As the recall crisis winds down, what’s ahead for GM? – Fortune

Posted: Friday, August 22, 2014

Are better times coming for GM


? There’s a palpable feeling around Detroit headquarters that it has put the worst of the ignition switch recall crisis behind it – and the company will emerge stronger for it.

Sure, there is a lot of work still to be done cleaning up the damage: getting the affected cars brought in for repairs, making sure that spare parts and qualified service people are available, and paying out hundreds of millions of dollars in damage claims.

But the cascade of notices that have brought about 29 million recalls of GM vehicles since February – and dominated the news coverage — seems to be running its course, notwithstanding reports of a federal probe into the behavior of the company’s legal division.

“It is coming to an end,” said one well-placed company insider. “I can feel it. We’ve uncovered all the rocks and drained the swamp.”

If it is, in fact, over, the headlines will wither away and GM can get back to the car business again. No new recalls have been announced since July 23rd.

An old story of Abraham Lincoln’s told of the man who was tarred and feathered and then ridden out of town on a rail. Asked how he liked it, he replied, “If it weren’t for the honor of it, I would have avoided the whole thing.” GM might say the same thing. The six-month ordeal has been painful medicine for a company less than five years removed from its government-financed bankruptcy. As one blogger on Seeking Alpha has pointed out: “Recalling a massive number of vehicles is as much an act of courage as an admission of failure.”

The individual recalls have ranged from the consequential (7.6 million vehicles with keys that can be bumped out of the run position) to the near-trivial (184 vehicles with unsecured floormats), but all with the potential to be troublesome. In addition to the damage to its individual brands and corporate reputation, GM has endured lawsuits, civil penalties, regulatory investigations, and congressional hearings, not to mention organizational upheaval and an internal investigation.

It could have been worse. According to GM, two-thirds of the cars and trucks that have been recalled are no longer in production. Some go back to the 1990s and GM’s current management can’t be blamed for the mistakes made in the Jack Smith era five CEOs ago. And GM has taken a kitchen-sink approach with respect to recall-related reserves by taking $900 million for “additional warranty costs over the next ten years.” Some of these costs may be released in future quarters, providing an upside to earnings.

In a uniquely challenging baptism by fire, CEO Mary Barra has emerged stronger than before the crisis. Her appearances before Congress, while not always illuminating, were notable for consistency, stamina, and her ability to withstand at times withering criticism. She stayed calm and managed to escape without making a major misstep or faux pas. Her performance bodes well for the remainder of her tenure.

Barra has also displayed a willingess to buck GM tradition on several fronts. She ordered up an internal investigation of the defect and safety procedures that led to the recalls and, by making it public, demonstrated a new aggressiveness toward initiating recall campaigns and holding people accountable for their actions. In a very un-GM way, she fired 15 people involved in the debacle, some very highly regarded – a move several of her CEO predecessors would have shied away from.

Barra has been ably assisted by other top executives, who, surprising critics of GM culture, are, like her, GM veterans. The most prominent were top engineer Mark Reuss and public relations operatives Steve Harris and Tony Cervone. Their success suggests the existence within GM of a core of leaders who are both experienced and capable.

They have plenty of work ahead of them. GM’s U.S market share, perennially troublesome, remains on a downhill slide. It has been declining since the bankruptcy. At this point in 2008, GM held 21.4% of the U.S. market. This year, its U.S. market share for the first seven months slipped to 17.8% in a rising market vs.18.1% a year ago, though its sales are up 4%.

”General Motors’ recall tsunami has not hurt their market share,” says independent analyst Warren Browne. “ Their share has been declining since emerging from bankruptcy.”

GM has two brands that aren’t pulling their weight. Chevy, the largest, has been hurt the most by recalls, followed by Cadillac, which is still sorting out its overhauled product line. Even some newer models like Silverado, Impala, Malibu, Equinox and ATS aren’t performing, according to Browne. To be sure, GM isn’t alone in losing share. Much-honored Ford has also seen its share slip this year, to 15.4% from 16.2%. Both domestic companies are under pressure from a resurgent Chrysler and a more aggressive Nissan.

Going forward, GM is launching its Colorado and Canyon midsize trucks this year to middling reviews. Later in the year comes the Chevrolet Trax compact crossover, sister car to the fast-selling Buick Encore. But promotions around them are likely to be drowned out by anticipation surrounding the launch of Ford’s 50th anniversary Mustang this fall and the aluminum-intensive Ford F-150 pickup later in the year.

Little of GM’s changing prospects has resonated with investors. GM shares hit a low in April of $32, then briefly bounced to $38 in July before profit-taking drove them down to $34.34 recently. One investor who did like what it saw was Berkshire Hathaway. Berkshire first purchased GM in the first quarter of 2012. It reduced its stake by about 25 percent in the first quarter of 2014, but in the second quarter it increased the position by about ten percent.

GM could use some good news right about now. Rains in August flooded its historic engineering center in Warren. A week after the storm, storage basements were still flooded and the buildings for design and R&D remained closed with some 4,000 employees sidelined. “We’ve had some serious problems,” Reuss told reporters. “There’s a lot of damage.”

And in the unkindest cut of all, Chevy’s global marketing director Tim Mahoney parked his black 2015 Tahoe on a downtown Detroit street overnight in August , only to find it in the morning “teetering on bricks and concrete” according to Automotive News, its wheels and tires gone. Moaned Mahoney: “I managed to get 425 miles on the odometer before the wheels went missing.”

Mahoney, notably, is not a GM veteran, and has spent much of his career in the suburbs. But at least now he doesn’t have to worry about his Tahoe being recalled.


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