Toyota has received a lot of bad press the past few weeks. The company once known as the “best car company” that produced high quality affordable cars has becoming the laughing stock of the car industry . Toyota has manufactured millions of cars with multiple defects in them, and then allegedly tried to cover up the defects.No doubt Toyota will lose billions of dollars from this fiasco. I am giving a really rough estimate here, but Toyota plans on recalling around 10 million cars. Toyota will pay the dealerships to fix these cars. Assuming it will pay $100 per car that amounts to $1 billon. I think the costs will be far higher than $1 billion since many of the defects will cost more than this. In addition the company is diverting current employees to deal with all the recalls. In fact I went to my local Toyota dealership the other day and they informed that they would be open until mid night to deal with all the recalls. I assume Toyota will absorb those costs and not the local dealers. The company may also be subject to lawsuits from drivers who suffered serious injuries due to the defects.
Toyota in addition will lose billions of dollars from current and future Toyota buyers. My wife and I both own a Toyota and we will both hesitate buying a Toyota in the future. My wife’s car got in a serious accident approximately a year ago that cost thousands of dollars to repair. Of course the auto insurance company dealt with most of the costs. However, I was forced to pay a $500 deductable, my insurance premiums went up and the re-sale value of the car is now far lower. In addition, my wife’s car an Avalon 2005 was subject to three separate re-calls. I had to bring the car into the dealer on three separate occasions. This was a huge inconvenience and took away from both my wife, and our work schedules. I am sure other Toyota owners are as upset as I am.
I am not just telling a personal story here, there is a lesson to be learned for the investor. Ravi of rationalwalk.com and a GuruFocus columnist wrote an excellent article describing how Toyota spent decades building up decades building up its wonderful reputation (the direct link is here http://www.rationalwalk.com/?p=5015). Ravi notes how quickly that reputation can erode. Ravi quotes a Barron’s article which ranked Toyota #6 on the world’s most respected companies. This survey was taken before all the recalls, I have no doubt that Toyota would rank significantly lower if the survey was taken today.
I think there is another lesson for investors to learn. I think Toyota’s woes justify the merits of having a diversified portfolio. Whether Toyota will be able to un-do the damage it has caused to its brand is a separate question.
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To read the rest of my article on GuruFocus click here