Why Didn't General Motors Company Just Fix the Switches?

GM CEO Mary Barra faced tough questions from two Congressional panels this week. Source: General Motors Co.

Unless you've been living under a rock for the past few weeks, you're surely familiar with the basic outline of the story behind General Motors (NYSE: GM  ) recall debacle.

To recap: Over the last two months, GM has recalled over 2 million vehicles for a faulty ignition switch that's being blamed for 13 deaths. Most of those vehicles were made last decade -- in fact, GM fixed the switch design in 2007. 

But for some reason, GM never recalled the affected vehicles until now -- even though some people within GM knew the switch was a problem, and had apparently known for years, possibly since 2001.

So, here's the question everyone has been asking me all week: Why the heck didn't GM just fix the switches at the time?

When $0.90 a car was a big, big deal
The real answer is that we don't yet know for sure.

But here's a very educated guess: It's because switches that worked properly were more expensive, and "more expensive" was a no-no at Old GM. 

Reuters reported on Wednesday that it had obtained a series of internal GM emails from 2005 in which it was said that a change to the switch design to address the issue would have cost an additional $0.90 per vehicle and added $400,000 to tooling costs.

That's a devastating report. In the context of the hundreds of millions of dollars that GM routinely spends to develop and produce new vehicles, it's a trivial cost.

But it's understandable -- somewhat -- in the context of GM's culture and priorities at the time, in which keeping costs (even little costs) down was absolutely paramount. (To be very clear, it's not excusable. But it is somewhat understandable.)

Pre-bankruptcy GM -- Old GM -- was at a huge disadvantage to many rivals. High "legacy costs" -- rich union contracts, underutilized factories -- meant that GM felt it had to spend less per vehicle than rivals such as Toyota and Honda.

That pressure led to vehicles (especially smaller cars) that weren't fully competitive with the best from the Japanese brands. That, in turn, meant GM had to offer them at lower prices, and that, in turn, gave GM less to spend on the next generation of cars, and so on. Keeping costs down was of paramount importance.

Long story short, adding $0.90 to the cost of a compact car like the Chevy Cobalt -- where profit margins were likely razor thin, if in fact GM was making any money at all -- was probably a very big deal.

For somebody in the middle levels of GM's bureaucracy, it might have even been a career-limiting move.

Of course, those somebodies had no idea their decisions would lead to deaths and would put the company in a ton of hot water a decade later.

That wouldn't fly at most of GM's rivals nowadays
Nowadays, at most automakers, the parts of the company that decide whether to issue a safety recall are deliberately kept separate from the parts that make decisions about cost and pricing.

Fiat Chrysler (NASDAQOTH: FIATY  ) Sergio Marchionne recently told Bloomberg that the company's recall committee includes members from the engineering, safety, and legal departments. 

He said senior executives aren't told about recalls until they're issued -- and that's the way he wants it. Ford (NYSE: F  ) and BMW (NASDAQOTH: BAMXF  ) have similar processes, Bloomberg reported.

From what Mary Barra and other GM executives have said recently, it sounds like GM now follows a similar process as well. 

But apparently, that wasn't true nine years ago -- and that's probably why GM didn't fix the switches before it was too late.

Say goodbye to "Made in China"
For the first time since the early days of this country, we're in a position to dominate the global manufacturing landscape thanks to a single, revolutionary technology: 3-D printing. Although this sounds like something out of a science fiction novel, the success of 3-D printing is already a foregone conclusion to many manufacturers around the world. The trick now is to identify the companies -- and thereby the stocks -- that will prevail in the battle for market share. To see the three companies that are currently positioned to do so, simply download our invaluable free report on the topic by clicking here now.


Read/Post Comments (3) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 05, 2014, at 3:52 PM, funfundvierzig wrote:

    If someone down in the middle ranks of GM at the time had harboured an individual ethical reservation or safety worry about these lethal switches and dared to express it up the line, she or he would have been branded a "NON-TEAM Player", career effectively trashed! Such is the unalloyed corruption of this disreputable motorcar company and the poisonous Group-Think in Ren Sin. ...funfun..

  • Report this Comment On April 05, 2014, at 4:54 PM, lem2004 wrote:

    funfun,It is bad enough to read all of your rants against GM on SA,and know you are here to?Sad.

  • Report this Comment On April 07, 2014, at 8:05 AM, Barmil wrote:

    Why is Barra answering for GM when the man in charge at the time was Rick Wagner. He should be answering the questions it was his watch the time these bad decisions were made not Barra's.

    That's what I love about our government investigations. When it comes to business investigations the real players in the story never seem to be investigated, just the ones left holding the bag.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2903482, ~/Articles/ArticleHandler.aspx, 10/22/2014 8:59:40 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement