The Real Scandal Behind the Toyota Recall

The Real Scandal Behind the Toyota Recall

Business Week

February 11, 2010, 4:39PM EST

Fuzzy findings, media manipulation, and tort lawyers scare the public and destroy millions in shareholder and resale value, writes Ed Wallace

By Ed Wallace

Following my own advice to go to the source, I called a few respected local Toyota (TM) dealers in the Dallas area to ask a simple question: "In the past 10 years, how many Toyotas have come into your service department with the complaint of unintended acceleration?"

The answer I got again and again? "None."

And they would remember: For new-car dealers across America, unintended acceleration is the most serious complaint a customer can make. Not because the situation exists as represented but because, as any auto industry insider knows, this condition can invoke a media firestorm whether it happened or not.

The newest story is that Toyota products are falling in resale value as a result of this issue. If true, this proves that our ability to remember widely reported, identical automotive complaints from the past goes down our collective memory hole intact.

Ask anyone who dealt in luxury cars what happened when the Audi 5000 unintended acceleration case panicked drivers in the mid-1980s. Owners of those vehicles rushed into competing dealerships trying to unload their automobiles, but retail sales for used Audis, already poor, had dropped off to nothing. Even wholesalers wouldn't buy them because they couldn't resell them. Audi dealers didn't want them. A typical bid for a one- or two-year-old Audi 5000 that originally sold for close to $30,000 often came in at $3,500.

Now, that's a serious hit to resale value.

A TRIP DOWN AUDI MEMORY LANE

What's ominous is that the Audi 5000 case seems to have set the example for how stories concerning serious defects in automobiles would be covered in the future.

Yes, there were people on TV (and in newspaper articles) who swore that their Audis, too, had become possessed and uncontrollable, and there's little doubt that they sincerely believed what they said. That does not alter the fact they were mistaken: In time, our government painstakingly tested every "possessed car," and no causative defect was ever found.

The Audi case seems to have foreshadowed a scenario occurring now with Toyota. This from Peter Huber's book, Galileo's Revenge, Junk Science in the Courtroom:

"The Audis, like other new cars, had come packed with sophisticated electronics to maintain idle, to regulate emissions, and to operate cruise controls. Never before had car engines been built around such sophisticated computers. So from the beginning, the car's electronics were numbered among the lead suspects. And after the accident, the brakes are always found to be functioning just fine. Always."

Sound familiar?

In the 60 Minutes piece on Audis' unintended acceleration that put this story over the top, they brought in William Rosenbluth to prove that Audis were defective on camera. As 60 Minutes correspondent Ed Bradley said, "We took a car that had already been involved in two sudden-acceleration incidents and, without his foot on the gas pedals, showed it could do this." Again from the book, Junk Science: "… and 30 million viewers saw it with their own eyes." What they saw was the gas pedal apparently moving under its own power.

But what the viewers didn't see was also revealed in Walter Olson's column, "It Didn't Start with Dateline NBC:" Off camera, they had drilled a hole in the vehicle's transmission and pumped extreme high-pressure air into it, which had the effect of moving the gas pedal down without the driver pressing it.

The audience and all of America came to believe that this Audi with two black marks against it was possessed. In reality, it was rigged.

As you'd expect, an Audi official appeared on that broadcast. He said his company had investigated these incidents and could find nothing wrong with their vehicles. Nobody believed him. There was a tidal wave of calls for the National Highway Traffic Safety Administration to recall 200,000 Audis, and massive engineering studies were done. Turns out the Audi official had been correct: The cars did not have any known defect.

Contrast that with Toyota's admission that it examined complaints on this issue, did find a problem with gas pedals made by CTS, and came up with a solution. As for the Toyotas' electronics, like the Audis', the company can find no issue at all. It should also be noted that Toyota looked into the complaints covering brakes on its hybrid electric Prius. While no real problem was found, Toyota did issue a recall to update the computer codes.

And just for the record: Many antilock brake systems feel as if they are skipping or failing to take hold quickly when engaged suddenly on bumpy roads.

FIRESTONE'S FIRESTORM

In some ways this case is little different from the Ford-Firestone fiasco of a decade ago. When Lea Thompson with Dateline NBC lifted up a Firestone tire's torn and separated tread for the camera, few viewers noticed that particular tire had almost no tread left. Old tires without treads often fail.

