Toyota And Daihatsu Screwed Up So So So So Badly

There are scandals that flit out of the news quickly, and there are scandals so big they get their own name (Watergate, Dieselgate, Firestone). What’s going on with Toyota and its subsidiary Daihatsu is almost certainly going to be the latter. The size, scope, and meaning of this growing scandal is incredible and potentially terrifying.

The end of the week is a great time to announce bad news because people are distracted by the weekend and not sitting bored at their computers. The end of the year, when folks start heading to their in-laws, is an even better time. The end of the week at the end of the year? Put on your gloves, we’re taking out the trash.

In addition to the Toyota scandal, there’s a massive Honda recall worth discussing, a potential Chinese EV tariff, and a look at dealership profits.

The theme of this morning’s The Morning Dump is Bah Humbug.

The Toyota Daihatsu Scandal May Affect 64 Different Models And 3 Engine Lines

Toyota’s budget brand Daihatsu really screwed up; I’m going to do my best to put this into some usable context for readers who, by and large, haven’t seen a Daihatsu car since the ’90s.

This story is a Taco Bell Crunchwrap Supreme of Ignominy, where the flour tortilla is negligence, the seasoned beef is corporate pressure, the ripe tomatoes are faked safety test results, the crunchy outer shell is the shaken trust of consumers, and the warm nacho cheese sauce is the creeping understanding that this has likely been going on for more than a decade.

As background, Daihatsu is one of Japan’s oldest automakers and, in the middle of the Bubble Era, became primarily owned by Toyota. By 2016, Daihatsu became a solely owned subsidiary of Toyota with a long-term goal of having “Daihatsu and Toyota to attain their joint goal of achieving sustainable growth.” This was a big project of then Toyota President (now Chairman) Akio Toyoda.

Here’s what Toyoda said at the announcement of the deal:

“Toyota and Daihatsu have frequently held discussions and shared opinions on the topic of sustainable growth. Last autumn, we told Daihatsu that we wanted to strengthen the relationship between our two companies in order to enable us both to make ever-better cars. President Mitsui from Daihatsu might have been a bit taken aback at first, but―as we kept talking―he told me that he hoped to maintain Daihatsu’s unique approach to manufacturing, but that, on the other hand, the company’s resources would limit his ability to expand the scope of the business, embrace the next wave of technologies, and improve competitiveness.”

Growth happened, but likely not in a sustainable way, because an investigation into safety irregularities earlier this year has blossomed into a revelation of decades of faked tests and other malfeasance that metastasized after Toyota took over.

From the Associated Press:

Japanese transport ministry officials inspected Toyota subsidiary Daihatsu on Thursday, one day after officials announced it was suspending the small car unit’s shipments of all vehicles in and outside Japan after an investigation found improper testing involving 64 models.

The safety test irregularities earlier this year prompted an independent panel investigation, which found widespread and systematic problems at Osaka-based Daihatsu Motor Co. It is the latest of safety or other violations found at at least five of Japan’s major automakers in recent years.

It gets worse when you read Toyota’s long apology and explanation, which it admits has “shaken the very foundations of the company as an automobile manufacturer.”

As mentioned above, Toyota created an independent Third-Party Committee to look into these irregularities and what they found was pretty terrible, including using one airbag module in safety testing and then a completely different one in manufacturing. Here’s how Toyota described it:

Over the course of the investigation by the Independent Third-Party Committee, Daihatsu received some information regarding models that may have been involved in the procedural irregularities. In response, Daihatsu has been conducting one-by-one in-house technical verifications and actual vehicle testing for these vehicles to ensure that their safety and environmental performance meet legal standards.

In the final stage of the investigation, it was discovered that a different airbag control unit (ECU) than the mass-production model was used for the airbag tests for Daihatsu Move / SUBARU Stella, Daihatsu Cast / Toyota Pixis Joy, Daihatsu Gran Max / Toyota Town Ace / Mazda Bongo. Although technical verification confirmed that the airbag met standards of occupant protection performance, in the course of testing, it was found that the “Safety Performance Standard for Occupant Evacuation (Unlocking)” in the side collision test of Daihatsu Cast / Toyota Pixis Joy may not comply with the law. At this time, we are not aware of any accident information related to this matter, but we are conducting thorough technical verification and investigating the cause to take necessary measures as soon as possible.

That’s serious and anyone who has been injured in a crash in any of these vehicles should maybe reach out to a lawyer. The oldest vehicle listed here is the iQ, which was built in Toyota’s Takoaka Plant and went on sale in 2008.

