Is Toyota in Trouble?

Like millions of Americans, Suzanne Oshry is a loyalToyota owner. Or at least she has been.


Earlier this year, Oshry purchased the latest in a string of Camry sedans from Miller Toyota of Culver City, Calif., but she didn’t even make it home before she noticed something seriously wrong with the way the car rode and handled. Her subsequent struggle to get the problem resolved has left Oshry with more than a sour taste in her mouth.


While her problem is more the exception than the norm, Oshry’s experience is being repeated with unexpected frequency around the U.S. And so, ironically, even as the Japanese maker surges to the number-two spot in the American market, it is suffering what one influential publication has dubbed “cracks in its armor.” Quality problems, recalls, and rising incentives could reverse what, until recently, seemed Toyota ’s irreversible momentum.


For Suzanne Oshry, the problem with her Camry – a set of improperly installed tires – was eventually resolved, but only by going to another dealer. Indeed, repeated efforts to get Miller Toyota, or the factory, to assist were rebuffed until became involved. By then, said the Southern California housewife, it was too late.


“There (is) no way I would ever do business with Miller again and would also dissuade anyone I knew interested in acquiring a Toyota from using that particular dealership.” More disconcerting, at least for Toyota , Oshry adds that, “my loyalty to their brand has been lessened.”


Even the best brands will occasional make a mistake, and anger a customer. But over the years, Toyota ’s reputation and market share has grown based on a reputation for bulletproof products that give owners little reason to get upset. Suddenly, more consumers find themselves experiencing problems, often with Toyota ’s best-known and normally most reliable models.


Nagging issues with the latest version of the mid-size Camry, the new full-size Tundra pickup, and the all-wheel-drive version of the maker’s highline Lexus GS sedan, led the highly influential Consumer Reports magazine to issue a stern rebuke. Declaring “ Toyota is showing cracks in its armor,” the magazine has pulled those three models from its “Recommended” list, a sought-after rating that Toyota and Lexus products have normally won automatically.


It needs be noted that Toyota still produced 17 of the 39 most reliable vehicles in the Consumer Reports survey, but, it finished overall in fifth place. “To see one of the premium manufacturers have three vehicles fall below average in reliability is a big concern,” said David Champion, director of auto testing for the magazine. “They've always been average or better with all their products up to this point.”



Recalls mounting


The non-profit publication isn’t the only one to question Toyota’s quality. The most recent Initial Quality Survey, from J.D. Power & Associates, showed the Japanese giant nudged aside by its Asian rival, Honda, and other recent quality studies have found several U.S. brands, including General Motors’ Buick, besting Toyota.


A number of huge recalls over the last three years, have further tarnished Toyota ’s reputation for building cars, trucks, and crossovers with the reliability of the best appliances. That may be one reason why the automaker, despite record U.S. market share, is working a little bit harder to complete every sale.


While conventional wisdom would suggest that Toyota doesn’t need to use rebates and other giveaways, the truth is that the maker’s incentives have increased by roughly 250 percent over the past three years. In September, the average Toyota giveback was only marginally less than the struggling General Motors, $3752 per vehicle versus $4326 at GM. In September 2004, the U.S. maker laid out $5168 in incentives compared with $1506 at Toyota , according to CNW Marketing, an automotive research firm.


At GM, it should be noted, “They need incentives just to get customers in the door,” explains CNW President Art Spinella, while Toyota showrooms are traditionally busy. But, he adds, “It’s becoming harder (for Toyota ) to close a sale” without sweetening the deal. Much of that is offered in the form of “dealer cash,” or money a retailer can use to close a deal, rather than the highly publicized rebates Detroit is famous for.


Toyota ’s incentives vary widely, from model to model. The new Tundra has some of the biggest numbers, reflecting its slower-than-expected launch.


Since the mid-1980s, when Japanese makers came to dominate the passenger car market, Detroit has focused most of its attention on light trucks. While Japanese makers have steadily gained ground in the SUV and crossover segments, they’ve repeatedly failed to crack the full-size pickup market, dominated by the likes of Ford’s F-150 and Chevrolet’s Silverado. But that was supposed to change with last year’s launch of the new Tundra.


The new model is bigger and more powerful than ever, with more variants aimed at distinctly different sets of pickup buyers. Toyota even built a new assembly plant in San Antonio, Texas, the heart of U.S. pickup country. But the plant was beset with problems, running well over budget and rolling out vehicles with a series of snags, including a reported engine defect.


