General Motors: Think Reputational Risk, Not Financial

When General Motors (GM) was forced to recall a bunch of cars with a potentially fatal defect, I’m sure it hoped to get the work done and the issue moved into the past quickly. That’s not gonna happen.

AP

Congress has decided to investigate why it took so long to respond to a defect that has been linked to 13 deaths. The New York Times has the details:

A House committee has started an investigation into the response by General Motors and federal safety regulators to complaints about faulty ignition switches that have been linked to 13 deaths, officials said on Monday.

An Energy and Commerce subcommittee will hold hearings that will most likely include the automaker and the National Highway Traffic Safety Administration, although the date has not been set, said Charlotte Baker, a committee spokeswoman.

RBC Capital Markets’ Joseph Spak considers the damage:

In our view, the immediate financial impact is insignificant; however, there could be some reputational risk which could impact share.  The latter, to be frank, is hard to quantify…

Remember while this was old (pre-bankruptcy) GM, the consumer won't differentiate.  And it does appear that GM employees have known about the risk for a while, so it does seem there is a failure to act somewhere along the way.   GM clearly has a test on their hands and how they manage it will likely impact the reputational risk.  In term of previous comps for reputational risk, there are mixed results from large visible recalls.  [Toyota Motor (TM)] lost share in their sudden acceleration recalls towards the end of last decade. [Ford Motor (F)] saw less of an impact with their Ford Explorer recall in the early 2000's.  Obviously the longer this stays in the headlines the worse it could be for GM

JPMorgan’s Ryan Brinkman and team note that Delphi Automotive (DLPH) could be in the firing line. They explain:

We learned that Delphi is the supplier in question of the ignition switches [General Motors] is recalling on 1.6 mn affected vehicles. The ignition switch was produced by a predecessor entity to the current post-bankruptcy Delphi Automotive, potentially shielding the supplier from liability, but we nevertheless expect Delphi to incur costs to assist [General Motors] in fixing the affected vehicles, which we believe both [General Motors] and Delphi are committed to doing in as expeditious a manner as possible. Delphi management commented that a typical ignition switch is an inexpensive part, sometimes costing as little as $2 to $5 to produce (suggesting a total recall cost of ~$3.2 mn to $8.0 mn, ex-labor, or ~$0.01 to $0.02 of EPS), and that swapping the ignition for a new one is not labor intensive – potentially done in only a few minutes. This contrasts with other recalls with which Delphi has been involved, which can sometimes necessitate replacement of a costlier component or one that is in a hard-to-reach area, such as deep within an engine, and was described as relatively straight-forward.

Shares of General Motors fell 5.2% to $35.18 today, while Ford Motor (F) dropped 1.4% to $15.30, Toyota Motor (TM) declined 0.8% to $112.46 and Honda Motor (HMC) gained 0.9% to $36.89. Delphi Automotive rose 1.4% to $67.77.

This post was updated to include RBC’s opinion and closing prices.