General Motors Co. announced Saturday morning an additional recall of almost half a million pickup trucks and 172,000 compact cars, bringing the total number of recalled vehicles this year to 4.8 million.
For new GM CEO Mary Barra, the timing couldn’t be worse.
She’s scheduled to testify in front of Congress Tuesday and Wednesday regarding previous recalls announced earlier this year, and the latest setback this weekend by the company will no doubt increase lawmakers’ ire.
GM’s earnings will take a hit this year. Barclays’ analysts predicted that the company will likely set up a $1 billion to $1.5 billion settlement reserve for customer lawsuits. It is also expected to face a federal fine, estimated to be around $1 billion according to Barclays.
As of March 28 close, shares of GM (NYSE: GM) have tumbled 15 percent since Jan. 1.
4.8 Million Vehicles Called Back
In a span of three months, GM announced seven recalls totaling 4.8 million vehicles.
The majority of the recalls—2.6 million—relate to ignition switch problems on compact cars sold from 2003 to 2011, including Chevrolet Cobalt and HHR; Pontiac G5 and Solstice; and Saturn Ion and Sky. The fault, which could cause cars to stall without warning, is believed to have caused multiple fatalities. The ignition switch is the main reason for Barra’s testimony in front of Congress this week.
Another 1.2 million SUVs were recalled due to issues with air bags. This recall affects 2008–2013 model year Chevrolet Traverse, Saturn Outlook, GMC Arcadia, and Buick Enclave vehicles.
Relatively smaller recalls of 303,000 for Chevrolet Express and GMC Savana, as well as 63,900 Cadillac XTS were also announced.
Lastly, Saturday morning, GM made additional recalls on some of its most popular vehicles, including 490,000 pickup trucks and 172,000 Chevrolet Cruze models with 1.4L engines.
Firefighting
Until the recalls hit, GM was on track for an auspicious year. The company recently emerged from bankruptcy, and announced a new CEO in Barra, the first female CEO of any major automotive firm. It also introduced two new well-regarded models in the 2014 Cadillac CTS and Chevrolet Silverado.
This spate of massive recalls represents the biggest challenge GM has faced since its bankruptcy. Even worse, GM may have known about the ignition problems, which caused 31 crashes and 13 deaths, as early as 2001.
The enhanced scrutiny—stakeholders will be watching her every move and decision—will be a trial by fire for the new CEO.
But unlike the aloof and stiff demeanors of GM’s past CEOs, Barra’s energetic demeanor and personable nature is one of the company’s biggest assets, especially during this tribulation. She created several online videos to directly address concerns about the recalls.
Automotive companies learned that the best strategy during recalls is to quickly own up to problems and resolve them as soon as possible. One only needs to look at Toyota Motor Corp.’s recalls in 2009 and 2010 as an example. The Japanese automaker was slow to issue recalls due to unintended acceleration problems on millions of vehicles, resulting in a battered image and a $1.2 billion fine announced last week by U.S. Attorney General Eric Holder. Automotive recalls are not the type of challenge that companies can push back on and win.
That’s one of the reasons GM chose to expand its recall last Friday by almost 1 million compact cars instead of trying to locate the specific vehicles that had the issues.
Ghosts of GM’s Past
Newly released legal documents show that GM may have known about the faulty ignition problem—though perhaps not the severity of it—before selling the cars.
According to a Wall Street Journal report, a GM engineer testified in a 2013 lawsuit related to the death of a Georgia woman that GM made “a business decision not to fix this problem.”
That woman was driving a Chevrolet Cobalt, which stalled at highway speeds due to the ignition problem the current recall hopes to address.
In the early 2000s, GM was scrambling to develop compact cars to rival the Honda Civic and the Toyota Corolla as gas prices skyrocketed. From a business perspective, it had to carefully weigh the risks of a potential problem against the costs and lost revenues of a delayed launch (the Cobalt was introduced as a model year 2004 car). It was a costly mistake in judgment.
And it was one of the mistakes that eventually drove the company into bankruptcy.
Today, GM is a decidedly different automaker. Since 2003, the company has turned over four CEOs, and is finally producing world-class vehicles instead of the mediocre lineup it marketed during the early 2000s.
The ongoing recall is a massive setback for GM’s recent progress, but whether it reverts back to the “old GM” will depend on how it resolves such challenges.
