Don't have a Fit, Dude

29 January 2010
Massive recalls from both Toyota and Honda must be causing widespread alarm in the auto industry. Just a few days ago, Toyota announced recalls of millions of cars due to a faulty accelerator pedal.

Now Honda is recalling 646,000 Fits (also known as Jazzes) and Citys because of a defective switch that could lead to fires.

Hondas built in Japan, China, Brazil, Thailand, Malaysia and India will be recalled. In the US, 171,372 will be recalled, 141,140 in the US, and 229,000 are Latin America.

With the auto industry in the sorry state it is in worldwide, recalls from such respected, quality-producing companies only hurt the industry overall, or at least damage any remaining confidence anybody may have had in it.

Effect on the Auto Industry
So how does this affect the auto industry in Japan and the rest of the world?

First of all, the suppliers of Toyota and Honda will suffer. Many auto parts suppliers are highly reliant on one (or two) manufacturers for their business. So when Toyota gets the flu, they definitely start sneezing.

And with Toyota recalling more than 12 times Honda - at a staggering 8 million vehicles worldwide - the ripples will spread far and wide. In 2009 Toyota didn't even sell that many vehicles worldwide. This may be more like a cancer than a flu.

How bad is the Toyota recall? It's only estimated to knock $556 million in operating profit each month, nearly the amount it earned in Q4 2009.

Effect on Porter's 5 Forces
Since CarFreaks.info has so many Porter's Five Forces analyses, or assessments of the attractiveness or profitability of an industry, let's see if these recalls can affect any of these forces. In reality, a news story like this, while significant, is only a micro factor and will not reshape the auto industry. (Also, as always, one must define the business unit and market when conducting a P5F analysis.)

But because the car industry has taken so many hits recently, the cumulative effect of these could indeed put drags on the industry for the long term. Let's look at the five forces and see if there could be any changes:

1. The threat of new entrants
Generally, this is already very low. Now it just got lower.

2. The bargaining power of buyers/customers
Ha. With recalls it is obviously increasing, making the industry less attractive to the automakers.

3. The threat of substitute products
Many people are going to be crossing Honda and Toyota off their lists of preferred cars.

4. The amount of bargaining power suppliers have
They are going to be hurting now, and won't want to bargain.

5. The intensity of the competitive rivalry (which is in part determined by 1-4)
I believe it is this intensity that may have led to shortcuts and quality issues, causing the recalls in the first place.

Porter's Five Forces in the Auto Industry Around the World
A P5F analysis of the auto industry in general US here.

To see a P5F analysis of the auto industry in China, click here.

A P4F analysis of the Indian auto industry is here.

Manufacturers' Sites
Toyota recalls on their US site

Honda recall site (enter your VIN to check if your car should be recalled)

-Vladimir Gonzales