Oh! What a feeling!

Of course, designing in failure modes for safety critical electronic systems gets to be a fine art.  What would you like the system to do?  Might you build in redundancy?  How expensive is that?  How likely is that to happen?  Can the supplier of these components deliver to six sigma quality levels, and even if so, is that adequate?   The failure of Firestone tires on Explorers, for example, was in the parts per million region, but was still enough to torpedo one of Ford’s best selling vehicles ever.  Of course, a vehicle has four tires, and only one throttle, but quality control on these safety critical components has to be beyond reproach.

Now, is the electronic throttle to blame?  The jury is still out.  But it is important to recall what the motivation behind the device is.  There is perhaps nothing more reliable than a simple steel cable, which has served well for nearly 100 years in the role.  The old-fashioned cable due to its flexibility is easily package-able and is fiendishly simple and is reliable to a fault.  The reason an electronic system has been adopted is not due to cost or quality considerations, but to emissions.  Interactive electronic controls are able to fine-tune fuel delivery and throttle settings in order to both accept driver input and shade inputs one way or another to still meet emission regulations.  Yes, my friends, it has come to this.  But as regulations become more and more draconian, electronic throttle control will become more and more prevalent, potentially causing the sort of "beta error” that may be affecting Toyota’s quality perception.

Now, if you were Toyota, would you worry?  Yes, you would.  Toyota has few things going for it other than quality, meaning trouble-free operation for years and years of ownership and sterling resale values when it’s time to trade-in the old Camry, Corolla, Tundra or Tacoma.  Toyota is not known for style, technology, luxury, performance or any other of a number of attributes.  It is known for metronomic, boring reliability and durability.  If that is no longer associated with the Toyota brand, then Toyota is toast.

If you were Toyota, would you panic?  No, not necessarily.  If you were Ford, GM, Honda, VW or Hyundai, would you start celebrating?  No, I’d hold off for a while.  Unlike Audi, which had a fairly thin reputation, and not a very robust one at that, in the eighties, Toyota reigns as the quality king, and has a strong residual reputation remaining.  Let’s just say that the American consumer has paused in his and her rush to Toyota.  

While the market itself is off 24% this year from 2008, some makers have made at least market share gains, giving those OEM’s a leg up if and when sales recover to traditional levels.   Big gainers thus far have been Hyundai/Kia, Ford, VW and (somewhat inexplicably) Subaru.  GM and Chrysler, not so surprisingly, have lost share with poor public perception, iffy quality on the part of Chrysler, divisional and dealership closings on the part of GM, and a whole host of government mandated screw-ups.

Toyota ordinarily would be expected to at least gain share in a down market, being a safe haven for quality and value driven buyers.  Overall, though, Toyota Motor Sales remains stuck at 16.8% of the American market.  In other words, it is merely station keeping in this environment.  To its credit, Toyota Division remains the popular brand in America, at 15.0% thus far this year.  But Lexus is not moving strongly up, and the Scion brand is, amazingly, cratering, despite its youth, economic, and affordability focus.  Scion is down a Chrysler-like 42% this year, shedding sales in all its offerings, the tC coupe, xB box, and xD small hatchback.

For those who would wish Toyota ill, then, while we see that Toyota has not taken advantage of the current downturn, it has not been hurt by it either.  Overall share is steady, while only the Scion sub-brand is hurt.  Also, the Automotive News reports that many plants are now working overtime, despite a weak 10.4 million SAAR, and a second shift is being added in Ontario to built the RAV4.  If needed, the suspended Mississippi plant to ready to boost Toyota share in the U.S., and in a stealthy move, while Toyota isn’t moving the market share needle, Toyota-partner Subaru has, improving 0.7% in share and increasing volume by 14% this year, eking out a slight lead over Toyota’s worldwide nemesis, Volkswagen, in this market.

On the other hand, Toyota has stalled a bit.  It’s strongest markets, Japan and North America, have been hurt the most in the current slowdown.  Archrival VW has benefited from friendly governmental trade-in policies at home in Germany, an aggressive product plan, and a strong presence in China.  VW also is not above growth through acquisition, having recently won its intra-family war with Porsche and, more importantly from a volume standpoint, has bought a near 20% stake in Suzuki, India’s leading manufacturer through its partner Maruti.  While we’ve seen few growth-by-acquisition schemes prosper, VW is on a roll, and Toyota is being overshadowed by its German competitor.

So, will quality woes slam Toyota?  The giant has been staggered to be sure.  A rush headlong for growth and vicious cost containment may have led to some sloppiness.  Toyota has reservoirs of residual good will in the American market, but all the company has is Quality at the heart of its image.   If Toyota loses that patina, it may enter into a GM-style death spiral.  Frankly, I doubt that there will be more bad news for a company with such a strong culture for quality design and manufacturing.  But one never knows.

For VW, its podium finish has been dependent on its rival’s misfortune as much as its own strengths.  While the company will continue to be strong via its core brand and Europeans’ love of Golfs, Toyota will probably recover once the U.S. (in particular) and Japan recover.  As Porsche becomes VW’s tenth brand, and Suzuki potentially its eleventh, the ability of VW’s leadership to maintain growth, profitability, innovation and dominance among so many brands will be difficult.  On one hand, ultra premium offerings from Bentley, Porsche, Lamborghini, Bugatti will be relatively easy to keep differentiated, as each brand has a clearly defined niche.  But maintaining separation for more popular offerings at VW, Audi, Seat, Skoda and now Suzuki will be more difficult.

To regain the momentum and the lead, Toyota will need to rededicate itself to engineering excellence, benefit from economic recoveries in North America and Japan, and find its feet in China.  For challenger VW, coming up with an Alfred P. Sloan style model of operating several overlapping brands will be key.  Growth via acquisition has been the crack cocaine of business strategy.  It feels good for a short time, but internal contradictions take over.  Thus far, the nationalistic German and burgeoning Chinese markets have buoyed VW, while Seat and Skoda have made gains elsewhere.  As more internal competition chips away at VW, and competition is revitalized once the current recession ends, might Toyota, Ford, Hyundai, Honda, Nissan-Renault and others keep challenging VW’s ambitions?  Assuredly, so.