Hitting the brakes

Toyota: Toyota’s troubles have shifted into overdrive. The embattled Japanese automaker is recalling more than 400,000 hybrid vehicles, including its iconic Prius, following problems with 8.1 million others with regular combustion-engines in recent weeks. It's not that the immediate cost will be punitively high —somewhere between $50 million and $220 million, according to analysts' estimates. It's the longer-term price that is more worrisome.

Sure, the gas-pedal fault that prompted the initial recall was bad enough. That put a large dent in the firm’s reputation for producing quality products. It also erased about a fifth of the value of Toyota’s shares, or $34 billion. That’s equal to what Volkswagen is currently worth and just shy of Ford’s market cap.

Toyota’s initial problems weren't unusual. Ford, for one, recalled 4.5 million vehicles last fall because of a cruise-control button that could catch fire. While there may be a whiff of protectionism in the US reaction, and the company could have been quicker off the mark, it was all still relatively manageable.

But the Prius problem could really strike at the company’s hard-earned reputation. First, it makes it seem as if Toyota's quality problems are endemic. That may be unfair — one of the issues with the brakes, that they lack as much power as conventional cars, may just be a matter of differing performance and has not yet been deemed to breach safety regulations. But potential customers may not make, or care about, the distinction.

Second, hybrid cars are at the heart of Toyota’s growth strategy. The company hopes to sell 1 million by 2012, triple the number of top-selling Priuses sold last year.

Fixing faults, and its reputation, will divert resources.

The knock-on effects of the Prius recall could send costs across the company soaring. Mizuho Securities puts the price at $6.6 billion over the next two years, in part due to upping sales incentives to entice customers to buy its vehicles. But that’s not really all either.

The cure could require shaking up management, altering the organizational structure and halting a cost-cutting program.

Toyota’s recent estimate of a one-time $2 billion hit related to the gas-pedal fixes is quickly fading in the rear-view mirror.