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Summary

  • GM is currently being blamed for the deaths of a dozen drivers, due to faulty ignition switches in several models; which are being recalled.
  • It remains to be seen how new CEO Mary Barra and her team will boost consumer confidence after the company reputation has been so tarnished.
  • With the financial resources to absorb the recall and fines, and GM stock still relatively strong, we believe the company will recover and investors should continue to hold.

With safety advocates warning that an ignition flaw in eight General Motor (NYSE:GM) cars sold a decade ago continue to cause fatalities, and with ambulance chasing lawyers lining up plaintiffs seeking compensation for alleged wrongful injury or deaths, the biggest automaker in the United States may have to pay restitution to victims from a time prior to GM's 2009 bankruptcy reorganization - a move that shielded the new company from many of the liabilities of the old company.

GM recalled 1.6 million models, including Chevrolet Cobalts, Pontiac, and Saturn models. While GM is admitting to only identifying 12 deaths related to flaws in their earlier models, and claiming that they are continuing to review information, Clarence Ditlow, an executive director of a consumer advocacy group for auto safety, believes that there are usually about ten more fatalities than the incidents reported back to the automaker.

Managerial Reputation Derailed

GM - lampooned by wits as "Government Motors" after the U.S. Government bailout of $49.5 billion - is trying its best to recapture public faith as a reliable, well-managed and trustworthy automaker. And, as a matter of fact, it has made great strides in this direction.

For one thing, it hired a new chief executive officer, Mary Barra. While she is drawing attention as the first woman to ever lead GM, she is actually an outstanding leader in her own right, with a well-earned reputation as a visionary, engineer, organizer, negotiator, and articulate spokesperson - a panoply of skills, honed from her long years rising through the executive ranks at the automaker. In other words, she is probably better suited for the job than anyone else at GM.

Besides leaning on their new chief's quiet, strong, sensible personality and instant likeability to restore its tarnished reputation, GM is also rolling out a new line up of technologically remarkable vehicles - vehicles which have been enthusiastically endorsed by Consumer Reports magazine and J.D. Power & Associates - reviewers that consumers have come to trust for their independent opinions.

Still, this heroic effort to make a comeback after the embarrassing government bailout has encountered a setback with the new sting of litigation.

What is at stake here is not a new financial crisis, but a new dent in their reputation. In terms of costs, GM has the wherewithal to handle the cost of a $100 million recall and pay a $35 million fine from the National Highway Traffic Safety Administration. It is also likely to have enough money to handle the unknown costs from encroaching lawsuits. However, what really concerns the company is loss of future sales from customers. In other words, the cost of damage control will not hit the company as hard as its loss of face as a maker of fine automobiles.

Apology Not Accepted

Currently, neither Mary Barra's sterling reputation as a competent executive, nor a new line up of full-bodied aluminum pickups may be enough to help GM win a cynical buying public over. While the company no longer sells the recalled models, lawyers and consumer advocates are concerned that the internal managerial or engineering issues that caused the errors in the first place have not been properly addressed. GM management is now tasked with convincing the consumer market that the internal issues have been identified and resolved. It has to convince car buyers that its past engineering flaws will not be reintroduced into new vehicles.

In response to this challenge, GM has apologized at great length by explaining how the faulty ignition switched shut off the engines and affected the flow of power to the airbags and has promised to upgrade their safety processes. However, this attempt at reconciliation and reassurance has not been received well. Ambitious trial lawyers are now trying to figure out if there is a way to appeal to the U.S. bankruptcy court to strip away GM's liability shield- a legal immunity which has protected the company from its pre-reorganization history of defective manufacturing. In summary, from GM's perspective, this new problem is no mere fender-bender but a bad situation that could get worse.

Conclusion

Overall, GM stock has been on a steady uptrend in the past two years, reflecting the company's recovery.

(click to enlarge)

(Nasdaq.com)

Although on Tuesday, March 11, shares fell 5% on the news of faulty vehicles, GM overall still has just a 2% short float, indicating the majority of shareholders still support the company going forward. While it remains to be seen how Ms. Barra and her team will weather this storm of negative press, we believe the company will continue to recover, particularly with its great car and truck lineup and strong financial resources.

Source: GM Weathering Storm Of Negative Press