IN the world of automakers, Toyota Motor Corp stands apart from its peers as the manufacturer of quality and safety — simply put, Toyota is known for making “the best built cars in the world”. But in just one week, Toyota’s golden image, which helped it overtake General Motors Corp (GM) as the world’s number one carmaker in 2008, was tarnished by one of the biggest recalls in history. The automaker must now get a grip on its publicity crisis and provide a suitable resolution to its customers if it wants to salvage its legacy. Until then, however, the recall is expected to narrow the gap between Toyota and its rivals, which have the opportunity to capitalise on the Japanese juggernaut’s major blunder.

According to Toyota, its gas pedal recall, which no one saw coming, could end up costing it in the region of US$2 billion. Unfortunately, that estimate is just the tip of the iceberg as it does not include any expenses or lost sales associated with the latest blow to the Toyota brand — the recall of its hybrid Prius models, announced on February 8, 2010. Throw in dozens of lawsuits by Toyota drivers and dealers, not to mention a probe by the US Transportation Department, and the recall could cost the carmaker in excess of US$5 billion.

Currently, the automaker is scrambling to assemble a crisis team in the US made up of top lobbyists, lawyers and public relations specialists in a last-dash effort to diffuse its regulatory and PR disaster. Meanwhile, its Detroit counterparts are wasting no time trying to cash in on its troubles — after all, this is the big break they’ve been waiting for, for nearly three decades. Not surprisingly, soon after news of the first recall broke, GM, Chrysler LLC and Ford Motor Co began offering US$1,000 cash back incentives for any Toyota traded in for certain models of their cars or trucks.

While all of the big three (Big 3) US automakers plus Hyundai Motor Co Ltd and Honda Motor Co Ltd are poised to get much-needed head starts in the US auto race, Ford has been labelled the “comeback kid” as it has the best opportunity to win back customers from its biggest rival. Ironically, Toyota’s huge misstep comes at a time when Ford seems to be finding its footing once again. The US automaker recently posted 2009 profits of US$2.7 billion, its first full-year profit in four years and a stark improvement from its record year-ago loss of more than US$14 billion. Apart from returning to the black, thanks to deep cost cuts and layoffs, Ford had the foresight to continue introducing new, innovative, energy-efficient vehicles, while its US rivals struggled to emerge from bankruptcy.

That strategy helped the owner of the Volvo brand to grow its market share in the US last year for the first time since 1995, though it still trails GM and Toyota for the top spot. It now plans to further bridge the gap by luring the usual buyers of Toyota’s most popular models — Camry and Corolla sedans with its recently relaunched Taurus and Focus models. Its new ads touting the tagline “Ford is better than Toyota, especially with Toyota recalling 2.3 million cars and trucks” sure won’t hurt its chances of success either (hoping that drivers forget its string of safety issues including last year’s completion of a series of recalls affecting an unprecedented 14 million vehicles).

However, Ford and other automakers who hope to leave Toyota in the dust must not overlook the clout of Toyota’s secret weapons — loyal customers and a healthy balance sheet. Since the recalls began, local dealers in the US have made it clear that though Toyota owners are frustrated they will likely keep their vehicles and even buy Toyota vehicles again in the future. The Big 3 should also be aware that their “get-rich-quick” schemes may be unsuccessful as Toyota owners are hesitant to trade-in their vehicles given the significantly lower resale value stemming from the gas pedal and braking issues. Once the problem is corrected, the value of their cars will appreciate, thus making it financially sensible to sell if they choose to leave the name they have come to know and still trust.

Turning the focus to the numbers, Toyota has proven that it is among the most-cash rich of its global counterparts. In fact, as at December 31, 2009, the automaker had cash and short-term investments of JPY3.88 trillion (US$43.45 billion). Its total assets amounted to JPY29.55 trillion (US$330.88 billion) and shareholders’ equity stood at JPY10.133 trillion (US$113.42 billion), making the automaker well able to withstand the direct costs of the recall like repairs as well as the expenses associated with rebuilding its reputation. The impact of the recall should put only a minor dent in the Company’s capital base of less than four per cent (assuming the costs total US$5). With regards to its bottom line, Toyota projects 2010 Net Income of JPY 80 billion (US$ 892.61 million), which already takes into account the damage control costs.

On the other hand, though Ford unveiled an impressive income statement for the year just ended, its balance sheet is anemic at best when compared to Toyota’s. Ford’s liabilities of US$52 billion (as at December 31, 2009), far exceed its total assets of US$39 billion. The company would need to enhance liquidity, raise additional capital and reduce its debt burden to even come close to the Japanese automaker’s financial strength.

Furthermore, if history has taught us anything Toyota is in good stead to weather this storm, so long as it takes swift action, learning from the likes of Johnson & Johnson (NYSE: JNJ). The consumer and healthcare products giant put a lid on consumers’ fears, with a successful PR campaign in response to one of the most talked about recalls in memory. JNJ removed 31 million bottles of its Tylenol painkillers from retailers’ shelves, costing it over US$100 million after seven deaths occurred in the US in 1982. It was the company’s preventative measures to invent temper-resistant packaging and even lobby for federal anti-tampering laws that helped it remain one of the most trusted household names today.

Though its rivals may close in on its global reign in the upcoming months, Toyota will use its formidable resources to withstand the severe backlash of its public humiliation over the long run. Already the company’s workers are doing overtime to ensure that Toyota vehicles are back on the road in the shortest possible time. It has also used the media to reassure customers of its commitment to safety — it took Toyota decades to build a name synonymous with reliability, quality and affordability, and that brand isn’t going anywhere anytime soon. Others have recovered from corporate nightmares such as this and so too will Toyota.

Kimberly Thelwell is a Research Analyst at Stocks & Securities Ltd. You can contact her at kthelwell@sslinvest.com.