There have been numerous demands for a recall of the V-8-powered Tundra, which is now on Consumer Reports’ “Least Reliable” list. But for the moment, “We’re still investigating that issue,” and have not made a decision on whether to recall the truck, said Toyota ’s John Hanson. The automaker’s spokesman insisted that overall, Toyota has a lot to be proud about, but he acknowledged, “We didn’t do as well as we did last year,” and are in the process of trying to get to the heart of the worsening quality issue.



What’s the problem?


Exactly what’s wrong isn’t clear. And it seems like every industry expert has a differing opinion. In some cases, a single defective part can lead to the recall of more than a million vehicles, as happened two years ago. But there’s little doubt that the mounting problems are linked to Toyota’s rapid expansion, particular in the U.S. marketplace. It has not only pushed past perennial number three automaker Chrysler but in recent months, Toyota has also been nudging aside the seriously wounded Ford for the number-two position.


To get there, the Japanese maker has been rapidly expanding its North American production base, with factories like the one in Texas . With the exception of its Japanese-made Lexus brand, the vast majority of Toyota products sold in the States now are built in the U.S. or Canada .


“Part of the problem,” suggested one senior company executive, asking not to be named, “is that we’re running out of sensei.” The Japanese term refers to specially-trained team leaders who serve as a sort of manufacturing disciple, moving from well-established plants to newer facilities, in order to ensure the smooth transfer of the vaunted Toyota manufacturing system.


On top of all that, Toyota has begun to experience an unexpected and unprecedented series of defections at its senior ranks, including its top American executive, Jim Press, who is now the number two at Chrysler; Deborah Meyer, who was a top marketing manager; and Jim Farley, seen by many as a fast-rising star at Scion and Lexus. The losses have almost certainly distracted management attention.


Further complicating matters, Toyota has been rapidly expanding its model lineup, adding new trucks, like the Tundra, crossovers, hybrid-electric vehicles, all-wheel-drive luxury sedans and more, each creating new opportunities for things to go wrong.


The problem is clearly not limited to the U.S. At the same time Consumer Reports took Toyota to task, the automaker was announcing the recall of 470,000 vehicles sold in Japan for problems including defective engines, steering, and fuel pumps.


Soon after taking the helm at Toyota two years ago, president Katsuaki Watanabe was forced to go onto television and apologize for the way the company had handled some serious quality issues. The executive responded with the Customer First program, assembling every senior engineer in the company and demanding that they come up with ways to get their arms around the problem.


Even though it has one of the fastest R&D operations in the business, lead times in the auto industry are long, and the first product developed under Customer First is just now hitting market. To ensure things go right with the 2008 Highlander SUV, Toyota tacked on an extra 30 days to the development process, mostly to search out unseen gremlins.


Whether Customer First resolves matters remains to be seen, but spokesman Hanson says, “We feel this pilot program will be the template for everything that comes after.”



Things gone right?


No matter now good a manufacturer gets, some things invariably go wrong. According to one senior Toyota official, the damage to Suzanne Oshry’s tires could have taken place “in nearly a dozen different locations” between the supplier and the dealer. But those retailers have often been cited as one of the weakest links in the entire Toyota system.


Toyota has traditionally limited the number of retail outlets, good news for dealers who sell, on average, several times more vehicles per store than even the best of their Big Three rivals. But that also has meant that their staff “are little more than order takers, rather than salesmen,” asserts analyst Spinella. And numerous studies, including the J.D. Power Dealer Satisfaction Index, show Toyota dealers ranking low in terms of addressing customer problems.


As first reported in June, Toyota is preparing a new program, dubbed Everything Matters Exponentially, or EM2, to deal with snags on the service side. “The company is trying to address the entire sales and service experience (because) if we really want to keep growing, we have to do it by increasing customer loyalty,” explained Jack Hollis, the corporate manager who oversaw the initial development of EM2.


The work in progress didn’t seem to help Oshry, which only underscores the danger Toyota faces. For nearly two decades, the Japanese maker has built a reputation for doing the right thing: building reliable, if somewhat bland, products, and then standing behind its customer. Word-of-mouth, as much as all its corporate ad campaigns, have turned Toyota into the force to be reckoned with in the U.S. market. But if the current spate of problems continues, the automaker’s momentum could reverse.


Has that process already begun? The automaker’s U.S. sales dipped a slight 0.6 percent in September. But it’s easy to read too much into those numbers, especially when compared to the all-time record the maker set a year ago, cautions analyst Spinella.


But even so, he insists that, “Frankly, this is the downside of the slope for them. If they’re unable to fix this, in five years, I think their position in the U.S. could resemble GM’s, with shrinking market share.”

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