Almost unreported during the media coverage of that event were the easily available consumer warnings on the Goodyear Tire Web site. Anyone who went there could easily find Goodyear's (GT) explicit warning: If you drove on Goodyear tires that were seriously underinflated, the exact same thing would happen to you. Goodyear's accompanying photo showed a chronically underinflated tire's abnormally worn edges, where the resulting tread separation would start.

Firestone, on the other hand, admitted finding a small batch of tires from its Decatur (Ill.) factory that were substandard. But even that did not slow this story down; the media countered and claimed to have found faulty Firestone tires built at other plants.

There was a problem with that rush to judgment: NHTSA's database contained a corrupt sort command. I know, because I found it and reported it to NHTSA. It turned out that on their Microsoft Excel spreadsheet, if one clicked on the lower tab showing accidents tabulated according to where the tires were built, it juxtaposed the data—which then showed faulty tires being built in one plant when in reality those tires had been manufactured elsewhere.

That glitch also transposed all sorts of data about accidents reported. As an example, remember the story in which a Ford Expedition with only 800 miles and Wilderness tires on it rolled over? It never happened—except in NHTSA's database.

Still, that was an honest mistake. NHTSA corrected it within minutes and informed the media of the correction on its Web site. That was also the week the Ford-Firestone story went away.

ANOTHER OVERSTATED CASE

Shortly after the Ford-Firestone story left the headlines came the story of the exploding Crown Victorias. A number of incidents happened in North Texas (and across the nation) in which that car's gas tanks exploded when rear-ended by speeding drivers. Those stories certainly got broad and intense coverage, as did the chilling videos of the aftermath. We lost several respected police officers to such fires during traffic stops, and the City of Dallas considered suing Ford Motor (F) for failing to build a safer car.

One video, created by a law firm working on these cases and given to TV stations, showed a static Crown Vic being plowed into at a high rate of speed and bursting into flames. But against that film, Ford brought scientific evidence that the Crown Vic didn't just meet federal standards for rear-end collisions; it exceeded them. In fact, for this type of collision, the Crown Vic was substantially more robust than most vehicles of its class.

All of those exploding gas tanks did actually turn out to have one thing in common: Every individual who hit those Crown Victorias, often drunk in the middle of the night, was going uncommonly fast. In some cases the estimated impact speed exceeded 80 miles an hour. No car, not even a $120,000 Mercedes S Class, can stand up to that much kinetic energy.

In 2003, Texas finally passed a law to cut down on this particular problem. When approaching an emergency vehicle with lights flashing on the shoulder, drivers must either move over one lane or slow to 20 miles an hour less than the posted limit as they pass the emergency vehicle. That law is widely ignored today. Of course, drunks driving in the middle of the night aren't generally demonstrating mastery of the law.

THE AUTO INDUSTRY HALL OF SHAME

Automotive history should have a Hall of Infamy for scandals like this next one—the 1988 story involving Consumer Reports. The magazine's "investigation" of rollover problems it "found" while reviewing the Suzuki Samurai focused intense media coverage on a nonevent, destroying not just a vehicle but nearly its manufacturer.

Consumer Reports' raw video and its test drivers' reports were released in the mid-1990s when Suzuki (SZKMF) sued Consumers Union. According to that evidence, at CU's test track on Apr. 20, 1988, driver Kevin Sheehan took the Suzuki Samurai through its paces 16 times, some runs going in excess of 50 miles an hour, without ever once lifting the vehicle's wheels off the ground. Sheehan wrote in his notes: "Easy to control … Never felt it would tip over."

At that point, driver Richard Small took over and performed 21 runs, at least one at 55 miles an hour, and rated the vehicle "5 plus. No real problems."

That day Editorial Director Irwin Landau and Technical Director David Pittle were present at the track. And according to the lawsuit, one eyewitness claimed to have heard Landau tell Sheehan, "If you can't find someone to roll this car, I will."

David Pittle took the wheel himself nine times and managed to lift the wheels off the ground once. CU then changed the course setup—and would still have trouble getting the Samurai to show a propensity to roll. Somehow that became a nonissue: Consumer Reports proceeded to warn the American public that this was one very dangerous vehicle.

