Northstar BMW Car Club of America
Audi 1980s Scare May Mean Lost Generation for Toyota Sales
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By Andreas Cremer and Tom Lavell

Feb. 5 (Bloomberg) -- Volkswagen AG¿s Audi luxury brand spent 15 years rebuilding U.S. sales after sudden-acceleration incidents in the 1980s almost wiped out demand, a possible sign of the difficult times Toyota Motor Corp. faces.
Audi's U.S. deliveries plunged 83 percent by 1991 from their peak in 1985, following recalls of the German automaker¿s 5000 sedan. A class-action lawsuit filed in 1987 by Audi owners seeking compensation is still being fought.

Audi was then selling no more than 75,000 cars a year in the U.S. and was chipping away at the market for higher-priced models. Last year, Toyota, the world¿s largest automaker, sold 17 percent of all cars in the U.S. The Japanese manufacturer's recall of almost 8 million vehicles, including 5.6 million in the U.S., to fix defects that cause sudden acceleration has prompted the U.S. government to probe the cause.

There are very strong parallels between the Audi incident and Toyota, said John Wolkonowicz, an analyst at IHS Global Insight in Lexington, Massachusetts, who worked on product- development analysis for Ford Motor Co. at the time of the Audi recalls. This whole mess can take longer than seven years to overcome. It might well have a generational impact.

Toyota shares have dropped 21 percent, wiping out $33 billion of the company¿s market capitalization, since the carmaker announced a recall of 2.3 million U.S. vehicles on Jan. 21.

Return to Profit

The stock rose 1.4 percent to 3,325 yen as of 9:30 a.m. in Tokyo, the second-biggest gain in the Nikkei 225 Stock Average, after Toyota said yesterday it expects to return to profit in the year ending March 31. Strong sales in the quarter ended Dec. 31 and cost cuts will outweigh the estimated 100 billion yen ($1.1 billion) cost of the recall, according to the company.

Toyota's recall led to a suspension of U.S. sales and production of eight models. Sudden acceleration of Toyota vehicles has been linked to 19 deaths in the last decade, according to Henry Waxman, the U.S. House of Representatives Energy and Commerce Committee chairman.

Toyota's U.S. sales in January fell 16 percent to a 10-year low of 98,796 vehicles. The Toyota City, Japan-based carmaker said this week it will fix the defect by having dealers install shims in accelerators.

The Audi model in the 1980s recall was linked to six deaths and 700 accidents, according to Washington-based Center for Auto Safety, a group co-founded by consumer activist Ralph Nader. The Audi 5000's sales drop accelerated after a 1986 report on CBS Corp.'s 60 Minutes television news program. The segment was later criticized by business groups for use of unidentified simulations and staged events.
U.S. Sales

Audi's U.S. sales in the 1980s peaked at 74,061 in 1985, then dropped to 12,283 in 1991, staying at about that level for the next three years, according to company data. Deliveries topped the 1985 number only in 2000, when Audi sold 80,372 cars. Its U.S. deliveries in 2009 totaled 82,716.

The recovery in the U.S. was partly helped by a 1994 turnaround strategy, which included the new A4 and A8 models and a reorganization of distribution networks, said Audi spokesman Juergen de Graeve.

You can't restore image or reputation overnight, de Graeve said in an interview. We're talking about a process here that was stretching over many years. Even if it were found out later that the claims were unjustified, the damage was already done.

`Lasting Damage

Toyota expects sales to drop by about 100,000 cars and revenue to decline by as much as 80 billion yen this fiscal year ending in March because of the recall, Senior Managing Director Takahiko Ijichi said yesterday.

We are doing everything we can to regain our customers trust, Ijichi told reporters in Tokyo.

Toyota¿s situation is a bit different from Audi's, said Garel Rhys, who heads the University of Cardiff's automotive industry research center. Audi was pushing itself as an up- market brand while Toyota is a huge player and defending its quality-brand image. Toyota has a huge image to lose in the U.S. The potential for lasting damage to their image is enormous.

Toyota faces at least 29 lawsuits in the U.S. and Canada seeking class action status, including suits that allege defects in the electronic throttle system. At least eight other lawsuits have been filed by customers or their families alleging deaths and injuries.

1987 Lawsuit

A class-action lawsuit filed in 1987 by Audi 5000-model owners seeking compensation is being contested in county court in Chicago after appeals at the Illinois state and U.S. federal levels. About 7,500 plaintiffs are involved, Robert Lisco, a Chicago-based lawyer representing the car buyers, said.

I dont think Toyota will recover from this, said Juergen Pieper, a Frankfurt-based analyst at Bankhaus Metzler. They used to have an edge thanks to quality, but surely that's been irrevocably shattered now. The impact of this catastrophe on their pricing power and sales will be enormous.

The Audi 5000 recalls took place from 1982 to 1987, with the first fix aimed at adjusting the distance between the brake and accelerator pedal on automatic-transmission versions, the Rehoboth, Massachusetts-based Safety Research & Strategies said in a June report on Toyota incidents. The final repairs, of 250,000 cars dating back to 1978, added a device requiring the driver to press the brake pedal before shifting out of park, the consumer advocacy group said.

Mitsubishi Motors

The U.S. National Highway Traffic Safety Administration recommended two of the Audi 5000 recalls, according to an NHTSA document on the Center for Auto Safety's Web site.

Mitsubishi Motors Corp. had one of the auto industry's largest recalls prior to Toyota, taking back more than 2 million vehicles to repair defects in 2000 and 2001. That pushed the Tokyo-based automaker to the brink of bankruptcy.

How quickly Toyota will recover depends on how long the carmaker takes to respond, said Anil Valsan, global director of automotive research at Frost & Sullivan in London.

The company's reaction has been pretty poor over the past few weeks, he said. If they can do this quickly and fix it this fiscal year there will still be an impact on sales, but they have an opportunity to at least sustain their position.


--With assistance from Cornelius Rahn in Frankfurt, Chris Jasper in London, Margaret Cronin Fisk in Detroit and Makiko Kitamura in Tokyo. Editors: Kenneth Wong, Terje Langeland


Posted by KGB on 04-FEB-2010

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