COMMENTARY: Witch Hunts and Cost Cuts Affect All Companies, Not Just Toyota
By Michelle Krebs February 17, 2010Toyota's dilemma should be thought of as a parable that applies to the entire industry, writes GaveKal, a Hong Kong-based financial services, macro-economic firm.
Why? Two reasons, says GaveKal in an excerpt from the company's recent report posted here with permission: the witch hunt is on and cost-cutting has a downside for all.
As Toyota's shares have plunged, the shares of competitors have gained, even in an otherwise falling market. But while there will be winners and losers in this story, at the same time, Toyota's dilemma should be thought of as a parable that applies to the entire industry.
This is for two key reasons:
The witch hunt is on: Volkswagen became the latest automaker to announce a recall, on 193,620 vehicles made in Brazil. This is due to potentially problematic bearings on the rear wheels of the two models involved -- but there have actually been no incidents. "The recall is a preventive measure," VW explained on its Brazil Web site.
Toyota's woes have undoubtedly unleashed both an external and internal witch hunt: Knowing that the public is on the lookout for defects, auto companies will need to launch reviews, and possibly take preventive (and costly) measures, such as the one VW has done. All this to say that this is not just a Toyota story.
The downside to cost-cutting: As we all know, the globalized business world is an extremely competitive one, which has led to extreme pressures on companies to pare costs. Some cultures seem to do it better than others.
Product quality scares out of China in the past couple years seemed to reflect the willingness of short-term thinkers to commit fraud in order to underbid the next guy's price.
Yet in many other industries, the tech sector being one of them, globalized competition has provided consumers with better quality at ever lower prices.
Why has the auto sector had a rockier history, with recall scandals stretching back into the 1960s? We can think of a number of obvious factors:
1) Car ownership is very widespread, vehicles are used on a daily basis, and are made of huge chunks of metal designed to travel at fast speeds-they are, technically, dangerous.
2) Making autos is very complex, both in an engineering sense and in a political sense -- the latter being the fact that automakers often have to locate production within the local markets to which they hope to sell.
3) Economies of scale are crucial in this high-cost, competitive industry, which exacerbates pressure for firms to focus urgently on size.
4) Of course, quality and brand is crucial, which is why Toyota has in the past invested so heavily in these areas.
So why did Toyota fail so publicly on point (4), besmirching its hard-won reputation? We do not have a fly on the wall at Toyota, but we all know that the company has focused heavily on expanding market share in the past half-decade, while keeping a firm lid on costs. This goal forced Toyota to move more and more production out of Japan (only half of its cars are produced in-country), which may make it more difficult to control the production process. Finally, the sheer volume of pressures facing this industry may have led executives to close their eyes to any news that would stall the machine.
Toyota's case reminds us that cost-cutting is an art, and one that must be performed with care. We think the Toyota case will lead to rising costs for all automakers, as they review their procedures more closely, and increase investments in R&D and quality control. To a certain extent, this parable extends to all companies.
While this is good news for investors betting on a capex-led recovery (which we have made the case for more than once), it does raise some troubling questions about the idea of ever falling prices of manufactured goods. Toyota's troubles will lead to costs hikes across the auto industry, as well as many others.
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Unfortunately, you're absolutely right. Recalls aren't good for anyone (financially). Even so, I'm glad there has been such a public outcry lately. And not just against Toyota, either. Banks, Washington, automakers, et al are each getting hammered. I detest people like Sarah Palin and Michael Moore, but I really like the awareness they've brought to the mob.
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