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General Motors Recall

Ignition Switch Defect: Cause and/or Effect


Marcelo Vieira
Prof. Dr. Patrick Taylor
Millsaps College Executive MBA
August 2014

General Motors (GM) CEO Mary Barra testifies during


a House Energy and Commerce Committee hearing
on the GM ignition switch recall, on Capitol Hill in
Washington, D.C. on April 1, 2014.
http://www.upi.com//www.upi.com/News_Photos/New
s/General-Motors-Discusses-Ignition-SwitchRecall/fp/8287/#ixzz3BLIQHQFR

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General Motors Recall
Ignition Switch Defect: Cause and/or Effect
The problem: start and stop, and consequences.
In 2005 and 2006, an ignition switch defect in some of General Motors passenger
model cars caused fatal accidents. The accidents happened as the defect caused the switch to
turn off the vehicles electrical system with the car still in in motion, causing the driver to lose
control, and subsequently failing to deploy airbags.
The cases revealed that the GM models Cobalt and Saturn Ions had defects that could
potentially cause fatal accidents like the ones mentioned, and probes into service bulletins
issued internally at the company showed that the issue was already reported by engineers and
inspection officials years before the accidents.
Following the years of 2005 and 2006, when the first major accidents were reported,
GMs response to the issues were considered inadequate by the general public and the media,
until 2014, when new CEO Mary Barra found out about the problem and started a course of
actions to address it.
When the 2008 financial crisis hit, the company reached the edge of the bankruptcy
cliff, and was saved by a government bailout. Amidst a good recovery in sales and overall good
reviews about GM in the 2010-2013 period after major restructuring in 2009 a program
engineer reported in 2013 that GM made a business decision not to fix the problem, referring
to the ignition switch defect discovered before 2005. In the end of that year, GM admitted that
failure in dealing with the issue led to at least 13 deaths and 31 accidents. Reports of failure in
airbags deployment as a result of the defect increased substantially in the first half of 2014, for
several different models.

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After Mary Barra assumed the CEO position at GM in January of 2014 the first
woman to lead a major automaker and learned about the defect and its consequences, GM
issued notifications to the National Highway Traffic Safety Administration (NHTSA) and a
massive recall operation was put in place, still in effect to this day.
Our role in this case is to analyze the issues leading to and resulting from the actions
and consequences of this defect and the recall operations. We will look at financial data,
company and industry reports and market responses to the accidents, as well as public
announcements by the company and the media.
However, the problem is more complex than just addressing a public crisis for the
company. It involves assessing the damage that the issues bring to GM and its level of
accountability in the deaths resulting from the accidents, but it also leads us into an analysis of
the background and culture of GM leading to the financial crisis of 2008. Are the issues
involved in this case causes, effects of the crisis and the subsequent government bailout or
both?
Asking ourselves how the microeconomics aspects of this case influenced the events,
and what are the projected impacts on GM and the macroeconomics of the auto industry, our
study will recommend a course of action from a strategy standpoint.

The ignition switch: lowering quality standards for market share?


The choice of putting an inferior ignition switch in vehicles dating back to 2001 should
be seen as a serious symptom of a major issue with the culture inside GM. The subsequent
failed attempts to address the problem before any fatal accident was reported (in 2005) also
lead us to look at possible reasons relating to costs containment measures to keep margins up,
standing up to competition due to the continuing loss of market share to foreign automakers

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(mostly Toyota and Honda). Those aspects of the case, aggravated by the accidents in 2005 and
2006, are important clues for understanding the overbearing impact of the 2008 financial crisis
on GM.
A redacted document available at the National Public Radio website (npr.org) by former
US attorney Anton Valukas, an internal inquiry into the 11 year history of the companys
failure in addressing this problem, gives us insights into the matter:
The below-specification switch approved in 2002 made its way into a
variety of vehicles including the Chevrolet Cobalt. Yet GM did not issue a
recall for the Cobalt and other cars until 2014, and even the initial recall was
incomplete. GMs personnel inability to address the ignition switch problem
for over 11 years is a history of failures. ()
() As a result, GM personnel viewed the switch problem as a
customer convenience issue something annoying but not particularly
problematic as opposed to the safety defect it was. Once so defined, the
switch problem received less attention, and efforts to fix it were impacted by
costs considerations that would have been immaterial had the problem been
properly categorized in the first instance. Indeed, in this same decade, GM
issued hundreds of recalls at great expense (including at times when its
financial conditions was precarious) because in the great majority of instances,
it correctly determined or agreed that the issue that came to its attention
implicated safety and demanded prompt action. But in the case of the Cobalt, it
did not so. ()
() As a whole, from beginning to end, the story of the Cobalt is one
of innumerous failures leading to tragic results for many. As discussed below,
many individuals have substantial responsibility for the delay in recalling the

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Cobalt. These individuals, as well as the GM committees and groups that had
responsibility for the Cobalt, failed to demand action in the face of mounting
injuries and fatalities, to make themselves or others accountable, and to
marshal the information and expertise at their disposal to solve a problem that
brought harm to GMs customers.

