At the height of the global recession two years ago, Toyota Motor Company wrested away General Motors’s 77-year-old title as the world’s largest automaker. Toyota, the symbol of a once powerful and feared Japanese economy, boasted $263 billion in sales last year, making it far and away Japan’s largest company.
Then, practically overnight, sales began to slide after the company was hit with a nightmarish public relations fiasco. Consumer complaints about deadly defects in coolant pumps, brakes, accelerators and even floor mats prompted the recall of over 10 million Toyota vehicles worldwide. At the height of the recalls, from November 2009 through the first quarter of 2010, Toyota’s stock prices on the NYSE hovered around the $78 range, largely where it remains today. In 2008, its stock was well over $100 a share. The company’s shares plunged more dramatically in the Tokyo Stock Exchange, where they lost 22 percent of their value from January to February 2010.
Toyota executives found themselves fighting to protect the company’s stellar brand name at a time when the industry was showing signs of revival, and the Big Three automakers in the U.S. were starting to make a big comeback. “It’s like science fiction,” said IHS Global Insight senior analyst Aaron Bragman, of the role reversal taking place between Toyota and the Big Three — General Motors, Ford and Chrysler. “The truth is stranger than fiction.”
With Toyota’s 5 percent growth in retail sales in November, the company retained its title as the number one retail brand in the U.S. However, worldwide, Toyota was the only car and truck manufacturer to see its sales numbers decline (by 3.3 percent) from November 2009.
resurgence with Toyota on the outside looking in.
“We recognize we've got some work to do in restoring the brand,” said Toyota spokesman Steven Curtis, “but we’re encouraged by a number of trends we're seeing in the marketplace. Camry remains the number one-selling car in the country, and competitive trade-ins have reached pre-recall levels.” Meanwhile, strong overall sales in October and double digit sales increases of truck sales in November for all Big Three domestic automotive manufacturers prompted many analysts, including Bragman, to declare an industry resurgence with Toyota on the outside looking in. The latest sales data has been especially promising for an American auto industry not far removed from its brush with bankruptcy. The sales also bode well for Detroit and the U.S. economy.
So how did they do it? The Big Three’s resurgence is due in large part to scaled-back production, better quality and more attractive, fuel-efficient vehicles. GM eliminated its Saturn line, and is phasing out Pontiac — an 84-year-old brand whose sales peaked in 1973. In addition, GM’s hourly labor costs have fallen along with its workforce, from $16 billion in 2005 to $5 billion this year, due in part to cuts made as part of its bankruptcy restructuring.
As for reliability: An annual study conducted by J.D. Power and Associates declared that “domestic auto brands, as a whole, have demonstrated higher initial quality than import brands for the first time” in the study’s 24 years. And while Detroit automakers bet heavily on gas-guzzling SUVs for well over a decade, domestics are starting to turn that reputation around. Ford’s Fiesta is 2011’s most fuel-efficient subcompact vehicle, according to the U.S. Department of Energy. GM is also preparing for the highly anticipated launch of its Chevy Volt, touted as the world’s first mass production electric running vehicle. The Volt was named Motor Trend’s 2011 car of the year.
Consumer Confidence Shattered
While American automakers are poised to regain their position atop the market, Toyota, long considered the industry’s gold standard, continues to fight negative publicity from its “runaway Toyotas,” cars that accelerate uncontrollably due to gas pedal and floor mat defects.
“Toyotas always sold [because] they were reliable,” said Bragman. “Over the last year that reputation has basically crumbled.”
National Highway Traffic Safety Administration records show hundreds of complaints of stuck throttles in 12 vehicles, nine of which are among Toyota’s models. Those vehicles include Avalon, Camry, Corolla, Highlander, Matrix, Prius, Tacoma, Tundra and Venza.
In addition to the recalls, some analysts remain critical of Toyota designs. No doubt, car design is largely a subjective category. But according to Bragman, consumers rarely buy Toyotas for their styling prowess, but rather, more for their once-stellar reliability ratings.
