Why Toyota’s Testing Scandal Is Rocking Japan Stocks
As Japan’s most-valuable brand, Toyota is a flag bearer for Tokyo stocks. It and four rivals are now caught up in a data-rigging scandal sweeping the Japanese auto industry.
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Toyota Motor TM (T:7203) is Japan’s best-known brand and leading export. It is the world’s top-selling carmaker. So it is a blow to Japanese companies and stocks in general to see the company tainted by scandal, sending its shares into recent descent.
It is not alone. But it is the most-valuable brand in Japan, according to Interbred, worth more indeed than global marques like Mercedes-Benz MBGAF, Coca-Cola KO and Nike NKE. What happens to Toyota, to some extent, tarnishes “Japan Inc.” in general.
So investors should watch the expanding auto scandal in Japan. Toyota as well as rival car companies Mazda Motor MZDAY (T:7261), Honda Motor HMC (T:7267), Suzuki Motor SZKMY (T:7269) and engine maker Yamaha Motor YAMHF (T:7272) admitted at the start of last week that they had been cheating on safety tests, resulting in six current models being pulled off the market. Numerous discontinued models are also involved.
Toyota shares are down yet again on Wednesday, off 6.0% in June and 15.4% since the end of the first quarter. It is a sharp change of fortune for a company that had soared on the back of the weak yen. Toyota shares ran up a whopping 46.4% in Q1.
This current investigation can be traced to late last year, when Daihatsu Motor was forced to suspend all shipments after it discovered “irregularities” in safety-test data, as I explained at the time. Daihatsu is a wholly owned small-car subsidiary of Toyota, and the 64 models involved also include 22 cars sold under the Toyota brand.
Japan’s transport ministry then raided Daihatsu’s headquarters in Osaka in response, with some of the test manipulation dating back as far as 1989, well before Toyota took full control in 2016. I noted the 4% dip in Toyota shares at the time of the Daihatsu declaration could represent a good entry point, and of course you have made out very well in 2024 if you took that opportunity. But we need to watch the expanding investigation with concern.
Besides Toyota’s market decline, we have also seen Mazda stock down 8.0% so far this month, and Honda off 3.5%. Only Yamaha, down 1.3% in June, and Suzuki, actually up 2.1% so far this month, have been spared, since the issues involve only one current and two former Yamaha engines and only one discontinued Suzuki model. For Tokyo stocks in general, the broad-market Topix is down slightly, off 0.6% so far in June.
Toyota’s chairman, Akio Toyoda, bowed deeply in apology for the current situation. And he’s been apologizing a lot lately.
Another Toyota subsidiary, the bus and truck maker Hino Motors HINOY (T:7205) suspended shipments of its small trucks in mid-2022 after uncovering that data had been falsified on emissions tests. Then Toyota was forced to suspend shipments on some models including Hilux trucks and the Land Cruiser 300 SUV after uncovering similar “irregularities” on emissions tests for diesel engines made by affiliate Toyota Industries TYIDY (T:6201).
Now Toyota Motor itself is affected. So what began as isolated episodes that could be blamed on a subsidiary and even then only certain models or engines is starting to look like a company-wide, indeed an industry-wide problem.
I’m highlighting Toyota since they’re the biggest name involved. But they’re also relatively forthcoming when they uncover these “irregularities,” a euphemism for cheating on tests. It may in fact be that the testing system in Japan is too involved and laborious, and there have been similar emissions-testing scandals in Europe with the likes of Volkswagen. While that’s surely serious, the transport ministry will no doubt escalate the investigation to another level now that it’s clear that safety tests have also been rigged.
Two types of Toyota Corolla sold in Japan — the Fielder and Axio models — were cleared by the company using inadequate and erroneous data on crash tests for pedestrians and occupants. The Yaris Cross has similar flaws as well as four discontinued models.
On the plus side, the company finds that the concocted data isn’t concealing any performance issues that would require the cars to be taken off the road. But the company is, yet again, halting shipments of the affected models. Those two assembly lines produce around 130,000 cars per year, a fraction of the 11.2 million vehicles that Toyota made worldwide last year.
Toyota declared its group vision in January is “Inventing our path forward, together.” It would clearly be best if the invention is restricted to actual models of real vehicles rather than the invention of safety, emissions or performance data.
This certainly isn’t the end of it. Japan’s transport ministry continues its investigation at vehicle manufacturers, and it seems that where it looks, it finds flaws. False data, false testing, improper modification of crash-test models, the manipulation of conditions on the test … the list goes on.
The transport ministry says the cheating and misreporting are “actions that undermine users’ trust and shake the foundation of the automotive certification system.” It may yet result in changes to a system that critics say is struggling to keep up with advances in automotive technology, and the steady flow of slightly tweaked “new” models.
Toyota Chairman Toyoda, a grandson of company founder Kiichiro Toyoda, admits that the misconduct “rocks the foundation of the certification system itself,” so presumably these issues will factor into the reform of group performance and governance that the company began in January.
Mazda has been forced to suspend shipments this month of the Roadster RF and Mazda 2 models. Honda reports faulty testing and results on 22 discontinued models, prompting its CEO, Toshihiro Mibe, to “deeply apologize” on behalf of the company.
The industry is also embarking on a discussion with regulators and the government about the certification-test system. Some of the “violations” are certainly worth nothing more than a slap on the wrist. For instance, Toyota at one point used a heavier load to test a rear-end collision than required by the standards, simulating the wreck with an 1,800-kilogram cart instead of the 1,100-kilogram standard.
But the issues do reveal potential industry-wide skirting of the rules and massaging of data. The transport ministry has 85 automakers on its radar altogether, requesting those companies to inspect and report any falsified tests. After Toyota, its staffers will come calling on Mazda, Honda, Suzuki and Yamaha, certainly causing disruption and likely leading to the discovery of more problem data.
Where Toyota goes, the other automakers are likely to follow. Let’s hope it will lead industry and testing reform, winning back any confidence lost among consumers, and investors.
