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February 05, 2010 – Comments (3) | RELATED TICKERS: TM


One of the things I like to do when thinking about companies and investing is draw parallels between what I am seeing in the world today what may have happened in similar instances in the business world in the past.  As I was driving into the office this morning and listening to the radio, I heard a brief news story on some of the now famous (or infamous) troubles that Toyota is having, and my mind went back to the 1980's.

Anyone who's grown-up in southern California knows that one of the teenage/young adult rites of passage, for many at least, is going to Knott's Berry Farm for Halloween.  For those unfamiliar, the amusement park is converted into one rather huge haunted house.  The staff where costumes, the rides and other attractions are decorated in accordance with the holiday, and at least when I was a teenager, employees would do their best to startle, scare, and spook those of us in attendance.

One such ride at the park is a little train (called the Calico Mine Ride, or something similar, I think).  Sitting at the front of the train was an engineer, and I'll never for get his costume, because at the time I found it pretty funny.  He had taken some large cardboard box, cut out holes for his arms and head to poke through, painted it or covered it in white paper, and decorated the box with the appropriate logos so as to look like a box of extra-strength Tylenol.

This, was of course, during the height of the 'Tylenol scare' that those who were around at the time likely remember, and that is still the stuff of cases in business schools today.  I don't remember the details, but for those around at the time the scare involved someone tampering with Tylenol and lacing it with poison.  Of course sales took a nosedive (even after the company had recalled all the product), and took some time to recover, but revover they eventually did.

Then I thought of an instance a couple/few years ago.  At the time, I owned shares in air-bed purveyor Select Comfort.  The share price took a nose-dive when news spread that at least some of their beds housed mold.  Of course later on the share price recovered (at least for a while) because, it's a moldy world out there, and no mattress is really immune - Select Comfort's, or anyone else's.

And then I think of Toyota's recent troubles.  Sure, the Tylenol case was different - it involved tampering with their product after it had left the factory.  Select Comfort's case involved mold that is pretty prevalent everywhere, so not limited to just their products.  Toyota's troubles, unlike Tylenol's, started with their own design and were built in their own factories, and unlike Select Comfort's, seem limited to just their cars.  So yes, there are differences.

But I can't help but look back at the decades-long reputation of world-class product quality from Toyota and not come away thinking that the current problems, no matter how severe they may be (and they are), are anything but temporary.  I can't help but wonder whether or not the stock market is overreacting, discounting the entire future of Toyota's abilility to return money to it's shareholders by some 30% or so (given quick glance and 'eyeballing' the stock chart).

Some of my favorite investments are those made in good companies in temporarily out of favor industries, or in great companies suffering from a temporary setback.  I'm not suggesting that Toyota is a good investment today.  I haven't done any homework.  Haven't done any analysis.  Haven't read any public filings.  I haven't even closely followed the recent news, hearing only the little bits and pieces I gather from the news during my morning and evening commute.

What I am finding myself doing, however, is drawing parallels...  and sometimes, when it comes to investing, I've found that it's not a bad place to start.


Russell (a.k.a. TMFEldrehad)

P.S.  I own no shares in any company mentioned in this blog post.

3 Comments – Post Your Own

#1) On February 05, 2010 at 12:33 PM, Dobbes (< 20) wrote:

A lot of people are eager to get in to Toyota on the dip, but they should keep in mind that the entire market may be going through a 'dip' for at least the next few weeks and wait for their buy in.

I think Toyota will emerge from all of this mostly pristine, with perhaps some brand erosion in the hybrid segment.  Not the worst thing.  Hybrid sales have slumped since gas got cheap again, and the number one selling car when gas was high was the mini-cooper, not a hybrid.  Consumers may prefer smaller, gas vehicles if forced to choose for fuel efficiency again.

Maybe the next generation of hybrids will be a bit more enticing.

