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.
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.