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A big win for GM on recall controversy

Rick Newman
Daily Ticker
General Motors CEO Mary Barra testifies on Capitol Hill in Washington, Wednesday, April 2, 2014, before the Senate Commerce, Science and Transportation Subcommittee. Barra is back before Congress, where members of a Senate subcommittee are expressing doubts that the culture at the nation's No. 1 automaker has really changed. (AP Photo/Pablo Martinez Monsivais)

It took Toyota (TM) nearly five years to resolve all the government claims that followed a recall controversy that began in 2009. General Motors (GM) has taken a big step toward resolving a similar crisis in just three months.

The Dept. of Transportation has fined GM $35 million, the maximum amount allowed, for dragging its feet on a deadly safety flaw that eventually led to the recall of 2.6 million vehicles. That flaw, a defective ignition switch that could inadvertently flip from on to off, contributed to at least 32 crashes involving 13 deaths, according to GM. The recalls, involving cars such as the Chevrolet Cobalt and Pontiac G5 from model years 2005 through 2010, has been the biggest controversy GM has faced since emerging from bankruptcy in 2009.

Yet the fine and an accompanying consent decree ought to help GM emerge from the cloud of scandal. Though the fine is the biggest ever levied against an automaker by DOT, it’s tiny compared with GM’s revenue and profit. The automaker earned $4.4 billion during the past 12 months, according to S&P Capital IQ, which is 125 times the amount of the DOT fine. And the fine barely adds to the charges GM has already taken on account of the recalls, which total about $1.5 billion.

Investors seem sanguine about the financial implications. GM stock fell on the early news of the DOT fine, then soared temporarily before settling back around $34 which is where it was before the news broke.

Improvements needed

The consent decree requires GM to make a long list of internal improvements to get a better handle on safety issues. The decree, for instance, requires GM to tighten procedures for tracking safety problems and acting on them. GM will also endure a kind of probationary period for the next three years, during which it must meet regularly with regulators and disclose reams of safety-related information, even if it doesn’t lead to a recall.

Yet GM is already doing much or all of that. In March, GM appointed Jeff Boyer to the new position of vice president for global vehicle safety. Since then, GM has hired about 40 new safety investigators to help the company spot problems more quickly. GM has also hired attorney Anton Valukas to investigate what happened with the ignition defects and produce a comprehensive report. As part of the consent decree, GM must provide that report to the government.

The deal with the Transportation Dept. still leaves GM vulnerable to criminal prosecution, if the government chooses to pursue charges, and to private lawsuits. In Toyota’s case, criminal prosecution turned out to be far costlier than battles with regulators. A criminal suit filed by the Justice Dept. wound on until March of this year, when the government fined Toyota $1.2 billion for deliberately withholding safety information from consumers and regulators. (Justice is not subject to the limit on fines the DOT must abide by.)

More government action to come?

GM could face similar legal problems. While announcing the $35 million fine, Transportation Secretary Anthony Foxx accused GM of breaking the law by concealing what it knew about the ignition defect. Coming from a Cabinet official, that suggests further government action may be on the way.

But GM also learned from Toyota’s mistakes and handled its recalls differently once they got underway. Toyota stonewalled the government for months after safety concerns first surfaced in 2009. CEO Akio Toyoda even admitted later that Toyota needed to reform a culture of arrogance that interfered with safety matters. Toyota’s intransigence made bad publicity worse, with its reputation taking years to recover.

GM also stalled, since it knew about the ignition defect at least as early as 2009, and didn’t issue a recall until 2014. But once new CEO Mary Barra learned of the problem this January, action came quick. The initial recall occurred on February 7 and was expanded several times after that.

The government accused GM of failing to respond promptly to a long list of questions, and fined the automaker $7,000 per day until it provided a full set of answers. But now the consent decree resolves all outstanding regulatory matters — including the daily fines — as long as GM plays by the rules.

Meanwhile, GM’s sales have risen by about 7% this year, which is slightly less than the industry overall but far better than the thrashing Toyota took in 2009 and 2010, when sales plunged. With one big problem resolved, GM has an opening to ease back into the fast lane.

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