Toyota Recalls Made No Dent On Their Brand

A study from North Carolina State University shows that Toyota’s safety-related recalls that began in 2009 made little to no impact on how consumers perceived the brand.

“These findings highlight the importance of establishing and maintaining a reputation for quality,” says Dr. Robert Hammond, an assistant professor of economics at NC State and lead author of a paper describing the study. “Not only will it help you sell cars in the first place, but it will help you weather public scrutiny in the event of a recall.”

Hammond launched the study because he wanted to see how consumers respond to recalls. “I wanted to look at how a product recall for safety would affect what a consumer is willing to pay for that product,” Hammond says. He looked at Toyota models that were subject to recall in 2009-2010 as a result of highly publicized concerns over “sudden unintended acceleration.” Those recalls applied to over 9 million vehicles worldwide.

In order to focus on consumer perception of the brand, Hammond looked at used-car markets. Sales of new vehicles can make it difficult to assess the impact of a recall, because there are multiple confounding variables – such as promotions, marketing campaigns and new models that weren’t subject to the relevant recall.

But by looking at the average prices for specific models in the used-car market, researchers can determine how much Toyota owners were willing to accept when selling their vehicles – and how much used-car buyers were willing to pay for them.

Hammond found that, despite the high-profile media coverage of the Toyota recalls, there was very little effect on what consumers were willing to pay for a Toyota. Specifically, Hammond found that the average price of affected vehicles declined by approximately 2 percent relative to comparable, unaffected vehicles (such as similar Honda models). That 2 percent decline is within the statistical margin-of-error for the study.

And the effect did not last long. The first Toyota recall was in November 2009, and the apparent decline in vehicle price had leveled out by January 2010.

Hammond did a similar analysis of Audi vehicles that were recalled due to similar acceleration concerns in 1986. The impact there was more significant. Audi showed an average price slide of over 16 percent relative to similar, unaffected vehicles over the course of six months. “Comparing the Toyota and Audi experiences highlights the value of a well-established reputation,” Hammond says.

The paper, “Sudden Unintended Used-Price Deceleration? The 2009-2010 Toyota Recalls,” is forthcoming from the Journal of Economics and Management Strategy.

-shipman-

Note to Editors: The study abstract follows.

“Sudden Unintended Used-Price Deceleration? The 2009-2010 Toyota Recalls”

Author: Robert G. Hammond, North Carolina State University

Published: Forthcoming, Journal of Economics and Management Strategy

Abstract: Using data from the vehicle resale market, I test consumer responsiveness to large-scale product recalls that are caused by safety problems. The used-vehicle prices of Toyotas are compared to the used-vehicle prices of the other major domestic and foreign manufacturers. The results quantify the losses suffered by Toyota vehicle owners in secondary markets due to the 2009-2010 safety recalls of more than nine million Toyota Motors vehicles. The treatment effect of a recall is measured using panel data with a difference-in-differences estimation approach that allows for time-varying treatment effects and serial correlation. I find that this recall episode had negative effects in the resale market for automobiles that were quantitatively small (less than 2 percent of the vehicle’s resale value), statistically indistinguishable from zero, and short lived (did not persist beyond December 2009). A comparison with Audi’s recalls in the 1980s of vehicles with sudden unintended acceleration suggests that the extent to which a company’s reputation is established is more important than whether or not a company has a reputation for producing high-quality products.