General Motors Company (GM), the country’s largest auto maker, announced the recall of another 2.4 million vehicles, ranging from cars and trucks to SUVs, related to four different faults. Repair-related costs for the latest recalls will amount to an extra $200 million.
The recalls include 1.3 million SUVs installed with low quality front-seat belts that could break over time, a million midsize cars with gear shift problems that were linked to 18 crashes and one injury, 1,402 latest model Cadillac Escalades and escalade ESVs with faulty air bag deployment systems, and 58 latest model Chevrolet Silverados and GMC Sierras with loose generators that could trigger a fire.
GM’s Unending Recall Saga
The new recalls follow the 2.7 million GM vehicles that were recalled last week, which the company had noted would cost $200 million. Coupled with the $1.3 billion charge that the company absorbed in the first quarter, resulting from its February recall of 2.6 million vehicles, the aggregate recall-related costs for the company are now about $1.7 billion for 2014.
In 29 incidents so far this year, the company has already recalled 15.4 million vehicles worldwide, the most since 2004, when it had recalled 10.7 million vehicles. The automaker has now recalled more vehicles than the 9.7 million it sold globally last year.
GM’s accelerated recalls follow an extensive investigation by US regulators relating to the automaker’s decade-long delay in recalling 2.6 million faulty vehicles in February, that killed 13 drivers and caused 31 crashes over the years.
GM admitted that it had been covering up a crucial ignition switch defect in multiple GM vehicles, including the popular Cobalt. The ignition problem would cut off power to the engine, lock the steering wheel, and make air bags dysfunctional.
Although GM has settled with federal authorities to pay $35 million which is the maximum fine possible, law makers are of the view that the penalty should be increased.
A senior US Senator, Richard Blumenthal, said in an interview with the Wall Street Journal: “It is laughable at how low the penalty is and would be hilarious except for the fact that people are being killed in cars amid failure by auto makers to disclose information. They need to be held accountable.”
Blumenthal said yesterday that he is spearheading a legislative change that would increase the $35 million ceiling on imposing fines on automakers for violating regulations relating to customer safety. The Obama administration is also proposing extending the financial penalty on automakers failing to report a safety defect within five days, to $300 million.
Implications for Investors
GM will want onlookers to extract every bit of optimism they can, perhaps even weigh the company as a responsible unit that is aggressively looking to ensure customer safety at the cost of jeopardizing its current financial performance. The embarrassingly large amount of recalls however, is making it difficult for investors to buy into such claims. Recognized investors like David Einhorn and Warren Buffet certainly are not.
Einhorn sold off his 17 million shares earlier this year when GM absorbed a $1.3 billion hit on its February recalls. Warren Buffet also sold 10 million shares to reduce his stake in the company to roughly $1 billion, comprising 30 million shares.
GM’s recalls have fast turned from a normal business practice to a backdoor leading into the company’s internal inefficiencies, which now seriously threaten the company’s credibility and eventually its sales. The company will need to put an end to this recall saga to push its stock price up.
GM stumbled 3.45% in trading yesterday to close only seven cents above its initial offer price of $33 and then declined a further 0.18% in afterhours trading. The stock is down about 19% year-to-date.
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