Following is a paper I submitted on March 18, 2010 to my professor of Corporate Social Responsibility course @ SCU( I received an A grade for the course) :
“For every complex problem there is an answer that is clear, simple, and wrong.” – H.L Mencken
As an engineer working in the technology industry, my job function and responsibilities are mainly in the area of software product testing. While I am neither an employee of Toyota, nor an employee of any other automobile company, as a Software QA Team Lead, I feel that this topic is very relevant to my day to day work, for the simple reason that Toyota’s recent troubles allegedly stems from some electronic components inside the accelerator/braking system, a defect that was supposedly not caught in their quality tests. This case has a lot of relevance to the kind of decisions that quality personnel have to make on a regular basis. Furthermore, this is a hotly debated topic in the public policy arena at the moment.
My goal in this paper is to demonstrate the potential repercussions of a populist crusade against genuinely good businesses – a perspective rarely considered by ethicists in their enthusiasm to bring down a corporation because of situations with mere appearance of impropriety.
The Toyota Way
Toyota started in 1933 as a division of Toyoda Automatic Loom Works devoted to the production of automobiles under the direction of the founder’s son, Kiichiro Toyoda. Its first vehicle, passenger cars A1 and G1, rolled out in 1935. The independent Toyota Motor Co. was established in 1937.
In recent years, Toyota had grown into the single largest manufacturer of passenger cars in the world, overtaking GM. Some of Toyota’s sedans like the Camry have outsold most all others in the United States for several years. Over the years, Toyota has earned the reputation as the maker of some of the most reliable, durable, and safe automobiles in the world.
In April 2001 TMC adopted the “Toyota Way 2001”, an expression of values and conduct guidelines that all employees of TMC should follow. The values and guidelines are summarized as follows: (Human Resources Development, 2003)
- Continuous Improvement
- Kaizen (improvement)
- Genchi Genbutsu (go and see)
- Respect for people
However, according to outsider observers, there are four components to the Toyota Way (Liker, 2003)
- Long-term thinking
- A process for problem solving
- Adding value to the organization by developing its people
- Recognizing that continuously solving root problems drives organizational learning
Toyota takes pride in her insistence on being the highest quality automaker. This was validated by the trust that customers placed in their Toyota and Lexus branded automobiles. Toyota had a reputation for being the car with one of the highest resale value, and longest durability, until the recent brouhaha about the reported “sudden unintended acceleration” problem and subsequent accidents and associated loss of life.
Toyota and the Sudden Unintended Acceleration (SUA)
In November of last year, Toyota initiated a recall of some 3.8 million of its vehicles for a sticky pedal problem. The recall was voluntary, out of fears that loose floor-mats might cause the pedal to stick, increasing the odds of an accident. The recall was the largest in the company’s history.
The recall was followed by an amended recall on Jan 28, 2010, that included 5.2 million vehicles for pedal entrapment/floor-mat problem, and another 2.3 million vehicles for accelerator problem. Around 1.7 million vehicles were subject to both problems. (Toyota Pressroom, 2010)
While working with National Highway Traffic Safety Administration (NHTSA) to send letters to owners of its cars, Toyota planned a 3 pronged strategy for its recall effort: train their dealer service staff to reshape gas pedals, redesign and ship new gas pedals, and install a brake system that will turn off the engine if both the brake and the accelerator are pressed simultaneously.
Toyota also announced that the cost of the recall will be borne by a $5.6 billion fund that the company had set aside for recalls, and thus there would be no effect on the company’s bottom line. (Toyota Press Release, 2009)
However, history of SUA didn’t start in November of 2009, but going all the way back to the last millennium. Since 1999, at least 2,262 Toyota and Lexus owners have reported to the NHTSA, the media, the courts that their vehicles have experienced SUA under a variety of conditions. These incidents have produced a total of 815 crashes, 341 injuries and, 26 deaths potentially related to SUA. (Kane, 2010)
The critiques of Toyota argue that the company ignored plenty of warning signs, in a callous quest for profit. As stated earlier in this report, there have been over 800 incidents of reported SUA involving a Toyota/Lexus branded vehicle.
Toyota brand has been tarnished by the events of this particular case, the company has been vilified, and has been named defendant in many a class action lawsuit. The biggest impact is to the company’s bottom line. According to JP Morgan’s Kohei Takahashi, the company could take a hit of 5.5 billion USD due to the SUA incident (Hosaka, 2010). So it begs the question – what went wrong for company that could otherwise do no wrong?
