Will This Huge Recall Sink General Motors' Stock?

13 deaths. Congressional hearings. This recall is shaping up as a big test for new CEO Mary Barra.

Mar 11, 2014 at 8:01PM

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So far, new GM CEO Mary Barra (shown here with her predecessor, Dan Akerson) has done a good job of handling the fallout over a long-overdue safety recall. But more trouble lies ahead. Photo credit: General Motors 

Last month, General Motors (NYSE:GM) announced the recall of 1.6 million older vehicles due to faulty ignition switches. The switches are blamed for a series of accidents in which 13 people have died.

Concerns that GM had known about the problem for years before agreeing to a recall led the company to issue an unprecedented public apology. At the direction of CEO Mary Barra, GM's legal department has begun a comprehensive internal investigation, and Barra and other GM executives say they are determined to find out what happened -- and to ensure that it doesn't happen again.

But the stakes got raised on Monday: Now, Congress is launching its own investigation.

Now Congress is involved, and this isn't just showboating
The U.S. House Energy and Commerce Committee said late on Monday that it would launch its own investigation into the recall, complete with hearings. Reports on Tuesday suggested that the U.S. Senate might shortly follow suit.

Sometimes, congressional hearings are held mostly to allow ambitious congresspeople an opportunity for some televised showboating. This is not likely to be that: The House committee's chairman, Michigan Rep. Fred Upton, has a long-standing interest in auto safety. 

Upton was the lead sponsor of the Tread Act of 2000, the last major piece of auto safety legislation to pass Congress. The Tread Act came in response to a series of accidents involving Ford (NYSE:F) Explorers equipped with some types of Firestone tires. Among other things, it requires automakers to more quickly report fatal accidents linked to safety defects.

It's fair to say, in other words, that Rep. Upton has a real concern here. 

Is it time for GM shareholders to get concerned too?

Hard lessons learned from Toyota's experience
Automotive recalls happen all the time, and most are no big deal. Often the defective part is found quickly by the automaker's own internal testing, and the recall is taken care of before anyone gets injured.

The GM recall is an exception, of course. But in recent years, automakers have learned the hard way that it's in their best interest to be proactive about recalls, to err on the side of recalling more cars rather than fewer, and to do it earlier rather than later. The expense and hassle of a no-big-deal recall is trivial next to the expense, hassle, and public relations damage -- and potential legal exposure -- of a recall that is delayed too long.

Toyota (NYSE:TM) found that out to their chagrin a few years ago. A widely publicized series of accidents led to massive global recalls in 2010 -- but only after Toyota dragged its feet for months, and made a whole series of PR blunders. There were congressional hearings in that case, too -- and CEO Akio Toyoda also apologized during his testimony.

The whole incident was a PR disaster for Toyota. It probably cost the company quite a few sales in the U.S., and did big damage to Toyota's reputation for quality. Toyota paid some hefty fines and probably had to pay out some hefty damage settlements as well.

But here's the lesson for GM: Once CEO Toyoda got involved, once Toyota became open about its internal troubles and began addressing them, the furor rapidly died down.

And here's the lesson for GM shareholders: Fast forward to today, and Toyota's sales, reputation, and bottom line are in fine shape. 

In time, it's very likely that GM's will be too. But it's possible that things could get bumpy between here and there.

So how bad will it get for GM?
It's also possible that this won't have all that much effect on GM's sales, reputation, or stock price. There are some very big differences between GM's situation today and the pot of hot water that Toyota was in four years ago -- starting with the fact that GM has clearly learned from Toyota's experience.

First and foremost, the problematic GM vehicles were built between 2003 and 2007, before GM went into bankruptcy and began a sweeping overhaul. GM is a very different company now, under very different management, making much better products. 

That separation between Old and New GM works to the company's advantage. There's a perception that GM's new leaders are working to fix long-standing problems that they inherited from the bad old days; the bureaucracy that delayed this recall was certainly one of them.

On the other hand, unlike most recalls, this one is a big deal. Over 30 accidents are blamed on the defect, and as I said above, 13 people have died. 

On the other other hand, Barra and her team appear to be doing all the right things now. GM has been quite transparent over the last month about what its internal investigations have found. Those investigations were stepped up Monday, when GM announced that it had hired prominent Chicago lawyer Anton Valukas to lead the investigation. Valukas led a court-ordered investigation of failed investment bank Lehman Brothers back in 2008.

GM North America chief Alan Batey did issue that public apology, and the company has launched a website to provide its customers with detailed information about the recall. The company has released a chronology of events uncovered by its investigation so far, and plans to release a more comprehensive one later this week.

A big test for Mary Barra
Barra has made it clear that whatever caused this problem will be found and fixed. GM is clearly taking this seriously, and sharing plenty of details about its process and its investigation's findings. From all appearances, GM is ready to make any changes that might be warranted -- and ready to accept consequences for its failure.

Those are the right moves. It's no consolation to the families of those who have died as a result of the defective switches. But it's the right way to reassure future GM owners -- and current GM investors -- that this kind of thing won't happen again.

Long story short, while this recall has the potential to hit GM's stock price hard, it's more likely that GM will weather the storm without serious damage. Either way, it'll be an important test of new CEO Barra's skills -- one that all GM shareholders should be watching carefully.

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