GM Faces Further Scrutiny Surrounding Safety Recalls
Since early February, GM has recalled almost 7 million vehicles, largely surrounding ignition switch, steering and side airbag safety concerns. The latest recall includes 1.3 million vehicles over power steering issues. The defects have been linked to 13 deaths.
GM knew about some of these issues as early as 2001 but only took action to address the problem this year.
The company said it will absorb a $750 million charge during the first quarter in response the costs associated with repairing the impacted vehicles. Shares of General Motors slipped 15% year-to-date and remained choppy when CEO Mary Barra, who took the reigns of GM just over two months ago, was grilled by lawmakers on Capitol Hill in an April 1 hearing.
"More than a decade ago, GM embarked on a small car program," Barra said in a prepared statement during the hearing. "Sitting here today, I cannot tell you why it took years for a safety defect to be announced in that program, but I can tell you that we will find out."
Aside from the costs associated with fixing the cars, one of the biggest challenges the company faces is rebuilding its brand image and public trust.
"GM will do a measured analysis of lost sales that could result from negative public opinion or how much they may lose if legal cases from the victims go to trial," says Columbia Business School Professor Bob Bontempo. "I anticipate they will sound contrite and make large payouts to victims."
The company hired lawyer Kenneth Feinberg, who was involved in victim compensation during the 9/11 attacks and the BP oil spill in 2010. This suggests the company is weighing payout options, though Barra made no commitments during her Congressional hearing. Since the company claimed bankruptcy, a legal technicality may absolve GM from providing financial compensation to victims.
"I'd be surprised if GM hid behind the legal protection of the bankruptcy," Bontempo adds. "The real issue is the court of public opinion."
As for consumers driving the recalled cars, the company will inspect the impacted parts and make repairs at no cost. Still, the process of inspecting and repairing the affected vehicles could take months. Drivers will also be provided with rental cars, should they feel uncomfortable driving a defective car while replacement parts are delivered to dealerships.
Despite the recalls and avalanche of negative public relations surrounding the company, GM said its March sales rose 4% year-over-year, delivering roughly 256,000 vehicles.
- Written by Scott Gamm for MainStreet. Gamm is author of MORE MONEY, PLEASE