It is significant that there is little public gloating from other auto manufacturers as Toyota Motors’ (NYSE:TM) leadership globally offers mea culpas. Although it is Toyota’s reputation that is melting under the heat of headline risk, competitors are only too aware that the next tolling of the bell could be for them.

This is why. While the damaged intangible assets are three of the big six: ethics, safety, and quality, the underlying problem is the global supply chain. According to Bob Rittereiser, CEO of Zhi Verden, a supply chain systems and information management company, “the stark reality today is that the global supply chain is a business operating system with global reach, thousands of participants, established practices, government requirements, blazed paths, known bottlenecks and many known risks, yet no one is in charge!” Or, said differently by John Hurrell, Chief Executive, Association of Insurance and Risk Managers, “The complexity of supply chains puts your reputation in the hands of the lowest common denominator.”

Reputation drives intangible asset value. As reported in Mission: Intangible -- Managing Risk and Reputation to Create Enterprise Value (IAFS with Trafford Press, March 2010), research shows that superior reputations pay off with (i) pricing power , (ii) lower operating costs, (iii) greater earnings multiples, (iv) lower beta (i.e., stock price volatility) and (v) lower credit costs. And when reputation is damaged, these benefits are lost. All told, we estimate the reputational impact, so far, to be a $2 billion cost to Toyota's earnings and a $25 billion cost to its market capitalization.

Previously we shared Toyota's reputation metrics from the Steel City Re Corporate Reputation Index. We take time out from our membership drive to offer this financial breakdown shown at left.

Legend. Income Statement Impact (values in $‘000). Lost sales and a 3% loss in pricing power will reduce Toyota’s gross profit by around $900 million. Costs associated with the worldwide recalls, litigation, insurance subrogation, and regulatory compliance will cost at least another $500 million. The lower credit ratings will increase borrowing costs by at least another $71 million, and non-cash depreciation expenses associated with a 3% write down of Toyota’s automobile asset base will reduce earnings by another $540 million. Data source: Steel City Re.

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Innovation: Hot Policy and Practice Issues

Be sure, by the way, to register for a complimentary seat at the 5 March Mission:Intangible Monthly Briefing, held by phone at 12h00, EST. It's an innovation smack down. Athena Alliance President and intangible asset policy expert Kenan Jarboe goes head to head with Steel City Re's Judith Giordan, Managing Director of IA Finance and former senior technology executive with Pepsi, Henkel, International Flavors & Fragrances, and Polaroid. Yes, as always, registration is complimentary and slides are already posted on the website events page.

Earlier today, the Society’s Mission:Intangible® Monthly Briefing by Dr. Judy Giordan of Steel City Re spoke to the demonstrated link between managerial and directorial diversity and corporate enterprise value. Thanks to her data-rich presentation, we better appreciate that diversity under critical conditions can create value through the wisdom of crowds. Apparently, so does Chrysler.

Earlier this week, Chrysler Group LLC Chief Executive Sergio Marchionne laid out plans to revive the struggling Auburn Hills automaker. His plans -- replenishing its lineup with high-quality and attractive models to more than double sales within five years and start generating profit in 2011 – were derided as generic by many analysts.

But not dismissed. This is why. Marchionne and his management team, a mix of executives brought over from Italy and promising managers at Chrysler whom he promoted, have been working in secret on the plan since Chrysler emerged from bankruptcy in June. This team of diverse individuals is differentiating itself from generic auto strategy teams in other ways. David Cole, chairman of the Center for Automotive Research in Ann Arbor, notes "the youth of the team kind of brings energy and enthusiasm to the process."

Score one for subtly signaling the intangible asset value of diversity.

There’s more. Chrysler is working hard to improve quality. "We're not in denial in relation to the public perception of quality at Chrysler," said quality chief Doug Betts, who worked previously at Toyota Motor Corp. and Nissan Motor Co. Chrysler now has 1,500 people addressing its poor quality, focusing on manufacturing.

There are skeptics. "Their quality reputation is dismal right now, and you don't change that in a couple of years," said Jack Nerad of Kelley Blue Book.

Well, maybe not usually. But reputation can be restored quickly if stakeholders find compelling reasons to expect change. After all, reputation is an expectation of future behavior.  This is why. Reputation grows out of the totality of information stakeholders receive about a company — information that creates the cumulative impression of how the company manages all its business processes. These are the business processes that create an ethical work environment, drive innovation, assure quality, uphold safety, promote sustainability, and provide security. Along with their embodiment in brands, trademarks, and patents, these processes are the intangible assets which have become the primary determinants of corporate success or failure today.

Industry experts were impressed by Chrysler’s forthright emphasis on the quality issue, just as they were impressed by the composition of the management team. The Company is signaling unambiguously a commitment to new and improved processes – commitments that are evidently reshaping reputation at this very moment.

Ninety days ago today, on 10 July, General Motors (fomerly NYSE:GM) emerged from bankruptcy. At an auto show this past weekend, Robert Lutz, the ‘new”  General Motors vice chairman of marketing and communications, said, “The world does not realize how great today’s GM products are." Lutz said GM is not afraid to back up those comments. He is heading the team that has started a new “may the best car win” ad campaign, “Our products are equal or superior to the competitors.”

