A Wrenching Week for General Motors Company

Court battles, a potential new recall -- and somehow, a surprise profit for GM.

Apr 26, 2014 at 1:30PM


The all-new 2014 Chevrolet Impala has been a bright spot for GM. Will a glitch in its high-tech safety systems make it the next recall victim? Photo credit: General Motors Co.

It was another challenging week for General Motors (NYSE:GM). The scandal that has erupted around GM's long-delayed decision to recall more than 2 million cars for a problem it should have addressed years ago has made it almost impossible for the automaker to talk about anything else.

But there's a lot going on at GM -- both around the recall, and around its business. Here are a few key highlights from the last week.

GM invokes its immunity -- but only in some cases
One of the key questions around the recall mess has been this: Would GM invoke its immunity to lawsuits concerning things that happened before its 2009 bankruptcy?

The new company that was created as part of GM's bankruptcy agreement -- "New GM" -- was given protection against lawsuits that might arise from events that happened before its creation. When CEO Mary Barra appeared before Congress earlier this month, several senators urged her not to invoke that immunity -- not to hide behind it, in other words, and evade responsibility.

GM doesn't want to look like its running way from responsibility for the defective ignition switches that are being blamed for 13 deaths. But at the same time, its potential liability is massive. Enterprising lawyers have already filed a raft of suits against GM. Some are seeking damages on behalf of everyone who owns a car that has been recalled -- a total that could exceed $10 billion or more.

GM this week split the difference. It went back to bankruptcy court to ask a judge to rule that it was indeed immune from liability for things that happened before bankruptcy -- but only with respect to economic damages. 

GM very carefully said that it is not seeking to block lawsuits regarding accidents that caused injuries, loss of life, or loss of property. But it doesn't want to be forced to buy back all of the 2 million-plus vehicles that are affected by the recall.

Naturally, the plaintiffs' lawyers were loudly opposed -- but experts say they'll essentially have to prove that GM committed fraud during its bankruptcy proceeding in 2009 in order to win. Expect a lively court battle over this one.

Meanwhile, there's another recall looming...
... but this one is very different. GM CEO Mary Barra has talked a lot about how much GM has changed since the days of the Cobalt. The extent of those changes is debatable; but if she's right, the contrast between the Cobalt recall and this situation is a nice example.

National Highway Traffic Safety Administration officials said this week that they are investigating whether an automatic-braking system found in GM's much-acclaimed new Chevy Impala might have been set off accidentally, causing a crash.This is, in some ways, the exact opposite of the situation involving defective ignition switches in those old Chevy Cobalts. With the Cobalts, GM is accused of using a too-cheap ignition switch that compromised safety.

This is not that. This case involves a cutting-edge new safety system that GM is installing in one of its best new models -- the new Impala is currently Consumer Reports' top-rated sedan. The system in question senses whether you're about to crash into something in front of you and, if so, it slams on the brakes on your behalf. 

Like many of the new safety systems that have come to market during the last couple of years, it's a product of automakers' ongoing research into self-driving cars. And that's a field of technology that government regulators are just beginning to grapple with.

So far, only one problem has been reported. A new Impala with the system seemed to malfunction on several occasions, ultimately bringing the car to a sudden halt in 40-mile-per-hour traffic -- which resulted in an accident as the car was hit from behind.

Nobody was hurt... but the Feds are investigating -- with GM's full cooperation, by the way -- and there might be a recall coming. Stay tuned.

Despite the troubles, GM managed to earn a profit
GM surprised Wall Street with a profit on Thursday. Despite a whopping $1.3 billion hit to its bottom line for costs related to the recalls, GM managed a net profit of $125 million in the first quarter. 

That's both good and bad. On the one hand, it's GM's worst quarterly result since 2009. On the other hand, it was better than Wall Street had expected -- and if it weren't for those recalls, GM would have had a nice story to tell.

If you set aside the recall-related costs, GM's profits in North America would have been up sharply, thanks to the strong transaction prices GM has been getting on its all-new Chevy Silverado and GMC Sierra pickups, as well as profitable new models like the Cadillac CTS and, yes, the Chevy Impala.

Meanwhile, GM's losses in Europe are narrowing as its turnaround plan is working better than expected. And profits in China are up, as GM gears up for another big round of expansion in the region.

Long story short: GM's old business decisions continue to haunt it, but its current business is actually doing fairly well. Can GM keep up its business momentum as the recall saga drags on? We'll find out.

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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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Jun 12, 2015 at 5:01PM

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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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