- Despite recall issues, GM posted higher sales number for the month of June.
- This could be due to higher numbers of customers returning to GM stores for recall purposes, recovering auto sales post-recession, or other factors.
- GM has been making plans for expansion in China, in tandem with possible recovery in the domestic market.
- While YTD GM stock is at a relative low point, recovery is possible; investors might consider taking positions in the second half of 2014 if results continue up.
Recently, General Motors (NYSE:GM) has taken on the burden of a series of recalls, involving a defective ignition switch in six of their vehicle models. Documents indicate that GM knew of the switch problem as far back as the year 2000 but failed to fix the defect. They also failed to notify owners of the problem.
Despite these issues, GM posted higher sales number for the month of June, indicating consumers feel that GM has made significant and meaningful efforts to remedy past failures.
Overcoming Past Mistakes
GM's current trouble stems from malfunctions of the ignition switch that could suddenly turn off the engine, creating a hazard in traffic for drivers. This defect also turned off the airbag deployment system, which also could lead to serious injuries.
Engineers at GM were fully aware of the problem early in the manufacturing process, but the decision was made to go ahead with the design. As a result, reports soon came in about accidents due to the faulty switch.
A number of documents surfaced revealing GM's cover-up of the problem, which led to investigations by the National Highway Traffic Safety Administration and hearings before the U.S. Congress. During these hearings, GM was forced to admit its failure to remedy the defect. As many as 13 deaths are being attributed to the ignition switch defect.
As a result, GM was fined $35 million by the NHTSA for hiding the problem.
In February of 2014, the reports of ignition problems with the vehicles reached critical mass, and GM was forced to issue a recall. A number of subsequent recalls followed, efforts that indicated GM was finally committed to dealing with the problem honestly and in full measure.
Compensation expert Kenneth Feinberg recently announced that the company's compensation fund will begin accepting claims for damages on August 1, 2014. The final costs for the recall and compensation program are currently not known.
Consumers Give A Vote of Confidence
Despite this nightmarish start to 2014, GM has two strong factors working for it:
The first is the arrival of Mary Barra as CEO of the company. Because Ms. Barra was not CEO at the time of the initial design problem, she can only take reactive responsibility for the result, and she has done this with vigor. Fifteen engineering employees responsible for the faulty switch were fired in early June of this year. Her internal investigation revealed a corporate culture that made it easy to cover up the problem rather than deal with it directly.
As CEO, Ms. Barra has taken an aggressive approach in handling the defect issue, ordering recalls immediately as increasing problems have been revealed. Though these efforts will significantly cut into the company's earnings, she sees them as a necessary step in re-establishing trust in the GM brand.
So far, her efforts have paid off handsomely in increasing sales numbers both in the U.S. and globally-a second positive indicator for the company.
GM's strong sales numbers indicate confidence in the company's new leadership and their ability to move forward even in the face of a devastating recall effort.
Some experts feel the increased sales reflect consumers who delayed the purchase of a new vehicle during the depths of the recession. Another reason may be strong brand loyalty that is bringing buyers in to examine the company's new offerings.
Whatever the cause, GM is expected to continue to reap the benefits for some time to come.
We suggest investors watch the next earnings results carefully (July 24th, before market), and if GM continues to post positive news, consider taking positions in their stock.
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