Product Liability Suit - the Recall of Toyota Company - Case Study Example

? Product Liability Suit: The Recall Case of Toyota Company Texas A&M - Commerce In partial fulfillment of the requirements for MGT 590 Lloyd M. Basham April 12, 2012 Table of Contents Abstract 3 Introduction 4 The History of Development and Innovations 5 The Case of Car Recalls - What went wrong? 6 The Actions Taken 8 Impact of the Recall Incident 10 Conclusion 11 References 13 Appendices 15 Abstract With the fast growing world economy, the production is also intensified to meet the consumer’s ever-changing demands. It is imperative that products must comply with safety and quality standards to establish reputation and considerably reduce liability for the company. However, there are several reports of untoward incidents that are caused by safety-related defects of products. The failure of most companies to be responsible for their products resulted to product liability lawsuits. As a consequence, severe damage on the profit and sales can be experienced with a tainted reputation from the consumer perception. The case of Toyota Motor is an example of how product liability can make or break the success of a multinational company. This paper will examine the product liability suits of Toyota and their actions taken to face and mitigate the adverse effects of the staggering market complaints. Keywords: product liability, defects, Toyota, reengineering, Lean strategy Introduction With the continuous evolution of customer needs and satisfaction, quality and safety of products are becoming more diverse and demanding. The emphasis on quality products always goes hand-in-hand with customer safety and health. These are some of the deciding factors that maintain customer loyalty, establish reputation and considerably reduce liability for the company. Our society is becoming more litigious and very particular with performance, reliability, durability, and other value added benefits. However, there are sheer number of cases where products resulted to untoward incidents like injury and death which drive most companies to bring product liability to the spotlight. It is imperative to all companies that the heaviest responsibility for their products in the market rest on their shoulders. Failing to meet this responsibility will obviously result to legal actions and even threaten the company’s existence in the long run. The liability of manufacturers of products for harms caused to consumers has great prominence mostly in United States. It has already resulted to thousands of liability cases filed annually including some class actions of millions of individuals as plaintiffs (Polinsky and Shavell, 2009). The case of Toyota Motors has shown the world how a successful multinational company can be devastated with product liability suit within several years. Toyota is facing the biggest recalls in its history after uncovering widespread problems with its vehicles. Before we directly examine the events that caused Toyota Motors to recall millions of cars in different countries, let us first take a look on the beginnings and success of the company until the major outbreak of customer dissatisfaction and lawsuits regarding the failure of their products. The History of Development and Innovations The beginnings of Toyota Motors Company can be traced back from its founder Kiichiro Toyoda in Aichi, Japan. Established in 1937, the Toyota was previously branded as Toyoda which literally means “fertile rice paddies” in Japanese. The new name represented a convenient break from associating the company with old-fashioned farming. The newly formed word was trademarked and the company was registered in August 1937 as the "Toyota Motor Company (Toyota Motors Company, 1988) The Toyota Global (2012) website indicated that April 1936, Toyoda’s first passenger car was the Toyoda Standard Sedan AA. From September 1947, Toyota’s cars were sold under the name “Toyopet”. In 1982, the Toyota Motor Company and Toyota Motor Sales merged into one company, the Toyota Motor Corporation. Toyota then started to establish new brands at the end of the 1980s, with the launch of their luxury division “Lexus” in 1989. From thereon, Toyota began branching out by adding many larger and more luxurious cars to their lineup such as pickups and SUVs. In 1997, they began producing the Prius, the world’s best-selling hybrid car. A factor of the company’s success can be traced from its management strategy and philosophy. The “Lean Manufacturing” is the production system developed by Toyoda which emphasized on hearing customer’s voice and continuous improvement with eliminating of waste elements. In addition, the “Just in Time Production” in which each process produces only what is needed by the next process in a continuous flow (Toyota Global, 2012) At present, Toyota has established itself to be one of the forerunners in automobile manufacturing and has high regard for its quality and innovation that they constantly reinvent. However, in recent years, the world was shocked with the outpouring of product liability cases in which effects extended throughout the entire global automobile industry. The Case of Car Recalls - What went wrong? As early as March of 2007, Toyota has been receiving reports on accelerator pedal glitch in some of