Toyota is wounded but in the long term the brand is strong

LAST week was surely the worst in the history of the Japanese car-maker Toyota. A global safety recall of 9m cars was projected to cost the company $2bn. The potential damage to future sales can only guessed at, but we can get a hint from what happened to its share price, which fell by more than 20 per cent.

So, where can Toyota go from here? A problem of this scale could destroy a business. Michael Tyndall, auto specialist at investment bank Nomura, says that in this instance the company has to react quickly to limit the potential damage: “They need to nip it in the bud as fast as possible. We need to see that the cars have been fixed and there are no further problems.”

In the short-term, Toyota’s woes could be good for other Japanese carmakers. For all that it is now struggling, Toyota has been massively popular. In 2009 the Camry model was the best selling car in the US and the Toyota Corolla model has sold 30m units worldwide. This boosted the reputation of Japanese brands, which are perceived to be reliable.

“There is a high level of patriotism when it comes to car-buying,” Nomura’s Tyndall says. “Lots of people have bought Japanese cars because they trust them to perform well and they like the service. Although current events might put them off Toyota, they could still choose to buy other Japanese brands.”

This has been reflected in the equity markets. Nissan’s share price has risen 8 per cent in the past week, while Honda’s has risen by 6 per cent. Any further announcements of faults with Toyota’s cars could put more upward pressure on its regional rivals and Nissan and Honda could be the chief beneficiaries of Toyota’s woes. For spread betters who want to make a short term gain, this could be a profitable trade.

But the broader question is: can Toyota actually recover from this? Yes, says Brigid McMullen, managing director of branding agency The Workroom. But Toyota has to come clean about all the problems facing its cars: “Honesty has to be part of the essence of the brand.”

Toyota seems to understand this. Company president Akio Toyoda made his first formal apology on Friday night in Tokyo. He took personal responsibility for the problems that have afflicted 9m car owners worldwide and said a committee would be set up to look at the quality of Toyota cars. However, McMullen says that it would have been more effective if he had made the statement earlier.

Even with its shortcomings, though, Toyota is the world’s largest automaker and is a well-respected global brand. McMullen says that people who have had a good experience with a Toyota car in the past are more likely to forgive its current problems: “Its cars are reliable and there is a lot of trust in the brand already.

Customers who already own a Toyota and have been pleased with its performance might be willing to give it the benefit of the doubt this time.”

History suggests that Toyota will recover. Other major brands have been able to come back from potentially damaging scandals. Back in 2006 Cadbury had to recall 1m bars of its chocolate amid a salmonella scare. Cadbury took quick action to contain the problem and within a few weeks the matter was forgotten.

Toyota has offered to give its dealers financial assistance so that they do not go out of business as a result of this crisis. This is good news, says Michael Tyndall from Nomura, because it means that Toyota cars will still be visible in the market place. In fact, Toyota’s size could help it to recover: “It sold 2.5m cars in the US last year and it is not going to disappear overnight. It has the resources to get through this crisis.”
Automotive experts say that this crisis could actually improve the performance and quality of Toyota cars. If and when the company enhances its braking technology to address its current problems, then it should end up with a reputation for making the safest cars around. And if it can protect its brand from too much damage in the next crucial weeks, then Toyota could actually emerge from this crisis with a better name than it had before.

A spread better with a longer time frame could take a view that Toyota will survive. And after the massive pull back in the share price last week, now could be a good time to go long in the hope that the company can resolve its problems and protect its brand for the future.