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Toy tariff story

Nov 20, 2019

Takata, Toyota, GM: how do companies survive recalls?

May 25, 2015
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Takata’s recall of defective airbags in 34 million vehicles – equivalent to two years of sales in the entire U.S. auto market – is a juggernaut.  It isn’t the largest, however.  That title belongs to the 2004 recall of 150 million pieces of Chinese-made toy jewelry that had a high risk of containing lead. 

Nor is it the only major recall this year – Toyota just recalled 110,000 vehicles for faulty software. 

The fact is, recalls happen all the time. Just last week there were 11, including a stove that turns on by itself and a weight-training bench that can break. 

Major recalls can be costly, running into the billions of dollars, especially if lawsuits or fines are involved. And yet, “it’s extremely seldom that a recall leads to the ruin of a company,” says Jonathan Bernstein, president of Bernstein Crisis Management.

Take GM in 2014. It recalled 30 million vehicles. That does not mean, however, that it replaced 30 million vehicles. 

“Almost always in the case of a recall it’s just a part getting fixed,” says David Whiston, an equity analyst with Morningstar. “Honestly, the people who make the biggest deal out of them are usually reporters.”

For GM, the cost so far is $2.5 billion. This shaved profits in North America from 8.9 percent to 6.5 percent in 2014, according to Whiston. Costly for sure, but not company ending. GM also had significant cash from its bailout, Whiston says. 

Between law suits and repairs, recalls also take a while (Takata’s is expected to take years). So does paying for them.

“The financial damage gets spread out over time, it’s not all at once,” Whiston saysSome firms even have recall insurance. 

Takata also has its size and importance going for it.

“The company’s essential to the auto industry,” says David Sullivan, an analyst with AutoPacific. It’s one of the few firms that provide critical safety equipment, including safety belts, to many manufacturers. “They have to survive – they’re too big to fail,” Sullivan says. 

Reputational damage can be worse and more enduring than financial damage. 

“Arthur Andersen put themselves out of business because of their reputation,” says Bernstein, referring to the Enron accounting scandal. He counsels companies to be quick and thorough in their announcement of problems, acknowledge the feelings of their customers and then move on as quickly as possible. Stringing things along or having small details or negative news leak out intermittently over time withers a brand and consumers relationship to it. 

Takata didn’t have to worry about brand recognition, at least not until now, because it’s not a consumer-facing company; it sells to auto manufacturers. 

“For a company that’s primarily a business to business, one of their worst nightmares is their name becoming known to consumers in a negative way, because normally their name isn’t known to consumers at all,” Bernstein says. The company may now have to deal with a loss of trust from both consumers and the manufacturers it supplies. Analysts say Takata’s recall is survivable, but even given its importance in the automotive industry, it won’t be easy. 

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