While some members of our Society may know much about cars, as a group we share common interest in the concepts of quality and reputation, and we recognize that communications are an integral step in the process by which stakeholders form impressions that culminate in a company's reputation. In view of Bob Lutz's challenge, we thought it would be interesting to baseline business sentiment in the media covering the Automotive sector. As before, we use use the Financial Times' Newssift engine for the sentiment analysis.

We searched for articles in the business press covering both reputation and one of these five automobile companies: General Motors (GM), Ford (NYSE:F), Toyota (NYSE:TM), Honda (NYSE:HMC), and Daimler (NYSE:DAI). We broke down the data into the 90 days prior to GM's emergence from bankruptcy, and the 90 days following, and using the Newssift engine, sorted articles by sentiment: positive, neutral, or negative. Here are the results.

With respect to business press articles that had a positive angle, GM and Daimler showed little change. Positive articles comprised about 1/3 and 1/2 of the news stories, respectively. Positive articles about Ford and Toyota increased from about 1/3 to nearly 1/2. Positive articles about Honda dropped from nearly 1/2 to less than 1/4, although the total number of articles about Honda in each case, 25, is small compared to the total of 1139 articles analyzed.



With respect to business press articles that had a negative angle, GM and Daimler again showed little change at around 20% and 11% respectively. Negative articles about Ford dropped from 25% to 13%; they rose for Toyota from 13% to 20%. At Honda, they remained the same at 4% which represented only one article for each period. For those of you keeping score in the reputation sweepstakes, the current winner following GM's emergence from bankruptcy is Ford.

 

Turning now to the economic returns over the 180-day period, looking at the chart adapted from BigCharts.com, so far Ford is leading with an ROE of about 70% followed by Daimler at 40%. The S&P500 is up about 20%. As they say in the business, the race is on. And as Bob Lutz says, may the best car company win. Stay tuned.

As he made his way here to Pittsburgh, home of the Intangible Asset Finance Society, to address a gathering of union leaders on Tuesday, US President Obama stopped by a General Motors plant in Ohio, where he said the government’s intervention in the automobile industry “may not have been popular,” but helped jumpstart the struggling sector. Let’s take a closer look at the sector from the Society’s perspective.

Let's first look at the reputation metrics from the Steel City Re IA (Corporate Reputation) Index? from 22 April when we last looked at this sector. The Index, which correlates with reputation surveys such as those published by Forbes, Fortune, and Harris Interactive, captures the financial implications of stakeholder behaviors and expectations of stakeholder behaviors as determined by corporate reputation. The Index is a good leading indicator of financial performance and returns on equity.

At that time, Ford (NYSE:F) showed a rising IA index and decreasing EWMA IA Index volatility with a final log magnitude of 2 while GM (NYSE:GM) showed opposite directional movements and a final volatility log magnitude of 3. From these data, we projected great financial results for the former, and ongoing dismal financial results for the latter.  Honda (NYSE:HMC) was our highest ranked automotive firm on 22 April.

Let’s see how those financial projections panned out as demonstrated in these graphs from BigCharts.com.



Since April, Ford has returned nearly 100% on equity; GM has lost nearly 65%, and Honda (which had returned 45% for the year until 22 April) still had some firepower left and continued to move upwards, but underperformed the S&P500 for this period.



If we take the long view of a 2-year return, Honda just barely beats Ford but is in negative territory; both outshine the S&P500 which is about 30% off from the 2007 peak, and GM is, well, "underperforming."

Let's wrap this up with an homage to reputation management. Kudos to Ford for demonstrating the power of reputation mangement, and its ability to create value on the basis of expectations of further great things to come. This type of financial result is exactly what the Society seeks to promote. And kudos to Honda for demonstrating the power of a superior reputation to forge resilience. This type of financial resilience is exactly what the Society hopes will motivate companies to exercise best practices in the management of their intangible assets.

Over the past year, the monolithic big three US auto companies have resolved into their individual identities revealing, a rising Ford Motor Company (NYSE:F) and a sinking General Motors Corporation (NYSE:GM). Among the 11 companies that comprise the Automobiles sector, Ford has outperformed its peers by 6.23% while GM has underperformed by 44.9%.

Looking at the reputation metrics from the Steel City Re Intangible Asset Finance (corporate reputation) Index below, Ford shows a rising IA index and decreasing EWMA IA Index volatility with a final log magnitude of 2 while GM shows opposite directional movements and a final volatility log magnitude of 3. Our question to you - what business processes do you think are the most important drivers of corporate reputation in this sector: safety, innovation, quality, sustainability, ethics or other?  We look forward to hearing from you on this blog (post a note) or email the Society at secretariat@iafinance.org.

By the way, in case you were wondering, the number 1 ranked firm in this sector as of 17 April is Honda Motor Company Ltd (NYSE:HMC) with a return on equity this past year of 45%.