Why GM's Latest Recall Mess Isn't GM's Fault

GM's latest safety concern involves the airbags in the popular Chevy Cruze compact. A major airbag supplier is being blamed for the defect, which has affected several big automakers. Source: General Motors Co.

Another week, another General Motors  (NYSE: GM  ) safety issue. Some critics are wondering if GM will ever get its act together.

One could argue that all of these GM recalls are a sign that the company is getting it together. But for GM, the tough headlines continue. This past week brought news that GM had ordered its dealers to stop selling one of the company's most popular models, the Chevrolet Cruze, while an issue with the vehicle's airbags is sorted out.

GM has been lambasted this year for dragging its feet on a recall of defective ignition switches. And rightly so: Those switches have been blamed for over a dozen deaths, some of which might have been avoided if GM had taken action earlier.

But as Motley Fool senior auto specialist John Rosevear explains in this video, this latest issue isn't GM's fault. It's the fault of the supplier that made the airbags -- and General Motors is far from the only automaker affected by this latest auto-safety mess.

A transcript of the video is below.

Warren Buffett's worst automotive nightmare (Hint: It's not Tesla Motors)
A major technological shift is happening in the automotive industry. Most people are skeptical about its impact. Warren Buffett isn't one of them. He recently called it a "real threat" to one of his favorite businesses. An executive at Ford called the technology "fantastic." The beauty for investors is that there is an easy way to invest in this megatrend. Click here to access our exclusive report on this stock.

John Rosevear: Hey Fools, it's John Rosevear, senior auto specialist for Fool.com. We've all been watching the General Motors recall saga unfold, GM has done over 40 recalls in North America so far this year which is just a huge number, and on Wednesday it ordered dealers to stop selling 2013 and 2014 Chevy Cruzes because of an airbag issue.

But this one is different because it goes way way beyond just GM. It involves a supplier, a Japanese company called Takata Corporation, they make airbags, and apparently there's a problem with a huge batch of inflators, the thing that pops the airbag when you get into an accident, it has been described as being somewhat similar to a shotgun shell, it's a controlled little explosion, and these inflators may be defective.

The issue is that apparently humidity can can degrade the inflators causing them to explode, which is obviously a bad thing, even if the airbag doesn't fully deploy it can damage the airbag and other parts and possibly the car's occupants too. There are some that might have received faulty propellant that may have been stored improperly under humid conditions, but we don't know which ones for sure because apparently Takata's record keeping was faulty.

Again this company is a huge supplier, and these recalls have mostly affected Japanese brands but they're spreading. There have now been almost 10 million vehicles recalled around the world to deal with this, just this past Monday, Honda (NYSE: HMC  ) , Nissan, and Mazda recalled 3 million vehicles between them to replace these potentially defective airbags. Honda says it knows of two deaths that may have been linked to faulty airbags, and the company knows of 41 cases where the inflators exploded and ruptured the airbags.

Here in the U.S., the National Highway Traffic Safety Administration has directed automakers who bought airbags from Takata to recall certain vehicles in certain parts of the country, and the list includes Honda, Toyota  (NYSE: TM  ) , Nissan, Mazda, Ford  (NYSE: F  ) , Fiat Chrysler (NASDAQOTH: FIATY  ) , and BMW.  

Chrysler issued a grumpy-sounding statement on Monday where they said that they're not issuing a "recall", it's a "regional field action" that they're doing to honor a request from the NHTSA. Chrysler says it's aware of one injury in one of its vehicles that may be related to the defective airbag parts, and so they'll replace airbag inflators in certain vehicles that are registered in Florida, Hawaii, Puerto Rico, and the US Virgin Islands, regions that were selected by the Feds presumably because they're humid for much of the year.

But the larger lesson for us as investors is this. Generally we see economies of scale as a good thing. One big supplier that makes airbags for seven different automakers can presumably do that at lower cost, which lowers the automakers' costs and gives them an opportunity to improve margins.

As investors, we like that, and we cheer for companies like Volkswagen that are going to greater and greater lengths to share components among their vehicles around the world and get greater economies of scale and so forth. But the downside is what we see in this case: if something goes wrong with one of those widely shared components, it can affect a whole lot of vehicles all over the world, and the recalls can be extensive and expensive. This is something I expect we'll see more and more of in coming years. Thanks for watching.


Read/Post Comments (3) | Recommend This Article (0)

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 June 29, 2014, at 12:25 PM, lem2004 wrote:

    Thanks John for the article/video to many news article just run with any recall of GM's recalls without telling any of the facts,and you hardly see anything about the other auto makers having the same problem.

  • Report this Comment On June 29, 2014, at 12:29 PM, lem2004 wrote:

    Should have said, just run with any story of GM's recalls.

  • Report this Comment On June 29, 2014, at 12:38 PM, funfundvierzig wrote:

    The last time we looked GM is legally responsible for the hidden defective parts it puts into its cars and trucks. That is the case whether of not the supplier has slipped in defective inflators or ignition switches or whatnot. The ultimate accountability rests with GM officials, who for a decade have fallen asleep literally at the switch, or worse yet, collaborated to cover-up deadly defects. ...funfun..

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: 3011224, ~/Articles/ArticleHandler.aspx, 10/31/2014 7:29:24 AM

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