Frost & Sullivan: Loss of Consumer Confidence Will Have Long-term Costs

LONDON - Any timid hopes that the automotive industry was making its way out of the woods have been dashed with the latest loss in consumer confidence arising from Toyota's biggest recall in its 70-year history.

The recall of over 8 million vehicles over sticking accelerator pedals, and further problems with loss of braking on the latest Prius, Lexus HS250 h and the Sai models will likely cost Toyota a total of 80,000 –100,000 cars in lost sales to other vehicle brands in the first half of 2010, as sales of its 8 recalled models and the Prius suffer a slowdown.

Adding fuel to the fire is today's press conference announcement by company president Akio Toyoda that the company is considering a recall of the Corolla, the world's best selling car.

The loss of consumer confidence and the reigning media frenzy have wiped nearly one-fifth of the company's value off the board of the Tokyo stock exchange.

Moreover, the suspension of sales of eight Toyota models in the United States will not only dampen first quarter sales figures, but also offer a critical leg in to competitors offering trade-in incentives.

"One of the key concerns for Toyota is the loss in sales of its flagship hybrid Prius to other market substitutes'" says Vigneshwaran Chandran, Frost & Sullivan's Program Manager, Business Strategy and Innovation Group, in a new article entitled: Total Recall: Impact Assessment of Toyota's Quality Issues on its North American Business. "Honda is a brand high on the brand recall list for Americans and the Insight mild hybrid which is competitively priced, could become an immediate alternative for Toyota customers," Chandran warns.

Initial estimates suggest that the accelerator fix alone will cost Toyota half a billion dollars at least, and the overall cost could spiral to at least $1.5 billion. Compounding this is the temporary sales suspension that has already cost the company more than 50,000 cars in lost sales since January and a potential loss of another 50,000 cars over next three months.

The biggest expense, however, may be the legal fees: with already more than 40 class-action suits filed against Toyota in the United States and 13 lawsuits alleging death or injury due to unwarranted acceleration.

In the longer term, Toyota faces tremendous publicity damage. Owners worry about loss of vehicle re-sale value and confidence in the brand as representing safe and reliable cars has plummeted. In response, Toyota is trying to shift some of the blame onto suppliers, while repairing all affected models.

As part of its damage control campaign, dealerships are open longer, television campaigns re-iterate the strong quality record of the company and the company has used an outright apology combined with a commitment to fix things.

Despite these efforts, it remains to be seen how the whole issue will affect the long-term performance of the company. This is especially true as other carmakers, including Honda and Ford, increasingly face recalls.

Toyota upped its vehicle forecast for the fiscal year ending March 2010 from 7 million to 7.2 million units in February and is trying to comeback strongly in March with strong incentives, including a $1,000 discount in addition to existing loyalty cash incentives for returning Toyota owners.

The company also plans to offer free oil changes, regular services and match Hyundai's 10-year powertrain warranty program.

"With an anticipated slowdown in demand due to scrappage incentives coming to an end in most developed markets, we wait to see if the recalls affect overall consumer confidence and purchase behaviour, thus slowing down the market recovery further," Chandran said.