Will engineering ever be flawless?
As an engineer responsible for designing quality processes and procedures for complex products, I can tell you that the answer to that question is a resounding never. Even small software products have millions of possible combinations of software code-paths that will be impossible if not impractical to conceive ahead of time, plan it, and test it before a product is released. The job of a smart quality engineer is to design tests such that bulk of the flaws, especially the more serious ones, a customer could encounter be caught and fixed before the product is released.
In the case of an automobile, not only does it contain complex software that controls the fuel injection and breaking system, but also 1000s of electro-mechanical parts that have to work together to create a satisfactory and safe utility for their paying customers. The potential combinations of tests are impossibly huge and, tremendously expensive, as any person with a background in quality engineering can tell you. A product that undergoes this type of “comprehensive” testing will be impossibly expensive, if not impractical to create. So the question really is not, “should Toyota have caught this problem before their vehicles left the factory floor?”, instead, “Should they have taken the early warnings more seriously?” A quick peek into the history of SUA incidents might give us some clues.
History of SUA
The history of SUA did not start with Toyota. It goes all the way back to the late 1980s when SUA was reported with all manner of cars. In the popular case of the late 1980s, the NHTSA eventually ruled that the cause of the accident was “pedal misapplication”, in other words, stepping on the gas when the driver meant to step on the brake. These incidents were correlated with three things: being elderly, being short and parking (or leaving a parking space)
In Sep 2000, I was personally involved in a not-at-fault accident where the other driver crashed into the passenger side of my car, coming from behind at a speed much above the stated speed limit. The location of this accident was right on top of the Dumbarton Bridge that connects eastern shore of the San Francisco Bay to the peninsula. That driver was a gentleman of more than 60 years of age, if not closer to 70 years. He drove a Ford Taurus, and reported to the CHP that he lost control of the car as it accelerated without any intent on his part to do so. Cops who deal with cases like this were pretty sure that it was a case of an old man losing control of the car on top of a bridge with a well known condition of high winds.
One thing that any student of MGMT505 should know about human behavior is that human beings have a tendency to not blame themselves for the circumstances that causes undesirable events or outcomes. It should be easy to see why SUA was construed as one such case, not only by Toyota, but by regulatory agencies such as NHTSA.
As reported earlier in this document, the total reported incidents of SUA, both alleged and real, was “only” 841. That may sound callous, but compared to 1.2 million killed and 50 million injured worldwide in traffic accidents worldwide in year (World Report on Road Traffic Injury Prevention, 2004), the 841 figure really diminishes in significance. Now, here is the real kicker, 34% of those accidents are directly attributable to road design and the road environment, clearly a responsibility of the governments in most part of the world, whose opportunistic agents have gotten a special kick out of demonizing Toyota Motor Corp(TMC) (Santos, 2002).
In addition, if one looks at the demographics of the driver fatalities in these SUA incidents, a striking pattern emerges. In the words of Megan McArdle, “The overwhelming majority are over the age of 55. The elderly are more prone to this sort of neuronal misfiring. This effect would be enhanced by the driver being slightly misaligned in the seat when he first gets in the car. This is not too hard to understand, given that even a basketball player who makes 90% of his free throws sometimes misses the hoop.”
The data from the recent Toyota SUA complaints paints a very similar picture (Williams, 2010): (McArdle, 2010)
When a car accelerates unexpectedly, the driver often panics, and just presses the brake harder and harder. Drivers typically do not shut off the ignition, shift to neutral or apply the parking brake.
To quote Ms. McArdle again: “in many cases, there were no witnesses, therefore no exact details as to when the car started to run away. In fact, in many cases, the best witnesses to the incident were all killed in the incident, and their families just doing what they can to reconstruct what happened from their prior knowledge of the deceased. In some other cases, the police or doctors have an alternate theory of what happened: one of the victims was bipolar, which puts him at a high risk of suicide; two other young drivers were driving at very high speed, which is something young men tend to do regardless of the stickiness of their accelerator; and few other drivers seem to have had a stroke to which the doctors/police attribute the acceleration” (McArdle, 2010).
In any event, once you digest all of these facts, it becomes clear as to why Toyota did not consider this as overwhelming evidence of a serious problem. That is not to say that it is the drivers who are necessarily at fault. Whatever the defect in Toyota vehicles, it is not smart enough to pick on short and elderly drivers.
None of this is going to help Toyota. Its image has already taken a toll in the eyes of the public, it will continue to face waves of lawsuits, and it might be very difficult to get a fair trial.
