GM Recalls 28 Million Cars -- Here's Why Investors Aren't Breaking A Sweat

GM Recall Crash victimsREUTERS/Jonathan ErnstFamilies of recall crash victims prior to Barra’s testimony

Despite the unfavorable press following an ongoing series of recalls, experts and investors agree that General Motors is far from the end of the road.

GM announced this week that it would recall an additional 8.4 million vehicles in North America, running its tally up to more than 28 million cars recalled in the last year.

For the latest round of recalls, the automaker cited problems stemming from unintended ignition key rotation to faulty electrics inside the cabin and under the hood.

The scale and magnitude of GM’s recalls are simply unprecedented. At no time in recent history has any major automaker in the United States ever recalled so many cars for so many different types of defects.

As investigators and CEO Mary Barra delve deeper into GM’s history, more and more of the company’s past sins have come to light. These revelations of past missteps, along with repeated recall announcements, could severely erode both consumer and investor confidence in the company, said Professor John Allan James, Chairman Emeritus of the Center for Global Governance, Reporting, and Regulation at Pace University’s Lubin School of Business.

“This isn’t the last of it. Odds are there will be more recalls,” James told Business Insider. “GM’s management have repeatedly shown themselves to the world to be screwups. They knew about the risk for years and yet model after model, year after year, they put out the same cars with the same defective part.”

While the company could indeed suffer in the long run,
short-term metrics indicate that the recalls have not impacted the bottom line.

Minimal Market Impact

With GM shares trading around 3% higher level than just before its latest recall, the market has responded in a surprisingly blasé manner to the company’s attempt to rectify its quality control standards.

Industry experts and car buyers share this sentiment. Kelley Blue Book senior analyst Karl Brauer said that “all of KBB’s metrics indicate that the recalls have had little to no effect on GM sales.”

KBB’s measurements mesh with the latest sales figures, which actually grew in June.

Financially, the recall will not be the kind of black hole for the company that some had initially projected. Based on the latest figures from UBS, the total cost of the recall repairs will amount to roughly $US2.5 billion for a company that is estimated to generate around $US4.7 billion in profits this year.

Different Than Other Recalls

GM, it appears, has emerged relatively unscathed, especially when compared to past scandals like Toyota’s unintended acceleration recall.

When Toyota recalled more than 10 million cars for issues related to unintended acceleration, the company’s sales plummeted and its corporate leadership was axed. But unintended acceleration is particularly terrifying for consumers. When such a failure occurs, a car’s throttle fails to react to driver inputs, effectively transforming a family sedan into a runaway train. A tragic 911 call that captured a family’s last moments in their runaway Toyota further damaged the company’s image.

GM’s faulty ignition systems have been connected to fatal accidents, but are overall less dangerous. “The engine shut-off that results from the failure is perfectly manageable in most situations,” said KBB’s Brauer.

General Motors2008 Chevrolet Cobalt

Toyota’s recall also affected popular models, like the Prius and Camry, which were on sale in dealerships. GM’s recall, on the other hand, consists mostly of nameplates that have either been discontinued or replaced by new models. As a result, GM dealers are less affected by the recall when selling new cars.

Recall aside, GM has actually made great strides in improving the design, quality and engineering of its new cars, which has helped buyers forget about the recalled vehicles, said Tom Mutchler, senior automotive engineer at Consumer Reports.

In terms of corporate response, Toyota’s management team was seen as culpable for the company’s failures. Mary Barra and her team at GM are perceived differently. Much of GM’s wrongdoing occurred before the Barra administration. Industry insiders like Brauer and Mutchler said they appreciate Barra’s candor with respect to her company’s past failings, and see her as a positive figure trying to a fix a broken system.

It remains to be seen how GM’s latest round of recalls affects the company. Even Brauer conceded that expanding the recall from 20 to 28 million cars could be a tipping point for buyer sentiment. But Mutchler said he believed that like Toyota, GM would continue to improve its vehicles, and that consumers would eventually put this latest scandal out of their collective consciousness.

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