July 16, 2017 12:00 pm JST

Takata: A textbook example of crisis mis-management

Why Toyota and Samsung succeeded where the scandal hit air bag maker failed

TAKESHI SHIRAISHI, Nikkei staff writer

TOKYO -- How does a company go from a global leader in its industry to filing for bankruptcy in a matter of years? Just ask Takata. The Japanese autoparts supplier controlled 20% of the air bag market until a protracted recall ballooned into an uncontrollable crisis. Now it is seeking bankruptcy protection in Japan and the U.S., its debts having mounted to 141.2 billion yen ($1.26 billion).

Nearly 100 million cars equipped with Takata air bags were recalled globally due to a defect with the ammonium nitrate propellant used to inflate them, which can violently explode during deployment due to degradation after prolonged exposure to high temperature and humidity.

Even more than the defect itself, however, Takata was undone by its failure to manage the fallout of the scandal -- a failure due to both internal shortcomings and external factors.

Study in contrasts  

Takata is not the only company to find itself in hot water over dangerously defective products in recent years, but its response was by far the most lacking.

Toyota Motor faced a massive recall in 2009 and 2010, when an unintended acceleration problem gained widespread attention. The problem, which first surfaced in 2007, was with floor mats that could trap the accelerator. It was no trivial matter; fatal accidents would occur. In September of 2007, Toyota agreed to recall certain vehicles.

Toyota had denied the existence of any defects and once replied to a request from the U.S. National Highway Traffic Safety Administration by writing there is no sudden acceleration trend but that the media and internet forums were artificially inflating the situation.

Another barrage of media criticism hit later that year after news programs repeatedly broadcast a phone conversation recorded during an accident that killed four people in San Diego.

Finally, Toyota stepped up and issued consumer alerts to remove floor mats. Toyota President Akio Toyoda even attended a congressional hearing in Washington, where he declared a customer-first policy. Promising to accept full responsibility helped put public opinion back on Toyota's side.

In 2011, the NHTSA issued a report stating that the sudden acceleration was mostly caused by driver error. In 2014, Toyota reached an agreement with the U.S. Department of Justice to pay $1.2 billion to resolve a criminal investigation, and the dust gradually settled.

Samsung Electronics was also able to put a similar crisis behind it relatively quickly. Last August, its latest smartphone, the Galaxy Note 7, began catching fire due to defective batteries. The scandal had a global impact, and many leading airlines banned passengers from bringing the phones on board. The world's biggest smartphone manufacturer discontinued production of the model in October and released its successor, the Galaxy S 8, the following April. The new flagship model got off to a smooth start, with more than 10 million handsets shipped in its first three weeks.

On July 7, the South Korean company announced a 72% year-on-year surge in April-June group operating profit on a preliminary basis to 14 trillion won ($12.6 billion).

Moving quickly under strong family leadership, Toyota and Samsung were able to restore customer trust.

For Takata, however, control by the founding family only complicated matters.

Internal resistance  

Takata Chairman and CEO Shigehisa Takada used his position to fiercely resist filing for bankruptcy. He only gave in once pressure came from Japanese car companies.

In the first of a series of meetings with senior executives of automakers beginning in January, Takada stressed he had no intention of resorting to the legal process of rehabilitating the company under the courts' supervision.

He pointed out that Takata still had 80 billion yen in cash and deposits. The founding family, which holds a 60% stake in the company, argued for a creditor-led debt workout, claiming that bankruptcy would cause disruptions to the supply of parts. But the automakers began to grow frustrated by the lack of progress, and increasingly concerned over how the new U.S. administration might react to any more fatal accidents.

After a week of talks with Takata, the automakers agreed to name Key Safety Systems as the leading candidate to sponsor the supplier's reorganization and pressed the air bag maker to file for bankruptcy protection.

Takada, however, rejected the proposal to allow the U.S. maker, whose share in the world's air bag market stands at just a few percent, to support his company's bankruptcy proceedings. In early February, he turned to U.S. private equity giant KKR & Co., which had been dropped from the list of candidates to help reorganize Takata, as his last hope.

Finally, the carmakers that had the largest claims to the supplier's assets, including Toyota and Honda Motor, presented an ultimatum: either Takata filed or they would as creditors.

An emergency meeting of 10 board members was held on June 26.

At the outset of the 7 a.m. meeting, Hideaki Sudo, a lawyer who headed a committee of experts tasked with working out a turnaround plan, briefed the executives on its recommendation to file for bankruptcy protection simultaneously in Japan and the U.S.

After Sudo left the room, Takada asked all of the executives for their opinions. All of them said the company had no choice but to accept the committee's proposal. After 30 minutes, Takada capitulated. "This seems to be the only option," he said, formalizing the biggest postwar bankruptcy of a Japanese manufacturer without putting the issue to a vote.

After agreeing to sell Takata's operations to KSS, the third-generation leader of the company turned his attention to ensuring his family's continued involvement in its management.

