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Inflategate

5 November 2015 By Peter Thal Larsen

Honda has punctured Takata’s financial force field. For the past year, shareholders in the Japanese car parts group have mostly brushed off the growing scandal over exploding air bags which have been linked with at least eight deaths. But the carmaker’s announcement that it will stop using Takata air bag inflators has burst the belief that the supplier is too important to fail.

The $70 million fine that U.S. regulators slapped on Takata this week is just the beginning of its financial woes. The company will probably face further penalties in the United States plus claims for damages from the families of people killed or injured by its faulty products. Then there’s the cost of recalling and replacing inflators in as many as 34 million cars. These liabilities would overwhelm companies far bigger than Takata, which had assets of just 485 billion yen ($4 billion) at the end of June.

Yet while shares in the much larger Volkswagen have dropped more than 25 percent following its emissions-testing scandal, Takata’s market value had until recently hovered around the $1 billion mark.

Shareholders’ indifference appeared to rest on the assumption that its customers don’t want to lose one of only a handful of global air bag makers. Honda’s public rebuke undermines that belief. Others may follow: Mitsubishi Motors on Nov. 5 said it was also considering switching suppliers.

Inflators are only one component of an air bag system. So the switch is not immediately fatal for Takata’s air bag business, which brought in 38 percent of the company’s sales in the year to March. Besides, the long time lag involved in designing and producing new models means Takata will be supplying parts to Honda and others for many years to come.

Yet if Takata’s customers have lost faith in the company, they may also be less willing to help foot the bill of recalling and replacing faulty air bags. Takata shares have lost a third of their value in less than two days. Unless its financial force field can be repaired, they will fall further.

 

 

 

 

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