their car models. As an action, Toyota performed widespread car recall activities starting as early as September of 2007 where in the United States, 55,000 Camry and ES 350 cars were involved. The National Highway Traffic Safety Administration (NHTSA) assisted the recalls followed by an advisory of the danger of unwanted acceleration wherein the identified culprit is the heavy-duty rubber floor mats (CNNMoney, 2012). Despite of the recall activities happened for Toyota car models, a tragic accident in August 2009 which ended the lives of a whole family inside a Lexus car has caused uproar in the media and consumers alike. It was reportedly instigated by the same design failure of the rubber floor mats which unfortunately caused the accelerator pedal to get stuck. The NHTSA investigated the accident and found out that design defect was committed and complacent installation of the accelerator pedal resulting to car’s failure. After two months, Toyota announced the voluntary recall of more than 3.8 million vehicles. The design defect is part of the liability of any companies. The design defect happens when a product design is proved to be essentially potential to cause harm or rendered useless (and hence defective) no matter how carefully manufactured. The determinants of this liability are reflected by failure to satisfy ordinary consumer expectations for the product safety or the risk associated with the product outweighs its benefits (Barker, 1978). After the massive car recalls in 2009, the following months has been dedicated to redesigning/reengineering to prevent the floor mat from causing the accelerator to stick, including reconfiguring the shape of accelerator system, redesign of floor mats, and installation of a break override system (MSNBC, 2012). Despite of the corrective actions done, in early of 2010, complaints keep pouring into the company and forced for a second massive car recall because of faulty accelerator pedals but this time, without floor mats. This event was labeled by the NHTSA as the “sticky pedal recall” which requires a repair by the manufacturer itself and come up with new pedals to replace the repaired pedals as per recommendation from the NHTSA investigation (NHTSA, 2010). The second recall was done mainly in the United States, Europe and China covering a total of more than 4 million cars followed by the suspension of sales which was lifted in February of 2010. The second recall mainly involved a manufacture defect as from the statement of Toyota recall FAQ (2010), materials used and environmental conditions has catalyzed the degradation of acceleration pedals causing it to stick. The case of manufacturing defect is a clear instance of strict product liability. A product "contains a manufacturing defect when the product departs from its intended design even though all possible care was exercised in the preparation and marketing of the product” as stated in the Restatement (Third) of Torts by American Law Institute (2010).  In any case, the company is more vulnerable with product liability suit. The unfortunate recalls did not stopped yet. The following month of February, 2010, the NHTSA announced of problems encountered to the braking system of specific car models like the newly release Toyota Prius at that time. In the US, around 102 reports were filed and an additional 14 were made in Japan. The incidents were investigated both by Toyota and NHTSA and agreed on a software glitch in the braking system. As reported by Zino (2009) of the Detroit Bureau, some complainants directly said “my car surged as I was slowly pulling up to a stop sign and gently braking. I came very close to hitting the car in front of me, had to push down on the brakes very hard, which activated the abs (anti-lock braking) system”. This event was probably caused by poor decisions with the design and calibration added by some seen factors like the low rolling resistance tires and suspension settings (Zino 2009). The recalls were then initiated on the following months not only for Prius models but for other models as well like Lexus, Crown and Avalon cars in the late months of 2010 recovering more than 1.5 million cars. Within this year, mixed reports came streaming to the company with issues on steering and valve spring systems including stability of controls (Toyota Press Room, 2010). In fact, recalls were also recorded during November 2011 in some countries (other than US) for steering problems and the latest was reported in March 2012 involving around 680,000 cars for faulty airbags and brake lights for pick-ups and sedans respectively (Dapena, 2012). Aside from product liability failures of Toyota, the fast paced expansion of the business can be attributed to the immense recalls. In an issued statement by Akio Toyoda, he admittedly pointed out that Toyota’s priorities for safety, quality and volume became mixed up and listening to customers’ voices for better products has significantly weakened. These require them to pay significantly for the consequences and take some corrective and preventive actions. In addition, the CBS news stated that bureaucracy, overconfidence and weak management of the company are some problematic characteristics that emerged during the recall crisis (Holstein, 2010). The Actions Taken The piling up of product liability