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Toyota's shares slide as its reputation loses steam

By Frank Ahrens
Washington Post Staff Writer
Thursday, February 4, 2010; A13

For more than two decades, Toyota has won a reputation as a builder of high-quality, reliable vehicles. Sure, they were priced somewhat above their American competitors, but they were worth it, consumers were told, because Toyotas were the product of an innovative management culture, a happy workforce, and engineering and design teams that made vehicles you could count on for years.

Much like Detroit used to make.

Toyota's influence spread far beyond Japan and Camrys. When Alan Mulally took over Ford in 2006, he championed the idea of "one Ford everywhere," meaning a global unification of the auto giant's incompatible parts and processes. It was an idea taken directly from Toyota, a company Mulally had admired since his days as a Boeing executive.

Now, after last month's bad news -- a 2.3 million vehicle recall for accelerator pedals that could stick, followed by an unprecedented halt in sales of several popular models -- Toyota's fortresslike reputation has taken major damage.

"One thing that has probably changed forever is the idea that the Japanese have superior quality," said David E. Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich. "Toyota is a great company and they'll go on, but that historic concept of superior quality is probably gone forever."

That's the long-term problem. The short-term problem, Cole said, is that it seems "they're turning up new stuff every day and you just don't know when it's going to end."

There was more "stuff" Wednesday morning, when Transportation Secretary Ray LaHood said he would urge Toyota owners to stop driving recalled vehicles immediately. Shortly after, the nation's top automotive authority attempted to ease off his remarks, but it was too late, at least for Toyota's stock. Shares of Toyota, known as American depositary receipts, slid more than 7 percent in the moments following reports of LaHood's statements, an instantaneous $3 billion loss in company value.

Toyota's shares fell 6 percent on the day, finishing at $73.49, much lower than the broader market. The company was forced to release a statement, saying the sticking-gas-pedal problem is "rare and generally does not occur suddenly."

LaHood's statement "was just reckless," said Tammy Darvish, vice president of Darcars Automotive Group, which owns four Toyota dealerships in the Washington area. "It really just scared the heck out of people."

Darvish's dealers got plenty of calls from customers on Wednesday -- many had already discussed the recall repairs but were spooked by LaHood's comments and called back.

Other companies have recovered from catastrophic public relations disasters. After seven Chicago deaths were traced to cyanide-laced Tylenol in 1982, drugmaker Johnson & Johnson responded by quickly recalling all Tylenol nationwide, destroying the company's market share. But the company's swift action and pioneering, tamper-proof packaging won back its customers within a year.

For an automaker, reputation is everything, and it can linger for years even after the facts prove it otherwise. When Japanese cars hit U.S. shores in the early '70s, they were seen as cheaply made and unsafe. Chastened, the Japanese automakers retrenched and doubled down on quality. By the late 1980s, Toyota and Honda, above the rest, were besting their American counterparts every year in quality, reliability, even performance and styling, auto and consumer magazines raved. For Toyota, that reputation lasted, pretty much intact, until last month -- despite the fact that, in 2007, Consumer Reports raised flags that Toyota quality was slipping.

"Toyota has enjoyed a reputation for quality and safety that gave them a certain level of goodwill and brand loyalty with consumers," said Jeffrey Thomen, a product-recall specialist with the law firm McCarter & English. "Now with the pedal recall, you can see that reputation is taking a hit and that the typical consumer complaint will be looked at with more heightened scrutiny going forward by U.S. auto safety officials."

As if things weren't bad enough, now Toyota's pride and joy is the latest log on the PR bonfire.

The Japanese government has ordered Toyota to investigate the 2010 Prius braking system, and the U.S. government said it would probe the Prius's brakes, too. Of 171 complaints filed by 2010 Prius owners with the National Highway Traffic Safety Administration, 111 involved brake problems, the agency's database shows, and at least two led to driver injuries.

The Prius employs an unusual system known as "regenerative braking" that turns braking energy into electricity, which is pumped back into the Prius's battery. The process can feel unusual to a new Prius owner.

Concerns about the Prius will not make it any easier for Toyota to repair its image. In auto industry terms, the Prius is a "halo" vehicle, an attention-getting car that typically does not sell widely -- either because of high cost or specific traits -- but that is promoted as the best that automaker has to offer.

Staff writer Nicole Norfleet contributed to this report.

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