"The sludge issue was a significant blow," said Art Spinella, president of CNW Marketing Research Inc. in Bandon, Ore. Toyota's in the position that GM was in back in the 1970s. A lot of people were buying GM products in the '70s because they were GM products, but they had fractures at the edges. It took 15 years before GM started to suffer from that long-term negative word-of-mouth."

At Toyota, he said, "it's going to hurt them if they don't turn it around."

August 5, 2006
Repairing Some Dents in an Image
By MICHELINE MAYNARD and MARTIN FACKLER

The news is something no car owner wants to hear. Power steering on their hard-to-get hybrid could fail. Tires on their small pickups could bulge and possibly burst. Air bags may not inflate during a crash.

These recalls are the type that have long bedeviled American carmakers, but this time it was Toyota of Japan, long known as the crème de la crème in quality.

Just as Toyota appears poised to pass General Motors to become the world’s largest automaker, it has a growing problem with recalls that is sullying its carefully honed image.

In the United States, Toyota’s largest market, the number of vehicles recalled soared to 2.2 million last year. That was double the number of vehicles recalled in 2004, and more than 10 times the 200,000 cars it recalled in 2003, according to the National Highway Traffic Safety Administration.

In Japan, the number of recalled vehicles has jumped 41-fold since 2001, to 1.9 million last year. And because many of the recalls are for vehicles that are more than 10 years old, analysts fear that another wave of bad quality news may be in store.

The situation has alarmed Toyota’s top executives and angered the Japanese government. It ordered Toyota to explain itself, which the company did in a report delivered Thursday, accompanied by the latest in a series of apologies. In it, the company promised to create a new computer database to obtain information more quickly from dealers on repairs and complaints. The police in Japan said three Toyota officials were under criminal investigation on suspicion that they concealed vehicle defects over eight years.

Inside Toyota, the spate of recalls and the criminal investigation has caused a flurry of high-level efforts to diagnose and fix the problems, which have affected its Prius hybrid, the gold standard among fuel-efficient vehicles; the Tacoma pickup; and cars in its Lexus luxury lineup.

Quality problems can befall any company, whether based in Detroit, Europe or elsewhere. This week, in fact, Ford expanded a recall of its vans, sport utility vehicles and pickup trucks because of problems with cruise control systems that were prone to catching fire.

For now, Toyota’s quality issues do not seem to be damping its operations either in Japan, where it is the biggest automaker, or the United States, where Toyota passed Ford in July to rank as the No. 2 company in terms of auto sales. Nor is it affecting Toyota’s net income, which climbed 39.2 percent during the second-quarter, to $3.2 billion, the company said yesterday. [Page C4.]

But executives know they cannot let the situation fester, because it ultimately threatens Toyota’s ability to grow. If they fail to get their arms around the problem, they will have to pull back on the company’s expansion plans, which are set to include more assembly and engine plants for the United States, as well as factories elsewhere.

At Toyota’s annual executive meeting in June, its departing chairman, Hiroshi Okuda; the new chairman, Fujio Cho; and its chief executive, Katsuaki Watanabe, all vowed to managers that the quality issue would be addressed, according to a senior Toyota executive who attended the meeting.

“The quality issue is a big concern. They’re embarrassed about it,” said the executive, who insisted on anonymity because the meeting was private.

“You think about Toyota, and quality is in our DNA,” he continued. “We are concerned about looking like the rest of the pack. The market is forgiving because of our long reputation, but how long will they be forgiving?”

Interviews with car owners and dealers show they have some latitude.

Bruce Wachtell, 71, bought a 2006 Prius in March after years of driving a Toyota Tacoma pickup without any problems.

“It’s never seen a dealer,” he said of the truck.

Mr. Wachtell, a retired ship’s radio officer living in Stinson Beach, Calif., began buying foreign cars after growing frustrated with the quality of American-made vehicles. That sentiment is confirmed, he said, whenever he peruses repair records for various brands in Consumer Reports, and he has not lost any confidence in Toyota because of the recent recalls.

“I think recalls are just simply a function of the fact that no design is perfect,” he said.

Mr. Wachtell called his dealership after discovering recall notices that included the 2006 Prius on the Internet, but he was told his vehicle was not among those affected. Both the Tacoma and the Prius, however, are among the vehicles in Toyota’s recent recalls.

At Bredemann Toyota in Park Ridge, Ill., Don Ziemke, the general sales manager, said only a few shoppers had asked about the implications of the recalls. Other dealers said they had prepared their employees to answer such questions, but that no one had even brought up the topic.