Alarmed at her son's actions, Takada's mother, Akiko crafted a plan with certain senior executives who agreed to submit a motion to oust the CEO in a board meeting on March 23. On the day, however, the autocratic top executive flew into a rage over a report on company operations and demanded a revised report in one week. Overwhelmed by the outburst, Akiko and the executives failed to carry out their plan.

While management chaos was reigning in Takata's boardroom, Honda and other big clients were terminating their purchase contracts. Takata's competitors took advantage by recruiting engineers from the embattled supplier. As Takada fought on, the company was bleeding technological and financial resources.

Slow to act  

Flawed family management is not the only reason for Takata's failure to address the air bag scandal effectively.

The first accident linked to the defective device was reported in 2004 in the U.S., when an air bag in a Honda vehicle in Alabama deployed in an unusual way. Honda began recalling the model in question in 2008, before a fatal accident took place in 2009.

While the cause of the accidents remained unidentified, concern was mounting over air bags in Honda cars, fueled by news shows repeatedly broadcasting a woman's account of being wounded by metal shards propelled by an air bag.

Vehicle recalls are implemented by an automakers, not a parts producer, even if faulty parts are responsible for the problem. Unlike the Toyota recall, in which the company was able to take the initiative, Honda and Takata were slow to take action, partly because Takata air bags were used by a number of carmakers and the cause of the problem had yet to be identified.

"I've reached the end of my tether," Takanobu Ito, former president of Honda Motor, told The Nikkei in December 2014. Honda had just decided to broaden the investigative recall the southern part of the U.S. to the entire nation.

Losing confidence in Takata, Ito and other Honda executives asked a third party to identify the cause of the trouble.

"We relied on Takata for its expertise in this specific area of technology," Rick Schostek, executive vice president of Honda North America, told a U.S. Senate committee on Nov. 20, 2014. "We provided our performance requirements, and Takata designed the air bag components to those criteria."

Meanwhile, Takata maintained that there was "no scientific basis" for the nationwide recall in the U.S., adding, however, that it is an automaker that decides whether to launch a recall. The stance underscored the deepening rift between the company and its client.

Honda initially launched a recall after receiving a report from Takata that faults in the manufacturing process had caused defects in air bags. After certain air bags that were supposed to have been manufactured properly were also found to be defective, Honda's feeling of distrust grew.

In November 2015, Tetsuo Iwamura, then vice president of Honda, publicly said that Takata had presented an inappropriate report to his company. According to the U.S. Justice Department, Takata was already aware in around 2000 that its air bags did not meet the required level of quality but concealed that knowledge from automakers.

Emails stating that there was "no choice but to XX" -- a phrase used internally as code for doctoring test data or other wrongdoing -- had been circulated within Takata, the DOJ found.

Takata and Honda needed to closely work together to identify the cause of the defects, but their rift only widened. The two companies "fought each other over which was responsible for the trouble in association with the burden of recall costs and lawsuits in the U.S.," said Akiko Takada.

Public perception  

The air bag maker also did little to improve its image. In contrast to Akio Toyoda at the height of the Toyota recall, Takata's top executive did not even appear at a news conference, let alone a congressional hearing.

Shinichi Tanaka, a crisis management expert and president of FleishmanHillard Japan, said, "There was a difference in position between an automaker and a parts maker. When trouble erupts, a company needs to figure it out and strategically provide information, with consumers and product users in mind. It was vital to build a relationship of trust and work together with automakers. Takata's failure to do so was fatal for the company."

Another problem for Takata was that the automakers using its air bags were divided in their responses. Japanese makers were willing to recall their cars, but it was not until 2015, about a decade after the first accident tied to a Takata air bag, that automakers from a variety of countries embarked on a joint investigation. And in 2016, General Motors called on the U.S. transportation authorities to delay the recall of 1 million of its vehicles, insisting that their air bags did not carry a risk of rupturing.

When Takata finally announced its decision to file for bankruptcy protection, the company had less than two billion yen in cash and deposits.

Nikkei staff writers Akihiro Ota and Tomoko Wakasugi contributed to this story.

Get Insights on Asia In Your Inbox

To read the full story, Subscribe or Log in

Get your first month for $0.99

Redeemable only through the Subscribe button below

Once subscribed, you can…

  • Read all stories with unlimited access
  • Use our smartphone and tablet apps

To read the full story, Subscribe or Log in

3 months for $9
SUBSCRIBE TODAY

Take advantage of this limited offer.
Subscribe now to get unlimited access to all articles.

To read the full story, Update your account

Resubscribe now to continue reading.
BEST OFFER:
Only US$ 9.99 per month for a full-year subscription

To read the full story, Subscribe or Log in

Once subscribed, you can…

  • Read all stories with unlimited access
  • Use our smartphone and tablet apps

To read the full story, Subscribe or Log in

3 months for $9
SUBSCRIBE TODAY

Take advantage of this limited offer.
Subscribe now to get unlimited access to all articles.

To read the full story, Update your account

We could not renew your subscription.
You need to update your payment information.