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Exploding Auto Airbags – Bankruptcy is the Rest of Takata’s Story

Posted on June 26th, 2017 by in Chemical R&D

Takata

Chairman and CEO of Takata Corp., Shigehisa Takada, bows as he attends a news conference after the decision to file for bankruptcy protection in Tokyo, Japan, June 26, 2017 (Source: Reuters/Toru Hanai)

In March 2017, in my blog post Material and Parts Failure – 42 million Cars Recalled for faulty Airbags, I reported on the deadly explosions of airbags manufactured by Takata Corporation. Now the other shoe has dropped.

Takata’s bankruptcy is thought to be the largest ever by a Japanese manufacturing company (Source: New York Times, June 26, 2017).  Takata is facing tens of billions of dollars in costs and liabilities resulting from almost a decade of recalls and lawsuits.  Its airbags have been linked to at least 17 deaths, more than 180 injuries and have resulted in the recall of more than 100 million vehicles worldwide.

According to the Tokyo Stock Exchange the shares of Takata would be delisted on July 27.  The U.S. arm of the Company filed for Chapter 11 bankruptcy in the State of Delaware on Sunday June 25.  It has liabilities in the range of $10 to $50 billion.  The Japanese parent Company filed for protection with the Tokyo District Court early on today.  Key Safety Systems, which makes airbags, seatbelts and other auto safety equipment, said it would buy Takata’s factories for about $1.6 billion. Key Safety Systems is based in Michigan but is owned by a company in China, Ningbo Joyson Electronic Corporation.

According to CNN Money KSS is staying away from the parts that deal with the airbag inflators, which will eventually be wound down.  U.S. bankruptcy laws permit a would-be buyer to acquire Takata’s desirable assets, but not necessarily assume unwanted liabilities — including recall obligations, according to Robert Rasmussen, a University of Southern California law professor specializing in corporate reorganizations (Source: Bloomburg Businessweek, June 25, 2017).

Earlier in 2017, Takata publicly admitted manipulating and withholding key information about the faulty inflators for years, even after they started exploding in people’s cars.  It pleaded guilty in the U.S. to a criminal charge of wire fraud for which it will have to pay $1 billion, including a $125 million fund to compensate victims and their families.  To date only 35% of the affected cars have had their inflators replaced. The process of making all U.S. vehicles safe again could take until 2023.

Takata is an 84-year-old legendary company that started in Japan and expanded to the far corners of the earth.  It now faces billions of dollars in lawsuits and recall-related costs to its clients.  Honda, BMW, Toyota and others have been paying the cost of recalls.  The airbag scandal led to a slow and painful demise for Takata, which started out as a textile manufacturer more than 80 years ago and later came to specialize in seat belts and other auto safety equipment. “The sad saga of Takata has resulted in the implosion of one of the automotive industry’s oldest and most successful suppliers due to technical hubris, mismanagement and a systemic corporate culture of manipulation,” said Scott Upham, the CEO of Valient Market Research.

The core issue was replacement of tetrazole airbag propellant, a reliable and stable compound, with the more explosive agent ammonium nitrate.  Past applications of ammonium nitrate have included fertilizers and explosives for mining and construction demolitions. Takata engineers and other employees had concerns over switching to such a risky compound.  Ammonium nitrate can deteriorate and become unstable over time or when it is exposed to moisture in high heat and humidity, causing the propellant to burn too fast; blow apart the metal canister; and send shrapnel into the necks and faces of vehicle occupants.  Nevertheless the Company proceeded to make the change and the rest is history.

It appears at least a few automakers have some culpability in the Takata fiasco.  Based on a February 2017 article in the New York Times, “…fresh allegations against Ford, Honda, Nissan and Toyota, made as part of a class-action lawsuit in Florida and based on the Company documents, point to a far deeper involvement by automakers that used Takata’s defective airbags for years.” There was no way for Takata or automakers to keep the massive problem covered up forever. In today’s world rapid communication spreads any news almost instantly.  In this case it led to propagation of investigations globally.

The plight of Takata is a cautionary tale for every manufacturing company.  Death and injury caused by unexpected explosions of the new inflation agent were severe setbacks for Takata as they would have been for any company.  But early public reporting, candor and a genuine plan to correct the problem and compensate the victims might have given the Company a chance to survive.  Takata management could have found a blue print for handling recalls in the September–October 1996 Issue of Harvard Business Review.

Takada manipulated data, deliberately misled the public and the automakers, did not report known problems to regulatory agencies, denied, stonewalled and obfuscated in its public statements.  Takata also made scores of other strategic and public relations errors.  A decade-long poor handling of the defect problem not only multiplied its miseries, it led to the total destruction of the Company.


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