“Toyota’s longevity and reliability has always been a strong suit,” Mr. Ziemke said. “That kind of takes a hit when there are recalls out there.”

Still, he said, “It’s against the grain as far as what Toyota has provided its dealer body and customers in the past.”

The primary reason for the recalls is Toyota’s overloaded engineering staff, say company executives and industry analysts.

Despite its global expansion during the 1990’s, it failed to hire enough engineers to keep up with production increases.

And it kept most of its development in Japan, even though it built research and development centers in places like Ann Arbor, Mich., and Brussels. At the same time, a new Japanese law required companies to pay for overtime for white-collar workers, raising the costs incurred by engineers, whose long hours on the job were the stuff of industry legend.

Analysts say that all this may have contributed to a number of errors introduced during vehicle development. There have been fewer problems on the assembly line, however, which has been a more common cause of recent recalls at other carmakers like Nissan.

Another issue is that Toyota, like other global auto companies, has farmed out the development of key components to its suppliers, both companies with which it has been doing business for years, like Denso of Japan, and newer ones, like the Delphi Corporation, the biggest American parts maker.

The damage has been slow to emerge — indeed, most recent recalls involve cars produced in the 1990’s. But that means potential problems from hectic growth years in the early 2000’s have yet to appear, and analysts warn that Toyota’s quality woes may only become worse before they get better.

“I’m more concerned about the future,” said Kunihiko Shiohara, an auto analyst for Goldman Sachs in Tokyo. “A fundamental turnaround in quality levels will take at least four years.”

It also does not help that some rivals appear to be gaining quality ground on Toyota, whose Toyota-brand cars and Lexus line of luxury cars had long topped quality rankings. It still dominated the recommended list from Consumer Reports this year. But in June, a survey of new-vehicle quality by J. D. Power & Associates, a marketing research company, ranked the German luxury carmaker Porsche in the top spot, and with Hyundai of South Korea in second place, ahead of Toyota at No. 3.

To be sure, rising recall numbers are not limited to Toyota. A reason that recalls have gone up is that automakers are using an increasing number of common parts across a number of car models, which saves money, but also means that flaws affect larger numbers of vehicles.

Another is the increasing complexity of vehicles, as companies rely more heavily on electronics and computerized features that used to be mechanical. “It’s not fair to single out Toyota for many problems,” said Takaki Nakanishi, an auto industry analyst with J. P. Morgan in Tokyo.

Still, the rapid rise in recalls at Toyota stands out in comparison with other carmakers. In Japan, where Toyota is the largest auto company, with about 39 percent of the market, its recalls quadrupled over the last four years, to 1.9 million in 2005. That compares with 199,000 at No. 2 Nissan and 205,000 at Honda in 2005, according to the transportation ministry.

In Toyota’s case, 68 percent of its recent recalls can be blamed on design flaws, according to Goldman Sachs. They include rubber parts not made thick enough to withstand engine heat and joints too weak to hold together. Of Toyota’s recalls in 2004, 68 percent were because of design problems, Goldman Sachs said.

Analysts say Toyota’s problems stem from the mid-1990’s, when Mr. Okuda, who was president, began expanding its global production. Toyota did not hire enough engineers to keep up with production increases because it was trying to meet tough self-imposed cost-cutting targets, analysts said.

Understaffed design centers have also forced Toyota to rely on large parts makers to help design major components “Toyota’s resources have been stretched quite a bit by the big increases in volume,” said Andrew Phillips, an analyst at Nikko Citigroup in Tokyo. “What’s remarkable is that most the recalls now predate the really big ramp-up.”

That came after 2000, when Toyota’s annual vehicle sales rose to the almost 8.85 million expected this year, from about 6 million.

But Toyota has increased the hiring of new engineers, bringing on 979 last year, compared with 310 in 2001. A company spokesman, Paul Nolasco, said Toyota planned to hire at least another 850 this year.

In a departure from corporate tradition that stressed spending a career at a single company, Toyota wants 200 of its new hires to be experienced engineers hired in midcareer from elsewhere.

In June, Toyota assigned a second executive vice president to its quality control division and created a new senior managing director spot dedicated to improving quality.

“Everyone is taking this very seriously,” said a top-ranking executive in Toyota’s North American operations who spoke only on condition of anonymity because of the sensitivity of the situation. The stakes are high, he added: “If we can’t lick it, we will have to slow down” — a decision Toyota hopes it does not have to make.

Nick Bunkley contributed reporting for this article.