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Recalls may undo GM's post-recession progress

Latest setbacks could have a bigger impact on General Motors than similar woes will on Toyota.

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I had originally planned to write this week about the ban on direct manufacturer-to-customer sales in New Jersey, and what it could mean for Tesla’s business model and expansion plans.

Then the whole General Motors recall fiasco came along.

If the franchise law development is a gathering storm for Tesla, then the current trials of GM is a Category 5 hurricane. It could seriously undo the company’s glacial but assured improvements to its image and brand reputation since its post-recession restructuring.

Not everyone seems to be of that opinion. An Automotive News opinion piece argued that no matter how bad it gets, it’s “hard to imagine GM’s recall becoming Toyota-bad.”

I beg to differ. Although the scale of the recent recalls may not match that of Toyota, which sent out notices for more than 15 million vehicles globally over unintended acceleration issues, GM may have more to lose from the callbacks.

First, a little context.

After more than a decade of internal investigations and deliberations, the Detroit automaker recently green-lighted recalls of nearly 1.6 million vehicles with faulty ignition switches.

The affected cars include mostly defunct brands and models: the 2005-07 Chevrolet Cobalt and Pontiac G5, the 2003-07 Saturn Ion and the 2006-07 Chevrolet HHR, Pontiac Solstice and Saturn Sky.

The actual volume of cars ordered back for remedial measures is no big deal in recall history. But GM’s troubles lie elsewhere.

So far, about 12 deaths have been linked to sudden engine and safety system shutoffs caused by the defective switch. More may emerge as investigations progress.

The company is also facing class-action lawsuits from different quarters, including two from Canada. According to the Detroit News, at least one GM shareholder is taking legal action against the company for allegedly keeping investors in the dark about the problem.

A U.S. Department of Justice probe where GM executives, including current CEO Mary Barra, will have to testify in front of Congress added further gravitas to recent developments.

And, to make matters even worse, GM issued another recall for 1.5 million vehicles — this one impacting more recent models — over various critical safety-related issues.

The question that’s on everyone’s mind is why it took GM so long to address the ignition switch issue.

Some are blaming it on the company’s penny-pinching ways in the 2000s, a time when it had way too many brands in its portfolio and was in deep red territory year after year. To be fair to GM, it did report the problem to U.S. regulators but ultimately it failed to take any meaningful action.

Yes, GM’s a different company now and new boss Barra is willing to do whatever it takes to put the past behind. She has apologized publicly and implemented a massive plan to repair the faulty models. The automaker’s social media response has been transparent and thoughtful.

But, inaction — past or present — and any whiff of coverups can decimate a company’s image. Particularly one that has struggled for years to change negative customer perception of its products.

Indeed, you could argue that Toyota is largely responsible for its misery because of poor damage control. The $1.3-billion fine it has been asked to pay by the U.S. government stems squarely from the company’s attempts to cover up its safety problems. Current GM executives may not be responsible for the recent turn of events but when they go in front of Congress, past skeletons will be unearthed for sure — and I don’t think they will simply go, “Boo!” The deaths and delay are sure to lead to some serious bloodletting. Toyota’s fall from grace may have been shocking for everyone, and it did lead to some market losses in the short-term, but I think people may have perceived it as a one-off indiscretion, because of the company’s impeccable reliability record. Its resurgent market share, particularly in North America, is proof enough that as far as the buying public goes, the company has been forgiven. GM, on the other hand, hasn’t been able to win over consumers on reliability. And the recent success it has enjoyed in some initial-quality surveys may take a serious beating, depending on the way the cards fall.

In other words, much of the good work that recent GM execs have overseen since the post-bankruptcy turnaround may come undone.

In the end, GM’s fall may turn out to be less steep than Toyota, but the climb back will be far harder.

Recalls may undo GM's post-recession progress

Kumar Saha is a Toronto-based automotive analyst with the global research firm Frost & Sullivan. Email: [email protected].

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