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Experts: Price of Toyota's troubles will soar

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Experts: Price of Toyota's troubles will soar

Hans Greimel

Automotive News -- April 12, 2010 - 12:01 am ET

TOKYO -- For now, the flurry of recalls has stopped. But the costs confronting Toyota Motor Corp. as a result of its quality crisis will keep climbing, analysts say.

By Toyota's own count, the string of worldwide recalls will cost the company $2 billion.

But that only covers the floor mat and sticky-pedal actions from last autumn through January -- not the Prius antilock brake recall in February. It also ignores the spiraling incentives, advertising bills and looming wall of lawsuits that have piled up in the last two months. And then there's the record $16.4 million fine imposed April 5 by the U.S. government.

Factoring in all that could put the total bill above $4.43 billion, some analysts say.

The world's biggest automaker, still digging out after its first operating loss in seven decades, suddenly finds itself in even softer financial quicksand.

To deal with this, Toyota is making a number of operational changes, including:

-- Delaying U.S. Prius production.

-- Cutting labor costs by reducing hiring in Japan.

-- Realigning its Japanese manufacturing base.

-- Suspending production in Europe.

A task force was launched March 30 to improve global quality control. Changes recommended by that group, along with actions triggered by consumer complaints and other internal quality-control committees, also could add cost.

"Toyota was a company in need of restructuring and cost reduction before this issue," says Kurt Sanger, an auto analyst at Deutsche Securities in Tokyo.

"The pressure that could come on earnings now makes that even more challenging."

Counting the costs

Sanger estimates that the total cost for all of the recalls will have a ¥290 billion ($3.09 billion) impact on Toyota's earnings in the fiscal year that starts April 1.

But others see a larger number.

Total costs could reach $4.43 billion, including repair bills, lost sales and litigation settlements, according to Kohei Takahashi, an auto analyst at J.P. Morgan in Tokyo.

Fixing the floor mats and sticky pedals that led to the recall of more 6 million vehicles in the United States since last fall for possible unintended acceleration will cost $1.07 billion, Takahashi says. Repairing the antilock brake problem that triggered the global recall of the Prius will cost an additional $160 million.

Lawsuits could eat up another $1.07 billion, Takahashi predicts. On top off all that, lost sales will cost Toyota $2.13 billion, he says.

But the real danger is the possibility of new problems surfacing.

Additional defects could amplify today's problems and derail future product plans. Says Takahashi: "That's a huge risk."

On Wednesday, April 7, Toyota extended the floor mat and pedal recall to South Korea, calling back an additional 13,000 there and bruising its image and customer confidence in yet another market.

In the United States, The National Highway Traffic Safety Administration is still investigating causes of unwanted acceleration in Toyota vehicles, including possible electronic control glitches.

The U.S. federal government is already making Toyota pay. The Transportation Department fined Toyota $16.4 million, the largest such penalty ever, saying it hid the sticky pedal defect and belatedly alerted regulators. Further investigations could bring additional penalties, it warned.

Air of uncertainty

A storm of unresolved lawsuits still hovers over the company. Toyota faces at least 177 lawsuits seeking class-action status and at least 56 suits claiming personal injuries or deaths caused by unintended acceleration, according to data compiled by Bloomberg News.

Toyota is predicting net income of $852.2 million for the fiscal year ended March 31, compared with a net loss of $4.65 billion a year earlier. Toyota has taken big strides toward profitability thanks to major cost cuts. It had targeted $745.6 million in cost reductions alone for the fiscal year ended March 31.

But the recalls create an atmosphere of financial uncertainty.

The cloudy future already has forced Toyota to delay plans to bring production of the Prius hybrid to the United States. And in March, Toyota temporarily halted production at plants in Britain and France, partly because of slumping demand in the wake of the global recalls.

In Japan, the company is reining in labor costs. This year it hired 3 percent fewer white collar workers than in 2009, for it smallest incoming class of engineers and administrators since 1994, according to Japanese media reports.

And Toyota is realigning its domestic manufacturing base across its small-car subsidiary Daihatsu and its truck unit Hino to consolidate production of similar vehicles, regardless of brand.

That move is part of a goal to shave $1.07 billion in annual production costs by 2012 by increasing the use of common parts, Japan's Nikkei business daily reports.

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If Toyota were to permanently stop selling new vehicles in the USA tomorrow, and instead concentrate on servicing current Toyota/Lexus owners until those cars are all gone from our soil by attrition, it would be the absolute ideal situation. Make it so.

Edited by ocnblu

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