If recent actions on the part of Honda Motors and company shareholders are any indication, Takata's days may be numbered. Airbags manufactured by the Japanese-based company have been implicated in at least eight deaths and over a hundred serious injuries due to faulty design as the result of cost-cutting efforts.
Honda, once its biggest customer, has severed business ties with Takata. At the same time, investors have been dumping their Takata stocks, the value of which has tumbled by 13% on the Tokyo Stock Exchange. Only one day earlier, the U.S. National Highway Traffic Safety Administration (NHTSA) slapped Takata with a $70 million dollar fine – an amount that may triple if Takata fails to meet certain conditions.
In the wake of these events, the Japan Credit Rating Agency has downgraded Takata from BBB+ to BBB-. This means the company presently has adequate ability to meet its financial obligations, but current economic conditions and Takata's circumstances cast doubt as to whether or not the company will be able to do so in the future.
Takata airbags installed in vehicles operated in warm, humid climates have deployed unexpectedly due to deterioration of the metal inflator housing. These housings literally shatter, causing jagged metal fragments – essentially, shrapnel – to fly into the face and upper body of occupants, causing serious – and in a few cases, fatal – injuries. The culprit is the propellant used.
Originally, the gas used for this purpose was a compound known as a tetrazole. The compound must be manufactured at great expense, as the gas does not occur naturally. Several years ago, engineers realized that ammonium nitrate could be substituted. Ammonium nitrate, commonly used by farmers as a fertilizer, is a powerful oxidant, and therefore highly flammable. Engineers use ammonium nitrate to blast away soil in order to create ponds. The substance gained notoriety twenty years ago when domestic terrorist Timothy McVeigh used it to create the bomb that destroyed the Alfred P. Murrah Building in Oklahoma City.
However, ammonium nitrate is dirt cheap. When the rubber seals in the inflator housings deteriorate, moisture can enter the inflator and come in contact with the ammonium nitrate, causing it to explode. Takata's civil liability from lawsuits filed by mass torts law firms, such as Levin Papantonio, is the least of its problems. In addition to a fine that may top $200 million (making it the largest penalty that the NHTSA has ever assessed), the company is facing a criminal investigation by the U.S. Department of Justice because of its mismanagement of vehicle recalls. As of the beginning of November, the number of automobiles equipped with Takata airbags and subject to recall totals 19 million.
Yet, in spite of having caused injury and death with its products and allegations of criminal misconduct, financial analysts are calling for regulators to ease up on Takata because it is “too big to fail.” Unfortunately, they may be right. Takata is one of only three manufacturers in the world producing automotive airbags, and right now, the auto industry is scrambling for the dwindling supply. In addition to facing mounting fines and the impending criminal investigation, Takata has been ordered to cease using ammonium nitrate in its inflators and find a more stable substitute – regardless of cost.
As it is, while the auto and financial industry has genuine concerns over Takata's immediate prospects, it appears that nobody is terribly worried if the company fades away over the next decade. Koji Endo, an analyst at a Japanese-based equities research firm, told the media, “Everyone would be troubled if Takata disappears immediately, [but] no one would be troubled if it disappears after 10 years.” Likewise, Takata executives are focused on finding short-term solutions to their troubles. That may not be easy. Honda Motors, which has now turned to Takata's competitors for inflator units, accounted for almost 40% of the company's revenues last year. If other car makers decide to follow suit, it could further damage the company's financial standing and seriously compromise its long-term viability. Fortunately for the company, it supplies other automotive components, including steering wheels and safety belts (a product Takata pioneered back in the 1950s).