Toyota fears loss of quality status February 9, 2007 BY JOE GUY COLLIER FREE PRESS BUSINESS WRITER Toyota Motor Corp., which has gained customers largely because of a reputation for quality, is concerned that a rise in recalls and customer service campaigns could hold back growth, an internal report shows. In the presentation about challenges facing Toyota in North America, Seiichi Sudo, president of its North American engineering and manufacturing unit, cites "the increasing recall trend" as a key risk. A chart in the presentation shows that recalls and the less-formal customer service campaigns, or CSCs, rose dramatically for Toyota in fiscal 2005 and 2006. "Design issues" were the chief culprit, caused largely by "high project workload." Warranty claims have declined, a positive sign that quality is being maintained, another chart shows. "However, chronic issues still exist," commentary in the presentation says. Toyota would not comment on the presentation obtained by the Free Press but said the report is a "planning document" that looks at challenges for Toyota in the next five years. "It is unfortunate that a confidential and proprietary Toyota document was released outside the company," spokesman Daniel Sieger said in a statement. The Japan-based automaker has come under scrutiny as many analysts predict it will surpass General Motors Corp. this year as the world's largest automaker. Toyota's global production rose 9.5% in 2006 to 9 million vehicles, shy of the 9.18 million GM made. Despite the concerns the presentation raises, Toyota had fewer recalls in the United States in 2006 than Chrysler Group, Ford Motor Co., GM, Nissan Motor Co., Honda Motor Co. or Volkswagen AG. Toyota's recalls fell by almost two-thirds to 814,507 vehicles in 2006, the National Highway Traffic Safety Administration reports. Toyota had several high-profile quality issues in the last year. Toyota had a worldwide recall in May of almost 1 million vehicles, including two-thirds of the Prius hybrids sold in the United States. In January, Toyota recalled 533,000 Tundra pickups and Sequoia SUVs produced at its Indiana factory because a flaw could make them difficult to steer. Toyota also settled this year a class action for potential oil sludge damage in a range of vehicles, including the popular Camry midsize sedans sold in the United States in the late 1990s and early 2000s. Businesses and academics around the world have studied Toyota for creating a production system that aims to find and fix problems before they reach the customer. But the Toyota Way is being stretched further each year as the company expands at a rapid pace. The automaker, which opened a truck plant in Texas last year, will open a Camry plant in Indiana this year and a RAV4 plant in Ontario in 2008. Redesigns and new vehicle launches often lead to a higher number of quality issues, but expansion has not affected Toyota's overall quality so far, said Neal Oddes, director of product research and analysis for J.D. Power and Associates. The Lexus brand ranked second and the Toyota brand fourth in the 2006 J.D. Power Initial Quality Study for fewest problems per vehicle after three months on the road. Porsche and Hyundai were first and third, respectively. The competition has closed the gap, but Toyota has continued to improve to keep its position at or near the top of the rankings, Oddes said. "We haven't seen any dip in quality," he said. "They continue to perform the same, if not better, than what they've previously done." Toyota stays at the top because it has an obsession with quality, Oddes said. "Their whole culture is built around reliability," he said. This mind-set can be seen in Sudo's presentation showing audacious goals for 2010: a "60% warranty reduction from 2002" and "zero recall/csc." Last fall before launching production of the new Toyota Tundra, Gary Convis, senior vice president of manufacturing in North America for Toyota Motor Corp., said maintaining quality is critical to Toyota's success. Toyota is well aware that it is being watched closely, he said. "The quality has got to be perfect," Convis said about the new Tundra. "Every truck has got to be perfect." Speaking Thursday at the Chicago Auto Show, Toyota Motor North America President Jim Press said the recent recalls will push Toyota to strive for higher quality. The recalls of Toyota cars and trucks, which peaked between 2003 and 2005, "scared us to the point where we're reenergized on quality, and you're going to see continuing bigger efforts to actually make the margin and the gap bigger," Press said, Reuters reports.