This introduction to Mr. Valukas comprehensive report shows us two major underlying
issues of the problem. One is the failure to communicate safety issues across different
management and executive departments at GM, a corporate-culture problem commented
recently by GMs new CEO Mary Barra. Secondly, the reluctance in categorizing the problem
as a safety hazard to customers could be pointed to an attitude resulting from a decision
making process crippled by the threat of ongoing lost market share in the industry segment of
passenger cars during the first decade of the 2000s.
Below we can see two exhibits from two different sources showing the decline in
market share for the three major US automakers combined, against foreign automakers, one
from 1999 to 2006 and another from 1961 to 2010. The evident weight of strong competition
from the foreign production, substantially expanding their entry into the US auto industry
market in segments like light/compact cars, raises questions about decision making processes
as to reduction of costs and about corporate leadership culture, where the war to keep market
share in an industry so fundamental to our way of life takes the charge. The case for GMs
failure to correct this problem, and the bailout needed to restructure the company after 2008 is
a good picture for the analysis of such questions.

There were also various elements of the macroeconomic level of the impacts of the
financial crisis on GM and its subsidiaries in the years leading to that crisis, as we can see in
this excerpt from the 10-k form of the re-incorporated version of GM in 2009. Some of the
mentioned elements are the decline in sales and the volatility of fuel prices:

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2008 Compared to 2007
(Dollars in Millions)
Automotive Industry
Global industry vehicle sales decreased in the year ended 2008 by 3.8 million vehicles (or 5.3%) to
67.2 million vehicles. This decline started in North America and extended into the other regions, especially during
the second half of 2008, reflecting the effect of slowing economies, tightening credit markets, volatile oil prices
and declining consumer confidence around the world. Industry vehicle sales in North America decreased by
3.1 million vehicles (or 15.6%) to 16.6 million vehicles and Europe decreased by 1.2 million vehicles (or 5.0%) to
22.0 million vehicles. These decreases were offset by industry vehicle sales increases in the Asia Pacific and the
Latin America, Africa and Middle East (LAAM) regions by 468,000 vehicles (or 1.7%) to 28.6 million vehicles.
Total Net Sales and Revenue

Predecessor

Total net sales and revenue

Year Ended
December 31, 2008

Year Ended
December 31, 2007

148,979

179,984

Year Ended
2008 vs. 2007 Change
Amount
%

$ (31,005)

(17.2)%

Total net sales and revenue decreased in the year ended 2008 by $31.0 billion (or 17.2%) primarily due to
declining Sales of $29.9 billion. This decrease reflects the decline in the global automotive industry that resulted
from tightening credit markets, a recession in the U.S. and Western Europe, volatile oil prices and declining
consumer confidence around the world. These factors first affected the U.S. economy in late 2007 and continued
to deteriorate and spread during 2008 to Western Europe and the emerging markets in Asia and South America.
Sales decreased by $26.3 billion in GMNA primarily due to: (1) declining volumes and unfavorable vehicle mix
of $23.1 billion; and (2) an increase in the accrual for residual support programs for leased vehicles of $1.8 billion
related to the decline in residual values of fullsize pick-up trucks and sport utility vehicles in the middle of 2008.
Sales also decreased in GME by $3.1 billion and in GMIO by $0.2 billion.
Cost of Sales

Predecessor

Cost of sales
Gross margin

Year Ended
December 31, 2008

Year Ended
December 31, 2007

$
$

$
$

149,257
(278)

165,573
14,411

Year Ended
2008 vs. 2007 Change
Amount
%

$ (16,316)
$ (14,689)

(9.9)%
(101.9)%

Impact on Goodwill but not on Overall performance


Clearly, the costs of repairing the ignition switch from the first time the issue was
internally reported, would be less than the recall costs being incurred today and the loss of
goodwill value.

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The Cobalt is only one in an extensive list of many brands of GMs cars and its
subsidiaries. Even in 2005 the year of the first fatal accident involving the ignition switch
defect the model in question helped Chevrolet lead sales in the US, even topping Fords sales
for the first time in 19 years.
Although we already pointed out a relationship between ill decision making in GMs
corporate leadership and the companys failure when facing the financial crisis, the impact on
overall product deliveries even after the 2009 company restructuring shows a strong recovery.
Data from Gms 2011 deliveries report shows this meager impact that the decrease of sales in
only one brand has when several other models and brands achieve significant increase.
On balance sheets from period 2010 to 2013 we can observe the net goodwill loss, but
we can also see how it does not affect the strength of total assets. Those two exhibits
(deliveries for November 2011 and a snapshot of GMs balance sheet assets accounts), on the
next pages, will help us observe that the issues arising from the ignition defect, and the impact
of the public perception of the issue does not, in effect, have a substantial impact on GMs
recovery and its financial health from the date of the accidents to the year 2014, when the
company is effectively responding to the specific problem of the accidents by incurring in
recall costs.
Any alternative response plan and recommended course of action will have to consider
much deeper questions than market share strategies and financial indicators, as the new
leadership is realizing. It took the company 10 years to start responding appropriately to the
incidents and to the internal communication and decision making issues that led to those
failures.
GM is too big of a company, but a lag in the market response could still surprise sales
in the future due to loss of confidence in the customer base.

