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Toyota's reputation takes a huge hit

By Chris Isidore, senior writer


NEW YORK (CNNMoney.com) -- For years, Toyota Motor was the automaker that could do no wrong. Now it's made a major mistake likely to have a lasting impact on the company.

Toyota last week recalled 2.3 million vehicles spread across eight of its models because of problems with a sticking accelerator. Then on Tuesday night it said it would stop selling those vehicles for an indeterminate period as it scrambles to find a solution.

The models affected include the company's three best sellers in the United States -- the Camry, Corolla and Rav4 SUV. Between them, they accounted for more than half of the Toyota brand's U.S. sales in 2009.

Five North American plants will halt production of these vehicles. The five plants have 14,000 employees, but they will be given training and other duties for the week of Feb. 1, according to Toyota spokesman Mike Goss. Asked about the potential for layoffs, Goss would not speculate what Toyota will do if the sales halt extends beyond that week.

All the affected Toyota vehicles are made in the company's North American plants, which are the source of 60% of the vehicles it sells here.

A Toyota spokesman said the company has not yet assessed any lasting impact this would have on its sales or market share.

"It's hard to tell long-term. Obviously, this isn't a positive," said spokesman John Hanson. "These are measures that we're taking to assure the safety of our customers and to help restore their confidence in Toyota."

Damage to brand to linger. But industry experts say that even when the plants start turning out these vehicles again, the damage to the Toyota brand and the company's sales may already have been done.

"They'll get through this, but I don't think it's anything they will recover from quickly," said Erich Merkle, president of Autoconomy.com, an industry analysis firm. He said that Toyota will be particularly hard hit because so much of its sales strength in the past was based on what had been an untarnished reputation.

"People don't buy [Toyotas] for their good looks. They don't buy it for the cash-back or financing offers," he said. "They buy them because they have a lot of confidence in the quality and safety of the vehicle."

Shares of Toyota Motor fell 4% in Tokyo Wednesday while Toyota (TM) shares that trade in the U.S. on the New York Stock Exchange were down 7% in late morning trading.

Other experts said Tuesday's actions should help assure Toyota buyers that the company is still committed to quality and safety, even though the company had little choice but to halt sales according to the National Highway Transportation Safety Administration.

"Too many jobs and lost sales are involved for this to be a PR stunt," said Dan Edmunds, director of vehicle testing for auto sales site Edmunds.com. "They must really be concerned about this being something other than a rare condition. Hopefully this means the fix is very close to being ready, because suspension of production and sales is not tolerable for very long."

Toyota facing tougher competition. Experts agree that this is a bad time for Toyota to stop selling some of its most popular models, even briefly.

Merkle said that Korea's Hyundai Motor Group, as well as American rivals General Motors and Ford Motor (F, Fortune 500), have similar vehicles to the ones recalled by Toyota which are far more competitive than they've been previously. Loyal Toyota customers who decide to look at other offerings are more likely to find something they like than they might have been in the past.

"The competition has picked up. Toyota fending off those rivals was going to be enough a challenge without this safety issue," he said.

The United States is the largest market for Toyota worldwide. But after years of strong, steady growth, its U.S. market share essentially plateaued in 2009, as Hyundai and Ford recorded bigger gains in a terrible year for sales overall.

Making matters worse for Toyota is that the issues with its vehicles keep growing. First the problem was believed to be just with floor mats, but now there are problems with the accelerator as well.

"I can't help but think that the company's credibility is being called into question," said Michelle Krebs, senior analyst with Edmunds.com. To top of page

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