Total Recall: General Motors' Strength Through The Fiasco

| About: General Motors (GM)


General Motors' fundamentals remain strong, despite record recalls.

The company has probably already seen the worst it could get on the recall front.

The "Made in China" era is over. What is good for China is not good for General Motors.

It is not a good time for General Motors (NYSE:GM). The company's recall statistics equal the scale of the total manufacturing stats of smaller (but respectably sized) car companies.

The total number of recalled vehicles for the first half of 2014 is a whopping 29 million. Still not in context? This is as many units that GM has sold in the past eight years. There are repair and retooling costs to look at, not to mention the amount that the company is going to have to pay in terms of legal compensation, which are estimated to go anywhere from one to two billion dollars.

The basic problem: faulty ignition switches which lead to a sudden stoppage of the engine and the inability of the airbags to open up. These faulty ignition switches have been behind 13 fatalities and 31 crashes.

Yes, and your point is?

If you were to look at the sales figures for the company, it would appear nothing has happened. In this midst of this maelstrom, GM posted its best sales (for the month of June) since 2007. That's 267,461 units.

But what about the older cars and the discontinued models which make up the bulk of the recalled cars? Surely their sales would have been affected? Well, not more than they would have, had there been no recalls. According to the NADA guides for used cars, the sales prices for Chevy Cobalts (of the models from 2005-2010) fell by 9.6 percent during the March to June period. What did the overall compact car segment's prices fall by during the same time period? 10.6 percent!

The folks at Toyota (NYSE:TM) would be scratching their heads at these figures. Back when they had their recalls, which were much smaller than GM's, their prices (both vehicles and stocks) took a beating much higher than GM. This is despite the fact that GM's fault has killed more than thrice Toyota's fault.

What is good for China is not good for General Motors

The Chinese business community has made a good case for moving out of the mindset where Made in China is an adjective phrase for shoddy quality. After all, aren't premium products like those of Apple made there? Just give them more money and they'll give you quality.

Well, it turns out that the automotive industry requires more quality than other sectors. A number of the ignition switches that were made for GM in China caused the current problem. This is not the first time something of the sort has happened to Chinese-supplied car firms. British car maker Aston Martin has also had problems with shoddy products from Chinese manufacturers.

No decision has been made public on what direction GM is going to take on this front. The company can go to a better supplier in China. Or it could move manufacturing back home to the US, where it could monitor quality much better. The latter is going to be a popular move but GM isn't running for president. The move would certainly cut into margins, given the higher manufacturing costs there.

So, is it a good buy?

Well, GM now has the worst of the recall situation behind it. So, things can get only better from here on. CEO Mary Barra seems to be on it, and she appears to have taken a proactive decision to recall the latest vehicles. Barra is in a mood to cut losses.

The reasons for the differentiated reactions of the public and stock owners between the Toyota recalls and GM recalls can be many, ranging from the nationalistic tendencies of US customers to the fact that Toyota had a then untarnished brand equity, for which the first chip would have been big. But the way the CEO handled the situation proved to be an effective cushion. This ranges from media management to internal evaluations.

If the brouhaha is going to cost the company $1.2 billion, the shareholders still seem to be confident about the company, given how the sales curves have weathered this storm. That confidence is reflected in the fact that GM stock is worth more now than it was 12 months ago, when there was no recall crisis to begin with.

The high price-to-earnings ratio of 42.45 also reflects that confidence and the belief that better times are ahead.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.