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Largest automotive recall in U.S. history- The ripple effects

Due to the largest automotive recalls in U.S. history, Takata Corp. filed for Chapter 11 bankruptcy in the United States, and bankruptcy protection in Japan in 2017.1 And in 2018, Shigehisa Takada, former chairman and chief executive officer of Takata, finally resigned as president.2

Over the past few years, tens of millions of vehicles equipped with Takata air bags have been recalled because the airbags were exploding, killing at least 22 and injuring over 150 people.2 Takata has since then been acquired by U.S. mobility safety company Key Safety Systems.2

When it comes to product liability, the consequences of the faulty Takata airbags have affected more than just the manufacturers. There has been a chain reaction felt by distributors, parts suppliers and distributing retailers, just to name a few.

On June 26, 2017, Jonathan Soble, of The New York Times gave a summary of what Takata has been doing to rectify the damages done by their exploding airbags:

Is Takata disappearing?

Basically, yes — Takata and its financial advisers have determined that it owes too much money to too many people to survive.

But instead of abruptly closing shop, the company is dismantling itself in stages.

First, it will sell its assets (its factories, mainly) to a rival company, Key Safety Systems, which is based in Michigan. Then it will use the money from the sale, about $1.6 billion, to pay down its debts and settle legal claims. A small remnant of Takata would then emerge from bankruptcy, primarily to handle the replacement of the airbag inflaters.

Much of the work will now take place in courts in the United States and Japan. They will be settling disputes by different groups that are seeking money from the company, like banks, carmakers and accident victims who are suing for damages. In court filings, Takata said it hoped to win court approval for its reorganization by the end of March.

Will there be enough money for everyone?

In a word: no.

In its bankruptcy filing in the United States, Takata projected its liabilities at $10 billion to $50 billion, vastly more than it will have to give even after the infusion of cash from Key Safety Systems.

The huge range is because of major uncertainties: The recalls are only partially completed, and no one yet knows how much they will ultimately cost or how much victims might be awarded in lawsuits. Analysts believe the recalls alone will cost $10 billion or more.

Will recalled cars still be fixed?

Yes, according to Takata and the automakers.

Carmakers say they are committed to finishing the job, and Takata said on Monday that it would continue to manufacture replacement airbag inflaters until the process is finished, something it expects will happen by 2020.

There is still a risk, however, that because defects only become apparent with the passage of time, more problems could come to light after Takata winds down.
If that happened, carmakers would have to deal with them without input from the original manufacturer, a potentially trickier task.

Who will be stuck with Takata’s bills?

Carmakers, for one. Major manufacturers including Honda, Toyota and Fiat Chrysler are among Takata’s biggest unsecured creditors, according to court documents.

Honda, Takata’s largest customer, summed it up on Monday when it warned shareholders that it would “become difficult to recover the majority of the claims” that the automaker holds against Takata, including costs of the recalls.

The silver lining is that carmakers have braced themselves for the blow by setting aside large reserves of cash to absorb recall costs.

Further afield, Takata’s banks in Japan may also be stuck with loans that have not been repaid, though how much remains is subject to negotiations and the decisions of Japanese courts.

Takata said on Monday that it remained committed to a promise it made to the United States government to pay $125 million in compensation to victims.

The outcomes of lawsuits are harder to gauge. Key Safety Systems, which is owned by a company in China, Ningbo Joyson Electronic Corporation, has sought to wall itself off from Takata’s legal problems by buying Takata’s assets, but not the company itself.1

Since this article, more recalls have been issued. In 2018 the Australian and New Zealand Federal Governments announced recalls for millions of cars with the Takata air bags. And New Zealand’s Ministry of Commerce and Consumer Affairs placed a block on the importation of any vehicles with the faulty airbags.3, 4

And most recently, on January 4, 2019, Ford issued a safety recall for vehicles using Takata airbag inflators. The recall totaled about 953,000 vehicles from the U.S. and it’s territories, and in Canada.5

We may have yet to see the end of the repercussions from Takata’s faulty airbags.


 

References

1.  Soble, Jonathan “Effects of Takata Bankruptcy to Extend Far and Wide” The New York Times. Publication date: June 26, 2017

2. Kageyama, Yuri. Associated Press. “Japanese air bag-maker Takata acquired by Key Safety Systems as president resigns” USA Today. Publication date: April 12, 2018

3. Sweeney, Lucy; Gribbin, Caitlyn; Mayers, Lily. “Airbag recall: Millions of Australians ordered to have deadly defects removed from cars” Australian Broadcasting CorporationPublication date: February 28, 2018

4. “Govt recalls 50,000 cars because of airbag fault” NZ HeraldPublication date: April 4, 2018

5. Ford Media Center. “Ford Motor Company Issues Two Recalls in North America” (news release). Publication date: January 4, 2019