Toyota Shares Sink as Daihatsu Tiny-Car Subsidiary Suspends Output

Toyota Motor (T:7203 and TM ) shares have dropped in Tokyo trading here on Thursday after the company said it would suspend shipments of all models developed by Daihatsu Motor, a wholly owned subsidiary that has been manufacturing more than motors.

An independent investigation has expanded to uncover "irregularities" in data for safety tests on 64 models, including 22 sold under the Toyota brand. It means Daihatsu, which first fessed up to rigged data in April and again in May, joins the massed ranks of shamed Japanese automakers discovered to have been concocting test data.

Toyota's stock ended the day down 4% on Thursday, immediately plunging at the start of trading and then holding to those losses.

Daihatsu makes around 4,000 vehicles per day in Japan and another 2,000 overseas. Nomura's Japan auto analyst Masataka Kunugimoto said it is hard to assume when production might resume. But a one-month pause in production would represent a "missing" 120,000 vehicles, denting Toyota's sales by ¥240 billion (US$1.7 billion) and hitting operating profits to the tune of around ¥125 billion (US$870 million), including compensation to suppliers. That's between 2% and 3% of Toyota's forecast 2024 year operating earnings.

Toyota bought a majority stake in Daihatsu in 1998, then took it over completely in 2016. The company makes compact and subcompact cars and trucks under its own name but also manufactures models such as the subcompact Toyota Yaris.

This decline in Toyota's share price clearly marks a dip that could be an entry point into a stock that is up a remarkable 41% this year. The company gets 48% of sales from the United States, meaning it has benefited in a big way from the weakness of the yen.

The Japanese currency, with the Bank of Japan still sticking to negative short-term rates, fell 18.6% from mid-January to mid-November. The situation has eased slightly since then, with the yen strengthening 5.6%. The company will be fighting against a currency headwind next year as the U.S. Federal Reserve looks set to cut rates while Japan's central bank may move away (slightly) from its highly accommodative stance.

Daihatsu in April reported "irregularity" with the door lining used in tests, then in May said side-collision test data was questionable. A third-party investigation has now concluded that the falsification scandal is far greater in scope and goes back farther than previously known. In the latest findings, Daihatsu used a different type of airbag in tests for cars than the one that appeared in the mass-production model.

While some of the data generated would still have passed safety tests, Toyota notes the Daihatsu "irregularities" will shake faith in the company. What's more, side-collision tests of the "kei car" Daihatsu Cast, sold in some markets as the Toyota Pixis Joy, may not pass the minimum requirements set by law.

Besides Toyota and Daihatsu, some models were sold under the Mazda Motor (T:7261 and MZDAY ) and Subaru (T:7270 and FUJHY ) brands.

Shares in Mazda (down 4%) and Subaru (down 3.5%) fell in sympathy and to a similar degree as Toyota. That's far greater than the overall 1.0% decline in the Topix index of all major Tokyo shares on a mixed day of trading in Asia.

Many of Daihatsu's models are "kei cars," the smallest expressway-legal car in Japan. They are very popular town cars, benefitting from preferential tax rates and escaping the requirement that a car buyer must own a parking space for their car. Similarly, it makes popular "kei trucks," particularly used for deliveries.

"We recognize the extreme gravity of the fact that Daihatsu's neglect of the certification process has shaken the very foundations of the company as an automobile manufacturer," Toyota said in a statement.

The questionable tests affect cars sold in different markets as the Daihatsu Move, Subaru Stella, Daihatsu Cast, Toyota Pixis Joy, Daihatsu Gran Max, Toyota Town Ace and Mazda Bongo. The company said it isn't aware of any physical accidents related to the issues.

Toyota said it may have placed too great a "burden" on Daihatsu to meet production targets. But it also recognizes that Daihatsu, which traces its roots to an engine maker first set up in Osaka in 1907, will require a "fundamental reform" in its operations. "This will be an extremely significant task that cannot be accomplished overnight," Toyota said, requiring not only operational changes but also a review of the overall structure and personnel changes.

Officials from Japan's transport ministry today raided Daihatsu's headquarters in Osaka following the revelations, which suggest the manipulation of data reaching back as far as 1989. The independent investigator said that marked the earliest "procedural irregularity," but that the scope of the problem has increased the most since 2014. The investigation states that section heads were generally at fault.

Daihatsu says it would like to "deeply apologize" to customers and stakeholders for causing "great inconvenience and concern and betraying their trust."

There's a long line of Japanese car companies that have seen top management bow apologetically at news conferences as they confess to manufacturing or tampering with test data. Nissan Motor (T:7201 and NSANY ), Suzuki Motor (T:7269 and SZKMY ) and Mitsubishi Motors (T:7211 and MMTOY ) have all been caught cheating on tests.

Another Toyota subsidiary, bus and truck maker Hino Motors (T:7205 and HINOY), last year suspended its shipments of small trucks after confirming data on emissions had been falsified.

If Daihatsu production remains disrupted, other Japanese automakers are likely to fill the gap in sales. Suzuki would be the chief beneficiary, with increased sales also likely at Mitsubishi, Honda and Nissan.

At the time of publication, McMillan had no positions in the stocks mentioned.