lawsuits for Toyota Motors seems to continuously increase. There are some reports that as early as 2010, the company was reported to experience “the biggest product liability case in the automotive industry” according to an interviewed Professor from Pepperdine University School of Law by the Los Angeles Times. However, these uncalled “misfortunes” can also be caused by driver’s negligence yet investigations still points the fingers to the company mainly due to design and manufacture defects. In response, several actions were made by Toyota to face several public scrutiny, government sanctions and numerous class action lawsuits. The first recall instigated the redesign of car models with focus on the floor mat and accelerator pedals. The redesign or reengineering actions made by the Toyota is part of the basic business process design (BPD) as a strategy for process that require improvements beyond what can be done via incremental enhancements (Meredith and Shafer, 2010). The BPD in this case is directed towards satisfying the need for the shifting customer requirements in terms of safety and quality of products. The basis of this action appeared to rest solely on the floor mats’ fault according to Toyota. However, the NHTSA issued a statement stating that the “removal of the floor mats is simply an interim measure, not a remedy of the underlying defect in the vehicles (NHTSA, 2009). It took only two years for another recall to happen which is caused by the same issues. In 2010, the floor mats were proven not only the source of accidents but the accelerator pedals as well. This shows lack of proper safety investigation and problem identification in the part of the company. Toyota has monetarily taken the unprecedented step of stopping production with the goal to re-examine its manufacture and design aspects. However, this was proven to be unsuccessful with complaints emerging from several car problems not only with accelerator pedals but on other components like steering and braking systems. The bolstering of the company as one of its strategy to highlight the positive attributes and qualities amidst the ruckus is not a good idea. In the Toyota Press Room (2010), statements were released like “doing the right thing for our customers” and “the way Toyota has stepped up to meet our responsibilities to our customers” which are not considered ethical. It was only until the CEO of Toyota appeared to the congress that a statement was made for a euphemism for apology through the words “deeply regret” for the victims and damages brought by product liability failures of the company. In fact, observers during the ‘supposed-to-be’ apology by Mr. Toyoda described it as superficial emanated from his bowing gesture (The Economist website, 2010). Moreover, his proposed solution — “to create a global quality committee and seek advice from outside experts to evaluate Toyota’s operations” did not impress most members of the business community. On a positive note, improvements in the management level were implemented. These include the assignment of Chief Quality Officers native to the region, promoting regional executives to positions formerly held by Japanese members, “promoting several Americans to chief engineer, adding time to the development process to focus on quality, reassigning 1000 engineers to focus on quality, establishing a group of highly trained technicians and engineers (SMART) who would go out to personally investigate the car a customer was complaining about, and the list goes on and on” as directly stated in the Toyota under Fire book (Liker and Ogden, 2011). Moreover, the company’s transparency on the recall activities can be also commendable. Impact of the Recall Incident In total there can be nearly 10 million cars recalled by the Toyota motors within a period of six years. The 2009 NHTSA data revealed that Toyota has the most recall for safety-related defects (please see Appendix A). The incidents of safety defects have caused several deaths recorded as shown in Appendix C and D. The recall incidents posed a threat on the sales and put at risk potential thousands of workers in major continents in the world. The Toyota faces overwhelming number of serious lawsuits since 2007 which has direct negative impact on its reputation and financial standing. It was reported that the recalls made until the early months of 2010 has inflicted a direct cost of around USD $ 2.3 billion (see Appendix B). The company’s losses were estimated at $7.7 billion in the first quarter of 2009 and $5.5 billion in the early 2010. Toyota has already slashed more than 6,000 jobs at Japan since the onset of the global economic crisis. Furthermore, the company’s production dilemma has resulted in tens of thousands of jobs being lost in the auto parts sector that supplies its production lines (World Socialist Website, 2010). The longer safety and customer satisfaction matters remain under media and government scrutiny, the more serious the potential consequences of the lawsuits against Toyota (Zino, 2009). In the consumer side, Toyota drivers also have their share of dilemma from the recalls. The safety defect might cost them to pay any portion of damages incurred to any untoward situation during driving. The resale value of Toyota and Lexus has dropped significantly which is a