Toyota's $16.4 Million Fine Is Just a Slap on the Wrist


In assessing the largest fine ever levied against an auto maker, the federal agency that oversees vehicle safety lashed out at Toyota Motor (TM) for failing to disclose what the company knew about defects that may cause unintended acceleration in its vehicles.

The world's largest auto maker failed to live up to its legal obligations, Transportation Secretary Ray LaHood said Monday. "Worse yet," said LaHood in announcing the $16.4 million fine, the maximum penalty possible under current law, "they knowingly hid a dangerous defect for months from U.S. officials and did not take action to protect millions of drivers and their families."

The civil penalty relates to the Jan. 21 recall of some 2.3 million vehicles in the U.S. to repair "sticky" gas pedals. Federal law requires that auto makers notify the National Highway Traffic Safety Administration within five business days after a safety defect has been found. But NHTSA charges that Toyota documents prove that the company knew as early as late September that it was aware of the problem and took no action.

A Million Dollar Fine for a Billion Dollar Giant

The $16.4 million penalty hardly sounds like a punishing sum for the likes of Toyota, which has $20 billion to $30 billion stashed away in its corporate coffers. The company has until April 19 to accept or contest the penalty.

"It's not much of a fine at all but that's the most the government can charge them," says Art Wheaton, an auto-industry expert at Cornell University. Still, Wheaton doubts Toyota will challenge the fine, especially since the combined recalls of some 8.5 million vehicles worldwide to fix sticky gas pedals, bulky floor mats and other problems is likely to run well over $1 billion. By comparison, $16 million is pocket change for Toyota.

For its part, Toyota said Monday that it hadn't yet received the letter announcing the penalty. In a one-paragraph statement, released shortly after the fine was announced, Toyota said it has "already taken a number of important steps to improve our communications with regulators and customers on safety-related matters." Among those steps, Toyota said, is the appointment of a new chief quality officer in North America.

Toyota on the Rebound

Whether LaHood's tough language toward Toyota will hurt Toyota sales remains to be seen. But Toyota has already proved that it can ring up sales in the face of adversity. Despite myriad recall stories in the media and scathing criticism liberally doled out in congressional hearings in February, Toyota sales rose nearly 40% in March, driven by generous incentives, such as zero-interest loans and cheap leases, and a brightening economy.

In offering the largest incentives in its history, Toyota essentially bought sales, Wheaton says. Toyota also benefited from pent-up demand caused by the cessation of sales and manufacturing of eight models in early February to repair the sticky pedal problem.

While March sales showed a marked rebound from the precipitous drops seen in January and February, analysts are keen on seeing what April and May have in store for Toyota, Wheaton says. "And If they do keep piling on the incentives, what's their profitability going to be with those sales?"

Toyota said Tuesday it would continue to offer most of its heavy sales incentives in April. But with other manufacturers likely to follow in lockstep, the Japanese auto maker faces yet another challenge in landing new buyers. With its 40% bump in sales last month, Toyota managed to edge out Ford Motor (F) as the second-largest supplier of cars to the U.S. market. But Ford, which saw its sales perk up 43% last month, won't likely succumb to third place once again without a fight.