Latest Takata Recall Affects Airbags in 12 Million Vehicles

Japanese company's stock price plummets following announcement

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May 30, 2016
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If you didn’t know anything about Takata Corporation (TSE:7312, Financial), a Japan-based automotive parts company, except for its problems with its airbags, it would be easy to assume based on headlines from the last couple of years that Takata was an industry newcomer, perhaps prone to making mistakes due to inexperience and/or yielding to the temptation to cut corners.

In fact, Takata has been in business since 1933, when it started out as primarily a textile company known for its parachute lifelines. The company has long prided itself on its quality.

From that base, the company expanded into cutting-edge automotive technology. It started exploring the concept of seat belts in the 1950s, decades before seat belts became standard equipment on cars, trucks and SUVs. Likewise, it developed child-restraint systems in the 1970s, again decades before such systems became required equipment for young passengers.

Takata ran into problems with its seat belts in 1995 when nearly 8.5 million mostly Japanese built vehicles were recalled in what was, at the time, the second-largest recall in the Department of Transportation’s history. Vehicles produced by Honda (HMC, Financial) were the initial focus of the investigation, but a probe by the National Highway Traffic Safety Administration soon revealed that the problems were not limited to Honda.

The second NHTSA investigation concluded that vehicles made by 11 manufacturers were affected, and the number of affected vehicles eventually reached 8.9 million.

Honda and Takata were both fined $50,000 by the NHTSA for failing to reveal the defect to the agency. The NHTSA concluded that Honda was aware of the defect five years before the recall but never reported it or proposed a voluntary recall.

Takata’s airbags

Seven years before the seat belt recall, Takata began making airbags; by 2014, it could lay claim to 20% of the market. At that time, however, there were signs of trouble ahead as automakers had been recalling vehicles due to defective Takata airbags for a year.

Once again, Honda was affected but was more forthcoming about what it knew, citing 30 cases of injuries the company had linked to defective airbags. The problem was determined to be the inflator units.

That recall was not the end of the matter for Takata. On Friday the recall expanded, including 12 million additional vehicles in the U.S. Eight major automakers were named in the recall – Honda, Fiat Chrysler (FCAM, Financial), Toyota (TM, Financial), Mazda (BOM:523792, Financial), Nissan (TSE:7201, Financial), Subaru (TSE:9778, Financial), Ferrari (RACE) and Mitsubishi (TSE:7211).

Up to 40 million vehicles worldwide are affected by the recall.

The company’s handling of its problems with its seat belts suggests the company is resilient, but the airbag issue could be harder to overcome. The problem with the seat belts was with the buckles; the issue with the airbags is that a chemical inflator used by the bags has shown a tendency to degrade over time and cause explosions inside the vehicle.

Vehicles equipped with such airbags are particularly prone to these explosions in places with hot and humid climates. Reports have specifically mentioned vehicles in the Gulf Coast region.

Honda has been disproportionately affected with 4.5 million vehicles included in the latest recall. Its price was down more than 2% Friday to $27.17 per share, which is higher than the DCF Calculator’s fair value assessment of $25.34 and lower than the Peter Lynch earnings line.

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Takata witnessed a considerable plummet in its price on Friday. The company was down more than 8% to ¥421 ($3.82 in U.S. currency). That is lower than the DCF Calculator’s fair value calculation of ¥700.42 ($6.35 in American money) and the Peter Lynch earnings line.

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No gurus hold stock in Takata. The last guru shareholder, Tweedy Browne (Trades, Portfolio) Global Value, sold its 503,900-share stake in the fourth quarter of 2015 for an average price of ¥1,534.17 ($13.90 in U.S. dollars) per share.

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