Toyota Motor’s Difficulties: Their Impact on Japanese Economy

Since the spring of 2009, the automobile industry worldwide has recovered after the aftermath of the global financial crisis.

Along with the recovery of the automobile industry, the Japanese economy has also gradually recovered from the crisis. An annualised real economic growth of 3.8 per cent was recorded in the fourth quarter of 2009. However, new dark clouds are looming over the Japanese economy.

Toyota Motor Corporation has launched several large-scale recalls worldwide for defects in gas pedals and brake control systems. The number of recalled cars has already exceeded the annual sales figures for the company.

While the company is now criticized for its delayed response to customers’ complaints, the stock market also initially underestimated the effect of this issue. Although the company initiated recalls in the United States for defective gas pedals in November 2009, Toyota’s stock price rose until January 2010.

However, the stock price of Toyota Motor Corporation fell by more than 20 per cent between the end of January and the end of February 2010, when Akio Toyoda, president of the company, testified before the US House Committee on Oversight and Government Reform.

The fact that many other carmakers also frequently recall vehicles shows that it is difficult to produce defect-free motor vehicles. One of the reasons for Toyota recalling is related to the brake control system’s computer program, illustrating that traditional quality control procedures are insufficient to assure safety, given the growing importance of electronic control technology in automobile manufacturing.

As I am not of a technological background, I focus on the effects on Toyota’s business as well as the Japanese economy.

The most notable direct effect of the recalls is the estimated $5 billion it would cost to repair about 7 million cars, as well as to meet expenses for sales promotions and lawsuits. Although Toyota Motor Corporation earns $200 billion in annual sales, these costs are a substantial burden for the company, whose profits have been negative in 2008 and 2009.

The more serious effect is the damage to the Toyota brand, which had been respected as high-quality. The number of people who may hesitate to purchase Toyota vehicles may increase, due to safety concerns. Since Toyota is seen as representative of Japanese manufacturing, a lessened global respect for its quality may downgrade the image of all Japanese products.

Toyota Motors started “kaizen” or improvement of works by launching its Special Committee on Global Quality to address quality problems. Judging from Toyota’s history, I expect Toyota will work hard and would successfully solve all the manufacturing, financial, and reputational issues resulting from the recall. However, the manner in which Toyota resolves its present difficulties may affect the Japanese economy.

President Toyoda told the US House Committee, “I fear the pace at which we have grown may have been too quick.” His remark suggests that Toyota may reduce its rate of growth for the immediate future. The auto industry has been the only growth sector in the sluggish Japanese economy; if the auto industry intentionally constrains its growth, I fear Japan’s economic growth will slacken.

Finally, I discuss the effect of this problem on the Japan-US relation. At first, the Japanese people regarded US criticism of Toyota as “Japan bushing.” There was a great risk that radical nationalism would arise in Japan. However, the company stayed calm and dealt with the issue as one related simply to the technological defects of the product.

As a global enterprise, Toyota Motor Corporation—which sells 5 million of its 7 million cars annually outside Japan—derives no advantage from instigating national animosities. Fortunately, a serious negative effect on Japan–US relations, which have been fragile since the new Japanese government took office in September 2009, has been avoided so far.

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