Recall Could Cost GM Billions and Its Reputation

Douglas A. McIntyre

General Motors Co.’s (NYSE: GM) recall of 1.6 million vehicles could prove to be one of the most costly in automotive history. The company not only faces fines. The legal liability triggered by what could be thousands of personal injury lawsuits may be just as damaging to the reputation of GM’s important brands, which almost certainly will erode sales.

At the heart of the injury to GM is the accusation that some of its employees knew about an ignition switch fault as early as 2004. Interviews of GM management in front of the House Energy and Commerce Committee may draw the most important statements these executives ever make. It will only take one or two slips, if their testimony does not match the facts about the history of the recall. And if Congress or the courts find extreme negligence on the part of GM, its legal costs could run well into the billions of dollars.

Toyota Motor Corp. (NYSE: TM) estimated that its 2008 recall nightmare cost the company $2 billion. However, personal injury claims against the Japanese company have not ended. Some of these suits were resolved for $1.1 billion, but Toyota may now know the actual bill for years. Perhaps most critical for the company, Toyota management was not charged with negligence by the U.S. government. Certainly, there was no government claim that Toyota had known about acceleration pedal problems for a decade. That likely kept the overall penalties and legal challenges from crippling the Japanese manufacturer.

A better measure of what GM may face is the recall of Ford Motor Co. (NYSE: F) Explorers that had defects in the Firestone tires the SUV used. The cost of that recall was estimated to be above $3 billion. Ford and Firestone fought over the blame, which only served to make the public suspicious of how long one or the other company was aware of the dangers.

Because the GM recall involves cars that caused, based on media reports, deaths of 13 people, and so far uncounted injuries, lawsuits over these deaths and injuries could be in the courts for years. That makes it impossible to assess their eventual total.

The harshest cost of the GM recall to measure what it will do to sales. Suspicion about the integrity of GM management and the manufacturer’s wider commitment to safety could easily cost tens of thousands of car and SUV sales. The retail sales value of those could certainly be above $25,000 a vehicle. So, the effect would be well into the hundreds of millions of dollars.

GM faces years of trouble because of the recalls. The first part of this may be the most visible as management goes to Washington. The balance will hurt GM’s profit and loss reports for much longer.