Toyota has also experienced some untimely vehicle flops. Among Forbes’ 10 worst-selling vehicles for 2010 were the Scion xD and Toyota Yaris. No domestic vehicle made the list. Whether Toyota bounces back and joins its domestic competitors in the industry’s resurgence will depend largely on the reliability of its vehicles. David Champion, senior director of Consumer Reports Auto Test Division, says the recalls haven’t hurt the brand as much as analysts claim.
reliable car, is in the middle of the pack. Ford’s Fusion,
on the other hand, is ranked number one in its class.”
“Yes, the Toyota brand has dropped a little bit in terms of reliability, but it still ranks as one of the best,” Champion said. “The Consumer Reports data comes from a survey of 1.3 million drivers who rank their cars’ reliability based on ‘unscheduled events.’” It should be noted that the recalls were not part of the data, unless the driver actually experienced a car malfunction. A separate study on brand perception for reliability showed Toyota ranked sixth among the major automotive manufacturers.
“Toyota saw a dip in 2007 and never got that reliability back for some vehicles,” Champion added. “Camry, for example, long considered the brand’s most reliable car, is in the middle of the pack. Ford’s Fusion, on the other hand, is ranked number one in its class.”
The Big Three, meanwhile, have been enjoying a fairytale-like comeback. Very few industry experts saw the turnaround coming, at least not this fast. Just last month General Motors pulled off the biggest initial public offering in U.S. history, netting $23.1 billion.
“[GM is a] new company with a competitive cost structure, improved capacity utilization, leaner inventories, improved brand equity and customers willing to pay higher prices for great vehicles,” said GM CEO Dan Akerson, “all of which resulted in improved earnings and great cash flow.”
Meanwhile, Ford, whose stock price fell to a historic low of $2.08 in October 2008, is headed to $24 by 2011, according to Merrill Lynch. Chrysler earned a $239 million operating profit in the third quarter, an amount that narrowed its net loss of $84 million after repaying U.S. and Canadian government loans.
As GM Goes, So Goes the Country
For decades, General Motors in particular made generous retirement and health care deals with its union, largely because it could. GM was an icon of American manufacturing and one-time holder of nearly 50 percent of the U.S. auto market. The company underestimated its competition worldwide, and the union concessions came back to bite decades later. But in recent years, the UAW has agreed to lower wages and reduced health care and retirement benefits to help the Big Three rebuild and reinvest.
Today’s level playing field and strong sales numbers bode well for the U.S. economy. Since early 2009, Ford has added or announced plans to add more than 6,400 jobs, and GM says it would create 1,000 new high-tech engineering and research jobs in Michigan over the next two years, a state with an unemployment rate of 12.8 percent, the second highest in the country after Nevada.
President Obama said last month that GM and Chrysler have created more than 75,000 jobs since emerging from bankruptcy. And in addition to paying back $32 billion to the federal government, GM has invested $700 million in Michigan to produce the Chevy Volt’s battery pack, power train and body, which will require revamping and reopening several production facilities. Chrysler too will add 1,000 technical professionals to its workforce, mostly headquartered in Michigan.
“When GM and Chrysler were filing bankruptcy,” said Edmunds.com senior analyst Jessica Caldwell, “if I told you we’d be seeing the turnaround we’ve been seeing now, you probably would have thought that I was crazy.”
challenge built on incentives that narrow profit margins.
It all comes down to sales. According to Edmunds.com, car and truck sales in the U.S. before the economic downturn were roughly 16 million per year. During 2010 that number dropped to 12.2 million. Enticing buyers into showrooms is a marketing challenge built on incentives that narrow profit margins. Truecar.com, which tracks dealer incentive data, forecasts that Toyota’s November dealer incentives have gone will be up over 34 percent this year, at an average of $2,200 per vehicle.
The three American auto manufacturers had higher incentives per vehicle sold in November — Chrysler ($3,452), Ford ($2,942) and GM ($3,350), But unlike Toyota, their incentives have resulted in sales increases. “It was as if the world turned upside down,” said Jesse Toprak, an analyst for Truecar.com. “There’s strength in domestic brands, and this is the first time it’s been strength from the product and not the deals they’re giving away.”