disadvantage to buy-and-sell consumers and can prompt insurance companies to reduce their coverage during car accidents. Auto pricing experts started to document declines in the value of Toyota's products. Kelley says prices for used Toyotas caught up in the recalls have dropped 2.5% to 4.5%, depending on the model. Edmunds.com estimates that used Toyota models are down about 3% for retail and about 6% on trade-in value (Hirsch and Pfeifer, 2010). Toyota's latest situation needs to be remedied quickly and without future recalls to produce a minimal impact to perceived quality. The impact of a damaged brand image would be lower sales and resale values (Alamo Grp. Inc, 2010). Conclusion The reputation of Toyota Motor Company was already tainted because of their failure to address the staggering incidence of product liability cases and economic downturns hurled by domestic and global markets. Their unethical cover ups made during the first recall incidents cost them billions of dollars and loss of several lives. It was only in the recent years that apparent admittance of product liability failures was released. The Toyota maybe learned its lessons, and to be able to survive must minimize the recall activities. However, they must still face the retribution of their delayed acts to the consumers and the legal institutions alike. References Alamo Group Inc. (2010). Residual Value Report: Toyota recall impacts resale. ALG. Retrieved from: https://www.alg.com/pdf/MA10_RVR_US.pdf American Law Institute. (2010). Restatement Third, Torts: Liability for Physical and Emotional Harm. ALI, PA. Retrieved from: http://www.ali.org/index.cfm?fuseaction= projects.proj_ip&projectid=16 Barker, R.P. (1978). Employers insurance of Wausau. Barker v. Lull Engineering Co. Retrieved from: http://online.ceb.com/calcases/C3/20C3d413.htm. CNNMoney. (2012). Toyota’s Troubles: A timeline. Retrieved from: http://money.cnn.com/autos/storysupplement/toyota_timeline/ Dapena, P. (2012). Toyota recalling 680,000 vehicles. CNNMoney. Retrieved from: http://money.cnn.com/2012/03/07/autos/toyota-recall/index.htm. Hirsch, J. and S. Pfeifer. (2010). Toyota faces massive legal liability. Los Angeles Times. Retrieved from: http://articles.latimes.com/2010/feb/12/business/la-fi-toyota-liability12-2010feb12 Holstein, W.J. (2010). Toyota recall highlights deep organizational failures. CBS News. Retrieved from: http://www.cbsnews.com/8301-505125_162-51391889/toyota-recall-highlights-deep-organizational-failures/ Liker, J.K. and T.N. Ogden. (2011). Toyota Under Fire: Lessons for turning crisis into opportunity. USA. Retrieved from: http://chiefexecutive.net/unsubstantiated-public-attacks-learning-from-the-toyota-recall-crisis Meredith, J.R. and S.M. Shafer. (2010). Operations Management for MBAs: Chapter 1 – Operations Strategy and Global Competitiveness. 4th ed. John Wiley & Sons. MSNBC (2012). Toyota recall timeline. Retrieved from: http://www.msnbc.msn.com/id/35240466/ns/business-autos/t/toyota-recall-timeline/#.T4dOOqvTDfI National Highway Traffic Safety Administration. (2010). Consumer Advisory: NHTSA’s advice to Toyota consumers. Retrieved from: http://www.nhtsa.gov/CA/02-10-2010. Owen, D.G. (2008). Design Defects. Products Liability Law, 2nd ed. pp. 292-368. Retrieved from: http://www.law.missouri.edu/lawreview/docs/73-2/Owen.pdf. Polinsky, A.M. and S. Shavell. (2009). The uneasy case of product liability. Harvard Law Review. pp. 1-56. Retrieved from: http://www.law.yale.edu/documents/pdf/LEO/09-09-08_Polinsky.Shavell_ProductLiability.pdf The Economist. (2010). Body language in Japan: The bend, the bow and the kowtow. Retrieved from: http://www.economist.com/blogs/gulliver/2010/02/body_language_japan Toyota Motor Corporation. (1988). Toyota: A history of the First 50 Years Toyota Motor Corporation, 1st ed. p.1-522. Toyota Global. (2012). Toyota Production System. Retrieved from: http://www.toyota-global.com/company/vision_philosophy/toyota_production_system/ World Socialist Website. (2010). Toyota recall highlights crisis in global auto industry. International Committee of the Fourth International (ICFI). Retrieved from: http://wsws.org/articles/2010/feb2010/toyo-f12.shtml Zino, K. (2009). NHTSA Tracking Braking Loss on Prius Hybrids. An article on The Detroit Bureau. Retrieved from: http://www.thedetroitbureau.com/2009/12/nhtsa-tracking-braking-loss-on-prius-hybrids/ Appendices APPENDIX A Vehicles recalled in 2009 by auto-makers for safety-related defects. MANUFACTURERS VEHICLES RECALLED TOTAL RECALLS Toyota 4,872, 583 9 Ford 4,521,993 8 General Motors 2,242,230 17 Hyundai 1,059,617 7 Nissan 706,982 6 Chrysler 590,044 16 Honda 454,003 4 Volvo 191,705 7 Kia 176,382 2 Mazda 131,920 6 Volkswagen 100,764 8 Mitsubishi 76,498 4 Subaru 21,357 1 Jaguar 16,828 2 Mercedes-Benz 16,536 4 Maserati 8,736 3 Ferrari 4,306 2 Land Rover 4,041 2 BMW 2,858 2 Tesla 345 4 Lotus 87 1 Roush 81 1 Bentley 27 1 Source: Free Press Analysis of NHTSA data (2010). APPENDIX B Percentage gains/losses released by automakers for January 2010 compared to January 2009 Source: The companies, Edmunds.com by Los Angeles Times. APPENDIX C Toyota Vehicle-related death vs. Age Source: Free Press Analysis of NHTSA data (2010). APPENDIX D Toyota unintended acceleration vs. age Source: Free Press Analysis of NHTSA data (2010). Read More