors. At present, each of Toyota’s 18
group plants in Japan manufactures several different types of vehicle. By this summer, however,the production of each plant will be divided by type of vehicle, such as into large cars, small cars,and minivans. Toyota aims to create a more convenient environment for conducting andimproving quality control by streamlining its production of each type of vehicle. It also intends tocreate a hybrid version of all its car models. Moreover, by adopting common car bodies and parts
for the Corolla, Vitz and other models, Toyota plans to achieve an annual cost reduction of 100
billion yen by 2012.
Furthermore, at the meeting of the Special Committee for Global Quality on March 31, 2010,
Toyota decided to set up a more close-knit network for information -gathering, by placing sevenbases in North America and Europe, as well as six bases in China, to respond to any accident
reports immediately by sending out their engineers to the site. Toyota is also expected to plan out
a more specific strategy in the future. They will need to put a swift and appropriate strategy inplace, that should be conducted steadily and as designed.

Conclusion
The floor mat was the initial focus of Toyota’s recall problem, but it developed into a problem of－ 87 －

the gas pedal sticking. The problem then spread further to the malfunction of the Prius brake.
The Prius is a hybrid car that incorporates a good deal of new technology, and has experienced
many teething problems. Similar types of difficulties can be expected to happen with otherautomakers’ hybrid cars. In brief, Toyota’s recall problem revealed a common challenge faced by
all automakers.
It became clear to me while writing this paper that, despite many snags, electronic control
systems are inevitable in future automobiles. Moreover, a great deal more light has to be shone
onto Toyota’s recall problem, not to mention the possible drawbacks of electronic control systems
in automobiles. It is of utmost importance for Toyota engineers and managers to speak the truth,
without being daunted by having to announce more recalls, and that Toyota uses the lessons they
have learned in this period of hardship to successfully cope with future problems.
I have also tried to show the existence of at least two types of “facts” related to Toyota’s
reputation: the engineering facts and the reputation facts. Both exist and interact with each other,and both are real. This situation is a good example of the aphorism that the company may own
the product, but the customer owns the reputation.

References
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