It should be clear to any student who has completed the MGMT505 course that financial consequences of ethical negligence, purposeful or otherwise, on the part of corporate management, could be devastating to that company. Anyone doing a rational analysis of the situation will find it hard to buy into the narrative that Toyota did not care how many people it killed so long as they made a profit. Not in this day and age. It is too risky, in this age of nosy regulators and angry consumer activists.
Why is Capitol Hill so eager to publicly crucify Toyota executives? One possible answer could be found in the fact that the U.S government can no longer be trusted as a disinterested third party whose sole interest is to protect the U.S citizens they have vowed to represent. Because earlier last year, U.S government chose to become a major shareholder in couple of Toyota’s bigger competitors, in a politically unpopular move, I might add. Sunk-Cost fallacy tells us that those who supported the decision to bailout GM and Chrysler have a vested interest in making sure that their decision turns out to be a positive one. That is not to say that this SUA was born out of a conspiracy on the Capitol Hill, far from it. The congress is, merely, taking advantage of a situation that was thrown into its lap.
When the Transportation Secretary Ray LaHood urged Americans to “stop driving” their Toyotas this January, was he speaking as the head of a federal agency concerned with highway safety or as a sales advocate for a nationalized GM?
Moreover, according to WSJ, lawyers across the U.S are clamoring for lucrative roles in the litigation against TMC, hoping to emerge as leaders from the scrum of those who have filed dozens of lawsuits (Searcey, 2010).
It is clear, that corporations sometimes as large as TMC could be victims of persecution just as much as ordinary citizens.
The Toyota’s voluntary recall case is a clear sign that markets work as they should. A functioning market is one in which the various companies produce products that meet consumer demands – for products that are safe and effective. Companies that don’t meet this demand, intentionally or otherwise, risk losing customers and money, as the Toyota case has demonstrated.
Toyota’s decision to recall 3.8 million vehicles came in the backdrop of its regulator, NHTSA’s reluctance to reopen a closed investigation into potential defects in Toyota branded cars, clearly demonstrating private sector’s incentive to compensate for perceived problems. Errors are part of life, we all make them, and the management of TMC is no exception. Correcting errors when they occur is a necessary part of a well functioning market.
There are trusted private organizations like Consumer Reports, Kelly’s Blue Book, Edmunds.com etc. that have incentive to provide reliable, accurate and timely information on product quality and safety. Customers trust similar organizations when deciding to buy consumer electronics or appliances. So the Toyota SUA experience doesn’t prove the necessity for more regulatory bureaucracy.
The parent organization of consumer reports, Consumer Union, has about the same number of employees as NHTSA – 600 employees. While Consumer Union generates revenues of over 200 million from its willing customers, NHTSA costs tax payers upwards of $850 million (NHTSA FY 2009 Budget Overview, 2009).
If those aren’t enough reasons to distrust more regulations, consider this, among the legislators investigating the Toyota recall are Senator Rockefeller(D-WV) who admits to lobbying Toyota to build a plant in his state, and Representative Darrel Issa (R-CA) who still serves on the board at the auto alarm company he founded, which sells to Toyota. Lawmakers also have an incentive to just chase after catchy headlines.
Politicians in their quest for power and eagerness to boost their own egos have hurt a company with a longstanding reputation for serving its customers, known for producing the highest quality products in its market segment. The hurt that the regulators has inflicted on Toyota has far reaching consequences, in terms of lost jobs at TMC and its dealerships around the world, the loss of trust, and loss of shareholder wealth(therefore retirement funds for many), not to mention the anguish it inflicted on millions of anxious owners of automobiles made by Toyota/Lexus.
To sum up, the incentives to serve the customers’ interest clearly lie with the private sector and not with the government – politicians or bureaucrats. Toyota could be a victim of its own conscientious choice to recall cars. What message are the regulators trying to send to businesses by waging a war against Toyota Motor Corp.?
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Kane, L. D. (2010). Toyota Sudden Unintended Acceleration. Safety Research & Strategies.
Liker, J. (2003). The Toyota Way: 14 Management Principles from the World’s Greatest Manufacturer. McGraw-Hill.
McArdle, M. (2010, March 12). How Real are the Defects in Toyota’s Cars? Retrieved from The Atlantic: http://www.theatlantic.com/business/archive/2010/03/how-real-are-the-defects-in-toyotas-cars/37448/
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Toyota Pressroom. (2010, Jan). Retrieved from Toyota: http://pressroom.toyota.com/pr/tms/news.aspx
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