Why a Record Fine Is Good News for Toyota

It will help the automaker outrun its recall scandal—and barely ding company finances.


Is $16.4 million a lot of money? The government seems to think so. In a stern-sounding announcement, the Transportation Department has said it is imposing the "maximum civil penalty" against Toyota for taking too long to tell the government about the "sticky-pedal" defect that ultimately led to the recall of 2.3 million U.S. cars. Automakers have five days to tell the government about a safety problem once they know about it. Transportation Secretary Ray LaHood says that Toyota waited at least four months before telling the feds about the sticky-pedal problem. The resulting fine, according to DOT's announcement, "would be the largest civil penalty ever assessed against an auto manufacturer."

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Sounds severe. But Toyota would be getting off cheap by paying the fine. In fact, it might be just what Toyota needs to put the recall nightmare behind it and start repairing the damage.

First, a quick recap of the problem. Toyota has recalled more than 8 million cars worldwide for a variety of problems that can cause "sudden acceleration," in which the car supposedly speeds up on its own, without the driver's input. More than 50 deaths have been linked to such crashes, although many of those cases lack definitive proof about what caused the crash. But Toyota has acknowledged two general problems. One is roaming floor mats that can come unhooked, slide down in the driver's side footwell and end up resting on the gas pedal, forcing it down. Toyota has recalled the affected cars and fixed the problem for owners who have brought their cars in. The sticky-pedal problem is separate, and it led to additional recalls in January, after several acceleration incidents in which floor mats clearly weren't the cause. Toyota has said that worn parts in the accelerator assembly can cause excess friction, which means the gas pedal might stay depressed when the driver's foot comes off, instead of springing back to the idle position. Toyota has acknowledged that problem too and devised a fix, although DOT now says it took way too long to do so.

There's a third issue. Some critics feel there's an additional problem that resides in the electronics on as many as 40 million Toyotas that have been sold since 2000. Toyota strongly denies this, with an increasingly aggressive effort to rebut and disprove analysts who have tried to demonstrate a problem. So far Toyota's denials have been convincing, and there's no definitive evidence of electronic gremlins wreaking havoc with Toyotas. But any computer user knows that software bugs can be maddeningly elusive, and the government has set up two panels of experts—including NASA scientists—to investigate whether the electronics in Toyotas are faulty, and whether all the computers in cars made by virtually every automaker might constitute a safety risk. Whatever they find, Toyota desperately wants to avoid an open-ended inquiry into electronics that could cost billions if it appears there's a problem.

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Now that it has finally admitted mistakes, Toyota wants to pay its penance for the floor-mat and sticky-pedal problems, and have the whole controversy end there. The DOT fine might actually let it do that. By making it sound like tough government action, LaHood is actually giving Toyota the premise for saying that it screwed up, and paid the price. Lawsuits against Toyota are a totally separate matter, but Toyota will have to deal with those no matter what. It's an ignominious blot to get tagged with the biggest fine ever in your industry, but if it helps put the scandal to bed then it's a blessing in disguise.

And besides—$16 million is peanuts for a company the size of Toyota. Last year, pharmaceutical giant Pfizer agreed to pay the government $2.3 billion in penalties—about 140 times as much as the Toyota fine—as punishment for fraudulent marketing. Toyota hasn't been accused of fraud—only of violating government regulations—but if Pfizer can absorb a fine of that size, Toyota can certainly manage. In 2009, the government also fined the oil firm BP $87 million for a variety of safety violations. The biggest fine for any automaker up till now has been a paltry $1 million penalty against General Motors for problems involving windshield wipers in 2002 and 2003. The tiny size of auto fines suggests that maybe the government simply lacks the teeth to impose real punishments against automakers.

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Despite its recent skid, Toyota has very deep pockets. Although it lost about $4.5 billion in its last fiscal year, its profits leading up to that were astronomical. From 2006 to 2008, Toyota earned about $43 billion, making it the most profitable big automaker by far. According to MarketWatch, Toyota has about $25 billion cash on hand, which is plenty to ride out the current crisis, along with 5 or 10 other crises. Toyota, of course, doesn't want to burn cash waiting for an endless scandal to blow over. It wants to pay its dues and go back to convincing people to buy its cars. The U.S. government just offered a great chance to do just that.