Americans are generally forgiving folks, but when it comes to their cars, they have long memories.
German carmaker Audi still carries the baggage associated with a 1986 report on "60 Minutes" about unintended acceleration, even though the story was largely discredited.
Toyota Motor (TM, news, msgs) has undoubtedly banked more trust than Audi over several decades. Still, the scope of the Japanese automaker's latest announcement could seriously test loyalty among consumers, not to mention Wall Street.
It's hard to overstate the significance of Toyota's actions earlier this week. By suspending sales of eight models, including the best-selling Camry and Corolla, the company is temporarily sacrificing nearly 60% of its U.S. revenue base. One out of every five sedans on the road is a Camry, according to David Silver, a research analyst at Wall Street Strategies.
Additionally, the company will halt production for a week at five North American factories. The Associated Press reported Wednesday that the parts in question are also found in Toyota's European vehicles, on which Toyota has yet to take the same aggressive stance.
"It's the third recall in the last year," Silver says. "It starts to bring in quality questions."
Stock reflects the pain
Toyota's American depositary receipts are down almost 10% this week. That's a big move, but there's more pain to come in the near term, at least until Toyota provides further certainty about its sales halt.Silver had a "buy" rating on Toyota before the latest news, but he sees a continued sell-off in the short term. "I think there's going to be a little more weakness as the actual details come to light," Silver says. "Once they fix it and announce costs and how far-reaching the effects will be, I think you're going to see the stock bounce back."
Until then, we'd avoid Toyota shares. The news comes at a tenuous time for Toyota, thanks to new signs of life from Ford Motor (F, news, msgs) and General Motors. Ford reported December sales growth of 33.5% in the U.S., and the company's Fusion was named Motor Trend's 2010 Car of the Year.
Ford could fill the void left by Toyota in coming weeks.
Toyota still a force
To be sure, Toyota remains a powerful force. The company grew its U.S. sales by 32% in December, and in 2009, for the first time, it sold more cars to U.S. consumers than any other manufacturer.Meanwhile, the company's brand carries significant weight. Millward Brown Optimor, a brand consulting and strategy company, ranks Toyota as the auto industry's most valuable brand at $29.9 billion. BMW is a distant second at $23.9 billion.
When it comes to brand equity, Optimor director Benoit Garbe says, Toyota sets the benchmark for major car manufacturers.
"I think that's why they're taking this very costly and bold move," he says. "They see the value in that long-term (brand) piece, more than they actually see the value of saving a few bucks today."
Toyota is wise to focus on the long run. For now, though, a results-focused Wall Street is unlikely to reward the prudence.
This article was reported by Alexander Eule for Barron's.
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