Toyota Shows How Giants Stumble

Behind a huge recall are classic signs of decline—and possible redemption.

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At General Motors, they used to call their surging competitor "Mr. T," as if intimidated by a muscular rival who seemed able to seize market share at will. But Toyota suddenly looks pretty meek, thanks to a mystifying safety problem that has led to a huge recall, an unprecedented production shutdown, and an ugly dent in a once sterling reputation.

This corporate nightmare has mushroomed since last fall, when Toyota recalled about 4 million vehicles because of floor mats with a propensity to slip down into the driver's side foot well, potentially interfering with the pedals and causing sudden acceleration. Now Toyota has recalled an additional 2.3 million vehicles for a problem that sounds similar, but the company says it's different: faulty gas pedals that can stick if they become worn, causing—once again—sudden acceleration.

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Recalls aren't unusual. Here's what normally happens: The owner gets notified of the recall and brings the car to a dealer, where the problem is fixed in a day or two with no charge to the customer. But this recall is more confusing and far more draconian than usual. For one thing, Toyota announced the recall before there was a fix in place, so dealers didn't even know what to do if you brought them the car. Toyota implies that most of the recalled vehicles can still be driven safely, but it also offers these instructions for people who feel their car might have a sticky gas pedal: "The vehicle should be driven to the nearest safe location, the engine shut off, and a Toyota dealer contacted for assistance." Beyond that, Toyota has also issued some Dukes of Hazzard style maneuvers drivers should use if they're cruising along and the pedal does, in fact, stick, such as shifting into neutral or turning off the ignition (but don't take the key out!). Do they teach that in driver's ed?

If you're a concerned parent with a suspect Toyota, you could easily imagine that the gas pedal seems a little stickier than usual. And do what? Risk your kids' lives by driving them around in a death trap? Pull off on the side of the highway and call a taxi? Garage the car and rent something safe—at $300 per week—until Toyota figures out what's going on? Stressing out your customers like that isn't exactly the way to win repeat business.

The sales and production stoppage suggests an even bigger problem, with lots of legal liability. Toyota has stopped selling or building eight models, including the Camry, Corolla, and RAV 4, which represent more than 50 percent of its sales. That will cost Toyota millions, maybe billions, of dollars. It already ranks near the top in the annals of corporate meltdowns, and it's not necessarily over. GM, meanwhile, is poaching Toyota customers with special financing and other incentives, along with cars that go the speed you want them to.

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How did this happen? Toyota itself may not even know yet, and it could take months or years for the full story to develop. But Toyota's dramatic comedown isn't as sudden as it might seem. Some industry-watchers feel the saga has been building for years and may even have been inevitable.

In his 2009 book, How the Mighty Fall, business guru Jim Collins outlined five stages of decline that many big companies go through. Mostly he wrote about companies that lose their edge gradually, even imperceptibly, until thousands of tiny termite holes bring down the house. Toyota might qualify as an accelerated version of such a collapse.

Toyota has grown steadily into the world's biggest automaker, earning customer loyalty for the reliability and longevity of its vehicles. But problems have been slowly building. The T100 pickup sold in the 1990s failed to hit Toyota's usual mark for quality, with some critics complaining that it was an underpowered make-do truck that paled next to American counterparts. Beginning around 1999, thousands of Toyota owners complained about mysterious "sludge" buildup that wrecked their engines, prompting criticism that Toyota was growing too fast and skimping on quality; Toyota resisted the claims but settled a class action lawsuit brought by owners in 2007. Toyota owners have also complained about faulty head lamps on the Prius hybrid, and more than 100,000 Tundra pickups were recalled in 2009 for problems with rusting frames. On the business side, Toyota badly miscalculated when it built a new pickup plant in Texas, with sales far below projections.

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Consumers have noticed. Surveys by CNW Marketing Research in Brandon, Ore., show that from 1997 to 2007, Toyota consistently ranked at the top for nonluxury car makers, neck and neck with Honda. For 10 straight years, consumers rated Toyota 9.1 or higher, on average, out of 10. In 2008, that rating slipped below 9 for the first time, and in the latest survey—which took place before the gas-pedal recall—respondents gave Toyota an 8.5 rating. That's lower than the ratings for Honda, Buick, Mazda, Volkswagen, Ford, and even Saturn.

Toyota's recent history lines up fairly well with Collins's taxonomy of decline. His first stage is "hubris born of success," which certainly could apply to Toyota. For years, Toyota was a model of efficient manufacturing, mimicked even by firms in different industries. That may have convinced the firm's leaders they could grow rapidly and maintain quality at any size. Next in the evolution of decline comes "undisciplined pursuit of more." Toyota definitely had grand ambitions—to become the world's biggest automaker—but it's not clear yet if the firm was undisciplined or simply took risks that went against it. Collins's third stage is "denial of risk and peril," which many critics certainly saw in Toyota's rigid refutation of consumer complaints. Stage four is "grasping for salvation," which is what Toyota seems to be doing now.

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It's a safe bet, however, that Toyota will escape Collins's fifth stage: "capitulation to irrelevance or death." Despite its woes, Toyota remains a strong brand and a powerful company, and falling on its sword today may be the best path toward a corporate rebound. Surveys by BrandIndex, a market research firm, show that Toyota's "buzz" score—reflecting consumers' immediate perception of the brand—have dipped to historic lows. But positive impressions of Toyota still outweigh negative ones, which means customers are likely to return if the company solves its problems once and for all—and makes amends. "Consumers are pretty forgiving of blue-chip brands," says Ted Marzilli of BrandIndex. "Prospects are still quite good for Toyota, provided the issue is resolved quickly, there is clear communication to consumers, and there are no more issues in the near future." And humility replaces hubris.