Daihatsu scandal is prompting change at Toyota

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A scandal over safety testing at Japanese carmaker Daihatsu is shaping up as a pressure point for change at its parent Toyota.

After Daihatsu revealed last year widespread problems with crash safety testing dating back more than three decades, the world’s biggest carmaker by sales has been scrambling to deal with the fallout.

Following a Transport ministry raid on Daihatsu headquarters late last year, the subsidiary suspended all worldwide vehicle shipments. And last week the government said it would revoke certification on three of the subsidiary’s vehicles, essentially halting production of them until licences are regained.

Such is the concern over the repercussions for Daihatsu and its massive base of suppliers, that it was even raised in a Bank of Japan press conference. The BoJ’s Osaka representative Takeshi Nakajima warned that the central bank needed to “carefully examine the impact on corporate profits and business sentiment”.

Koji Sato, who only took over as Toyota chief executive in April, promises Toyota will reveal plans for an overhaul of Daihatsu next month, hinting it could potentially take in the governance structure of the broader group. The intriguing thing for Toyota watchers is how far that extends amid increasing questions over the underlying strategy that has underpinned the carmaker’s growth.

Not only could the scandal force Daihatsu and Toyota to redesign the affected car platforms but it could also force changes to the group’s sprawling web of affiliates and suppliers. After all, it is not the first scandal to hit a Toyota subsidiary. In 2022, truckmaker Hino lost some of its licences after admitting to falsifying emissions data.

One analyst, speaking on condition of anonymity, said that what was happening in Toyota’s network was a function of capitalism rather than systemic governance failures. Essentially, the Toyota group is very big and therefore it will suffer problems. And the solutions proposed for Hino, where Toyota is a majority shareholder, are not going to be the same as at 100 per cent owned Daihatsu.

However, others, including perhaps Toyota, think there is more going on. Sato said changes to be outlined next month by Toyota chair Akio Toyoda would strengthen its group governance so its large network of subsidiaries could adopt the “Toyota group philosophy”.

An investigation panel looking into the safety issues noted that pressures had been placed on Daihatsu employees as the company increased production of overseas compact cars for Toyota and other carmakers and wrestled with tight deadlines for delivery. A third-party investigation panel has discovered 174 safety irregularities, which affected a total of 64 models including 22 models sold by Toyota.

“It’s important for us to manage the group as a whole so that it can demonstrate its collective strength,” Sato told reporters. “What’s happening now shows that we are facing challenges” with the way the group is being governed. 

What that means is unclear. It could involve smoothing out production pressures between companies more efficiently; or making sure Toyota has more oversight over the engineers and the factory floor at its subsidiaries; or something else entirely. But as with everything Japan’s most valuable company does, it will be worth monitoring. 

One of the main points of the current structure, and why companies like Mazda, Suzuki and Subaru joined the Toyota family, was to provide protection as the pressure of investment in electric vehicles mounted. But analysts are questioning how far that logic holds.

Toyota has already unwound some of its many cross shareholdings in an effort to mobilise resources that can be used to fund the shift away from combustion engines. And there is a sense among some analysts and investors that the move towards battery EVs will accelerate changes to the way the group operates.

“The scale of the group seems to be a strength at the moment. But if you go into battery EVs and if engines are no longer how you differentiate automakers and brand, then maybe this kind of large scale can be a bit of a liability and some kind of consolidation might be needed,” says James Hong, auto analyst at Macquarie.

Sato himself admitted last week that “what’s important is not that each of the members of the Toyota group is protected but that each demonstrate its expertise so that the group of firms can contribute to the car industry through their collective strength”.

The question Toyota can answer in February is whether its current structure allows those firms to do exactly that.

david.keohane@ft.com