The One Good Thing About General Motors' Massive Recall

Years of delays. Thirteen deaths. But GM's new leaders are determined to do the right thing.

Mar 9, 2014 at 12:31PM

Gmmarybarra

General Motors CEO Mary Barra, shown here with former CEO Dan Akerson, says that GM will take an "unvarnished" look at the events that led to the recent recall of 1.6 million vehicles. Photo credit: General Motors.

Last month, General Motors (NYSE:GM) announced the recall of 1.6 million vehicles built between 2003 and 2007, for faulty ignition switches.

We at The Motley Fool often say that most auto recalls are no big deal in the grand scheme of things, and that's true. Nowadays, most recalls in the auto business involve a problem that could cause a safety issue. Typically, it's a defective part that is caught quickly -- often in the automaker's own internal testing -- and the comany is proactive in making sure it's repaired promptly. It's a nuisance for owners of the affected cars, and an expense and a hassle for the automaker, but rarely much more than that.

This is not one of those recalls.

The problem with these ignition switches is this: The impact of just the right kind of crash can make the switches switch from the "run" position to the "accessory" position. If the ignition switch isn't in the "run" position during a crash, the airbags won't go off. 

What are the odds of that happening? They're not zero: apparently, there have been 31 crashes in which this happened. Thirteen people have died.

That's bad. But it gets worse. GM has known about this problem for years. It fixed the switches in 2007. But the company didn't do a recall at the time.

Why? Good question. GM's legal department is now conducting an investigation to find out.

Of course, GM was in turmoil in 2007, and for several years after, as it spiraled into a wrenching bankruptcy. It's a different company now, under very different management. As Fool contributor John Rosevear explains in this video, the one good thing in this situation is that GM's new leadership is determined to find out what happened, to take responsibility for fixing it, and to make sure it doesn't happen again.

A transcript of the video is below.

Free report: Learn from Warren Buffett's greatest wisdom
Warren Buffett has made billions through his investing and he wants you to be able to invest like him. Through the years, Buffett has offered up investing tips to shareholders of Berkshire Hathaway. Now you can tap into the best of Warren Buffett's wisdom in a new special report from The Motley Fool. Click here now for a free copy of this invaluable report.

Hey Fools, it's John Rosevear. So you may have heard that General Motors has this enormous recall going on. The story in a nutshell is that they recalled 1.6 million older vehicles, these are all 2007 model year or older, Chevy Cobalts, Pontiac G5s, Chevy HHRs, Pontiac Solstices, and Saturn Skys, they've been recalled [for] faulty ignition switches.

The issue is that the switches can fail in a way that you'd never notice until you were in a huge crash and the car's airbags failed to deploy, basically, the switch's mechanism can become loose enough that it gets knocked into an "off" position, technically the "accessory" position, by the force of the crash, and of course airbags don't deploy when the car isn't switched on. There have apparently been 31 crashes where this actually happened, where investigators determined that the airbags in one of these affected GM vehicles should have inflated and they didn't, and 13 people have died.

As safety defects go in modern cars, this one's a doozy.

We often say that most recalls are no big deal, and that modern cars are very very safe, and that's true, but this one is a big deal. It's a big embarrassment for GM, a big potential liability, but it's interesting how GM has chosen to handle this.

GM is of course a very different company now than it was back in 2007; it has been through bankruptcy, and it's under completely different senior management that has taken a completely different approach, and I would argue a much much healthier approach. What's different, first of all, is that GM has made public a chronology that shows that the company first learned of the potential for a problem way back in 2004, they outlined the whole investigative process, and it shows that they probably should have done this recall in 2007 when they figured out what the issue was and implemented a change to the ignition switch design that solved the problem.

Just owning up to that is likely to land them in some legal hot water. I mean, it seems awfully likely that they'll get sued by some of the victims here, but in addition, it's a big violation of federal regulations. Automakers are required to tell the National Highway Traffic Safety Administration within five days if they become aware of a safety defect. The maximum penalty is a $35 million dollar fine.

It looks like what happened is that some balls got dropped within GM, which is somewhat understandable given all the massive internal turmoil that GM went through between 2007 and 2011 or so, but even though it's arguably understandable it's still bad. It really looks like GM as an institution kind of dragged its feet while people were getting killed and injured in defective cars.

But what's good about this, to the extent that there's anything good here, what's good is that GM's current leadership is finally stepping up and owning this. They did release the chronology, and GM North America chief Alan Batey actually apologized, he had a letter published in USA Today that apologizes for the defect and GM's slow response to it. Batey's letter says: "Today's General Motors places our customers' satisfaction and safety at the center of all we do. That is why we are deeply sorry for the events that led to our recent recall."

And he goes on to really take a shot at Old GM. He says, "It is fair that we are getting questions about our commitment to customers when you consider the way we did business and some of the vehicles we built at times during the past decade." Reuters reported on Wednesday that a team of GM attorneys is now conducting an internal investigation, questioning employees, a day after GM CEO Mary Barra sent a letter to employees saying that GM would take an "unvarnished" look at what happened.

I have to say, as a GM shareholder, I hate that this safety defect exists, I hate that it took them so long to deal with it, but I do like the way that GM is finally stepping up here. It's nice to see management trying hard to do the right thing. Thanks for watching, and Fool on.

John Rosevear owns shares of General Motors. The Motley Fool recommends General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers