Toyota Tries To Get The Feeling Back

“The reason Toyota became famous was one word, and that was ‘quality,’” Jez Frampton, chief executive officer of Interbrand Corp. told Bloomberg News recently.

“Quality” was what I had in mind when I bought six Toyotas between 1987 and 2005. It was also the word I was thinking of when, in 2007, I decided not to buy another Toyota-made vehicle.

Toyota Motor (TM) was the only large automaker to see a decline last year in sales in the U.S., which has historically been its most profitable market. Its stock fell 17 percent. Toyota sales did increase 19 percent in China, which is now the world’s largest auto market, but at the same time GM saw a 29 percent increase in Chinese sales and Volkswagen sales there went up 37 percent.

In response, the Japanese automaker is revamping its Scion vehicle line with more upscale models, most likely including a fully electric car, designed to appeal to U.S. consumers. Toyota is also unveiling a cheaper Lexus in the Japanese market to try to attract consumers there to its luxury line. The Lexus CT200 is a hybrid hatchback that was originally designed for the European market.

I doubt that the new model rollouts can, by themselves, put Toyota back on the growth path that made it the world’s largest car company. Its problem last year was not that it didn’t have an all-electric car or a cheap luxury model to market in Japan; its problem was that it lost the reputation for quality that made the company great.

The company’s quality control issues came to a head at the beginning of 2010, when it began recalls of more than 8 million vehicles, mostly for so-called “sticky accelerators” that caused cars to speed up on their own. The quality problems with the vehicles themselves were accompanied by problems with the company’s customer relations, as Toyota failed to acknowledge and deal with the unintended acceleration problem.

Even before the recalls, I noticed a drop in the quality of my own Toyotas. My 2000 Sienna’s anti-lock braking system failed at about 70,000 miles, and the transmission started to have problems soon after. The protective molding on my 2004 Avalon peeled off the side of the car, and my 2005 Sienna had a major problem with expensive run-flat tires that repeatedly wore out in less than 12,000 miles.

After all of my personal problems and the widely publicized recalls, I’d probably take a car from South Korea’s Hyundai before one for the same price from Toyota—and Hyundai doesn’t ask for the same price for a similar vehicle. Toyota continues to charge a premium for quality that it has recently given consumers little reason to expect. The Hyundai Sonata starts at $19,195, according to Bloomberg News, compared with $19,720 for the similar Toyota Camry. Hyundai’s compact Elantra starts at $14,830, compared with $15,450 for a Toyota Corolla.

To regain customers’ trust, and their money, Toyota needs to do two things: restore its commitment to quality, and prove to customers that it has done so. The first will involve vetting designs more thoroughly to avoid problems like the sticky accelerators. It will also involve examining and improving manufacturing procedures. A study by J.D. Power & Associates revealed that the rate of defects in Toyota vehicles rose from 101 per 100 vehicles in June 2009 to 117 in June 2010.

If Toyota wants to turn out high-quality cars, it will also have to spend money on high-quality materials. Consumer Reports has noted a decline in Toyota’s interior finishes over the past few years. David Champion, the magazine’s director of automotive testing, told Bloomberg News, “The quality of the materials they’re using seemed to be much lower than the materials they were using in previous models.”

No amount of improvement in quality will help Toyota unless it can convince customers to return to its showrooms. The best way for it to do that is to be the first one to bet on the quality of its cars by expanding its warranty. Its standard package is only good for the first three years or 36,000 miles. The relatively chintzy warranties did not deter me when I bought my Toyotas, because the brand’s reputation led me to believe I could count on the cars holding up much longer. Now, I’m not so ready to believe that, and without the strength of a well-earned reputation, I am not willing to trust an automaker that is not willing to put its own money on the line for more than three years. Despite its lower prices, Hyundai offers a better warranty: five years or 60,000 miles. Upgrading its warranty would allow Toyota to show customers that it stands by the cars that come from its factories.

When I see a change in the warranty terms, I’ll believe Toyota has made a real change in its practices. Until then, when I think of quality, I won’t think of Toyota first.

About Larry M. Elkin 525 Articles

Affiliation: Palisades Hudson Financial Group

Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002. The firm expanded to Fort Lauderdale, Florida, in 2005, and to Atlanta, Georgia, in 2008.

Larry received his B.A. in journalism from the University of Montana in 1978, and his M.B.A. in accounting from New York University in 1986. Larry was a reporter and editor for The Associated Press from 1978 to 1986. He covered government, business and legal affairs for the wire service, with assignments in Helena, Montana; Albany, New York; Washington, D.C.; and New York City’s federal courts in Brooklyn and Manhattan.

Larry established the organization’s investment advisory business, which now manages more than $800 million, in 1997. As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 25 states from Maine to California as well as in several foreign countries. He is the author of Financial Self-Defense for Unmarried Couples (Currency Doubleday, 1995), which was the first comprehensive financial planning guide for unmarried couples. He also is the editor and publisher of Sentinel, a quarterly newsletter on personal financial planning.

Larry has written many Sentinel articles, including several that anticipated future events. In “The Economic Case Against Tobacco Stocks” (February 1995), he forecast that litigation losses would eventually undermine cigarette manufacturers’ financial position. He concluded in “Is This the Beginning Of The End?” (May 1998) that there was a better-than-even chance that estate taxes would be repealed by 2010, three years before Congress enacted legislation to repeal the tax in 2010. In “IRS Takes A Shot At Split-Dollar Life” (June 1996), Larry predicted that the IRS would be able to treat split dollar arrangements as below-market loans, which came to pass with new rules issued by the Service in 2001 and 2002.

More recently, Larry has addressed the causes and consequences of the “Panic of 2008″ in his Sentinel articles. In “Have We Learned Our Lending Lesson At Last” (October 2007) and “Mortgage Lending Lessons Remain Unlearned” (October 2008), Larry questioned whether or not America has learned any lessons from the savings and loan crisis of the 1980s. In addition, he offered some practical changes that should have been made to amend the situation. In “Take Advantage Of The Panic Of 2008” (January 2009), Larry offered ways to capitalize on the wealth of opportunity that the panic presented.

Larry served as president of the Estate Planning Council of New York City, Inc., in 2005-2006. In 2009 the Council presented Larry with its first-ever Lifetime Achievement Award, citing his service to the organization and “his tireless efforts in promoting our industry by word and by personal example as a consummate estate planning professional.” He is regularly interviewed by national and regional publications, and has made nearly 100 radio and television appearances.

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