How did this happen? There’s a hint in Toyota’s account that makes total sense to me:

Since 2013, Toyota has been increasing the number of OEM models it receives from other companies, mainly compact vehicles. We deeply regret that the development of these vehicles may have been a burden on Daihatsu and that we were not aware of the situation with the company’s certification operations.

Emphasis mine. Isn’t this how it always happens?

A University of Virginia professor did a study of Volkswagen’s Dieselgate scandal and came up with three root causes, the first of which seems the most relevant here:

The pressure from the top was intense. VW’s 25-page Code of Conduct, on which every employee was ostensibly trained in ethics, seemed irrelevant when contrasted with management’s autocratic leadership style and single-minded goal to succeed at any cost. What’s more, the company’s engineering reputation was at stake, and the consequence of failure for the German economy and reputation around design and manufacturing would be substantial.

It seems that this pressure is what Toyota is hinting at and the impact on the Japanese economy is pretty similar, with the company assuring its suppliers it would help support them through these difficult times.

The actual safety impacts of these are less clear (does only crash-testing one side of a car matter that much?), but the idea that Toyota’s growth through this period is somehow built on practices that were not, in fact, sustainable isn’t a small thing.

[Ed Note: It’s not always easy to understand how serious things are when it comes to breaches of Japanese government regulations, and certainly the profuse apologizing you see here makes things seem unbelievably serious. That might be the case! (A stop-sale is serious any way you slice it, and so is knowingly using the wrong hardware in safety testing). But at the same time, the heavy apologizing — something we don’t see as much of from U.S. manufacturers unless things are really, really serious — is not really as uncommon among Japanese automakers. It’s just a part of the culture; I figured that was worth noting. -DT]. 

Honda’s Not-So-Happy Days

Things aren’t ideal in Hondaville, with the company having to recall about 2.5 million vehicles due to a malfunctioning fuel pump that can reportedly fail while driving.

Per Reuters:

The recall includes certain models of the Japanese automaker’s most popular models such as the 2018-2020 Honda Accord, Civic, CR-V, HR-V, Ridgeline, Odyssey and some more Acura models.

According to the NHTSA, the fuel pump inside the fuel tank may fail. Owner notification letters are expected to be mailed by February next year.

If you have one of these popular vehicles keep your eyes open for a letter.

Average Pretax Profit Down 20% Through Q3 For Dealers

Despite a lack of cars over the last few years or, rather, because of the lack of cars over the last few years, dealers have generally done exceedingly well for themselves.

What goes up must come down and that’s the case for dealerships as part of what some, according to Automotive News, are calling “The Great Normalization” of the automotive industry.

Pretax profits for the average dealership slipped by nearly a fifth and gross profit per new vehicle sold tumbled 26 percent through the first nine months of 2023 compared with the same time last year, according to an inaugural report by the Presidio Group, an investment banking and buy-sell advisory firm in Denver and Atlanta, and NCM Associates, a dealership training and consulting company.

This will be something I’ll be keeping an eye on next year as it’s another good data point to understand where the market is.

What Exactly Are We Doing Here?

Credit to The Wall Street Journal for cool stipple portraits and also this scoop that the Biden administration is exploring raising the tariffs on Chinese EVs.

Here’s the key part:

Chinese EVs are already subject to a 25% tariff, which has helped prevent subsidized Chinese automakers from making inroads into the U.S. market. Raising that tariff likely would have little immediate impact on U.S. consumers.

Other targets for potential tariff-rate increases are Chinese solar products and EV battery packs, the people said. While the U.S. now primarily imports solar material from Southeast Asian countries, China is still an important supplier of EV batteries.

Raising some tariffs could allow President Biden to signal he is tough on China as he approaches a 2024 re-election campaign that could again see him face Donald Trump.
The Biden administration is also considering lowering tariffs on some Chinese consumer products that officials don’t see as strategically important, in addition to the potential increases on clean-energy products, the people familiar with the conversations said.

I’ve said this before, but if we were only concerned about the environment (and obviously I realize we have other important interests) it’s possible we’d welcome the price competition and volume of cheaper EVs from China. Obviously, the stability of U.S. manufacturing and our ability to source items from places that aren’t China is important to this administration and the one before it.

The timing of this is also interesting because, frankly, with many cars no longer qualifying for the $7,500 tax credit I do think the 25% tariff probably isn’t high enough to prevent some Chinese companies from being price competitive. If the administration raised it to even 30% that’s a big difference, potentially.

What I’m Listening To As I Write This

It’s hard to believe that “Wide Awake!” is the seventh album by Parquet Courts as it sounds like both the first and the 900th.

The Big Question

What should we call this Daihatsu scandal? What do you make of it?