Many drivers cheered last week when federal regulators fined General Motors $35 million, a civil penalty for the automaker's failure to recall millions of Chevy Cobalts, Saturn Ions, and several related models. But while GM certainly behaved badly in this instance, those cheers may have been misplaced. That's because we're creating a culture that encourages recalls where they might not be necessary. (). And—surprise—that cost will be passed on to the car buyer.
GM's fine was a record, yes. But that's because $35 million represents the maximum penalty the Department of Transportation can assess for failing to promptly identify and recall vehicles with a safety defect. Toyota also paid the maximum in 2012 when the DOT blamed floor mat and pedal issues for complaints of sudden acceleration, but the max was only $17.4 million then. Congress subsequently doubled the top penalty. GM got the dubious honor of being the first automaker to pay it after admitting it had violated provisions of the Tread Act that require a carmaker to promptly notify authorities at the National Highway Traffic Safety Administration when it finds evidence of a safety-related defect.
While the ignition-switch issue appears to be clear-cut, GM's subsequent wave of recall notices—30 this year, 10 in the past week—may reflect an excess of caution. Wary of the ongoing wave of critical publicity, GM is treating every issue with the most extreme tool at its disposal: a recall. Toyota did the same in the depths of its own recall woes.
, automakers have been issuing more recalls ever since 2000, when the Tread Act put the primary legal responsibility directly on their shoulders. Now the publicity surrounding the GM issue appears to have put all automakers on high alert. According to NHTSA's figures, the car industry has already recalled more vehicles in the first five months of 2014 (22 million) than it has in any full year since 2004. Most of these recalls are not government-mandated, but are voluntary actions by automakers anxious to avoid the potential costs of penalties, legal liability in class-action lawsuits, and the damage to sales from bad publicity.
Minor Fixes, Major Recalls
From a mechanical standpoint, some of the concerns look minor. Consider GM's May 21 recall of 218,000 Chevy Aveos from 2004–2008 because the control module for the daytime running lamps can overheat. Just one day earlier, the company recalled 2015 model heavy-duty pickups with a 220-amp generator because the clips holding a fuse box to the body might loosen. It's a potential fire problem, GM says.
A few years ago such issues might have resulted in a technical service bulletin, a memo from automakers to dealer service departments with advice on how to repair any vehicle that might show up with the problem. Not anymore. Now car companies are recalling every one of the vehicles for inspection, and often make "repairs" where no problem is yet evident on cars that have been in service up to 10 years.
What's the cost of this hypervigilance? GM is writing down its latest round of recalls as a $400 million loss against profits just in this quarter. In the first quarter, when the ignition-switch recall was issued, the company took a $1.2 billion hit that wiped out its operating profit margin. And this isn't the end of General Motors' woes. Just this March Toyota paid an additional $1.2 billion criminal fine to settle a floor mat/acceleration case brought by the Department of Justice; that's atop the $48 million it paid for three earlier civil penalties to the DOT. General Motors can expect to pay at least as much if the attorney general winds up bringing criminal charges, as seems likely. Add to that the cost of settling the likely lawsuits, class-action and individual, filed by car owners.
Now that rapid-fire recalls have become standard operating procedure, manufacturers are surely folding the expense into the cost of doing business and, ultimately, into the sticker price on new vehicles. Divide the $48 million in fines Toyota paid across the affected cars, for instance, and it's about $30 a car in civil fines alone. Add the criminal penalty and you're nearing $100 per car even before considering the actual costs of performing the recall work. For GM's ignition-switch issue, the $35 million fine was about $22 for each of 1.6 million affected cars. So far this year the charges of $1.6 billion in recall-related costs spread across 15 million vehicles exceeds $100 per car.
And then there's the cost of responding to the bad publicity. Toyota dropped $50 million on a new safety-research center in the U.S., and GM has already announced structural changes to heighten its own oversight of safety issues.
In this context, that "record" penalty GM just paid looks like pocket change. And that's one reason why NHTSA acting administrator David Friedman and DOT secretary Anthony Foxx last week urged Congress to raise the roof on the fines yet again. Suggesting that $300 million would be a better cap, Foxx told the Detroit Free Press that $35 million amounts to " . . . a rounding error. We do think $300 million is attention-grabbing and capable of creating a deterrent."
Perhaps a nine-figure fine would deter car companies from covering up mechanical issues. But it might also tilt the balance even more toward the practice of recalling cars as the default response to every issue, which is going to cost all of us more money in the long term.