Source: Google Finance (https://www.google.com/finance?q=NYSE:GM&fstype=ii)

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GM deliveries November 2011

Source: www.gm.com

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CONCLUSION Response and action: looking at the future
As observed, even with the news of recall and costs related to lawsuits involving
various models that could present ignition switch and/or electrical problems, GM is still in a
healthy position before the industry and the market in general. Cobalt wholesale and auction
prices are stable, and we are still to see strong reactions to the latest recall, if strong at all.

Alternative responses to this problem should have been given way before the problem
arose, and new CEO Mary Barra, which refers to GM now as the new GM has addressed the
issue properly, even if late, by commissioning comprehensive analysis of the 11-year history
failure and by holding leadership accountable, pointing to a change in culture.

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We could see a lag in the market for GMs share of some of the most popular segments
in a couple of years, but even that possible negative impact of todays events may not reflect
materially in the companys financials.
The lesson GM seem to have learned is that competition for market share should not
trample quality standards, independently of how costly it can be to do the right thing, in this
case, address the issue as a safety hazard from the beginning.
Strategically, the effect of the aggressive entry in the US market of Asian cars most
notably Toyota and Honda should not have caused such competition panic in the corporate
leadership so much as to cause it not to see major issues in internal quality supervision and
communication across departments.
For the company to keep being passionate about designing, building and selling the
worlds best vehicles, it should look farther into the future and analyze investment
opportunities into what is showing to be still timid but growing trends.
As it keeps a good recovery pace and finally deals under Mary Barras direction
properly with the defects and recalls issues, a better look into the volatility in fuel prices and
the emergence of green/fuel efficient cars is still to be done by GM on a deeper level.
Also, a thorough analysis into self-driving cars will show that any major automaker
should be teaming up with the developers of that technology in order to make serious and long
term investments in what might be a great market in the future, especially for business
vehicles.

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REFERENCES
Basu, T. (2014, March 31). Timeline: A History of GM's Ignition Switch Defect. Retrieved
August 20, 2014, from http://www.npr.org/2014/03/31/297158876/timeline-a-history-of-gmsignition-switch-defect
Valukas, A. (2014, May 29). Report to Board of Directors of General Motors Company
Regarding Ignition Switch Recalls. Retrieved August 20, 2014, from
http://www.npr.org/news/documents/2014/valukas-report-on-gm-redacted.pdf
(2014, January 1). Retrieved August 20, 2014, from
http://www.gm.com/company/investors.html
Auto Sales. (2014, August 1). Retrieved August 21, 2014, from
http://online.wsj.com/mdc/public/page/2_3022-autosales.html
Cobalt Ranks second in sales. (2006, January 5). Retrieved August 20, 2014, from
http://www4.vindy.com/content/business_tech/372311088812641.php
Paris, D. (2014, April 9). Update: GM Ignition Switch Recall and Wholesale Auction Prices.
Retrieved August 22, 2014, from
http://www.nada.com/b2b/NADAOutlook/UsedCarTruckBlog/tabid/96/entryid/404/update-gmignition-switch-recall-and-wholesale-auction-prices.aspx
Muller, J. (2014, June 24). GM Profit Plunges On Recall Costs; $400 Million Set Aside For
Victims. Retrieved August 22, 2014, from

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http://www.forbes.com/sites/joannmuller/2014/07/24/gm-profit-plunges-on-recall-costs-400million-set-aside-for-victims/
Muller, J. (2014, May 28). Exclusive: Inside New CEO Mary Barra's Urgent Mission To Fix
GM. Retrieved August 20, 2014, from
http://www.forbes.com/sites/joannmuller/2014/05/28/exclusive-inside-mary-barras-urgentmission-to-fix-gm/
GM Annual Balance Sheet - General Motors Co. Annual Financials. (2014, January 1).
Retrieved August 20, 2014, from http://www.marketwatch.com/investing/stock/gm/financials
General Motors Company - Form 10-K. (2009, December 31). Retrieved August 20, 2014,
from http://www.sec.gov/Archives/edgar/data/1467858/10/000119312510078119/d10k.htm
Bennett, J., & S. Lublin, J. (2014, June 4). GM Recall Probe to Blame Cultural Failings.
Retrieved August 22, 2014, from
http://www.sec.gov/Archives/edgar/data/1467858/10/000119312510078119/d10k.htm