It's Getting Worse for General Motors

GM is under fire for a long-overdue recall, and it's only getting worse.

Mar 14, 2014 at 6:45PM

Gmrenaissancecenter

A recall scandal has GM's Detroit headquarters in turmoil. Photo credit: General Motors

Last week was a rough one for General Motors (NYSE:GM) and its new CEO Mary Barra. An emerging scandal over a long-overdue recall is turning into a tough test for GM's new chief. 

GM recalled 1.6 million vehicles in February to replace a defective ignition switch. The issue: The switch could cause cars to shut off suddenly -- or worse, they could fail in such a way as to shut off the car's airbags in a crash.

The scandal: The affected cars were made between 2003 and 2007, and GM -- at least, some parts of GM -- have known about the problem for many years. Meanwhile, at least a dozen people have died in accidents related to the defective switches.

That's a problem, one that has federal officials outraged -- and trial lawyers salivating.

It's a tough test for GM's new CEO, and it could get even tougher as more facts emerge in coming weeks. But as Fool contributor John Rosevear explains in this video, so far, Barra appears to be making the right moves to guide GM through this unfortunate mess.

A transcript of the video is below.

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John Rosevear: Hey Fools, it's John Rosevear. It has been a rough week for General Motors, which is getting beaten up over a huge recall.GM last month recalled 1.6 million vehicles, most made between 2003 and 2007, for an ignition switch defect that is blamed for a bunch of accidents in which at least 12 people have died.

The issue is that some people within GM have known for years and years that these switches were a problem, but GM for whatever reason didn't do a recall at the time, and the National Highway Traffic Safety Administration didn't for whatever reason force them to do a recall.

So there are some pretty serious inquiries going on here.

On Monday we heard that a U.S. House of Representatives committee led by Michigan Representative Fred Upton said they would hold hearings, and Upton is a longtime auto safety champion so these are likely to be serious stuff. On Tuesday we heard that a Senate committee will have its own hearings, and late in the day word emerged that the U.S. Justice Department is opening its own investigation, that's the U.S. Attorney for the Southern District of New York, meaning New York City, so this will be high profile. That news sent GM's shares down over 5% on Tuesday.

Then on Wednesday, GM said that its internal investigation showed that the company had seen signs of trouble with the switches as early as 2001, and it's not sure that it has determined the full scope of the problem, so these recalls may be expanded.

Delphi Automotive (NYSE:DLPH), the supplier that made the switches, said that the replacement switches will cost between $2 dollars and $5 dollars each, and that GM dealers will able to swap out the defective switches for replacements in a matter of minutes, so I guess the good news is that this recall isn't going to cost GM a fortune in terms of parts and labor.And aside from that big hit on Tuesday, GM's stock has held up fairly well.

I think there's a recognition that really the blame for this falls on GM's former management, GM has a whole new team in place now led by CEO Mary Barra, they do things very differently, and so far Barra has made all the right moves here, issuing an apology and starting a credible, in-depth internal investigation and being very transparent, not trying to hide or spin anything. They've also moved to try to take care of affected customers, GM dealers are authorized to offer anyone who owns a recalled car $500 toward a new one, and they emphasized that this isn't to be used for marketing purposes, its to help out customers who may need some help.

But this is still a big deal, and between lawsuit settlements and potential criminal and regulatory exposure the ultimate cost to GM could end up being quite big here. The good news though is again, this is a remnant of old GM, it doesn't affect the current company's reputation in quite the same way that the Toyota (NYSE:TM) recalls did a few years ago. So we'll continue to keep a close eye on this, but so far it's not something that GM shareholders need to panic about. 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.

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