The Toyota Weigh

http://www.flickr.com/photos/kenjonbro/ / CC BY-NC 2.0

For years Toyota has been the darling of capitalism. The "Lean Manufacturing" philosophy and "Toyota Way" became the model to emulate for manufacturing corporations around the globe. As people are quick to stand behind a winner, they tend to be even quicker to dissociate themselves if and when they fall from grace a la Tiger Woods.

To be fair to Toyota, the latest estimate is that their vehicles were responsible for 19 deaths in the past decade.^[1] While that's 19 deaths too many, it pales in comparison to over 420,000 motor vehicle related deaths that occurred in the United States alone over the same decade.^[2] It will take months to determine if Toyota executives acted with negligence or were slow to respond to the reports of problems; but given the statistics, even if Toyota admits 'mea maxima culpa', driving a Toyota remains safer than driving any given vehicle while texting, programing a GPS, speeding, or under the influence of alcohol among other driving hazards. It just happens that a large, financially successful corporation can be held accountable for those nineteen, while most of the 419,981 others lack such a powerful scapegoat.

That's not to acquit Toyota--especially if they knew about the design flaws and opted not to correct them for economic reasons. Ford allegedly did this with the Pinto in the early seventies. According to sources, the company knew about a design flaw that could cause a gas tank explosion in the event of a rear-end collision but determined that the ensuing lawsuits could be settled for less than the cost of fixing the design (since it was already well into production)^[3].

While the Pinto put a large gash in Ford's reputation, it has obviously recovered and is now all but forgotten. Given the scope of Toyota's recent recalls, this could have a much bigger impact on the company's reputation and future sales than the Pinto miscalculation did on Ford.

Some analysts have gone so far as to predict bankruptcy for the auto giant. This possibility may actually not be too far fetched given the debunking of the "too big to fail" myth in the past couple years. This, in addition to the fact that Toyota is still expecting a loss for the 2010 fiscal year (ending March 31) even before the impact of the recent recalls^[4]. Even so, it's also in the best interest of many economies, including the United States and Canada, to continue to support Toyota since the company produces so many local jobs.

At the end of the day, I wouldn’t feel too concerned about the statistics of driving a Toyota; but I do think it’s time for business to recall the cliche of the Toyota Way. Many of the principles will remain of course, but their association with Toyota will irreversibly fade. Now there may be a new business model for business to emulate: The Google Way.

The White House of Cards

The problem with foreclosures is that often times the pledgor is not cognizant of the severity of the problem until it's too late. It happened with millions of Americans who lost their homes. It happened with large institutions like Bear, Fannie, Freddie, Lehman and Wachovia. Now it is happening with the U.S. government.

Many financial advisers continue their rhetoric about a pending recovery of the U.S. economy, as it 'always does'. As mentioned in earlier posts, the U.S. economy is structured on cheap oil, which despite the crisis, still does not exist right now. In USD terms, oil is still more expensive than it was a year ago. Either the financial advisers don't get it, or they are lying the way Enron executives lied to their shareholders while funnelling their money out the back door. I suspect it is the former. Following weeks of market turmoil, record low auto sales and continuing record high oil prices, Citigroup finally began recommending to investors to sell shares in GM and Ford this week after their shares fell 82% and 67% in the last year. At least they made their statement sound eloquent:

"[W]e believe the risk-reward balance [on automaker stocks] has tilted decidedly negative on both absolute value and relative value versus underperforming suppliers," -Citigroup investment note.

Thanks Citi for the timely advice. Neither Ford nor GM has had a profitable automotive division in over 6 years. Better late than never I suppose.

Many had hoped that swift approval of the bailout plan would restore confidence in the U.S economy. Such an effect has yet to be seen as even the hopeful are growing skeptical. Hank Paulson said it will not prevent all bank failures--which are likely to resume their course now that the short selling ban has ended. Violent and sometimes even more damaging aftershocks continue to ripple worldwide as the USD is still the most widely held currency. The only stable asset right now is gold (it appears moderately unstable because of the gyrations of the currencies in which it is valued). Few signs of a bottom can be seen yet and confidence continues to slide.

Anyone who has been overseas recently knows that the once universal US dollar began to fall out of favour by merchants for other currencies over a decade ago. Unfortunately most Americans have never been overseas and don't even understand what is happening with their 401k's. Even the presidential candidates appear naive (or perhaps it is merely election rhetoric). They appear to think that they can solve the 'crisis' by investing in the economy (cutting taxes, fixing health care, energy independence spending, gas tax holidays, and so on). Unfortunately, it's probably too late for that, as they don't have any more pre-approved credit to invest. They would have to borrow it from foreign investors (or print it and make the USD worthless). The flaw that proved fatal for many of the failed institutions was the assumption that they could always raise more capital, if required.

House prices will always go up, storied institutions can always raise debt, and foreign investors will always buy up U.S. treasuries. The first two cards have already fallen. With foreign investors fleeing, the U.S. government needs to prove to its lenders that it will not default and is serious about paying back its debt rather than running deficits indefinitely. Serious action could take the form of pulling out of Iraq as quickly as humanly possible--this would likely split the country in three and destabilize the region, but the U.S. economy is pretty unstable itself if anyone hasn't already noticed; furthermore, as Alan Greenspan notes, Iraqi oil production has only now recovered to pre-war levels, so staying longer is unlikely to result in significant cheap oil supply anytime soon. It would also be wise to pull out of Afghanistan as soon as possible and negotiate a deal with the Taliban--this may not be in line with offical public policy; but as John McCain said, unofficial policy is often quite different from public policy. Most importantly, they need to sit down with the leaders of economic powerhouses and negotiate a set of terms to repay their debt and stabalize confidence. The first two cards have already fallen, if the third were to fall, it would get ugly. Barack Obama talks about hope and change. Let's all hope someone understands the severity of the problem and is willing to make the change required to avert a catastrophe.