General Motors Company's Recall Debacle Costs Continue to Balloon

The Dow Jones Industrial Average (DJINDICES: ^DJI  ) was trading 130 points lower, or 0.8%, by midafternoon despite a rise in consumer confidence, according to preliminary readings from the Thomson Reuters/University of Michigan index. The reading went from 80 at the end of March to 82.6 in early April. That suggests consumers are feeling more upbeat about the U.S. economy and are shaking off the harsh winter weather. With that in mind, here are some companies making headlines today.

The situation continues to get worse for General Motors (NYSE: GM  ) as the nation's largest automaker faces the continued fallout from its recall of 2.6 million vehicles. General Motors announced that dealerships should begin receiving repair kits on Friday to fix the problem that caused certain vehicles' ignition to flip to the off position, causing power loss. The defect has been linked to 13 deaths.  

General Motors also announced today that it increased the recall-related charge to its first-quarter results. Management initially expected a $300 million charge, which quickly more than doubled to $750 million as details made it obvious this recall and potential wrongdoing were much more serious than thought. That second estimate has now almost doubled again to $1.3 billion which threatens to erase a majority of the company's first-quarter profit. That seems like a small price to pay for the terrible decision not to fix the problem when it arose perhaps more than a decade ago.

Lincoln's 2015 MKC hits the U.S. market soon. Source: Ford.

In other automotive news, it recently became known that Ford (NYSE: F  ) had replaced Max Wolff, chief designer at luxury brand Lincoln, last December. Wolff's successor is David Woodhouse, who has been with Ford since 1999; his promotion comes at a time, in my opinion, when Lincoln is finally gaining some traction. Former Ford product planner John Wolkonowicz disagrees.

"This is a sign that what they're doing isn't working," said Wolkonowicz, now an independent auto analyst, according to Automotive News. "If they're trying to compete with Mercedes and BMW, they're not in the same galaxy. Lincoln doesn't have a memorable and distinctive design signature yet."

Harsh words from the former Ford employee, to be sure, and indeed Lincoln lacks the branding of its European competitors. However, I think saying what the Blue Oval is doing isn't working might be too strong. Lincoln's brand sales surged 31% in March, 36% for the first quarter, and 27% over the last six months. I believe this potential Lincoln turnaround is still in the early stages. 

Ford hopes the sales momentum will continue as the Lincoln MKC, a small SUV, is launched at midyear, followed by a redesigned Navigator in the back half of 2014. Investors hope Ford can work the same turnaround magic with Lincoln that it did with its overall business. Ford is betting $1 billion on the overhaul of its Lincoln luxury lineup and preparing to introduce the brand into China, the world's largest automotive market, later this year. If Ford's bet on its luxury lineup pays off, and sends sales to heights not seen in over a decade, it should be a significant boost to its stock price.

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Daniel Miller

As a Motley Fool Industrial Specialist, I use my marketing and business background in the automotive industry to evaluate major automakers and other large industrial corporations. Follow me on twitter for tweets about stocks, cars, sports, and anything I find amusing.

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8/31/2015 4:57 PM
^DJI $16528.03 Down -114.98 -0.69%
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Ford CAPS Rating: ****
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General Motors CAPS Rating: ***