Toyota Recall: Initial Observations and Short-Term Impact on Wholesale Values

The facts surrounding the current recall of over 2 million Toyota models for unintended accelerationcontinues to change day to day and quality concerns are quickly spilling over to other models, with thePrius being the next vehicle in question. As more models and quality problems surface consumers aremore likely to incorporate this information on the Toyota brand as a whole thereby reducing consumerconfidence in the brand. Clearly the repercussions of this recall are going to result in a disruption inremarketing used models as well as price performance. In fact, Toyota themselves are expecting adecline in value of their current lease portfolio from the negative perception of the recall which will shiftdemand away from Toyota products or at the very least drive down prices for used models entering thewholesale and retail markets. NADA’s analysis of last week’s auction performance for Toyota was largely inconclusive at this time,however volumes were down on newer models and there was some above average softness in prices onnewer models (2008-2009). Meanwhile, not surprisingly, auction volume is down ~23% week over weekas many Toyota models have been sidelined from the lanes based on recommendations from NAAA. Onthe retail side Toyota has also shown some early softness with prices dropping by slightly over 3%compared to a slight increase in retail prices for Honda models.Toyota must act quickly and create a confident and consistent message to consumers to mitigate thelong term damage to the brand. From a resale perspective this will be imperative since Toyota modelshold a strong price premium to substitute models with comparable actual quality (i.e. Chevrolet, Ford,and Hyundai). If Toyota’s perception is permanently damaged this premium significantly increases theirdownside risk in resale performance. Toyota’s recall is expected to prompt consumers to become morefamiliar with the quality of other brands that perhaps were not previously cross-shopped with Toyotamodels. This will drive down the price premium that was driven by consumer’s perception that the actualquality of Toyota models is significantly better than competitive products. NADA will monitor this situation closely and will incorporate additional news and market data into ourGuidebook Values. We are not anticipating a crisis in resale performance, but we have alreadyincorporated downward adjustments in our March forecasts that position our values towards the lowerend of the range of auction prices already witnessed on Toyota products.

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