Sales of the Suzuki Samurai fell from 83,314 units to just 5,031 after the Consumer Reports story ran; Suzuki suffered serious damages from the exposé. But the public never heard the worst: When it sued because Consumer Reports continued to disparage the company, Suzuki made copies of actual CU testing video available to the media, so reporters could see just how duplicitous those tests were. Nothing changed.

CU demanded that NHTSA recall those vehicles as inherently unsafe, and NHTSA refused to do so. As a NHTSA spokesperson told me at the time, virtually every year since NHTSA's creation, Consumer Reports has demanded that a vehicle be recalled (because CU testing showed it unsafe). Yet as of that date NHTSA had done so not once. And this is a government agency that loves to recall cars.

In 2004, Suzuki and CU agreed to drop the lawsuit, declaring mutual respect for each other. But neither side backed down from their previous position. NHTSA still refused to recall the Suzuki, because it met all government standards.

THE SCORECARD

So what's the net effect of this situation? First, we no longer let our logic be steered by engineering and science. Instead, we seem to be letting courtroom-worthy theatrics sway our emotions. It's not the true facts of the case that win the day, but whoever can sway the public's mind the best.

These stories are not to be confused with legitimate automotive safety recalls, which happen on a regular basis.

Ignored in all of this is the financial damage done, ostensibly in the name of protecting the public. The unfortunate owners who'd already bought these unjustly maligned vehicles took serious losses on their resale value. But the harm these ill-researched stories do to car owners, like the havoc they wreak on automakers, never makes the news.

Neither do the final, vindicating facts—at least, not loud enough to overcome the initial bad impression.

To this day the public believes there might have been a problem with the Audi 5000, but it's not true. They believe the Suzuki Samurai rolled over easily, and that's not true either. They think Ford built an unsafe Crown Victoria, when all evidence shows that the other driver's extreme high-speed impact was actually to blame. Firestone is remembered as the world's worst manufacturer of tires, but that was far from the truth: In the vast majority of Firestones' tread-loss incidents, the culprits were old tires, improper inflation, and driving too fast in hot weather. Exactly the conditions that cause all tires to lose their treads.

The Audi official who said his company had investigated those complaints and found nothing was telling the truth. So was Ford when it maintained that Crown Vics could actually take a worse rear-end impact than virtually any other car on the road. Suzuki officials' pleas that their Samurai was incredibly stable fell on deaf ears—but it was.

Today, no one remembers any of that.

Now it's Toyota's turn. They investigated the complaints, found a number of small problems and said that's the only problems they could find, and moved relatively fast to fix those issues. The only way Toyota could be in trouble now is if, in a Nixonian moment, it was discovered that they'd lied or covered up another defect. The likelihood of that happening is low.

ABOUT THAT DROP IN RESALE VALUE

Oh, and about that drop in Toyotas' resale value? According to the National Auto Research Black Book, which covers prices of vehicles sold at regional wholesale auctions each week, a one-year-old Toyota Camry CE dropped $100 in value from Feb. 1 to Feb. 8. And it had dropped $400 in average value from the Jan. 11 book.

However, looking at a one-year-old base model Honda (HMC) Accord coupe in the same book, we find it too dropped $100 in value from Feb. 1 to Feb. 8, and $500—or $100 more than the Camry—from the Jan. 11 book. So the Honda Accord's reputation is intact, but it actually dropped more in value during this period. For what it's worth, the Nissan (NSANY) Altima seems to have gained a couple hundred dollars in value over the past month.

As they too often do, the media took a so-called expert's word on what was happening to Toyota's wholesale prices. Looking up such things as the real-world wholesale auction figures seems to disprove the expert's position.

Then again, most recalled Toyotas are not being sold at auction right now until the updates are done. Two weeks from now when they can be auctioned again, we might have a different story.

Ed Wallace is a recipient of the the Gerald R. Loeb Award for business journalism, given by the G. and R. Loeb Foundation, and is a member of the American Historical Society. His column leads the Fort Worth Star-Telegram's "Sunday Drive" section. He reviews new cars every Friday morning at 7:15 on Fox Four's Good Day, contributes articles to BusinessWeek Online, and hosts the top-rated talk show Wheels Saturdays from 8 a.m. to 1 p.m. on 570 KLIF.