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With new Takata air bag recalls, automakers may face more liabilities

[July 19, 2017] By Naomi Tajitsu and Maki Shiraki

TOKYO (Reuters) - Takata Corp's <7312.T> bankruptcy filing last month was meant to draw a line under the auto industry's biggest safety recall, but last week's announcement of more air bag inflator recalls suggests automakers could face fresh liabilities in the future.(For a graphic on air bag inflators click http://tmsnrt.rs/1JDZ4vq)

In late-2015, U.S. regulators gave Takata until the end of 2019 to prove that its replacement air bag inflators - which add a drying agent to combat moisture that can set off the ammonium nitrate compound in an inflator, with potentially lethal results - are also safe.

If Takata fails that test - and some industry consultants, explosives experts and former employees question whether the workaround guarantees safety over the long-term - the 100 million or so replacement inflators currently being installed may themselves need to be replaced.

"Absent proof that the other desiccated inflators are safe, they will also be subject to recall," the U.S. National Highway Traffic Safety Administration (NHTSA) said in a statement last week. The agency declined to comment on the risk that additional inflators may be subject to recall.

NHTSA announced last Tuesday that new testing at Takata prompted the Japanese parts firm to declare 2.7 million of the new air bag inflators defective, raising questions about the risk from replacement air bags as moisture can still seep into the propellant of some inflators.

Takata's automaker customers, which have so far borne much of the estimated $10 billion cost of replacing faulty bag inflators, could be on the hook for future liabilities in the event that Takata fails to prove that the desiccant workaround is sufficient.

Last week's recall is the first to involve Takata bag inflators that use a drying agent.

Nearly 20 automakers have been affected by the air bag recalls, and some still use Takata inflators for replacements in the recalls. Automakers including Honda Motor Co <7267.T>, Toyota Motor Corp <7203.T> and Nissan Motor Co <7201.T> have said they will stop using Takata inflators for new contracts for future models.

"If NHTSA in the future raises issues about the safety (of desiccated inflators) we will of course comply with their orders," Nissan's chief sustainability officer Hitoshi Kawaguchi told Reuters. "At the moment, our focus is on getting replacement inflators to our customers."

Toyota said it was "working closely with all stakeholders, including Takata, other suppliers and relevant agencies, to assess any potential impact and take action accordingly" on the recall issue. Honda, Takata's biggest client, declined to comment.

"The automakers... and Takata - they all know that this is a future issue," said Scott Upham, chief executive at Valient Market Research, whose clients include auto parts suppliers. "But I think everybody is concerned about the near-term issues, and the financial arrangements of the bankruptcy."

Takata says it has produced around 100 million replacement inflators containing drying agents: the 2.7 million recalled last week used calcium sulfate, and the rest contain zeolite.

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Visitors walk past a logo of Takata Corp on its display at a showroom for vehicles in Tokyo, Japan February 5, 2016. REUTERS/Toru Hanai/File Photo

"We still have to prove the safety of our desiccated inflators, but we believe those using zeolite are safer than those using calcium sulfate," said spokesman Toyohiro Hishikawa.

The company has declined to comment further on the testing process or the NHTSA deadline.

Takata is the only global air bag maker to use ammonium nitrate as a propellant in its inflators. The compound's vulnerability to high temperature and moisture can trigger an explosion that can spew shrapnel inside a vehicle. The defect has been linked to at least 17 deaths, mostly in the United States.

'LENGTHENING THE FUSE'

The new inflators with the added desiccant have not been linked to any deaths or injuries, but the problems with the original inflators typically took five years or more to emerge.

Keiichi Hori, who oversees automotive safety components at the Japan Explosives Society, said adding a drying agent can reduce, but not eliminate, the risk of uncontrolled explosions.

If the desiccant can prevent all moisture from reaching the inflator propellant, "then it would be possible that the inflators could be used safely," he said. "Otherwise, alternatives should be considered."

But Upham, the industry consultant, predicts the recalled parts will themselves eventually be recalled - because ammonium nitrate is fundamentally too volatile - and Takata's carmaker customers may again have to foot the bill given that Takata is unlikely to be able to cover the costs.

"Automakers are hoping and praying that the desiccant solves the problem... (but) this might come back to bite them," Upham said.

Former Takata employees involved in manufacturing inflators have said the desiccant may buy Takata time. One told Reuters last year that by adding the desiccant, "you're just lengthening the fuse, not correcting the problems."

Key Safety Systems, a U.S.-based components supplier owned by China's Ningbo Joyson Electronic Corp <600699.SS>, has agreed to buy Takata's good assets such as seat belts and steering wheels, for $1.6 billion. The plan is for Takata's air bag business to be wound down by March 2020 after making replacement inflators for the ongoing recalls.

(Reporting by Naomi Tajitsu and Maki Shiraki in Tokyo; Additional reporting by Paul Lienert in Detroit and David Shepardson in Washington; Editing by Ian Geoghegan)

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