SCENARIOS-With image under fire, Toyota looks to shim

(For more on Toyota recall; [ID:nN27231388])

By Chang-Ran Kim, Asia autos correspondent

TOKYO, Jan 29 (BestGrowthStock) – Japanese automaker Toyota Motor
Corp (7203.T: ), revered in the industry for making reliable
quality cars, is caught in a mass recall debacle that has
spread from North America to Europe and China.

Toyota may have to recall close to 8 million vehicles
worldwide for two separate issues relating to floor mats and
sticky accelerator pedals, both with the potential to cause
unintended acceleration.

Below are scenarios for how the issue could play out, and
the business implications for Toyota.

(RELATIVELY) QUICK FIX

Toyota gets clearance from U.S. safety authorities for a
proposed remedy: shipping a “spacer” or “shim” to its U.S.
dealers — parts that would increase tension in the accelerator
and help prevent it from sticking. [ID:nN28120264]

Alternatively, or parallel to that, CTS Corp (CTS.N: ), the
supplier of the accelerator pedals, promptly ships out a
redesigned pedal allowing Toyota to limit — to just a week —
a planned production halt of eight models across North America.

A sales suspension would also be lifted relatively quickly,
limiting the damage to Toyota’s sales and bottom line.

But even here, Toyota could incur warranty costs of around
$230 million in the U.S. alone, based on an estimated cost of
below $100 for the shim or spacer fix, times 2.3 million
vehicles.

Other costs would include repairs related to the floormats,
financial support for dealers and increased sales incentives,
plus the potential for costly lawsuits from car owners.

RECALL CASE DRAGS ON

Toyota struggles to get swift regulatory clearance and the
recall turns into a full-blown political issue in the United
States.

Congressional investigators are already seeking documents
on the matter, and the House Energy and Commerce Committee
plans a hearing on the matter on Feb. 25. [ID:nN28126963]

Meanwhile, Toyota continues to suspend sales and/or
production of the designated models, which made up more than
half its U.S. sales last year.

Consumer sentiment turns against Toyota, hurting sales of
its other models, and shifting buyers into the showrooms of
rivals such as Honda Motor Co (7267.T: ), Hyundai Motor Co
(005380.KS: ) and Ford Motor Co (F.N: ). Resale values of Toyota
cars fall, indirectly hitting future sales.

RECALL CASE SETTLES, BUT DAMAGE CONTINUES

Solutions are put in place for repairs and recalls, but the
damage to Toyota’s brand image and reputation is done.

Consumers begin to shun the Toyota brand — Toyota is No.1
in selling cars to retail customers in the United States —
chipping away at market share.

Earnings also suffer. The United States is Toyota’s biggest
market, both in terms of volume and profit. Toyota has said it
expects to sell about 2 million vehicles in the U.S. this year
— about 27 percent of its total sales — but that was before
it expanded the recall and stopped sales of several models this
week. [ID:nTOE60P0AA]

Investing Analysis

(Editing by Ian Geoghegan)

SCENARIOS-With image under fire, Toyota looks to shim