Teflon Toyota
Joann Muller and Jonathan Fahey 07.03.06


Consumers don't seem bothered by a rash of recalls.
Here's a quiz: a carmaker last month recalled 1 million vehicles worldwide. In 2005 it recalled 2.2 million vehicles in the U.S., 10% of its total number of cars on the road here and twice the number it recalled the year before. Who is this bumbling manufacturer? No, not General Motors (nyse: GM - news - people ), but Toyota (nyse: TM - news - people ), whose vehicles jump off the lot because consumers swear by their quality. Just a few weeks ago Toyota again dominated consumer polls in the annual J.D. Power & Associates initial quality study.

Why this disconnect? The answer says something about the nature of recalls and how Toyota handles them. For one thing, the spike in recalls stems from Toyota's own efficiency. Rather than reengineering parts, it shares components among many models. So when something goes wrong, as it did recently with the steering shaft on the Prius and ten other (non-U.S.) models, the recall number is high.

Toyota, moreover, has perfected the art of detecting and fixing quality problems early, often before customers even notice them. "What we tend to see is that if a customer receives a recall notice before their car exhibits any symptoms, they don't see it as a problem," says Chance Parker of J.D. Power. It counts as a recall, for sure, but the Power surveys are gauging consumers' level of satisfaction. And Toyota knows how to keep customers satisfied. It gives its dealers plenty of leeway to fix customer complaints even postwarranty--by some accounts as much as $3,000 per vehicle.

Despite the headlines, it's not clear that Toyota's recall numbers are any worse than those of the other carmakers. The amount it spends making good on warranties is 1.2% of revenues versus 2.4% for GM and 2.3% for Ford (nyse: F - news - people ). Last year when Toyota had 12 recalls, covering 2.2 million vehicles in the U.S., GM had 30, covering 5.1 million, and Ford had 17, covering 6 million ( see story, p. 102).

No question that Toyota's remarkable growth has hit some bumps. Consumer Reports dropped the reliability rating on its newly redesigned Avalon from "much better than average" to "average." Even Toyota management wonders whether it has the bench to guide its growth. But for now quality doesn't seem to be an issue.