Auto recall, how bad at the bottom line?

Today brings news of another multi-million unit recall covering 3.4 million units with Happy_Auto_Repair_Customerpotential airbag inflator issues. In 2011 (the last year I have numbers for) more than 15 million motor vehicle were recalled in the U.S. While massive global recalls top headlines, do they really matter.  Well, like all things, that depends.  First it depends on how they are handled.  And secondly on what they are for.

This airbag issue is a great example of a recall that looks more financially relevant than it 10FS2_figabcreally is.  Toyota has the biggest exposure with 1.7 million units mainly in Japan and North America.  The cost of the recall could be several hundred million US dollars, however, the key word is “could”.  Many factors weigh on what the final cost to TMS will be.  In an industry where dropping $200 million on inventory adjustments is all too common, we need keep the cost of recalls in perspective.  I would guess the biggest expense is going to be dealer service costs.

The second point is the cost versus the risk of ducking an issue.  As Toyota (2010: 2.3 million) learned with  floormat accelerator issues, Nissan(2010: 2 million)  with ignition second-row-seatbelt-recall-issue-in-gm-crossovers_100319496_mswitch issues and GM (2005: 2 million) with a myriad of safety problems, the negative fallout from dawdling has grown too high.  The US has one of the most transparent recall processes worldwide.  One that is emulated in many emerging markets.  While Japans MoT process may actually be slightly more effective, I don’t think anyone can make an argument it is anywhere near as transparent.  Overall, the reputation damage and subsequent lost revenue and added marketing “make-good” expense massively outweighs a fix.

A top Japanese analyst published a report back in 2004 touting Toyota’s superiority over rivals for its lack of recall volume.  His premise was a) dangerous, as Toyota was shortly hit with several high volume issues; and b) wrong, as high volume issues are the product of global engineering and best QCD sourcing.  Recalls aren’t great, but they are better than the alternative.

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