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Will Ongoing Recall Woes Take a Toll on Auto Companies?

Zacks Equity Research

Recalls are rampant in the auto industry across the globe and a steep rise has been noticed in recent years, according to the National Highway Traffic Safety Administration. Frequent recalls not only result in significant financial expenses and lower vehicle resale value, but also involve reputational costs.

Recalls on the Rise: Here’s Why

With cars becoming more high tech than ever, recalls have been rising. Technological advancement has contributed to the rise in recalls. Notably, complex functionality and surging digital features in vehicles are proliferating electronic and software glitches. Advanced technologies used in vehicles are resulting in more complex units, software errors and new dangers, in turn leading to a rise in recalls. With cars becoming increasingly electric, software errors are affecting millions of vehicles at once.

Cost-cutting measures undertaken by automakers have also led to frequent recalls, as cost-containment initiatives have a direct impact on quality. Global automakers resorted to massive job cuts during the financial crisis, and the firms’vacant positions were not filled up in the boom years because of increasing investment toward new technologies like electric and driverless cars. As the industry is currently struggling with evolving consumer demand and technology-based competition, it is bracing up for more job cuts and production shutdown amid fears of global economic slowdown.

Auto recalls have been on the rise in recent years and the issue is unlikely to wane anytime soon. To deal with recalls due to quality issues, the chief task is to shift from firefighting to prevention across all functional processes with proper quality management solutions. Quality should be anchored in all functions, with clearly defined targets and key quality indicators.

Recalls Recap for September

Below we highlight various cases of auto recalls in the month of September. Several top-notch U.S. auto biggies like General Motors GM, Ford F and Fiat Chrysler FCAU, along with German giants like Daimler AG DDAIF, Volkswagen VWAGY and BMW AG BAMXF, and a few others, issued safety recalls during the month.

General Motors — the top automaker of the United States — issued a recall of 3.46 million U.S. pickup trucks and SUVs to fix a vacuum pump issue, which was causing a brake-related problem. The recall affected Chevrolet Silverado, GMC Sierra and Yukon, Chevy Suburban and Tahoe, as well as Cadillac Escalade vehicles from the 2014-2018 model years.The U.S. auto giant revealed that the pump in power-assist brakes can put out less vacuum power than needed, thereby resulting in a longer stopping distance and the risk of a crash.

The carmaker also recalled 177,276 of its 2018 Chevy Malibu sedans due to software bug, which could prevent the engine from starting and disable the fuel injectors, thereby increasing the risk of crash. The company also issued a recall for nearly 100,000Chevrolet Trax SUVs amid the ongoing strike between the UAW and the firm. The affected vehicles from2015 to 2018 model years were recalled due to a suspension welding flaw, which can cause steering problems, thereby increasing the chances of crash.

General Motors currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Nissan Motor Co. NSANY announced a recall for 1.23 million vehicles in the United States and Canada for a backup camera issue. The affected vehicles include those in the 2018-2019 model lineup, including its top two sellers Rogue and Altima. As the rear view mirrors are not in compliance with the safety standards, it can increase the chances of crash.

U.S. auto biggie Ford issued a recall of roughly 311,907 Ford Explorer vehicles in the United States, 23,380 in Canada and 3,045 in Mexico to fix seat frames with sharp edges. The affected vehicles were manufactured in the Chicago Assembly Plant from Feb 13, 2016 through Oct 25, 2017.The seat frames with improperly coined edges could increase the risk of injury if someone reaches between the power front seat and center console. 

German automaker Volkswagen issued recalls for 227,000 VW and Porsche carsover a problem with airbags and seatbelt pre-tensioners. The affected vehicles include Tiguan, Sharan and CC models that were manufactured in 2015, as well as Porsche 911, Boxter, Cayman and Panamera that were launched in 2015-2016 model years. 

Japanese automaker Subaru Corporation issued a recall of around 3,500 vehicles to fix a problem with brakes in the vehicles. The recall affected 2,862 Outbacks and 605 Legacy vehicles, which were built during 2019-2020. Per National Highway Traffic Safety Association (“NHTSA”), the brake pedal mounting bracket bolt is either not sufficiently tightened or is missing altogether, owing to which brake pedal is not functioning properly, increasing the risk of collision.

Fiat Chrysler issued a recall for more than 693,000 RAM pickups in the United States to fix tailgates that could open unexpectedly, increasing the risk of cargo falling in the road. The affected trucks include Models 1500, 2500 and 3500 that were built between 2013 and 2018.

Daimler AG recalled 451 Mercedes-Benz G-Class for2011-2018 model years, owing to faulty ABS hydraulic unit. Per the company, driving on corrugated roads could result in cracks in the brake lines in the ABS hydraulic unit, affecting the cars’ stopping distance, thereby increasing chances of accident and injury. The company also issued recalls for another 1,500 vehicles that include Model year 2020 Mercedes-Benz GLE350 4Matic and GLE450 4Matic SUVs. The recall was issued due to missing information about third-row head restraint adjustments in the manual, which can cause accidents.

BMW AG will be recalling 140 of its 2019 i3 and i8 models to fix a faulty high-voltage control module that could lead to loss of propulsion. The company also issued recalls for around 400 Rolls-Royce Cullinan SUVs of model year 2019 for a lightning issue. The affected vehicles’ brake lights were not bright enough, thereby increasing crash chances. Approximately 700 MINI Hardtop 2-Door Cooper, Cooper S and JCW vehicles for model year 2020 were also recalled, as the rear side trim panels were assemble without a crash pad. This would increase the risk of injury for rear seat passengers in a side impact crash.

Final Thoughts

Are recalls like these a harbinger of bad things to come for the automaker and its shareholders? Probably not! However, frequent recalls by a carmaker do reduce consumers’ confidence in a brand. Ultimately, the cost of repairs in a large-scale recall and even that of compensating victims are generally smaller than the cost of sales due to a tarnished reputation.  

The reports of frequent recalls of a huge number of vehicles on various grounds such as faulty airbags, non-compliance of emission norms, seat belts, among others, indicate widespread quality dispute and safety issues. Notably, auto manufacturers need to introspect in order to eliminate driving risks.Understanding the potential threats and formulating effective ways to prevent and resolve recalls are essential for the automakers to succeed in the industry.

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General Motors Company (GM) : Free Stock Analysis Report
Ford Motor Company (F) : Free Stock Analysis Report
Daimler AG (DDAIF) : Free Stock Analysis Report
Nissan Motor Co. (NSANY) : Free Stock Analysis Report
Bayerische Motoren Werke AG (BAMXF) : Free Stock Analysis Report
Fiat Chrysler Automobiles N.V. (FCAU) : Free Stock Analysis Report
Volkswagen AG (VWAGY) : Free Stock Analysis Report
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