History Suggests GM Recall Unlikely to Sink Sales

If history provides any guidance, sales damage from the messy ignition switch recall by General Motors likely will be muted but, experts say, the automaker must continue to move quickly and decisively through the crisis.

David Johnson, CEO of Atlanta-based consultant Strategic Vision and a crisis communications specialist, says the automaker’s efforts to be publicly transparent about the problem have been successful so far.

“They are out in front and they own the story,” he tells WardsAuto.

In the social-media space, where corporations typically face the sharpest criticism and reputational risk, Johnson says GM also has been pushing the right buttons.

“They really don’t seem to be taking a hit yet,” he says, citing third-party metrics from March 24. “It hasn’t exploded on them as you might think.”

For Toyota and Ford, U.S. market-share losses were relatively small and short-lived during their highly publicized recalls in 2010 and 2000, respectively.

Toyota lost a steep one-quarter of its market share between the close of 2009 and February 2010, arguably the height of the automaker’s recall of 8 million vehicles in the U.S. for poorly fitting floor mats and sticky accelerator pedals.

The January-February 2010 timeframe also saw Toyota issue a stop-sale notice on models affected by the recall, although the weakest-selling cars and trucks for the automaker in those months were not part of the callback.

Aggressive incentive spending helped Toyota’s market share recover within one month and it closed 2010 at 15.3%. Last year, Toyota finished with a 14.4% market share, roughly in line with its historical share of a normalized market.

The Camry midsize car and Prius hybrid, two of the recall’s most prominent vehicles, saw their share-of-segment remain consistent with Toyota’s overall monthly sales.

The damage to Ford during its 2000 recall to replace 14.4 million Firestone tires on its wildly popular 5-passenger SUVs was even less dramatic. When Ford first announced the recall in August 2000, it controlled 21.5% of the light-vehicle market. Over the next 12 months its share would decline below 21% on only two occasions, when it hit 20.6% in December 2000 and 20.8% in January 2001.

Sales of the Ford Explorer, which accounted for most of the recall tally, saw some deterioration in share-of-segment, shrinking to 23.7% in October 2000 from 27% two months earlier as news of the recall took hold. It would fall below 23% three more times over the next 12 months but otherwise consistently commanded upwards of 30% of its segment during that period.

However, both Toyota and Ford took it on the chin financially. The U.S. Attorney General last week hit Toyota with a $1.2 billion fine for issuing what the federal government considered misleading information about the safety of its vehicles in 2009 and 2010.

Toyota separately paid $49.8 million in fines to the National Highway Traffic Safety Admin. related to the recall. In 2012 the automaker also agreed to pay $1.1 billion to settle a resale-value-related class-action lawsuit in the U.S., and sunk $50 million into a new safety research center as part of an internal response to the crisis.

Ford never was fined for the tire recall, but estimates peg its losses from the crisis at more than $2 billion.

Johnson at Strategic Vision says GM CEO Mary Barra must remain the face of the automaker and continue to speak out on the topic as she has in blogs and public-relations videos, and will do on Capitol Hill April 1 and 2 before congressional panels.

“Barra also must reach out to the families of the victims, show they have a solution to the recall and let some people go if there is evidence of misconduct,” he says, adding that maintaining company morale must be another target.

“Employee morale reflects on the company,” he says. “You’ve got to keep them informed.”

Fitch Ratings says in a research report: “The longer-term impact to the brand will largely depend on the company’s handling of the situation. GM’s management will need to convince potential customers that the internal issues that led to the recall delay have been rectified.”

The ignition-switch recall affects 1.6 million Chevrolet, Pontiac, and Saturn small cars and CUVs built between 2003 and 2007. The defective part has been linked to 12 deaths and 31 crashes.

While GM has yet to report a full month of sales under the shadow of the recall, its finances already have been bruised.

GM will take a $300 million charge in the year’s first-quarter financial report to cover costs associated with replacing the part.

Shares of the automaker’s stock are tumbling, too. So far this year, shares are down 11.5% against a Dow Jones Industrial Index off just 0.8%. GM shares are down 17% from their 52-week high.

John Alan James, executive director-Center for Global Governance, Reporting and Regulation at Pace University’s Lubin School of Business in New York City, says the previous GM board of directors failed to act “prudently and justly” in the interest of shareholders when it almost certainly was aware of the ignition-switch issue.

“I can’t believe the previous board didn’t know,” James says. “They’ve made (GM) liable.”

A class-action lawsuit filed March 21 claims the recall’s effect on GM’s stock this year wiped out billions of dollars of shareholder value. The lawsuit came on the same day an owner of one of the affected vehicles in Tennessee filed a separate class-action suit claiming GM violated owner warranty rights. Victims of crashes involving the recalled cars also intend to pursue lawsuits against GM.

It’s unclear if the new GM will be held accountable in those lawsuits, because its 2009 bankruptcy provides protection from product-liability and wrongful-death claims related to the old GM. The automaker is under pressure by safety groups to waive that right.

Whatever the outcome in the courts, James says GM must settle quickly. He points to Goldman Sachs’ so-called ABACUS case in 2010 linked to the New York bank’s involvement in the subprime mortgage meltdown. Goldman Sachs paid a $550 million fine to the Securities and Exchange Commission, the largest ever in in the industry.

“They could not write the check quickly enough,” says Johnson, who also serves as a consultant to Fortune 100 companies.

In the meantime, he suggests GM continue to work quickly and decisively.

The automaker has said it expects to have the new parts by the of April, although it may take several months to perform all the repairs.

“People are willing to give companies the benefit of the doubt if they are working hard,” James says. “The public will not stand for indifference, but they are on a timetable.”

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