It is virtually impossible to create products that are 100% defect free. The reality is we would not be able to afford them even if that was statistically possible. As we’ve seen in pharmaceutical, health care and automotive examples—products have flaws. It’s what the manufacturer does with those flaws and when it does it that gives us confidence—or causes investigations, recalls and lawsuits. Recently that confidence was shaken with the case of airbags made by Takata.
Current estimates are that Takata’s faulty airbags will cost the company $24 billion, making it the largest automotive recall ever. Previous estimates by a financial analyst at Jeffries Group set the number at $7 billion and, even at that amount, they expressed concerns about Takata’s future. The new estimate, however, equates to more than 6x the total assets on Takata’s balance sheet in 2015.
So far, the airbags have claimed ten fatalities and 100 injuries when rupturing and causing metal and plastic shrapnel to violently spray passengers. Unfortunately there may be up to 287.5 million airbag inflators involved, and the company says that it is still unsure what is causing the malfunction. So far the culprit, according to researcher Orbital ATK, is that moisture, possibly caused by the ammonium nitrate in the airbag propellant that breaks down over time, is seeping into airbag inflators. Ammonium nitrate, says regulators, must either be proven safe, or they will recall all airbags that contain the compound. Takata is the only airbag manufacturer to use the compound, and asserts that it is safe if treated with a stabilizer.
The fact is the number of airbags replaced in high humidity areas is greater than in other areas. The company is also accelerating the recall of vehicles that are older models. Takata has until the close of 2019 to determine the cause or prove that the problem was solved.
While the first death occurred in May 2004 and involved a 2002 Honda Accord, both Honda and Takata claimed it was an “anomaly.” Honda did, however, become the first auto manufacturer to recall 4,000 vehicles based on the airbags. While the National Highway Traffic Safety Administration began to investigate in late 2009, the case was closed within months based on its conclusion that the problems were isolated. The last reported death was in December 2015.
Have we been down this road before?
Many times. One particularly memorable case involved the Ford Pinto and a rear-mounted and defective fuel tank design. The Pinto was the result of Lee Iaccoca, Ford’s president in 1968, and his decision that Ford would give the Japanese small cars that were flooding into the U.S. as a result of the oil embargo, a real run for their money. Iaccoca promised that Ford’s new and competitive car would weigh no more than 2,000 pounds, that Ford would deliver it in 25 months from the car’s announcement, and that it would not cost a penny over $2,000. The latter element became the crux of the issue—the limitation on cost.
Fast forward many Pinto design-cycle months and it seemed that positioning the fuel tank behind the rear axle, yet in front of the rear bumper, was not the best place for it. When the car was crash tested in low-speed rear-end crashes, the filler neck tore from the tank, spilling fuel under the car, and the tank was also punctured by bolts from brackets and the differential. The result of the design flaw was that literally all of the fuel poured out in less than a minute, creating obvious fire potential.
Returning to the $2,000 figure—it would have cost a mere $11 per vehicle to fix the flaws. Instead Ford stuck to its $2,000 sum, comparing actual repair costs of $113 million against potential damage payouts of approximately $49 million. Ford continued without initiating the fix.
The car’s true danger wasn’t exposed until a 1977 article that showed not only the fire danger in the design, but also claimed that Ford was well aware of problems and chose not to fix them. That same year, a California court gave a whopping $125 million in a Pinto injury case—greater than the total profits Ford amassed from Pinto sales. All 1971 through 1976 Pintos were recalled and upgraded. While there were more than 24 deaths, even more damaging to Ford’s reputation was the revelation that profits were put before safety and quality.
What’s interesting about the Ford case is that the company actually did not break any laws at the time. The business decision by Ford to not fix the dangerous fuel tank design was based on B-school-based formal cost-benefit analysis. On one hand you have the cost of potential lawsuits, deaths and redesign while the other hand held the cost to make the repair. The risk, according to Ford, was worth getting the car out on time at the $2,000 price tag. In fairness to Ford, the use of this type of analysis was common at the time.
Another ongoing and similar situation is the GM faulty ignition switch. In this case, the switch could be inadvertently moved to a position where it shut off the vehicle’s engine, disabled power steering and brakes, and left air bags unable to deploy.
As with Ford decades before, the company is accused of rejecting a fix for the flaw. This time the fix was not $11 per vehicle but approximately 90 cents per vehicle, according to evidence filed against the company. GM rejected the fix and authorities were not told of the flaw as required. Instead the company claimed the switches were not a safety problem, but a convenience issue.
In 2015, however, GM entered into an agreement with the U.S. Department of Justice, admitting that from early 2012 through February 2014, it failed to disclose the defect while falsely telling consumers that there were no safety concerns based on the defect. As a result GM forfeited $900 million, and $600 million in compensation was given to surviving victims of accidents caused by the switches.
While the Ford case showed a lack of ethics on behalf of the company in the business decision it made, GM’s and Takata’s mistakes appear to be one of deception.
Takata’s Ongoing Woes
Takata was accused in a New York Times article in 2014 of conducting secret tests on airbags that showed “its products ruptured and shot metal debris at a driver.” While design flaws were discovered, Takata, like GM, was accused of not alerting regulators and issuing recalls, as well as altering testing data.
On November 3, 2015, Takata was fined $70 million by the NHTSA for not promptly disclosing airbag defects and manipulating test data. The penalty can grow to $200 million if Takata sidesteps its agreement with safety regulators. Bad news mushroomed, as Honda dropped Takata as its airbag supplier on the same day.
Millions of cars are yet to be fixed in the airbag case, in fact the number of cars affected is still growing. Will Takata be able to survive? Taking punitive financial hits and paying out lawsuits is bad enough—but if the company’s actions leave it without much in the way of customers, survival might well be difficult.