Cars and Drivers

Will GM Have to Give Away 2 Million Cars?

The congressional attack on General Motors Co. (NYSE: GM) has reached the point where some officials want the nation’s largest car company to pull 2.5 million recalled models off the road. The logic behind the demand is that cars that have proven to have a dangerous ignition problems are too dangerous to drive before the critical parts are replaced.

According to USA Today:

Pressure is increasing on General Motors to tell owners of 2.5 million recently recalled U.S. vehicles that they are unsafe and should be parked immediately.

There is an expectation in some quarters that GM must replace those cars temporarily with new ones. The cost of this could easily run into the hundreds of millions of dollars. Additionally, it may be impossible for the manufacturer to get its hands on that many cars all at one time. GM sells about 2.8 million cars and light trucks in the U.S. each year. Even if GM has half that inventory on its lots or with dealers, it could take several months to build up enough supply to exchange what would be more than 2 million cars.

The logistics of the exchange would be a nightmare. If people are told their cars are too dangerous to drive, GM would either have to pick up these people and take them to distribution points, or take new cars to people’s homes or workplaces.

GM’s single biggest problem with the recalls could be a sharp drop in U.S. car sales and market share, as 24/7 Wall St. analyzed recently.

GM’s liability due to the recalls is unclear, as has been pointed out a number of times. Its Chapter 11 filing may shield it from product liability claims, at least for vehicles manufactured before the bankruptcy. That has not kept pressure off GM to offer reparations to families who have lost loved ones or to those who have suffered injuries. GM has gone so far as to hire Kenneth Feinberg, who handled reparation payments for BP after the Gulf spill incident.

So, even if all GM has to do is supply customers with replacement costs, its earnings could be very badly injured.

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