Fallout from Toyota Stop-Sale Continues as GM Goes After Customers in U.S.

Toyota and its dealers were reeling yesterday from the media frenzy over the company's cessation of sales and production of eight Toyota-brand models. Several developments over the course of the day showed just how disastrous the latest recall—related to unintended acceleration issues—is turning out to be for the automaker. As of late yesterday, the situation was as follows:

• Compulsory Stop-Sale of Eight Toyota Models, Ordered by U.S. Government: Officials from the National Highway Traffic Safety Administration (NHTSA) told the Detroit News that Toyota's decision to stop producing and selling the Camry, Corolla, Highlander, Tundra, Sequoia, Avalon, RAV4, and Matrix came at the request of the U.S. government, which said that Toyota was legally required to cease sales of the models affected by the company's second recall, announced last week. Toyota's take on the situation did not exactly match up to this reality, as it had announced that the cessation of sales was a voluntary measure that it had taken in order to safeguard its customers until a fix could be identified. U.S. transportation secretary Ray LaHood told Chicago radio station WGN: "The reason Toyota decided to do the recall and to stop manufacturing was because we asked them to." No answer was given when NHTSA administrator David Strickland was asked why Toyota sold vehicles for five days after announcing the recall if they were legally required to cease sales. "At this point, you need to talk to Toyota about those decisions", he said. "We'll be continuing to work with Toyota and having conversations."

• Toyota's First Floor-Mat Recall Expanded by 1.1 mil. Vehicles: The first recall, announced in November 2009 and covering 4.26 million vehicles over the issue of accelerator pedals sticking as a result of interference from a floor mat and the shape of the footwell, is being expanded by 1.1 million vehicles, according to a memo reviewed by the Detroit News late yesterday. In addition to the recall of nearly half a dozen Toyota and Lexus vehicles for pedal modifications, the following vehicles are now subject to a recall: 2008–10 Highlanders; 2009–10 Corollas; 2009–10 Venzas; 2009–10 Matrix models; and 2009–2010 Pontiac Vibes, which were jointly engineered by Toyota and General Motors (GM). These vehicles will receive modified-length pedals, along with an electronic brake override system and modified floor mats as per the company's prior recall. The total number of vehicles covered by Toyota's November recall now stands at over 5.4 million vehicles.

• GM Launches Incentive Offer to Lure Disaffected Toyota Owners: In a move that is highly risky, GM has announced a special incentive throughout February aimed specifically at Toyota and Lexus owners. The company has stated that it has received "thousands" of requests from Toyota owners asking for help in trading in Toyotas for GM products, and in response it has created the "Peace of Mind" programme. Lessees who swap a Toyota vehicle for a GM model can waive three payments from the new lease up to a total of US$1,000; cash buyers can receive a US$1,000 discount off their purchase. Qualifying financees can receive special 0% financing for 60 months. No other automaker has yet announced any sort of incentive aimed at Toyota owners, although none has ruled this out.

• Shares of Toyota, Dealer Chains, and Suppliers All Drop, But Ford Shares Up: The players involved in the ongoing Toyota fiasco all saw their shares finish lower in trading yesterday, with pedal supplier CTS seeing its shares drop a full 20%. The supplier is reportedly trying to rush a fix into production for Toyota, but with a backlog of 2 million pedals to replace on recalled vehicles in the United States and Canada, this will take some time. Group 1 Automotive, the U.S. dealership chain the most dependent on Toyota franchises, also saw its shares fall by about 6.1% as concerns over dealers' inability to sell cars (which have been financed by dealers and are costing those dealers money as they sit unsold) were raised. Toyota itself saw its shares fall 8% in trading, but rival automaker Ford posted a slight rise as investors felt that it would benefit from a protracted stop-sale at Toyota.

• Five Rental Car Brands Withdraw Toyota Models and Stop Sales of Used Vehicles: Enterprise Holdings (the parent company of the Enterprise, National, and Alamo rental car brands) and Avis Budget Group have both decided to withdraw Toyota-brand vehicles from their rental fleets, amounting to over 20,000 vehicles for Avis Budget (the Enterprise Group total is undisclosed). Both companies have also halted sales of used Toyota vehicles to the public. "The safety of our customers is our number one concern, so we are acting out of an abundance of caution to remove the affected vehicles from our fleet until Toyota has identified a remedy for the issue", said Matt Darrah, executive vice-president of North American operations for Enterprise Holdings.

Outlook and Implications

What started out as a notable recall for Toyota has turned into a fully fledged media and marketing disaster. Dealers are scared that it will be weeks before they can sell vehicles, customers are concerned over whether or not their cars are safe to drive, and the national media have jumped into what can only be described as a free-for-all, with Toyota at the centre. Staunch loyalists have defended Toyota's actions in online forums, but the growing voices of dissent are starting to drown these out. The company finds itself in a public-relations mess that has only been made worse with the news that even more cars are now being recalled to fix a pedal-floor mat interaction problem. Nor is the problem being contained to North America—Toyota has extended the recalls to Europe and China as well. The supplier in question, CTS of Elkhart, Indiana, is reportedly working on a fix, but the sheer volume of parts required thanks to Toyota's use of common assembly on nearly a dozen models means that the problem is not likely to go away anytime soon. Not only does Toyota have to get CTS to engineer, build, test, and ship replacements, but it then has to restart plants, repair vehicles at dealers, and get the recall campaign under way.

The response from Toyota's competitors has been predictably muted, with most automakers expressing their quiet sympathy but preferring to focus instead on their own message to consumers. Not so at GM. The U.S. automaker has decided that this is an excellent opportunity to try to begin sowing some seeds of doubt in consumers' minds about Toyota's sterling reputation for quality. On one hand, this is indeed an excellent opportunity for GM to start taking back control of its domestic passenger car market from its number-one rival, sensing weakness in Toyota and genuinely offering a deal to try to win over concerned consumers. On the other hand, it is a highly risky move as U.S. consumers tend not to like to see someone get kicked when they are down, and the jury is still out as to whether the court of public opinion will declare Toyota to be a victim in this case or a perpetrator of malfeasance. If the public decides that the media outcry against Toyota is unwarranted, GM could suffer a public backlash instead, given that Toyota still commands a significantly loyal following among U.S. car buyers.