Toyota Pedal Maker CTS in Spotlight as Recalls Widen (Update3)
February 01, 2010, 4:15 PM EST(Updates share price in the 17th paragraph.)
By Jeff Green and Mike Ramsey
Feb. 1 (Bloomberg) -- CTS Corp. was honored three times by Toyota Motor Corp. for the quality of the accelerator pedals that have thrust the 114-year-old electronics supplier into the center of a global recall of as many as 4.2 million vehicles.
Toyota’s sales freeze last week intensified the focus on Elkhart, Indiana-based CTS since it was singled out after the world’s largest automaker’s Jan. 21 U.S. recall of autos whose pedals might “stick.” CTS expressed “deep concern” on Jan. 29 about how its parts were being portrayed.
The supplier’s prominence in the case is unusual because automakers usually shield such details. General Motors Co. and Ford Motor Co. in November resisted identifying a partsmaker until India’s Rico Auto Industries Ltd. said it was the cause of a shortage that shut GM and Ford factories in the U.S.
“CTS was put on the defensive right away and it was evident there seemed to be finger pointing going on,” said Rebecca Lindland, an analyst at consultant IHS Global Insight. “It seemed like they were the sacrificial lamb.”
Toyota said today it plans to deliver a fix to dealers starting this week to prevent the pedals from sticking. The automaker has said its priority remains restarting five North American assembly lines idled by the recall and getting replacement parts to retailers for models already sold, not assessing any blame in the sudden-acceleration cases.
“We are currently doing all we can to ensure our customers’ safety,” Hideaki Homma, a Toyota spokesman, said yesterday. “I am not aware of any discussion yet on the question of who will bear responsibility.”
Modified Pedal
CTS began production of a modified pedal approved by Toyota last week that is being shipped to factories, both companies have said.
In last week’s statement, CTS said the pedals shouldn’t be linked to any cases of “sudden unintended acceleration,” which it said have been reported in Toyota autos as far back as 1999. CTS said it first supplied parts to Toyota for 2005 model-year vehicles. Mitchell Walorski, director of CTS investor relations, didn’t return a phone call or e-mail seeking comment.
CTS was pulled into the spotlight on Jan. 21 when Toyota cited the supplier in an announcement that accelerator pedals might stick in a depressed position on 2.3 million U.S-built cars and light trucks, causing them to speed uncontrollably.
On Jan. 26, Toyota said it was suspending sales of eight models in the U.S., and three days later it disclosed plans for the recall of as many as 1.8 million Toyotas in Europe. Toyota’s China venture will recall 75,522 cars, and PSA Peugeot Citroen also said it will recall 90,000 of its cars made at a Toyota plant in Europe because of the pedal flaw.
Slow Release
CTS Chief Executive Officer Vinod M. Khilnani said the flaw in the pedals was a slow release after being depressed, and that there have been fewer than a dozen such occurrences in the U.S.
The trouble probably was caused by condensation resulting from “extreme environmental conditions that go beyond CTS’s original specifications” from Toyota, Khilnani said on a Jan. 28 conference call. Toyota came back to CTS with a “more stronger, robust specification,” Khilnani said. CTS said it has liability insurance with a $1 million deductible.
“Once Toyota approved the specification CTS delivered and used on its products, they can’t blame CTS,” said Koji Endo, managing director of Advanced Research Japan.
No Objection
The U.S. Transportation Department doesn’t object to a remedy Toyota is proposing to fix the CTS design, an agency official said. Federal safety regulators said Jan. 26 they are studying whether recalls are required for other automakers that may have installed defective pedals. Toyota said it has been installing a modified pedal in European models since August.
CTS, formed in 1896 as Chicago Telephone Supply Co., sells electronic components and sensors to auto, communications, medical, defense and aerospace manufacturers.
Based on 2008 sales, the last year for which full data are available, Hewlett-Packard Co. was CTS’s biggest customer, with 11 percent. Toyota had about 3.2 percent of last year’s sales, according to CTS. The supplier estimates that it has 16 percent to 20 percent of the global market for accelerator pedals.
CTS rose 27 cents, or 3.6 percent, to $7.88 at 4:02 p.m. in New York Stock Exchange composite trading. The gain today was the first advance after four straight declines last week.
Before today, the shares had tumbled 18 percent since Jan. 20, the day before Toyota singled out the pedals in the recalled models. That slide erased some of the gains in the previous 12 months, when CTS more than doubled compared with a 49 percent increase for the Standard & Poor’s Smallcap 600 Index.
Quality Awards
CTS was recognized by Toyota in September 2005 with an “Excellent Launch Award” for the “design, quality and launch coordination” for electronic throttle controls and pedal assemblies for the Avalon, one of the models now subject to the recall.
In June 2006 and again a year later, CTS issued statements after Toyota honored the supplier for “exceeding quality expectations on the accelerator pedal modules” built by a CTS plant in Canada that makes the pedals now being recalled.
“If they manufacture a defective part, they could be held liable,” said Michael Louis Kelly, a lawyer with Kirkland & Packard LLP in El Segundo, California. “A plaintiff wouldn’t have to sue them, though.”
Supplier Liability
Suppliers usually aren’t part of legal actions unless the automaker can’t be sued, said Kelly, whose firm filed a class- action lawsuit against Toyota in federal court on Nov. 18. It’s harder to prove fault at suppliers, which often only build parts to specifications and aren’t involved in testing them, he said.
Toyota’s recall-related costs may exceed 100 billion yen ($1.1 billion), with 50 billion yen in direct expenses, 10 billion yen a week for closing plants and additional funds for liability reserves, according to a note today from Kurt Sanger, a Deutsche Bank analyst in Tokyo. He advises buying the shares.
John Hanson, a Toyota spokesman, declined to comment on the estimate.
Industry researcher Safety Research & Strategies Inc. said Jan. 28 it documented 2,262 reported incidents of sudden acceleration involving Toyota vehicles since 1999. Those cases resulted in 815 crashes, 341 injuries and 19 deaths, according to the Rehoboth, Massachusetts-based group.
CTS also supplies pedals to Honda Motor Co., Nissan Motor Co., Chrysler Group LLC and Mitsubishi Motors Corp., Khilnani said. Each company has its own specifications and designs, and there isn’t a common application of the Toyota part with other companies, the CEO said.
After an inquiry into a CTS pedal in China on Ford delivery vans in a partnership with Jiangling Motors Co., assembly was resumed when the design was found to be “unique” and not related to Toyota, Jiangling said in a statement this weekend.
“The relationships between manufacturers and suppliers is very much symbiotic these days,” said Lindland, the analyst at Global Insight in Lexington, Massachusetts. “It’s not really beneficial to anyone to be pointing fingers. But Toyota has an awful lot to lose if they are seen as responsible.”
--With assistance from Alan Ohnsman in Los Angeles, Angela Greiling Keane in Washington, and Makiko Kitamura, Tetsuya Komatsu and Yuki Hagiwara in Tokyo. Editors: Ed Dufner, Jamie Butters, Steve Walsh
To contact the reporters on this story: Jeff Green in Southfield, Michigan, at jgreen16@bloomberg.net; Mike Ramsey in Southfield, Michigan, at mramsey6@bloomberg.net
To contact the editor responsible for this story: Jamie Butters at jbutters@bloomberg.net;