Toyota Motors is in big trouble

If you are reading this article I assume it is because most of you are already familiar with the recent news about Toyota Motors. It could end up being very detrimental to the company and the consequences could be disastrous in term of market share in Europe, China and the United States.

Let’s recall what happened. Recently there has been a few car crashes in the US involving Toyota cars. A few people died in those car crashes, which raised concerns since there was a similarity in the even leading to the crashes. The cruise control on the Toyota cars seem to stop responding and cars accelerated for no reason leading to an accident.

After verification, there was a malfunction in the gas pedal of the Toyota cars. Several lawsuits are filled against Toyota right now from families that lost relatives. So far, it is not so unusual and it is the typical procedures car makers have to go thru when something of that magnitude happens.

However, the issue here is that the defective gas pedal is used on millions of cars and Toyota has just decided to recall about 8 million cars around the world to fix the problem. Analysts believe it could cost $1 billion a month for Toyota if they can’t fix the problem right away. As much as it is costly to Toyota in terms of Operating Profit, the biggest trouble does not lie into the financial loss.

What Toyota is facing now is a loss of credibility. Toyota has been able to become the leader carmaker in the world because it has build very secure cars. The recent problem with gas pedal will damage dramatically its image and would open the door to Toyota’s competition. Already Honda, Kia, Ford and GM have declared they will use Toyota’s weakness in the short time to increase their market shares and weaken the Japanese automaker.

I have no doubt these four carmakers will be able to increase their sales stealing Toyota’s customers. In an industry where confidence is Key, Toyota’s problem with its gas pedal will have a lot of consequences for the future of the firm. It is not hard to understand that the auto industry is of the “monopolistic competition” type since most cars (except the hybrid) are identical at 95% no matter which brand you take (e.g: a Ford SUV is very similar to a Toyota SUV). Thus, consumers can easily change from one brand to another without much thinking.

On top of that I read this morning that the US Senate is asking questions about Toyota. Why would they do that? What comes to mind right away is protectionism. By doing so, senators are trying to encourage customers to buy Ford and GM cars. The United States is dedicated to keep its auto industry afloat and the recent announcement from the Senate is just another example of politics stepping in the world of business. I don’t like it but I understand it!!

The next few months will tell us if Toyota is able to regain customers’ confidence. So far, investors are worried given that the stock has tumble more than 15% in the past week and the announcement of the recall.