Why A Massive Safety Recall Hurt Toyota More Than GM – Forbes

Posted: Wednesday, July 02, 2014

Four years ago Toyota was in the midst of a recall process that had its sales and stock price plummeting. After decades of uninterrupted growth and success in the U.S. market the world’s then largest automaker was losing ground to General Motors General Motors — the U.S. rival it had surpassed in global sales in 2008. Toyota would eventually lose its global sales lead to GM in 2011, though a devastating earthquake and tsunami contributed to the automaker’s challenges that year as well. Toyota regained the global sales crown in 2012 and retains it still, but GM (and Volkswagen) are surging, making it an intriguing 3-way race.

What’s more interesting, however, is the fact that Toyota’s massive “unintended acceleration” recall experiences in 2009 and 2010 included less than 10 million cars, yet it had a dramatic impact on the automaker’s sales and stock prices. It’s tough to know exactly how much the recalls contributed to Toyota’s 20 percent drop in sales because another market force, a massive global recession, also dampened car sales at the time. But throw in a stock price drop of more than 20 percent (or $35 billion) in just over a month, and Toyota had what could only be described as a crisis on its hands — even before the earthquake struck.

Here's photos of the new Toyota Prius V (comin...

Toyota Prius

Fast forward 5 years and you find GM recalling over 27 million cars in less than six months. That’s three times the recall number related to Toyota’s unintended acceleration case. Yet GM’s stock price on July 1st ($37.35) is actually higher than where it was on February 13 ($35.20) when the first ignition switch-related recall was announced. GM’s sales are up, too — 13 percent last month and nearly 3 percent so far this year.

So what gives? Do GM customers not care about recalls as much as Toyota customers?

Chevrolet Cobalt photographed in College Park,...

Chevrolet Cobalt

That’s actually part of the explanation. While no recall is good for an automaker, Toyota’s history of uninterrupted success in the U.S. market had established very high expectations for the brand. When the unintended acceleration recall hit in 2009 it hit Toyota hard in the image department. Suddenly the infallible was fallible, which had a lot of dedicated Toyota customers at least considering other options. By comparison, GM doesn’t have the same infallible reputation Toyota possessed in 2008, meaning a recall (even a massive one) doesn’t impact GM to the same degree. This is something CEO Mary Barra is anxious to change, as her aggressive reaction to the ignition switch defect confirms. But even with GM’s vastly improved product over the past few years it doesn’t yet possess Toyota’s reputation for benchmark quality. Ironically, that’s proving to be an asset during this recall process.

Digging beyond each manufacturer’s reputation and looking at the nature of the two recalls reveals another critical difference. First, the Toyota recall was related to “unintended acceleration,” which was referenced every time the recall was brought up in media reports. While that’s not a complete description of the issue it clearly connotes a negative experience. GM’s recall is known as the “ignition switch recall,” which simply doesn’t have the same flair. Dig deeper as a potential buyer and you learn GM’s problem involves unexpected engine shut off while Toyota’s involved cars accelerating out of control. One could argue GM’s recall is the polar opposite of Toyota’s recall — the former involves the car providing no power when you want it to, the latter involved the car providng excessive power when you don’t want it to.

If those differences aren’t dramatic enough consider the tragic proof that came to symbolize Toyota’s recall: a 911 call capturing the terrified passengers’ final moments in an out-of-control car. GM’s recall is equally tragic because it also involves fatalities, yet no equivalent recording exists to illustrate the problem and galvanize the public’s reaction to it. Going by numbers alone, there were 37 fatalities attributed to Toyota’s unintended acceleration recall while GM has, so far, attributed 16 fatalities to its ignition switch defect (3 were added when GM expanded the recall on June 30th).

Finally, the bulk of the vehicles involved in the Toyota recall were still being sold when the headlines broke about unintended acceleration. Models like the Camry, Prius and RAV4 represented the most successful Toyota nameplates in showrooms at the time. People who had just bought a new Toyota, or were about to buy one, had to reconsider their purchase plans. GM’s recall involves discontinued models like the Chevrolet Cobalt that, by any reasonable analysis, simply wasn’t up to the standard of GM’s current product. And because those models are 5 to 10 years old many of them are with second or third owners by now, meaning minimal new-car buyers remorse as a result of these recall announcements.

At least, that was the case until GM added over 8 million vehicles to the ignition switch recall list yesterday, with many of these models currently sitting in GM showrooms. The lack of any substantive negative impact on GM, both in terms of new car sales and stock price, was easy to understand given the above factors. Will this latest round of recalled vehicles break that trend? There’s no way to know just yet, though I suspect the quality of GM’s new product, the thorough nature of Mary Barra’s plan to address these safety issues once and for all, and the comprehensive approach of GM’s just-announced compensation plan for victims might contain the negative hit to the automaker, even given the unprecedented number of recalled vehicles.

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