Overwhelmed by recalls, air bag maker Takata files for bankruptcy

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Japanese air bag maker Takata Corp. filed for bankruptcy protection in Tokyo and the U.S. on Monday, saying it was the only way to ensure it could carry on supplying replacements for faulty air bag inflators linked to the deaths of at least 16 people.

Most of Takata’s assets will be bought by rival Key Safety Systems, a Chinese-owned company based in suburban Detroit, for about $1.6 billion (175 billion yen).

The company’s executives sought to reassure their customers, suppliers and shareholders in a news conference on Monday. With the company rapidly losing value while Takata struggled to reorganize its finances, filing for bankruptcy protection was the only option, Takata’s president, Shigehisa Takada, told reporters.

“As a maker of safety parts for the automobile industry, our failure to maintain a stable supply would have a major impact across the industry,” Takada said in Tokyo.

Takata’s inflators can explode with too much force when they fill up an air bag, spewing out shrapnel. Apart from the fatalities, they’re responsible for at least 180 injuries, and are grappling with the largest automotive recall in U.S. history. So far 100 million inflators have been recalled worldwide including 69 million in the U.S., affecting 42 million vehicles.

More than 70 percent of the airbags recalled in Japan have been replaced, and 36 percent in the U.S., said Hiroshi Shimizu, a Takata vice president. He said progress of the recalls in other countries was unknown.

Under the agreement with Key, remnants of Takata’s operations will continue to make inflators to be used as replacement parts in the recalls, which are being handled by 19 affected automakers.

Takata will use part of the sale proceeds to reimburse the automakers, but experts say the companies still must fund a significant portion of the recalls themselves.

“It’s likely every automaker involved in this recall will have to subsidize the process because the value of Takata’s assets isn’t enough to cover the costs of this recall,” said Karl Brauer, executive publisher of Kelley Blue Book and Autotrader.

Takata and the automakers were slow to address the problem with the inflators despite reports of deaths and injuries. Eventually they were forced to recall tens of millions of vehicles. The scope of the recall means some car owners face lengthy waits for replacement parts, meanwhile driving cars with air bags that could malfunction in a crash.

The defect in the inflators stems from use of the explosive chemical ammonium nitrate in the inflators to deploy air bags in a crash. The chemical can deteriorate when exposed to hot and humid air and burn too fast, blowing apart a metal canister.

At least $1 billion from the sale to Key is expected to be used to satisfy Takata’s settlement of criminal charges in the U.S. for concealing problems with the inflators. Of that amount, $850 million goes to automakers to help cover their costs from the recalls. Takata already has paid $125 million into a fund for victims and a $25 million fine to the U.S. Justice Department.

Attorneys for those injured by the inflators worry that $125 million won’t be enough to fairly compensate victims, many of whom have serious facial injuries from metal shrapnel. One 26-year-old plaintiff will never be able to smile due to nerve damage, his attorney says.

The lead attorney for people suing the automakers said in a statement following the announcement that he doesn’t expect the bankruptcy to affect the pending claims against the companies. Settlement agreements with Toyota, Subaru, BMW and Mazda already have won preliminary court approval, Peter Prieto noted.

That settlement will speed the removal of faulty inflators from 15.8 million vehicles and compensate consumers for economic losses, he said. Claims are continuing against Honda, Ford, Nissan and Takata.

Fallout from the bankruptcy filing came swiftly from the Tokyo Stock Exchange, which said it was stripping the company founded in 1933 from trading as of Tuesday.

Key makes inflators, seat belts and crash sensors for the auto industry and is owned by China’s Ningbo Joyson Electronic Corp. Its global headquarters and U.S. technical center is in Sterling Heights, Michigan.

Key said it won’t cut any Takata jobs or close any of Takata’s facilities.

The Takata corporate name may not live on after the bankruptcy. The company says on its website that its products have kept people safe, and it apologizes for problems caused by the faulty inflators. “We hope the day will come when the word ‘Takata’ becomes synonymous with ‘safety,’” the website says.

 

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