Shrapnel-Firing Airbags Prove to Be Bad Business for Takata

Jim Watson/AFP/Getty Images

Jim Watson/AFP/Getty Images

Takata, the auto parts supplier behind the recent recall of millions of airbags, announced last Friday that it had taken a loss for the previous fiscal year. Costs associated with the recall and its resulting lawsuits left the company with a $246 million loss for the year. Takata expects to return to profitability this year, but there’s no way to predict how expensive the lawsuits will end up being.

More than 20 million vehicles were affected by the recall, with Japanese manufacturer Honda probably being hit the hardest. Toyota and General Motors were hit hard too, with 10 total manufacturers currently affected. Takata’s airbags have been shown to explode during inflation, sending shrapnel towards the car’s passengers and causing gristly injuries or fatalities. So far, six deaths and more than 100 injuries have been reported.

Company executives are optimistic about returning to profitability, but with government fines and payouts from lawsuits hanging over their heads, it sounds like that optimism is rooted more in preserving stock prices than in a true belief that the airbag scandal is behind them. “We recognize that there are risks related to future recalls and lawsuits,” said Yoichiro Nomura, the company’s chief financial officer, essentially confirming that hopes of returning to profitability are not concrete.

Currently, Takata is facing a $2 billion lawsuit in Canada, and that’s not the only problem. American safety regulators are frustrated with Takata’s lack of cooperation with their investigation. As a result, they are fining the company up to $14,000 a day in an effort to force Takata to be more cooperative. The fines don’t appear to be working, though, with Mark Rosekind, head of the National Highway Traffic Safety Administration noting recently that Takata is still dragging its feet. He hasn’t specified what his plans are to force Takata to cooperate, but it should be more drastic.

“The endgame is pretty clear,” said Rosekind. “If all these airbags aren’t safe, then we need to make them safe.”

Toru Yamanaka/AFP/Getty Images

Toru Yamanaka/AFP/Getty Images

Despite fines and huge potential judgments, Takata’s business his thriving in other areas. The global auto market is doing well, and as an auto parts supplier, Takata is reaping the reward of higher demand for its other products. Making profits even better is the weak yen, which amplifies its profits on revenue earned outside Japan. Sales have grown and are expected to continue to grow, but the company is projecting growth will drop by at least a third in the next fiscal year.

Takata is also currently arguing that it’s the responsibility of auto manufacturers to pay for recalls, but that issue hasn’t been settled. If the courts rule that parts suppliers are responsible for the cost of recalling their own faulty products, a decision that looks likely, it puts Takata at even more of a risk.

The recall scandal has already claimed the job of the company’s president and forced other executives to take pay cuts. Despite the benefits of strong auto sales and the weak yen, the future of Takata really depends on which company is held responsible for the cost of recalls and how much the lawsuits end up costing the company. In the extremely unlikely scenario where automakers are held responsible for their own recall costs, and Takata wins in court, this airbag scandal could end up being nothing more than a minor inconvenience for the company.

It’s much more likely, however, that Takata will end up paying out quite a lot of money, which could seriously impact its future profitability. It’s also hard to imagine that future airbag sales won’t be seriously affected by the fact that Takata knew its airbags sold millions of airbags at risk of exploding and shooting shrapnel at people, and it still did nothing about it.

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