KBB Trims Values on Recalled Toyota Vehicles, Discusses Broader Recall Implications
By Joe Overby, Staff Writer
February 08, 2010
IRVINE, Calif. — Although the automaker has thrived on its reputation for ”quality,” Toyota’s recent recall has the potential to spiral into significant downward pressure on used values for the brand, according to Kelley Blue Book analysts.
As of the end of last week, KBB had already cut the values of the affected models anywhere from 1 percent to 3 percent, and depending on how quickly Toyota makes good with both the Department of Transportation and the general public, ”further devaluation” may be ahead, according to Juan Flores, director of vehicle valuation for KBB.
”With production shut down, sales halted, and rental car companies pulling affected vehicles from their fleets, Toyota’s usually rock-solid reputation for quality has taken a hit in the minds of consumers,” Flores explained.”The potential demand lost as a result of these actions becomes more and more difficult to recover with each passing day.
”In addition to a drop in consumer demand for Toyota, there is a growing supply of used Toyota vehicles that could put further downward pressure on values,” he continued. ”As leases come due and used Toyotas are returned to the manufacturer, the inability of dealerships to either sell or remarket these vehicles could add to an increase in overall supply of used Toyotas.”
Not to mention, there’s the pressure from competitors.
With rivals from the Big 3 as well as Hyundai providing conquest trade-in incentives, ”unsellable” used Toyotas may pile up, Flores noted.
So, in essence, there’s a two-pronged downward pressure that could potentially cause devaluation to continue: the mounting supply of used Toyota units, plus reduced demand for the brand.
”A growing inventory of used Toyota vehicles, coupled with a reduction in demand, however slight, only leads to the potential for further devaluation,” Flores shared.
”If a swift resolution is not implemented within the first few weeks, we expect to see a cumulative depreciation between 4 to 5 percent by the time this issue concludes, especially as the glut of inventory continues to build,” he added.
And the perception of Toyota’s quality continues to slide, the automaker’s rivals may benefit from a ”substitution effect,” Flores pointed out.
In other words, the vehicles directly competing with the recalled units Toyota’s lineup may see values go up.
”Additionally, as rental-car companies adjust their fleets to account for their loss of Toyota inventory, vehicles that were to be sold at auction are being put back into service, reducing the supply of vehicles that directly compete with Toyota’s recalled vehicles,” Flores explained.
”While this reduction to the supply of used vehicles may be slight, Kelley Blue Book expects that an increase in the demand for Toyota alternatives coupled with the aforementioned supply reduction could possibly push used-car values upward, again, most noticeably on models that directly compete with recalled Toyota vehicles,” he continued.
Long-Term Damage?
Continuing on, Eric Ibara, KBB’s director of residual value consulting, offered his take on some of the long-term effects of Toyota’s troubles on vehicle values.
While acknowledging that there are many questions about the long-term value impact of the recall — and that it may take a while to answer these questions — Ibara suggested that what is likely to have a strong impact on future values for the brand will be whether Toyota can be effective at assuring the public that it ”truly understands the cause of the problem.”
”Toyota needs to implement the recall quickly with as little inconvenience to its customers and instill in them the confidence that the unintended acceleration has been forever resolved,” Ibara commented.
”Even if the affected Toyota vehicles experience an immediate drop in value, the fate of the long-term residuals will rest on whether Toyota can convince owners and future buyers that it has identified and solved the accelerator pedal problem,” he added.
Interestingly enough, the Toyota units not impacted by the recall may be an indicator of how successful Toyota is at getting its message across, Ibara suggested.
”If the public still has confidence in Toyota’s ability to produce and sell quality vehicles, the value of Toyota vehicles not on the recall list should hold as it normally would,” he pointed out. ”Any lack of public confidence will cause these non-impacted Toyota values to fall.”
KBB said it will continue to watch the market ”very closely” to gauge the residual value impact. As was the case with the General Motors and Chrysler bankruptcies in 2009, the ”worst case scenario” doesn’t always happen when it comes to residuals, Ibara emphasized.
Aside from how Toyota values are immediately affected, Ibara expressed concern regarding Toyota’s ”strategic direction” in the next few months.
”It seems a focus on volume and market share may have caused Toyota engineers to neglect some controls that a smaller Toyota might not have missed in previous years,” Ibara stated. ”A continuing focus on volume could signal that future recalls from Toyota will continue.
That said, Ibara pointed to comments from Toyota’s chairman, which suggested that the automaker recognizes ”what the true cost of their focus on volume has been and (that) they now will return their full attention to quality.”
”If this is the new direction for this company, and if the accelerator recall goes smoothly, little long-term impact on values is expected to result,” Ibara noted. ”After all, Toyota has proven to the world that they know how to design and manufacture vehicles with world-class quality. All they need is the direction and the will to do so.”
To help reassure the public, Toyota Motor Sales, USA, again ran full-page newspaper advertisements in 20 major U.S. media markets Friday and Saturday. The apparent goal of these ads was to explain Toyota’s actions involving the sticking accelerator pedal recall in more detail.
