Impact of Product Recall on Share Prices: A Case Study of Toyota

This study evaluates the impact of news article of recalling vehicles on share prices of Toyota Company. It analyzes the impact on the share price of Toyota Company before and after the announcement and its impact on the long term period by considering the response of the management over the same.

Capital market research

TABLE OF CONTENTS
Introduction................................................................................................................................3
News Article...............................................................................................................................3
Impact on share prices................................................................................................................4
Respond of company towards the news.....................................................................................4
Conclusion..................................................................................................................................5

INTRODUCTION
Toyota motor Corporation is the multinational automotive manufacturing company,
headquartered at Toyota city, Japan. Toyota is one of the largest company in the world,
founded in 1937, since then it is continuously growing and achieve the significant position. It
is mainly engaged in the automobile manufacturing sector (Li, 2018). Along with the
automotive business, company is also engaged in the e-Toyota business, housing,
communications, financial services, Marine, Agriculture and Biotechnology, Powertrain
Units sales business and such other.
In the present era, the company is the market leader of the world in respect to the sales of the
hybrid electric vehicle, and it is also one of the largest companies to motivate the mass-
market for accepting the hybrid vehicle across the world (Liker and Ogden, 2011). The
company has also expanded its operations in most of the parts of the world such as in
Australia, North America, Europe and many other countries. The company also possess
significant human resources and around 3.64 lacs employees are working in whole over the
world. The present study is related to the evaluation of impact of news article of recalling
vehicles on share prices of the company. This study prescribes the impact on the share price
of Toyota Company before and after the announcement and its impact on the long term
period by considering the response of the management over the same.
NEWS ARTICLE
In the U.S., Toyota stated that it recalls about 807,000 of its Prius and Prius V hybrids
vehicles since they might stall while driving. The automaker is, in addition, recalling 168,000
extra motor vehicles in 2018 and 2019 inclusive of Tundra pickup trucks and Sequoia SUVs
for the reason of airbag trouble (Antti, 2018).
The faults take place in "rare situations,” according to the Toyota statement. It engages the
vehicle deteriorating to "go into a fail-safe driving form due to hybrid scheme faults."
At the time that occurs, “the motor vehicle might lose control and stall. As power steering
and braking will stay prepared, a vehicle stall although driving at advanced speeds might add
to the danger of a crash (Ball, Shah and Donohue, 2018)."
The automaker does not mention that rather any crashes had been connected with it, and lead
to any problems like injuries or deaths.

However, it is not the first experience of Toyota’s it always has the trouble regarding the fail-
safe process with several of its cars (Bowen and Zheng, 2015). Even in 2014-2015 the
corporation faces recalls problem, however they do not expect this new state at the point of
time.
"Because of unsuitable functioning in the airbag electronic control unit (ECU), responsibility
may be incorrectly noticed throughout vehicle start-up which would immobilize one or more
of the sensors used to sense crashes," Toyota believed.
"This might effect in the side and curtain shield airbags and/or front and knee airbags not
organized as intended in a crash. Consequently, there is a bigger threat of damage in the
happening of a crash and rigid supplies in convinced markets might not be assembling.
Chemical ammonium nitrate is used by Toyota to create a small explosion and blow up the
bags. Although it can get worse and be on fire very fast, blowing a metal canister
unconnectedly. The Lexus vehicles and Toyota were recalled before and the inflators put
back with new ones that motionless used ammonium nitrate (Chikudate and Alpaslan, 2018).
Furthermore, in the most recent recall, Toyota will make use of inflators that are created by
another corporation with a safer substance.
IMPACT ON SHARE PRICES
A product recall is a procedure of recovering and restoring faulty merchandise for customers.
At the time when corporation issue a recall, the corporation or producer soak up the price of
restoring and fitting faulty products (Amin, Blackburn and Garstenauer, 2018). On the other
hand, in large corporations, the expenses of fixing faulty products can increase to multi-
billion dollar losses.