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#2) On February 08, 2010 at 11:09 PM, fundamentalsrock (48.90) wrote:

I think a better parallel would be Ford Motor and the Pinto (remember the exploding gas tanks?)

 Why a better parallel?  Like Toyota, in the 1970's Ford was on top of the world when it introduced the extremely successful Pinto.  Like Toyota, insurance companies and government regulators told Ford of problems, and Ford (Toyota) failed to make relatively simple fixes (in Ford's case, an $11 design change would have saved 180 lives but was rejected as too costly).  Similarly, according to State Farm Toyota was informed in 2007 of problems and only acted when it was faced with impending government action; even Toyota acknowledges now that they took too long to act in the face of past government warnings from DOT in the U.S.

 In contrast, J&J's immediate response to the Tylenol tampering/poisoning is still taught in B-schools precisely because J&J acted immediately, publicly and aggressivelywithout regard to "cost/benefit" or bottom line analysis.  This caused consumers to increase their trust in J&J and the Tylenol brand.  J&J pulled all product off the market, and only reintroduced it once they had developed a "tamper proof" seal that is now practically required for all OTC medicines.   

 Do you really think that Toyota's conduct on this issue will increase trust in Toyota's product?   

The relevant question is not how apologetic Toyota is now, years after it learned of the safety issues and was literally forced to act.  Rather, Toyota investors should be asking whether Joe Q. Public will feel safe buying Toyota.  If the sales don't come back, 30% will only be the beginning of Toyota's fall from grace - and Fools would do well to recall that Ford's Pinto problems gave Toyota a huge boost as the pinto went from star performer to allegedly dangerous butt of jokes and Ford simply couldn't sell its star performing vehicle in the face of sudden widespread publicity.

 Ironically, Toyota resembles Ford in its own Pinto debacle.  And Ford had introduced the Pinto to battle  .... Toyota!

 To further the irony, Ford is a much safer buy right now than Toyota, and this gaffe will be mostly to Ford's benefit.


Disclaimer: I am long Ford calls, and short Ford puts.  

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#3) On April 08, 2010 at 11:58 PM, Antipopnfresh100 (62.42) wrote:

 I think you may be underestimating the long-term impact of this one.

You probably aren't a fan of his, based on politics at least, but blogger Nate Silver from has a three point test for assessing the lasting impact of political scandals on candidates.  I think the same three points apply to businesses after a stumble like this one.

 Here are the three points, and how I think they apply to the Toyota situation.

1.   Can the scandal be reduced to a one-sentence soundbyte (but not easily refuted/denied with a one-sentence soundbyte)?

Absolutely.  Scandal - Toyota cars kill you by accelerating out of control.  Response - Sometimes... but only because of the floor mats, or is it the electrical system, we just forgot to install a chip, the problem is solved (or is it?).

2.   Does the scandal cut against a core element of the (candidate's) brand?

You mean that Toyota's might not be as well-built and dependable as people think?  That was the whole reason people bought these things.

Incidentally,  Toyota's old slogan was "Moving Forward", which is just peachy for a company with braking and acceleration issues.

3.   Does the scandal reify/reinforce/"prove" a core negative perception about the candidate, particularly one that had henceforth been difficult to articulate (but not one that has become so entrenched that little further damage can be done)?

I think so.  A lot of people have the attitude that Japanese cars are just cheaply made, fad-ish gadgets. American cars have a reputation for being made with heavier parts and contain less advanced electronic systems. This design philosophy had previously been seen as just a drag on fuel economy and performance by many, but not all, Americans.  But now people may have more respect for simpler (and therefore more fool-proof) control systems and sturdier construction.

Take Chevy's "Like a rock"campaign.  It alway's seemed weird to me that you would want people to associate your car with stones, which are most famous for being low tech and, you know, not moving. 

But now it makes sense.  If you're stuck in a speeding Toyota, a rock would make a good anchor.


So that's three strikes.  And probably serious brand damage.

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