While General Motors Company (NYSE:GM) is busy handling the fallout of a number of unfortunate vehicles recalls, attending congressional hearings, dealing with litigation, and implementing a cultural change, competitors such as Ford (NYSE:F) and Tesla (NASDAQ:TSLA) are busy expanding and growing their sales by focusing on core issues like innovation.
The Negative Publicity Just Refuses To Go Away
In its most recent move, GM ordered dealers to stop selling the 2013 and 2014 versions of its most popular car, the Chevrolet Cruze sedan, because of faulty airbags built by the Japanese supplier Takata. Potentially faulty airbags manufactured by Takata are already the subject of a recall involving millions of vehicles made by Honda, Nissan, Ford, Toyota, Chrysler, Mazda and BMW.
However, this isn't the first or the biggest issue the company has dealt with recently. GM is under fire for the way it handled the ignition switch issue, which is allegedly linked to 13 deaths. Critics and lawmakers have both blasted the company for the way it handled the issue.
More Than 20 Million Recalls
Before the recent Takata airbags issue, General Motors issued another recall of midsize and full-size vehicles because of the ignition switch problem. Only this time the number was even bigger, 3.16 million. The safety recall follows a similar recall by the company in February.
The previous recall of 2.6 million vehicles, including Chevrolet Cobalt and other small cars, came after the death of at least 13 people. An investigation followed the recall and a $35 million fine was levied by the U.S. Department of Transportation on General Motors for failing to take timely action even after finding out about the fault, which could have resulted in the death of many. GM has recalled a total of 20 million vehicles worldwide, this year alone, a number which is even greater than the total 2013 U.S. new auto sales of approximately 15.6 million and almost double the record 10.7 million vehicles recalled by GM in 2004.
General Motors is in damage control mode. Mary Barra, CEO of General Motors, has fired 15 key employees including the switch engineer, development engineer and others who simply didn't take the action when they should have. General Motors is expected to spend approximately $1.7 billion to recall the vehicles during the first two quarters of 2014. However, I think the combined costs, including Department of Justice fines, victim's fund and litigation charges, which General Motors will bear, are unlikely to be very large. It is highly likely the company will use the bankruptcy shield to defend itself against the spurious economic loss class action suits.
But the damage to the company from the recalls is majorly amplified due to the company's questionable response toward the deaths caused by the faulty ignition switches. GM is expected to deal with a barrage of personal lawsuits in the future due to its negligent attitude toward the deaths caused by its defective vehicles. While the company would be handling this unfortunate episode, competitors such as Tesla and Ford would be expanding and growing themselves by focusing on other core issues like innovation etc., which may result in loss of market share by the company. Moreover, replacement of the core engineers and executive personnel at this crucial point would also be a huge setback for the company and it may take more than a quarter for the company to recover from its effects.
In response to the recall crisis, General Motors is implementing process changes to overhaul its culture and management. The company is taking a series of steps to accelerate the cultural shift and catch and announce recalls sooner. GM is adding 35 product safety investigators to identify and address the issue at an earlier stage. The company is implementing global integrity organization regulations to enhance the overall safety and quality performance and announce the recalls sooner.
The company is also restructuring the recall decision-making process with senior management at the center of the decision-making process. The company will appoint Jeff Boyer as vice president of Global Vehicle Safety to elevate and integrate its safety process under the supervision of a single leader. The company has also implemented a "speak for safety" program to encourage its employees to report issues quickly and forcefully. Mary Barra has herself asked employees to email her directly if the issues are not being addressed.
Sales Defying Negative News
In the middle of all the negative publicity, the company registered its best month of U.S. auto sales since August 2008. General Motors' sales grew by approximately 13% year-over-year to 284,694 vehicles in May. Despite the huge $1.3 billion recall related costs, the company was still able to report profit in the first quarter. General Motors has also managed to increase its presence in the all-important Chinese market and expects to grow its sales by 10% this year. Seeing the company's financials it appears that investors have factored in the bad news from recalls and have accepted Barra's reassurances.
The company's management knew about the issue and still didn't recall its vehicles until at a later stage. However, now the company is taking measures to deal with the unfortunate recall issue and if Barra delivers on what she is saying, the company can emerge as a strong organization with huge future potential. The company has not only reported healthy sales figures in the midst of the recall issue and has introduced a cultural change, it is also gaining ground in the all-important Chinese market. General Motors is expected to grow its sales in China more than the competition.
However, I still think, despite some positive results around the process and cultural change, a stronger brand focus is needed to drive better results. As a Barclays analyst wrote in a report, GM needs to accelerate its global product development, without compromising brand and regional needs. GM also needs to establish a mechanism for faster cross-functional decision making. Execution of these initiatives, while also communicating a better long-term balance sheet strategy, could help unlock shareholder value, especially as these initiatives would provide investors with better confidence in GM's prospects for margin expansion in the coming years.
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