Figure 1: Share price fluctuation
(Source: Market Watch, 2019)
Share price before news Share price after news Change
6773 JPY
4 Sept 2018
6450 JPY
5 Sept 2018
323 JPY
By considering the relevant aspect of the above study, it has been noticed that in the initial
year of the announcement the share price of the company got reduced, it became under the
category of the bearish stock however company take this matter very seriously and make the
strategies by which the share price of the company started to increase and after some time the
company gradually achieve its earlier position. Due to the recalling of the defective goods the
company suffered from significant losses, therefore, it impact the financial position of the
company adversely (Choi and Lee, 2018). On the other hand, it builds the reputation in the
eye of consumers, which leads to an increase in the brand reputation of the company across
the world. Confidence and trust of the consumers towards the company significantly
increased, which ultimately directed towards the increase in the share price of the company.
Therefore it can be said that in the short span of period, it drastically impacted the position of
the company in an adverse manner, however in the long run company sustained its position
back.
As a result of consumer protection laws, supplier and producer have to tolerate the expenses
of manufactured goods that are recalled. Although insurance might cover up a minimum sum
to put back faulty products, moreover a majority of manufactured goods recalls cause
lawsuits (Li, 2018). Among replacement costs, lost sales, lawsuits and government sanctions,

an important recall can turn into a multi-billion dollar trial. For multi-billion dollar
corporation, a costly short-term loss can be without difficulty conquer, however when
investors and clientele lose trust there might be huge long-term effects, for example, plunging
stock prices.
Toyota’s current stream of gas pedal recalls come up with the loss of $2 billion which consist
of repair operating cost and lost sales. In combination with the monetary disaster, Toyota’s
stock prices go down more than $35 billion or 20 per cent of it.
RESPOND OF COMPANY TOWARDS THE NEWS
Toyota does not feel good about how stakeholders are reacting about its airbag recall
consequently the corporation is preparing to get more violent to grab possessor notice.
Worldwide millions of vehicles manufacturer have been affected by the huge Takata airbag
recall. However vehicles model of 2001 is still on its list. Toyota states that although they are
on war towards reaching out to proprietor since far back as 2013, however half of the vehicle
proprietor doesn’t reply (Liker and Ogden, 2011). The trouble with the exaggerated airbags
is that changeable high temperature and high dampness enlarge the threat of break. Toyota
mentioned that the danger would be increased by time. As a number of the vehicles that were
recalled by Toyota are almost 10–15 years old, however, are very important to get fixed.
Consequently, the new movement will start with phone calls. Furthermore, there will be e-
mails sent. And in case that is not working than Toyota will begin with mailing out postcards
(Ni and Huang, 2018). A series of three bright colours, images and blunt language are
intended to encourage customers to carry its repair of exaggerated vehicle in for the free of
cost.
As per the Toyotas UKs market statement, it will examine vehicles without any charge, and
in the case where the wire core on the hybrid unit harness has been bare, it will be put back.
In conditions where the major point has not been uncovered, the defensive tape will be
practical to stop the insulation from tiring (Richardson, Shin and Soluade, 2018). Proprietors
will be informed of the awaiting recall opening in late September.
This was further disclosed in the annual report of a company with the heading of the
Cautionary Statement regarding Forward-Looking declaration, and additional Information
(Singh, 2018). It states that changes in the regulations, laws and administration strategies in
the markets in which Toyota functions that have an effect on Toyota's automotive process

will influence their future actions towards vehicles sold. This will chiefly include laws, policy
and administration strategies connecting to vehicle security as well as corrective actions for
example trade, recalls, environmental defence, vehicle release and vehicle fuel wealth, in
addition to alteration in regulations, laws and management strategies that influence Toyota's
additional processes, as well as the result of present and prospect proceedings and other
lawful measures, management procedures and study.
The company had presented the recall in a positive manner in their sustainability report. The
report states that the company is dedicated to keeping clients safe. They have a strategy of
including all their parent company’s (Toyota Motor Corporation) security expansion as
typical in all the novel vehicles they bring in. Moreover, they continue to work throughout
the Takata airbag recall for exaggerated Toyota motor vehicle in New Zealand.
The company further mentions that in 2015 worldwide recall of defective airbags shaped by
producer Takata has exaggerated a predictable 100 million motor vehicle globally from 11
main car producers (Zhou et al. 2018). They started working to put back the huge number of
affected cars. They continued to work all the way through the remaining vehicles as speedily
as parts bring in and capital allows. As a result of the scale of this recall, TNZ has engaged
additional employees to determine the problem as soon as possible for clients.
CONCLUSION
The present study shows that the impact of a product recall might be harmful in the short
run; however, there is no confirmation to hold up an enduring cut in stock prices and overall
sales of company. Leaders in their own manufacturing, Merck and Toyota have witnessed
huge monetary consequences because of product recalls. Furthermore, long-term tendency
indicates together corporation brands, as well as stock prices, have also been improved. With
the management of administrative agencies, product recalls have turn out to be as almost
weekly incidence. However, company had managed the issue in an effective manner to
maintain their image in market and prevent such issues in near future.

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