A Risk To Auto Industry’s Biggest Recall Posed By Takata Bankruptcy

A wild card into one of the biggest and most complicated recalls in automotive history is to be thrown by the expected bankruptcy of troubled air-bag maker Takata Corp. and it isn’t just a crisis for its employees and suppliers.

From Tesla Inc. to Toyota Motors Corp., tens of millions of defective air-bag inflators used by 19 car and truck makers around the world have bene pledged to be replaced by the Japan-based auto supplier. Sources said that a takeover offer from Key Safety Systems Inc. for about 180 billion yen ($1.62 billion) is slated ot be announced by the company after Takata files for bankruptcy protection.

But a manufacturer of recall responsibilities is not relieved by a filing to restructure. However, carmakers may have to cover the difference should its financial assets be exhausted before all the work is done.

According to Robert Ramussen, a University of Southern California law professor specializing in corporate reorganizations, unwanted liabilities — including recall obligations, may not necessarily be acquired by a would-be buyer while it can acquire Takata’s desirable assets, under the U.S. bankruptcy laws.

Rasmussen said that funding Takata’s production of replacement parts would be done by the funds raised by an asset sale.

“The big risk,” Rasmussen said, “is how much are the assets worth versus what’s the cost to do the replacements.”

Globally around $5 billion in future costs tied to the recalls, about $2 billion of which can be tied to Takata, would have to be faced by automakers and suppliers, estimates Scott Upham, president of Valient Market Research. About $1.5 billion to $2 billion would be generated from a Takata asset sale, he estimates.

“There’s not enough money,” Upham said and added that the shortfall may have to be covered by automakers.

To repair the millions of vehicles recalled for the company’s defective airbag inflators, for about 70 percent of the parts, the car companies have already shifted business away from Takata and toward rivals.

According to data on the U.S. Department of Transportation’s National Highway Trraffic Safety Administration website, in the U.S. as of May 26, only 38 percent of the 43 million air bag inflators under recall had been repaired. A spokesman at Japan’s transport ministry said this month that 73 percent of the close to 19 million air bags under recall have been repaired in the country.

There have been at least 17 deaths that have been associated with the defective air bags. Takata has bene forced to seek a buyer that would see it through a costly restructuring process by the mounting liabilities associated with the faulty airbags. A bankruptcy filing would bring the Japanese company a step closer to a sale and Key Safety Systems — the U.S. air-bag maker owned by China’s Ningbo Joyson Electronic Corp, has been recommended as a preferred bidder by a Takata steering committee.

“It would be hard for Key Safety Systems to put in huge amounts of money if there’s no guarantee against unexpected liabilities, after any deal,” said Mitsuhiro Harada, a researcher at Tokyo Shoko Research. “Takata is making money in non-airbag operations, so if they can drastically cut recall-related debt through bankruptcy, they can surely revive soon.”

By sourcing replacement parts from Takata competitors Autoliv Inc., ZF-TRW and Daicel Corp., automakers have avoided supply disruptions.

“We are working with suppliers to ensure a steady supply of replacement inflators for our customers,” said Kelly Stefanich, a Toyota spokeswoman in Princeton, Indiana. “We don’t anticipate any supply disruptions at this time.” Honda Chief Executive Officer Takahiro Hachigo said at a June 16 media briefing that the automaker hasn’t heard any specifics about the Takata bankruptcy plan.

“The automakers, the government, Key Safety Systems and Takata will come to an agreement to keep supplies flowing,” Upham said. “The No. 1 priority is the safety of the driving public, and I think everybody realizes that.”Bottom of Form

Due to the flaw that may end up being Takata’s undoing, Honda first started recalling Accord and Civic models in 2008.

Chris Martin, a Honda spokesman in the U.S. that Honda’s new vehicles in mass production worldwide use Takata inflators with ammonium nitrate propellant, said Chris Martin and it now uses no Takata-sourced inflators for recall repairs in the U.S.

(Adapted from Bloomberg)

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