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General Motors: Say It Isn't So

By Daniel Miller – Updated May 26, 2017 at 5:48AM

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Another day, another potential diesel emissions scandal -- but let's hope that for GM investors' sake, this lawsuit is baseless.

When it rains, it pours, and no group of companies understands that better than Detroit automakers right now. We're only a few days removed from Ford Motor Company's (F 2.52%) abrupt removal of former CEO Mark Fields in favor of Jim Hackett, and Fiat Chrysler Automobiles' (FCAU) stumble into the crosshairs of the U.S. Justice Department -- and at the time, one could have thought General Motors (GM 1.92%) was looking pretty good right now.

GM was looking good until Thursday, when Detroit's largest automaker was accused in a lawsuit of using emissions devices, similar to Volkswagen's, in more than 705,000 Duramax diesel trucks. Let's take a look at the scenario, how it's different from FCA's situation, and what GM had to say about the allegations.

What's going on?

This seemed to come out of nowhere on Thursday, and it makes General Motors the sixth automaker linked to diesel cheating scandals since Volkswagen was discovered to have installed cheating software to dupe emissions testing. It was a scandal that caused upheaval in Volkswagen's management, massive recalls and fixes, and forced the German automaker to set aside roughly $18 billion to cover the cost of fines, legal claims, and other related issues -- a massive amount. To emphasize how costly VW's diesel scandal was, it was more than four times the $4.1 billion that General Motors' recent ignition switch debacle cost.

Red Chevrolet Colorado driving on a mountain road.

2016 Chevrolet Colorado 2.8L Duramax Turbo Diesel. Image source: Getty Images.

Simply put, this could cost GM big if there's any merit to the lawsuit, especially considering that these are some of GM's most profitable and popular products. The class action lawsuit was filed on behalf of people who own or lease more than 705,000 Chevrolet Silverado and GMC Sierra full-size trucks produced with Duramax engines between the model years 2011 and 2016. Here's one of the more incriminating lines of the filing, via Automotive News:

The defeat devices allowed GM to have its cake and [eat it] too. It could gain the advantage of hot exhaust going into the SCR system needed to pass cold-start tests, while avoiding the fuel- and power-robbing Active Regeneration procedure that the DPF filter requires when the SCR treatment comes first. GM turned a blind eye to the twofold to fivefold increase in deadly NOx emissions its scheme caused...

What's next?

GM's stock initially traded 2% lower on the news Thursday. On the bright side, at least initially, the company vehemently denies the allegations. According to GM's statement:

These claims are baseless and we will vigorously defend ourselves. The Duramax Diesel Chevrolet Silverado and GMC Sierra comply with all U.S. EPA and CARB emissions regulations.

There is a difference investors should note between FCA's recent legal issues and GM's developing lawsuit. The U.S. Justice Department filed the lawsuit against the FCA, which will force the automaker to defend itself and could cost the automaker anywhere from $460 million to over $1 billion, according to multiple estimates, including from Barclays and Evercore ISI. General Motors, at the time of this writing, is only dealing with a class action lawsuit and not the U.S. Justice Department, and it is much better equipped, with a cash hoard and less automotive debt, to handle this potential financial torpedo.

But at a time when U.S. auto sales appear to be peaking and with GM's stock price having remained in neutral recently, this is just about the last development investors wanted to see thrown into the mix.

Daniel Miller owns shares of Ford and General Motors. The Motley Fool owns shares of and recommends Ford. The Motley Fool has a disclosure policy.

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