Toyota's Tylenol moment

NEW YORK (Fortune) -- In the midst of its biggest recall ever, Toyota is grappling with an existential crisis.

By suspending production and sales of eight models in the U.S. and recalling millions of vehicles, it is putting its business on hold for an indefinite amount of time while it attempts to correct its twin problems of sticky accelerators and faulty carpets.

This is an especially difficult dilemma for the company, because it has built its reputation not on looks or performance or great deals, but upon quality and dependability.

For guidance -- and perhaps inspiration -- Toyota should do some research on the Johnson & Johnson Tylenol recall of 1982.

That year, seven people in the Chicago area died from taking Tylenol capsules poisoned with potassium cyanide. The case remains unsolved, and no suspects were ever charged.

But Johnson & Johnson (JNJ, Fortune 500) didn't wait around for the authorities to act. It stopped production of Tylenol and issued a nationwide recall of 31 million bottles already in circulation with a retail value of over $100 million.

The murders stopped, and J&J's actions led to changes in packaging -- those annoying seals on everything from aspirin to milk -- as well as federal anti-tampering laws. Through its prompt action, J&J was able to actually enhance the value of the Tylenol brand by making product safety one of its attributes.

Toyota has a much tougher job ahead of it. That's because the problems in its cars are not the result of a crazed individual but are systemic to the product development process. Fixing the system that allowed the defects to occur will be complex and expensive.

The twin accelerator and carpet problems have been widely blamed on Toyota's pell-mell expansion over the last several years in its effort to pass General Motors and become the leader in worldwide sales.

But the accelerator problems seem to lie instead with a parallel effort that accompanied expansion: an almost paranoid drive to cut costs by using cheaper materials.

Last month, for instance, it was reported that Toyota had "requested" its suppliers to help in reducing parts costs over the next three years to compensate for slowing sales. That's a huge number, and a "request" from a big customer like Toyota is more like an order.

Cutting individual part costs can have a telling effect on their quality. Meanwhile, Toyota also moved more parts-buying overseas, away from familiar Japanese suppliers and into unfamiliar foreign ones. That may look good on the books, but it can lead to unreliable sources.

Just put an old and new Toyota side-by-side. You'll see the corner-cutting impact from the surface down, and it isn't pretty.

The 2009 RAV4, one of the models under the current recall, on the surface appears to be a better overall value than its predecessor. But take a close look at something like its instrument panel, and you'll see it has been noticeably cheapened by stripping out popular options and using inferior materials. And those are just the parts of the car that are visible to the customer. More cost-cutting may be hidden from view.

To ensure that it doesn't face any more embarrassing recalls, Toyota is going to have to look through all its new models' parts lists for potential problems caused by cost-cutting and find a fix. And it will have to rethink the way it is designing future models to avoid running into the same issue .

Toyota will be hard-pressed to match J&J's performance. The drugmaker developed tamper-resistant packaging in a matter of weeks. Toyota has been stumbling so far in coming up with a robust accelerator fix; one dealer describes the current one as a Rube Goldberg solution that is hardly representative of the kind of work usually done by Japanese engineers.

Another advantage J&J had the willingness of its CEO, James Burke, to step forward and accept responsibility. He became a national hero in a matter of weeks. Toyota's top executives are traditionally more reticent and like to stay in the background. It must be noted though that current president Akio Toyoda has shown himself willing to break with the past.

But the biggest difference between Toyota and Tylenol may be money. J&J spent $100 million two decades ago to clean up its mess. Toyota may have to invest billions, and that's a big bill to win back the trust of customers.