Senators Demand Late Recall Penalty from GM - Analyst Blog
April 14 2014 - 05:00PM
Zacks
General Motors Co. (GM) has been facing tough
times lately due to a series of vehicle recalls. Recently, a House
subcommittee released documents showed that the automaker is
reluctant to address the safety problems.
In Feb 2014, General Motors announced the recall of 2.6 million
older-model small cars associated with 31 crashes and 13 front-seat
fatalities due to faulty ignition switches. The recalled vehicles
mainly include Chevrolet Cobalts and Saturn Ions. Considerable
costs associated with the repair are a potential reason behind the
delayed recall. If replaced in 2007, the switches would have cost
the automaker $100 million. However, the expenses will be much
higher now with higher prices of parts.
General Motors identified the switch problem in 2001. The engineers
provided different options to rectify the defect but none of them
were accepted due to cost concerns. Delphi Automotive
plc (DLPH), the parts supplier of General Motors, also
said that the ignition switches did not match the GM
specifications.
According to General Motors, a heavy key ring or uneven roads can
cause the ignition switch to shift away from the run position, thus
turning off the engine and electrical power. In such a situation,
the front air bags will not inflate in case of a crash.
The documents also confirm that the present CEO of General Motors,
Mary Barra, has been aware of the faults in the Saturn Ion power
steering since Oct 2011. However, the company recalled the vehicles
more than two years later.
The U.S. senators requested the Department of Justice to take steps
which will hinder the efforts taken by General Motors to avoid
financial responsibility related to the late recall of vehicles
with faulty ignition switch.
The senators want General Motors to create a victims compensation
fund which will ensure that consumers are warned about cars with
potential ignition switch problems. General Motors will record a
$750 million charge in the first quarter of 2014 due to the
increased number of recalls. The expenses include a $300 million
charge incurred on three recalls in March and the ignition switch
recall.
Recently, Mary Barra had to face a congressional committee hearing
due to the delayed recall of vehicles with faulty ignition
switches. Barra revealed that the company is determined to resolve
the issue without further delay.
Barra also announced that it has hired Kenneth Feinberg, known for
handling the compensation funds for the victims of 9/11, the Boston
Marathon bombing and the BP oil spill, to find out ways to
compensate the victims of the accidents. Allocation of separate
funds for victims is not yet confirmed.
General Motors currently holds a Zacks Rank #5 (Strong Sell).
Better-ranked automobile stocks worth considering are Tesla
Motors, Inc. (TSLA) and PACCAR Inc.
(PCAR). Both carry a Zacks Rank #2 (Buy).
DELPHI AUTO PLC (DLPH): Free Stock Analysis Report
GENERAL MOTORS (GM): Free Stock Analysis Report
PACCAR INC (PCAR): Free Stock Analysis Report
TESLA MOTORS (TSLA): Free Stock Analysis Report
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