Could Recalls Hurt All Car Sales?

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The working theory among auto industry experts is that recalls by several large manufacturers could hurt their sales and undermine their market shares. Another possibility is that buyer swill worry about the safety of cars in general. After all, if General Motors Co. (NYSE: GM) and Toyota Motor Corp. (NYSE: TM) cannot make defect-free cars, what companies can?

The rate of car sales in the U.S. may already begun to decelerate, so recall problems can only compound that. After remarkable growth in sales in 2012 and 2013, nationwide sales were up only 1.4% in the first quarter to 3.74 million units. Much of that was because of sharp demand for luxury brands, in particularly Mercedes, BMW, and Audi vehicles. In the middle part of the market in terms of prices, which includes pick-ups and small sedans, demand has been stagnant for several months. Top selling vehicles, including the Chevy Silverado and Toyota Camry have suffered sharp drops from the first quarter of last year.

Another reason sales may have softened is that people held onto older cars through the recession. There were large numbers of seven- and eight-year-old vehicles on the road. Many of those were replaced in the last two years. as consumer spending recovered This replacement cycle may be ending.

So, the question becomes whether cars sales across America will begin to fall. Recalls will certainly make some buyers suspicious about how careful car companies were from 2007 to 2010 when large manufacturers were driven into insolvency by recession, and others suffered significant financial losses. One of the theories behind the GM recall is that the company could have been too expense-minded as it moved toward Chapter 11. If GM acted that way, why wouldn’t its competition?

April car sales will be out in less than three weeks. GM sales are expected to be badly battered. Much less certain is how the balance of the industry will fare. Aworried public could ding many of the car companies more than their managements expect.

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