Recalls, a new problem for automakers

An Audi R8 caught fire in Mumbai recently, with its occupants barely escaping. Similar incidents involving the particular model have been reported in Connecticut and Toronto in the past. In India, the last we heard of something like this was with the Nano.

Over the past few years, many of the large auto manufacturers in the country such as Tata, Maruti Suzuki, Ford, Toyota and Honda have initiated large-scale recalls to fix defects. The global scenario is worse.

A few months back, Toyota announced the recall of 7.4 million vehicles in what could turn out to be one of the largest recalls in the world.

This would take the total recalls initiated by the company during the last five years to nearly 20 million vehicles.

In fact, the company recently reached a settlement in the US, on lawsuits over acceleration problems worth over a billion dollars.

Are the number of incidents of vehicle faults and OEM (original equipment manufacturer) recalls on the rise? We are supposed to be in the digital age, sending vehicles into outer space to explore other planets.

And here we are, in our own planet, unable to trust our lives with the vehicles we drive on a daily basis. Isn’t that a bit ironic?

What’s hard to fathom is that the recalls come from the best of companies in the auto business, including Japanese players which are known for pioneering quality standards and manufacturing excellence techniques such as TQM, TPM, Six Sigma, 5S etc.

This is not only the case for cars and SUVs but also bikes. For instance, Honda recently recalled 11,500 units of its premium bike — CBR 250R — because of a defective brake system.

Quality, a double-edged sword

Despite increasing levels of automation in the auto sector and improved global norms/standards, ‘safety’ continues to be an Achilles heel.

The problem has perhaps not gained the visibility that it should in India (we don’t even have an auto recall policy in place), but safety issues and recalls are clearly emerging as one of the key global concerns for the sector.

The subject of quality (and, therefore, safety) is a double-edged sword for the auto industry.

On the one hand, the industry as a whole can be violently cyclical; fixed costs are high; very few players have pricing power and margins are almost always under pressure due to increasing material and labour costs.

Optimisation, the solution

These inherent economic characteristics make it essential to have a continuous cost-reduction mind-set through value-engineering and other programmes.

On the other hand, a single fault due to poor quality, could potentially be life-threatening. From a reputational standpoint, even a few life-threatening incidents can have a damaging effect on the model/brand that may take years to rebuild.

The problem gets accentuated in a country like India, which is unfortunately blessed with harsh driving conditions and rampant misuse of vehicles. How is a company to strike a balance?

The solution obviously involves a judicious trade-off between cost and quality or, in technical terms, “optimisation”. Unfortunately, the reality of any optimisation problem is that it changes with the price point of the model under consideration.

This means lower faults at higher price points. But the recent trends in product recalls of high-end models as well, definitely pose a riddle.

Quality and affordability

Whatever the driving factor behind safety risks in automobiles, I guess the risk can only be mitigated and never be done away with.

It is in fact akin to one of those tail events that Nassim Taleb speaks about.

From time to time, minor goof ups happen, which go undetected by the radar. Once in a while, a major goof up is bound to happen, which could turn sensational and potentially cripple the company involved, possibly giving rise to more stringent policies and tougher operating conditions for the industry participants.

Most of the Indian and global auto players operating in the country today are focusing on making their products more affordable, both from a domestic market and export perspective.

With the ongoing cyclical slowdown in the overall sector, now is probably a good time to shift focus to quality and take the growing issue of recalls head-on. Who knows,

Indian R&D could probably help auto companies achieve breakthrough quality standards, which are first time right without having to spend too much for it.

After-all what’s the point in affordability without safety?

(The author is a business consultant. He can be reached at >perspective@thehindu.co.in . The views are personal.)

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