Large GM, Toyota recalls show value of caution

The recent spate of large-scale recalls by GM and now Toyota — totalling nine million cars worldwide — suggest automakers are becoming much more concerned about the potentially much higher financial burden of lawsuits and regulatory fines.

Fines, lawsuits and other costs a big burden on bottom line

Toyota issued a massive recall this week, taking a cautious approach that likely stems in part from its recent fines and lawsuits over previous sudden acceleration issues.

The recent spate of large-scale recalls by GM and now Toyota — totalling nine million cars worldwide — suggest automakers are becoming much more concerned about the potentially much higher financial burden of lawsuits and regulatory fines.

"Companies have become extremely cautious" when it comes to recalls, says Dennis DesRosiers, founder of consulting and market research company DesRosiers Automotive Consultants. 

"Toyota perhaps is the most cautious … because of their big problems in ’09 and ’10. They’re terrified of regulatory risk and legal risk,” he told CBC News. 

In any recall, costs quickly add up because of the need to notify owners and replace the faulty parts. But costs can be much higher if the issue that sparks them leads to lawsuits and the potential for regulatory fines, which rise with delayed notification.

On Wednesday, Toyota Motor Corp. issued five recalls for 6.39 million vehicles worldwide, one of its largest recalls in history. None of the issues covered by the recalls caused injuries or fatalities, the Japanese automaker says, and the issues appear largely minor.

Though the cost of an individual recall is hard to know, financial analysts have estimated Toyota’s losses from this move could be around $500 million due to the short repair time and relatively inexpensive component costs.

Kurt Sanger, an auto industry analyst for Deutsche Securities, suggested that the recall was a sign of Toyota “continuing to be extremely proactive” following their recent fines over sudden acceleration problems five years ago.

Nomura analyst Masataka Kunugimoto said that because the faults identified are minor, fewer owners may bring in their vehicles for checks, potentially reducing the cost. Nomura estimated the repair time might take one hour per vehicle, while component costs would be moderate.

Toyota’s recall announcement comes mere weeks after it agreed to pay $1.2-billion US to avoid criminal prosecution over its lack of transparency with the 2009 and 2010 problems with floor mats and gas pedals that caused some cars to speed out of control.

Ten million cars were eventually recalled for those problems. The company also paid a record $66-million in fines to the U.S. federal regulator for delays in reporting the problems, and forked over $1.1 billion in a class-action lawsuit settlement.  

"Perhaps Toyota’s looking at this as ... 'let’s go ahead and get out as many recalls as we know about right now just so we can get this behind us and move forward'," said Alec Gutierrez, an analyst with the U.S.-based Kelley Blue Book. 

'Consumers don't react'

The fallout for Toyota suggests rival carmaker GM may face similar costs in the coming years over its current recall regarding faulty ignition problems. The defect has been linked to several accidents, resulting in 13 deaths. 

Since April 3, GM has been fined $7,000 a day for failing to answer questions from the U.S. National Highway Traffic Safety Administration about its recall for defective ignition switches that can suddenly cause the engine to turn off, disabling the air bags and causing steering and braking to be difficult. 

GM knew about the potential problem as far back as 2001, but only issued a recall this year.

Overall, the global auto sector spends about $45-50 billion US a year on warranties and recalls, a tiny fraction of what the industry rakes in from new car sales, according to consultants group Ernst & Young’s Global Automotive Centre.

It suggests the increase in large-scale recalls is in large part due to the increasing complexity of vehicles and the sharing of components across many models. A typical car now has 15,000 components, says Ernst & Young.

When it comes to the costs of a recall, one place where carmakers don’t appear to lose much is in consumer confidence.

“Consumers don’t really seem to react when we have these large recalls,” said Gutierrez.

He says that when you look at sales volume, interest levels in the company’s vehicles, resale value of the vehicles, there’s little negative reaction. “Things just tend to continue to flow on.”

He points out that GM, while in the congressional spotlight for its own large-scale recall, saw retail sales improve by seven per cent, beating the industry average.

GM CEO Mary Barra, who recently took office, has sought to portray the automaker as a “new GM” — a different company than when the problem was discovered, before the company's bankruptcy reorganization. But she vowed that "today's GM will do the right thing."

“She’s saying the right things," said Gutierrez. "She clearly wants to establish that this is a new GM and they want to be very transparent."

In fact, a recall may be something of a PR boon to automakers. “If anything,” said DesRosiers,“it reinforces quality and safety with the consumer.”

Long-term lessons

Josh Bailey, vice-president of research at Canadian Black Book, the pricing guide for new and used vehicles, said consumers also tend to be influenced by how a company handles the complexities of a recall.

During Toyota’s 2009-2010 recall over sudden acceleration, some owners seemed to appreciate how the company kept them informed, and the way it took care of the problem, said Bailey.

"It was done in a very professional way,” he said. “If it was a brand that sort of handled things in a lackadaisical manner, the outcome might have been entirely different."

About 3,000 automotive recalls have been issued in Canada over the past 20 years, affecting 40 million vehicles, according to Transport Canada data crunched by Bailey.

His research suggests that Toyota sees the highest average number of units (23,000) for its recalls. However, its automobiles rank among the top in terms of retaining their value on resale.

GM, meanwhile, saw the largest sheer number of vehicles recalled in Canada, with about a quarter of the total. It ranked 11th in terms of resale value.

Though buyers may take the massive recalls with a grain of salt, or even feel buoyed about a company’s safety record, that can change if the car company faces perpetual problems.

“If long-term you don’t seem to learn from your mistakes, eventually, you have to imagine that consumers are going to react negatively,” said Gutierrez.


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