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How GM plans to ride out a disturbing safety problem

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DOJ investigates General Motors

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The first indication of a problem with the ignition switch on the Chevrolet Cobalt came in 2004, right around the time General Motors (GM) was launching the vehicle for the first time. It took nearly a decade for GM to issue a recall to fix it. In the meantime, at least 13 people died in 31 crashes that may have been related to the faulty switches. GM and federal safety regulators have known about many of those crashes for years.

Why it took so long to act on an urgent safety matter is now a key question GM must answer. On Tuesday, Bloomberg reported that Justice Dept. investigators are considering pressing criminal charges against the automaker. Meanwhile, Congress is planing public hearings and personal-injury lawyers are circling. GM began the recall in early February, then expanded it a couple of weeks later. The recall tally now includes about 1.4 million Chevy Cobalts and Pontiac G5s, plus a few lower-volume models. (Full details are here.) As the controversy has grown, GM's stock has gone the other direction, falling by about 4% so far in March and 15% for the year.

The basic problem is that a key in the ignition could inadvertently slip or get bumped into the accessory or off position — even while the car is moving — which can disable power brakes, steering and airbags. GM is advising owners of the vehicles to use the key alone, without a key chain or anything else that could add weight to the ignition switch, until replacement parts are shipped to dealers and owners are notified a fix is ready.

The potential death toll makes the GM recall the most significant since Toyota recalled more than 6 million vehicles in 2009 and 2010, in a safety controversy linked to more than 80 deaths. That fiasco could ultimately cost Toyota more than $2 billion in fines, lost sales and litigation. But GM seems to have learned from Toyota’s troubles, and may not face nearly the damage to its sales or brand image that Toyota did. Here are 4 reasons why:

The problem happened at the “old GM.” All recalled models were manufactured before GM declared bankruptcy and received a federal bailout in 2009. GM no longer makes any of the vehicles. And since the recalled vehicles were built, GM has undergone a vast transformation under four CEOs, including the current chief, Mary Barra. “I don’t think this is going to get as big as the Toyota issue,” says Karl Brauer of car-research site KBB.com. “These are old models that GM never hung its hat on. It was a long time ago.”

So far, consumers seem to agree. GM’s “buzz score,” as measured by research firm YouGov Brand Index, has ticked down a little bit recently, but so have the scores for Ford (F) and Chrysler, as this chart shows:

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Source: YouGov Brand Index

That buzz could weaken further, however, since a drumbeat of negative news is like as Congress holds hearings, victims' stories make the news and a criminal probe deepens. Congressional investigators will also probe why the National Highway Traffic Safety Administration, which enforces safety rules, never forced a recall even though it was aware of the problem.

GM is conducting the recall voluntarily. Toyota erred grievously in 2009 by aggressively resisting a recall and dismissing the complaints of customers, insisting there was nothing wrong with its vehicles until basically forced by Washington to conduct a massive recall. GM, by contrast, is admitting there’s a problem and seemingly cooperating with investigators. What’s still unclear, however, is whether GM stiff-armed the NHTSA and managed to prevent a recall in the years leading up to its bankruptcy, when the company was bleeding money.

There are suggestions to that effect in a timeline GM provided to the NHTSA. After investigating an early report of an ignition-switch failure, GM engineers replicated the problem during tests and proposed several solutions. “After consideration of the lead time required, cost, and effectiveness of each of these solutions, the [matter] was closed with no action,” GM reported to the government. GM was under severe cost pressure at the time, as a $2.8 billion profit in 2004 swung to a startling $10.6 billion loss in 2005.

GM didn’t manufacture the part in question . A supplier, Delphi, did. That doesn't let GM off the hook, especially given that GM knew the ignition switches didn’t meet its own standards shortly after they hit the market. But it might help deflect a bit of the blame and legal liability.

GM has been contrite. Barra, the CEO, has yet to make a public statement about the recall, and her personal credibility on the issue will aid or harm GM’s own image. But other officials have signaled humility. “We are deeply sorry and we are working to address this issue as quickly as we can,” Alan Batey, president of GM North America, said in a statement. “The process employed to examine this phenomenon was not as robust as it should have been.” Toyota's defiance in 2009, by contrast,  backfired, ultimately prompting CEO Akio Toyoda to make a public apology while saying the company he led was “grasping for salvation.”

Automotive recalls happen all the time, usually with little notice by consumers, except for those faced with the inconvenience of bringing their car in for a fix at the automakers’ expense. But the combination of harmed drivers and corporate arrogance — whether real or perceived — can quickly turn an obscure technical matter into a corporate disaster, especially if criminal probes and other types of litigation drag on. Toyota, for instance, still hasn't settled all the legal matters relating to its 2009 and 2010 recalls, and data from research site Edmunds.com shows that Toyota's market share and popularity with buyers suffered for at least two years following the controversy.

GM, meanwhile, is finally healthy again after years of struggle and a bankruptcy that could have ended in liquidation if not for the taxpayer bailout. "They’re as galvanized as they could be,” says Brauer. “Overall, the company is as strong as it’s been since the 1970s.” That might make it a good time for GM to bear the cost of an unwelcome recall. As long as it didn’t delay the cost, at its customers’ expense, during leaner times.

Rick Newman’s latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.

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