General Motors Company Takes a $1.3 Billion Bullet for the Automotive Industry

General Motors' massive recall debacle enables its closest competitors to announce their own recalls almost unnoticed.

Apr 18, 2014 at 11:11AM

General Motors CEO Mary Barra testifying before the Senate subcommittee. Source: General Motors.

What the heck is going on with the automotive industry? It seems as though not a day passes without another massive recall announcement. General Motors' (NYSE:GM) ongoing debacle regarding 2.6 million vehicles with faulty ignition switches that could flip to the off position and cause a car to lose power is dominating the headlines. The technical fault is linked to at least 13 tragic deaths, and General Motors is being investigated for possible wrongdoing. 

However, have you heard about Toyota's (NYSE:TM) recall of nearly 6.4 million vehicles worldwide? What about Fiat Chrysler Automobiles' (NASDAQOTH:FIATY) recall of nearly 868,000 vehicles across the globe? Or Ford's (NYSE:F) recall of nearly 435,000?

The situation playing out in the automotive industry right now has General Motors taking a bullet for the automotive industry, and rightfully so.

GM's highly public and highly humiliating recall of millions of vehicles, in which the fatal problem was identified years ago, is almost certainly going to call more attention than any other current vehicle recall. The rest of the industry is taking advantage of the situation by announcing their recalls while all eyes are firmly fixed on GM.

In case you missed details on the rest of the auto industry's recalls, here's a quick recap.

Toyota announced last week a massive recall of 6.39 million vehicles for a range of problems. The recall covers five separate problems, ranging from faulty airbags to defective windshield wipers, and includes about 2.34 million vehicles in North America. While the overall number of affected vehicles is significantly larger than the number in General Motors' initial and highly controversial recall, Toyota is so far unaware of any crashes, injuries, or deaths connected to the vehicles, therefore this story is much less of an attention grabber. 

Earlier this month, Chrysler recalled 867,795 Jeep Grand Cherokees and Dodge Durangos to install a shield that would protect brake boosters from water corrosion, according to Bloomberg. Ford has also recently announced recalls of nearly 435,000 vehicles for rusting frame parts and faulty seats. So what do all of these recalls mean for GM and the automotive industry?

What to expect
General Motors has also announced additional recalls, pushing the total number of vehicles past 6 million worldwide. America's largest automaker might as well get it all out in the open now.

Directly, General Motors is going to take a $1.3 billion charge due to the recall in the first quarter, which is $1 billion more than the original estimate. Biting that bullet threatens to consume all of the company's first-quarter profit, and again, rightfully so. 

That might only scratch the surface of the true cost to GM. We have to consider negative effects on the company's future sales and brand image, which has already been battered by GM's bankruptcy. Furthermore, the competition can largely avoid negative results from their own recalls by essentially hiding behind General Motors' troubles. Perhaps these are all deserved punishments considering that GM appears to have made a very poor decision more than a decade ago that it was cheaper to fight in court rather than fix product defects. 

This recall saga is far from over, and could easily get worse for General Motors as the federal investigations continue. As for the automotive industry as a whole, don't be surprised if these aren't the last recall announcements you hear about over the next few months -- or maybe don't hear about, thanks to GM's massive debacle.

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Daniel Miller owns shares of Ford and General Motors. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford. 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.

4 in 5 Americans Are Ignoring Buffett's Warning

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Jun 12, 2015 at 5:01PM

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