Can Toyota Recover From This Setback?

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February 1, 2010

Quick – name any major auto manufacturer recall prior to the one Toyota Motors (TM) recently issued. If you’re like most investors - or even like most drivers - you’ll probably struggle to cite any. Yet (and incredibly), one of history’s biggest wasn’t that long ago…. last October, to be precise.

Ford Motor Co. (F) recalled over 4 million automobiles late last year to repair a problem with their cruise control mechanism. It was an extension of a recall from two years prior.

Ford certainly isn’t the only recent member of the recall club though. Earlier in 2009, Honda Motor Corp. (HMC) recalled nearly half a million cars for airbag problems. In 2007, Honda recalled a couple of versions of its popular Civic. Earlier in the same year, Ford recalled its Super Duty truck. Prior to that, GM (MTLQQ) [now owned by Fiat (FIATY), but a Chrysler brand at the time] recalled its 2005-2007 Dakota models for a whole array of problems.

Not the end of the world as we know it: So what? Shareholders of Toyota Motors need not worry themselves into a tizzy just yet. While the mechanical failure of any automaker’s cars can be embarrassing, it’s also clearly not certain death for the company…. even though the chatter of ruined reputations rings loud in the midst of it.

Indeed, Ford just posted a profit not only for last quarter, but for all of 2009. Honda swung back to a profit over its last two quarters as well, after dipping into the red ink for the two quarters before the most recent two.

No, GM didn’t fare as well, but it had nothing to do with auto recalls. GM survived decades’ worth of recalls before imploding two years ago thanks to painful labor expenses and unappealing cars.

And what of Toyota?: Early estimates suggest Toyota could lose more than $500 million in operating profit due to the production halt (assuming it’s less than a month), and it could cost another $250 million to effect the repairs. That may well be enough to pull the automaker back into the red for the current quarter.

If Ford’s or Honda’s history is any indication though (and it is), consumers are quick to forgive and/or forget. Toyota’s gas pedal recall should be a faded memory by the time we get next quarter’s results. Yes, Toyota will survive.

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