General Motors: Woes and Windfalls

GM Assembly Plant

Workers at an assembly line in Detroit;
photo courtesy of General Motors

General Motors: Woes and Windfalls
| published July 3, 2014 |

By R. Alan Clanton
Thursday Review editor

General Motor’s bad run of negative press has been staggering and unprecedented. Among other problems, including admitting culpability in a decades-long pattern of ignoring a defective ignition switch—now blamed for at least 13 deaths—the venerable company has set an all-time record for the number of recalls in a single month, a single quarter and a single year.

But this cavalcade of bad publicity, recalls and litigation hasn’t stopped Americans from buying new cars from GM at a terrific pace. All car-makers have seen an increase since the start of spring, but GM has rebounded far above Wall Street and auto-industry expectations.

Much of the surge in car buying came after a prolonged and severe winter which suppressed auto sales for months. Auto sales, like real estate, construction, transportation and dozens of other sectors, suffered mightily when most of the country experienced record-breaking chills and frozen roads. But once warm weather got here, those potential car buyers stopped dreaming and started purchasing.

Some economists also suggest that part of the surge in car sales can be found—paradoxically—in the slow housing market. Even though home sellers and home buyers are in general agreement on value, banks and lenders are being stingy. People with the disposable income to consider a new home are being forced to stay put in their existing house, or remain in an apartment—for now, at least. Instead, some of that pent-up desire to spend is getting channeled into auto sales, the next best thing in big ticket purchasing.

But why has General Motors seen such a surge despite what would have otherwise been a near-fatal set of negative circumstances? One explanation may be found in a simple form of psychology: consumers have decided that perhaps the best time to buy a GM product is when the scrutiny is at its most intense, and when the company’s internal controls are at their most stringent. A friend I spoke to who works as a consultant with an investment firm (he requested that he not be identified for the purposes of this article) suggests that sometimes consumers feel safest when managers and supervisors in a particular segment are edgy and ultra-vigilant.

“Think about it,” he said, “when is it the safest time to fly? When security concerns are at their highest level and everyone follows procedure to a fault? Or when everything is quiet and all the watchdogs are asleep?” He also used another airline example: the safest time to fly a particular airline is in the weeks and months right after a crash. “That’s when airplane maintenance is at its most thorough.”

The jump in car sales has been a blessing for GM, under fire for six months since it was revealed that the problems swirling around a defective ignition switch have caused hundreds of accidents, scores of injuries and at least 13 deaths—all spread out over a span of nearly a decade. A massive internal investigation found that there had been a pattern of neglect and incompetence within GM, and in May CEO Mary Barra announced that 15 employees had been fired and dozens more punished. In the wide wake of this scandal, beginning early this year, GM has issued waves of recalls for a variety of product and design defects. The total number of cars recalled as of last week exceeded 25 million, some with design problems dating back to the late 1990s.

Some business and legal analysts have suggested that the full impact to General Motors—in voluntary compensation, in regulatory fees, in litigation—could run into the billions before the story ends years from now.

GM’s attorney handling the problem, Kenneth Feinberg, has already begun hearing the cases and the testimonials of many of the victims (and family members of victims) of the ignition switch defect, even though claims will not be officially accepted until August 1 of this year. Part of Feinberg’s job will be to sort out which people have legitimate claims related to the ignition switch problem. Feinberg and General Motors’ attorneys will also have to decide in the near future whether to expand the compensation program to include drivers who fell victim to other design defects in GM cars during that same period. Some legal analysts say it is not clear that GM’s current compensation program—launched at the behest of CEO Barra—will be sufficient to cover all the potential legal actions involved. Initially, even as the problems were being revealed earlier this year, some in GM were waging a behind-the-scenes battle, pushing back against some of the claims. But Barra has been apologetic and magnanimous in her response—both before Congress and in public.

At the core of the problem is an ignition switch which can be accidentally cut off—because of the weight of the keychain, by inadvertent bumping, or through the jarring of the vehicle—rendering the car’s electrical system inoperative and shutting off power steering, power brakes and even the airbags. Despite thousands of documented complaints, evidence of accidents, and hundreds of pieces of internal correspondence on the defect, GM failed to act quickly to correct the problem, even though one possible solution may have been a small fix which would have cost GM about 57 cents per vehicle.

GM commissioned an extensive investigation into the scandal this spring, and a team led by attorney Anton Valukas interviewed hundreds of employees and pored over tens of thousands of emails and documents. At a public meeting in early June, Barra announced the firings of those most directly responsible for the disaster.

“Repeatedly, individuals failed to disclose critical pieces of information,” Barra said, “that could have fundamentally changed the lives of those impacted by the faulty ignition switch. If this information had been disclosed—and I believe this in my heart—the company would have dealt with this situation differently and appropriately.” Though Barra’s remarks were widely seen as genuine and heartfelt, there were concerns that GM had not gone far enough. Some top executives were spared being fired or disciplined even though their job descriptions included areas relating to vehicle safety and customer satisfaction.

Despite the barrage of bad press and almost continuous media coverage, General Motors has had a good quarter. In May, GM sold more cars in a month than it had sold since the start of the Great Recession—a rise in May of 13 percent and just under 285,000.

Car owners and those who may have been involved in GM crashes will have a deadline of December 31, 2014 to enter a claim against General Motors. Feinberg and his team will then review each claim as it arrives, and those who seek compensation can expect a decision within about 90 days after submitting the required documentation. Since hundreds of GM cars have been involved in accidents related to the faulty ignition switch, it is not clear just how much money GM can expect to shell out over the next one year or more. Some legal analysts have suggested that the grand total could range from as low as $4 billion to as high as $8 billion.

But some in Congress aren’t so sure that GM can wrap up what it expects by the end of this year. U.S. Senator Richard Blumenthal (D. Connecticut) has said that a December 31 deadline might not be sufficient for victims and their families. Feinberg said recently he feels that the December 31 cut-off is fair, and that it will go a long way toward preventing fraudulent claims against GM.

In one of many potential related cases, U.S. Bankruptcy Judge Robert Gerber said that if GM sought to cover-up or distort the facts about its ignition switch problems back in 2009, when thousands of people attempting to sell Ions and Cobalts found that buyers did not want them because of reports of faulty ignition switches, then General Motors engaged in outright fraud and could be subject to felony charges. At the height of the Recession in 2009, GM declared bankruptcy.

Some legal analysts have said that if GM concealed the full extent of the problem back during those 2009 proceedings, the company has—by extension—defrauded those most impacted by the low values of those cars at resale. At that time many in after-market car sales, among auto mechanic businesses, and even at dealerships knew that a widespread problem existed, especially on specific GM models. But under the complex terms of the 2009 bankruptcy, GM was allowed to waive off certain aspects of its extended warranties and warranty plans sold by third parties.

In theory, millions of people selling previously-owned GM cars were forced to sell at below-market prices. Now, many of those same cars are being recalled for the very defects which impacted car values over that same period of time. In May of this year, faced with nearly 100 separate car-value lawsuits and class-action lawsuits, judges in varying jurisdictions agreed to lump the car-value suits together, whereupon they landed in Federal court in New York City. Legal experts suggest that these cases could take years to resolve.

Related Thursday Review articles:

Despite Safety Problems, GM Sales Are Up; R. Alan Clanton; Thursday Review; June 11, 2014.

GM CEO Fires 15 Over Ignition Switch Scandal; Thursday Review; June 5, 2014.