Takata swallows pride, files for bankruptcy. So, what's next?

June 26, 2017

After months of hesitation, troubled Japanese supplier Takata finally filed for bankruptcy yesterday. The restructuring clears the way for Takata to be bought by one of its competitors, Michigan.-based Key Safety Systems.

Will this be a turning point for Takata? That remains to be seen, but KSS clearly has its work cut out for it.

Exploding airbag inflators

Reports about Takata's fatally flawed airbag inflators have dominated the headlines since 2014. However, the first recalls of those devices were issued six years earlier, in 2008. And the internal turmoil caused by the inflators has been roiling even longer, since shortly after the turn of the 21st century.

The problem with the inflators is that they use ammonium nitrate to deploy airbags, and ammonium nitrate is a notoriously dangerous compound. It was used in 1995 in the Oklahoma City bombing, and today, its sale is regulated by the federal government. 

But ammonium nitrate isn't just dangerous because it's capable of creating huge explosions. It's also dangerous because it's so easily destabilized, making it unpredictable.

That's the problem with Takata's inflators: the ammonium nitrate can become unstable and explode with excessive force when airbags are deployed. When that happens, the airbags that were meant to save lives have instead ripped open, and vehicle occupants have been showered with hot shrapnel. 

As of today, the airbags have been linked to at least 17 deaths and more than 100 injuries. Many of those deaths and injuries took place in the U.S.

Throughout most of the crisis, Takata steadfastly refused to admit that ammonium nitrate was the problem, despite overwhelming evidence to the contrary. In fact, researchers have now confirmed that, when exposed to high levels of heat and humidity, Takata's airbag inflators can become ticking time bombs.

In 2015, the company testified before Congress that its airbags were entirely safe, but said that it was bowing to public pressure to stop using ammonium nitrate--not immediately, but by 2018. As recently as last year, Takata was still making airbag inflators with ammonium nitrate, though the company added a dessicant to make the devices safer.

Earlier this year, Takata formally admitted guilt in the U.S. and agreed to pay a $1 billion settlement.  

To date, Takata has recalled roughly 100 million airbag inflators, making it the largest automotive recall in U.S. history. 

Looking for some help

Over the past three years, Takata's share value has plummeted 95 percent. Meanwhile, bills associated with the recall have continued to mount. By many estimates, the crisis could cost Takata $10 billion before all is said and done. 

Given its numerous problems, Takata has been trying to make itself attractive to suitors for some time. However, all of the companies interested in buying Takata have insisted that it first file for bankruptcy. In doing so, potential owners have been trying to provide marginal protection to their investment, shielding themselves and Takata from lawsuits filed by the families of those injured or killed by exploding airbag inflators. (Though as we've seen with General Motors, that's not a foolproof strategy.)

That hasn't sat well with Takata, which, before Sunday, had shunned the idea of bankruptcy. Its chief complaint was that restructuring would diminish what little value remains in the company for shareholders, including employees and the Takada family itself, which still owns a controlling stake.

At long last, more level heads have taken control of the matter, leading to yesterday's filing.

What's next?  

The timing of the move couldn't be better for Takata, which filed for bankruptcy in both Japan and the U.S. The supplier reported liabilities of up to $50 billion in its paperwork, which includes payments to the automakers who've shouldered much of the cost of the recall to date. Meanwhile, reports indicate that KSS will buy the company for $1.6 billion.

KSS says that it plans to keep most of Takata's 60,000 employees and to continue current production levels, allowing Takata to manufacture replacement inflators for the ongoing recall.

Both restructurings are expected to wrap up in early 2018, though the company will be delisted from the Tokyo Stock Exchange on July 27, 2017.

For more on this story, check out our colleagues at Motor Authority.

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