Sunday, February 07, 2010
From Mike Hull, President Donaldson Capital Management Consumer Strategist Like every corporation, Toyota has three obligations. It must be fair to its customers, employees, and shareholders. Being unfair to any of these stakeholders will cause them to take their contributions toward the company’s success elsewhere. Customers will buy what they need from another company. Employees will find work where they are treated better. And, shareholders will take their capital where it gets treated more profitably. Historically, Toyota has always treated all three stakeholders well. Today, however, it has a crisis with its customers with regard to unintended acceleration issues. To help recover from the crisis, employees are stepping up around the globe. Shareholders are scratching their heads and asking, “Is this still the company I thought it was or has the quality of its products and its reputation been irretrievably harmed? Indeed, would my money be better off somewhere else?” Employees are the easiest group with which to reach a conclusion. Toyota expects a lot from its people. But it trains them well, gives them all they need to do their jobs, and it pays them well. Insiders tell us Toyota treats their employees like family, which means, among other things, that they have almost no layoffs. From all we can see, Toyota is in good standing with its 320,000 employees. Toyota customers appear to be a loyal bunch. We have access to very little of the market research the car companies have performed. From anecdotes and general observations, however, Toyota has offered its customers quality and reliability for decades. That is evident in the way its customers have been willing to pay up a bit for those benefits, even as those cars hit the used car market. While most Toyota models are stylish, they do not command a crowd of “Toyota Enthusiasts” like Corvette or Porsche might. Toyota loyalists have come to look at their cars as highly dependable, quality rides. If Toyota can regain its quality and dependability, we believe the customers will remain loyal to the company. In the paragraph above, the word loyal stands out. We know loyalty can be won and it can be lost. We also know that loyalty does not depend on perfection. Everyone makes mistakes. Humans run car companies. Humans buy cars. In our judgment, if Toyota solves their current problems, their customers will forgive them. The company’s CEO said on Friday, “The company is prepared to cooperate fully and sincerely, and we are doing our utmost to deal with the matter in a way that brings safety and peace of mind to our customers.” We believe he'll deliver on his promises. Further, we are banking on two things happening over the next several months: 1) People owning Toyotas involved in the current recalls (8.1 million autos) will be treated far better than they would expect when they take their cars into their Toyota dealers. This great service will cause Toyota owners to regain their loyalty and become advocates for the company. 2) When people looking to purchase a new car think about Toyota, a new logic will come to mind that will sound something like this: “Toyota knows that they cannot afford to put another car on the road with any kind of quality issues. Surely, at this point, they have gone as far as a company can go to assure that the new cars coming from their factories are built of quality that is beyond challenge.” The media has beaten up the company pretty well on its slow response to these quality issues. Even Congress is going to jump into the act. Indeed, life-threatening problems with cars are serious business, but the number of reported cases of sudden acceleration is remarkably low compared to the total number of cars that are on the road. Furthermore, other auto companies have almost as many reported incidents of the acceleration problems as does Toyota. Bottom line: everywhere we look the news is about as negative as it could get for Toyota right now, and we believes it ignores the loyalty of Toyota owners. Oh yes, the third stakeholders: we the shareholders. Toyota is a company with huge financial strength; they can weather their current difficulties no matter how long it takes to clean them up. Because of this, we are much more optimistic about the company's prospects than many investors who have thrown in the towel on Toyota. Here's our reasons: Global auto sales fell dramatically over the last two years, pushing the average age of cars on American roads above 10 years. It is well known that the number of repair incidents for cars above 8 years rises geometrically. That means that repair costs for the average family in the US are rising rapidly. Additionally, repair costs are not the whole story. An unreliable car adds significantly to the nuisance factor in the lives of American families. In short, there is a lot of pent up demand for new autos that is building everyday. Toyota has built almost their entire strategy on quality and loyalty. Quality may be in doubt at present, but it will take more than the few issues they have today to break the loyalty they have with their customers. That is what we believe, and if that is true, Toyota common stock will recover and we will be rewarded along with their employees and customers. The best time to have bought Johnson and Johnson was during the Tylenol scare. We are convinced that history will show that the best time to have bought Toyota was during the accelerator scare. At current prices, we believe TM offers good value and we are nibbling on the stock for clients who don’t already own it. We own the stock. Please see "Conditions" on the right sidebar.