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Toyota's vehicle recall puts reputation at risk

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While the financial losses from Toyota Motor Corp.'s recent recalls aren't yet clear, experts say the company must work hard to protect a vital asset—its reputation.

Toyota announced on Jan. 21 that it was recalling around 2.3 million vehicles because of accelerator pedals that are at risk of becoming stuck, a recall separate from one initiated last November for around 4.2 million Toyota and Lexus models to reduce the risk of the pedals being trapped by floor mats.

Five days later, the Tokyo-based carmaker decided to suspend sales of eight models in the United States and added more than 1 million vehicles to the recall related to potential problems with floor mats.Recall insurance capacity of around $100 million is available for carmakers and their suppliers, sources said, but whether Toyota purchased coverage is unclear. A Toyota spokeswoman said in an e-mail that information on whether the company has recall insur-ance is not “readily available.”

“I don't know of a case like this that would be covered by insurance,” said Daniel Schwarz, an analyst with Commerzbank A.G. in Frankfurt. Such costs generally are accounted for when automakers price their cars and the warranties that go with them, he said, and those costs are “built into the balance sheet by the company.”

Accelerator pedals and floor mats are not expensive parts to replace, said Mr. Schwarz. “What is expensive is stopping the sale of eight models in the U.S.”

But that might be the least of Toyota's worries, Mr. Schwarz said. “What could be more expensive in the long run is the damage to their reputation for quality.”

Matthew Sharp, managing director at Media & Crisis Management Ltd. in Norwich, England, said companies that find themselves in such situations must “be open and honest, and move swiftly” to limit reputational damage, he said.

That advice is particularly important for Toyota, a company that has built its image around quality, Mr. Sharp noted. “They have always come out incredibly well in quality surveys,” he said.

“Their key asset is their quality reputation,” Mr. Schwarz reiterated. “In my view, you are not buying a Toyota because the brand is fascinating, but because of the reputation for quality.”

Other observers agreed Toyota will need to work to keep its reputation.

“They need to focus both on the cause and root of the crisis. They need to clearly define their action steps to solve the problem,” said Grace Burley, a vp at Crisis Management International Inc., an Atlanta-based crisis management consultant. “Communicating these actions and addressing the reputation side effectively is critical. I do think that they're taking it extremely seriously by their actions they are taking.”

“Crisis management in these situations is always absolutely critical,” said Justin Whitehead, a director at R.K. Harrison Insurance Brokers Ltd. in London. “The key is getting to the public early, managing the situation, and getting crisis management experts from outside” to help limit the damage, he said.

As Toyota has come under fire in the press for its handling of the recall, “one might think it could have been handled a little better from a crisis management perspective,” Mr. Whitehead said. Some reports have said the company took too long to react after problems surfaced.

“Toyota's obviously off to a difficult start,” said Gene Grabowski, senior vp with Levick Strategic Communications L.L.C. in Washington. “In order to mitigate risk here, the company has to do...a better job of communicating with its dealers to make sure the dealers have the information they need so that they're not antagonizing or turning off consumers looking for reassurance about Toyota automobiles.”

“For Toyota, this is their Tylenol moment,” said Mr. Grabowski, referring to New Brunswick, N.J.-based Johnson & Johnson's response to the 1982's deaths of seven people who'd ingested cyanide-laced Extra-Strength Tylenol capsules. “What they do next is so important. They took a big gamble—I think it was forced by the U.S. Department of Transportation to halt production of those eight vehicles. Now that that's done, they have no choice but to communicate clearly and transparently and come back strongly when they do go back into production, and probably add a safety feature or two that they can tout for these cars. So they will have something more that their competitors don't have.”

He noted that when Tylenol came back on the shelves after the 1982 tragedy, the bottles had tamper-resistant caps, which differentiated the drug from similar products. “They seized an opportunity from the crisis.” He said the key for Toyota is that “they have to be a lot more transparent and clear in their communications because they're creating confusion in the marketplace now and perhaps inviting some litigation that they might be able to mitigate if they act quickly and clearly.”

Michael Horner, a product recall specialist with Miller Insurance Services Ltd. in London, said an automaker of Toyota's size may have “some element of recall coverage” as part of its global program, rather than its stand-alone coverage.

Mr. Whitehead said Toyota likely has at least some recall insurance in the international market. “One would guess there is some form of coverage for this,” but he noted that the coverage typically covers only actual recall costs, such as those for repairs and parts replacements.

Experts say Toyota's suppliers would do well to check their own recall policies, if they have them.

“Normally in a major recall like this, everybody gets drawn in,” said Mr. Whitehead. “I'm sure Toyota is talking to everybody who had anything to do with the accelerator pedal.”

Toyota issued a statement on Jan. 27 noting that the manufacturer of the pedal, CTS Corp. of Elkhart, Ind., is working diligently to develop a new design that will remedy the sticking problem. “Meanwhile, we are also working with them to test effective modifications to existing pedals in the field that will be rolled out as quickly as possible,” Toyota said.

A spokesman for CTS could not be reached.

Automotive suppliers have a small and expensive market from which to purchase recall insurance, Mr. Horner said.

“There is a limited amount of capacity at Lloyd's for that type of cover,” he said, noting that Miller generally places limits of $5 million to $10 million for its automotive supply clients.

Meanwhile, the House Energy and Commerce Committee's Subcommittee on Oversight and Investigations announced it would hold a Feb. 25 hearing to examine complaints surrounding the sudden acceleration issue. “Like many consumers, I am concerned by the seriousness and scope of Toyota's recent recall announcements,” said the committee's chairman—Rep. Henry Waxman, D-Calif.—in a statement announcing the hearing. “Our hearing will help us better understand how quickly and effectively Toyota and the National Highway Traffic Safety Administration responded to consumer complaints about the safety of the recalled Toyota vehicles.”

Rep. Waxman and the subcommittee's chairman—Bart Stupak, D-Mich.—also sent a letter to Toyota Motor North America President Yoshimi Inaba and NHTSA Administrator David Strickland requesting additional information and documents related to Toyota vehicles sold in the United States. The letters request documentation from Toyota and NHTSA regarding when they first learned about potential safety defects related to sudden unintended acceleration and what actions they have taken to investigate and resolve the hazards. In addition, committee leaders requested information concerning NHTSA's investigation of consumer complaints and Toyota's response to these complaints, according to the committee.

Mark A. Hofmann contributed to this report.