Will GM recalls dent its recovery?

http://www.bbc.co.uk/news/business-26657339

Version 0 of 1.

"I pray everyday that I get to and from work in one piece and nothing does happen, and I am not that 304th person to be killed in her car," says Samantha Genader.

The 25-year old drives one of the car models affected by General Motors's recent recalls.

Her fears are not the kind of publicity any car company wants, not least one that is trying to rebuild its image.

But that is exactly what GM is facing right now and the issue is threatening to undo some of the progress it has made since coming out of its bankruptcy.

"The biggest risk winds up being the public's perception of whether this really is the new GM or is this more of the same that we saw prior to 2009," says Kevin Tynan, a senior automotive analyst at Bloomberg Industries.

Delayed response

The carmaker is in this place because of the recall it issued last month - affecting 1.6 million vehicles - over faulty ignition switches which could turn off the engine, disabling airbags.

Recalls are not uncommon in the industry, but GM has been hurt in this particular case by two factors.

First, the problem has been linked to deaths, though the number of casualties is being debated.

GM has linked the issue to 12 deaths, while a report by the Center for Auto Safety has put the number at 303 - a figure the carmaker has disputed.

What makes the issue worse for GM is the fact that it has admitted that some employees knew about the problem as early as 2004.

That means it has taken the firm ten years to address a problem that has potentially disastrous consequences for drivers.

"It really comes down to the issue of what GM knew, and when they knew it," says Mr Tynan.

Old v new

GM has worked hard to rebuild its image after being bailed out by the US government in 2009 at a cost of $49.5bn (£30bn).

By the time it filed for bankruptcy its reputation had taken a huge hit.

Customers were not happy with the type and quality of cars it was making and it faced criticism over the way it was being run.

Some analysts say it is unlikely that GM deliberately ignored the problem and the issue is an unwanted legacy of its pre-bailout years.

"It is easy to see why something like this might not have got addressed in time," says Lisa Whalen, vice president of automotive & transportation at the consulting firm Frost & Sullivan.

"You have to understand that prior to its bailout in 2009, GM was such a large and complex bureaucratic set-up that it is possible only a very small part of management may have been aware of the problem."

Analysts also point out that the issue affects cars manufactured before its bailout and subsequent restructuring, a fact that may help cushion the impact on its image.

"The public might think they are just cleaning up the closet from some of those older vehicles that were not as well built as they are now," says Mr Tynan.

At the same time industry watchers say the way GM has handled the issue in recent days may also help its cause.

"You have the chief executive who has come out and apologised about it," says Patrick George, a senior writer with auto blog Jalopnik.

"They have created a new post of vehicle safety chief and are carrying out internal audits. That makes people realise they are meaning to take tangible steps."

Expensive mistake

But nonetheless the issue is a serious one and will have financial consequences for the firm.

The company has already said it expects to spend $300m in the first quarter to fix problems with recalled cars.

That amount includes other recalls as well which affect 1.5 million vehicles.

But the biggest financial impact could come from fines over its handling of the issue.

Earlier this week, Japanese carmaker Toyota agreed a $1.2bn deal to settle a criminal investigation into its handling and reporting of safety issues.

Toyota had also come under scrutiny after allegations that it intentionally concealed information about problems in its cars and mislead regulators and customers.

While there is no indication that GM intentionally hid information, the fact that it has admitted that some employees knew about the problem may make things complicated for the firm.

Two congressional committees have already launched an investigation into the matter and there is talk of the US Justice Department looking into it as well.

"GM is certainly facing the prospect of this turning out to be an expensive mistake," says Ms Whalen.

Analysts say that how well and transparently the firm handles the repairs from now on will play a decisive role on how much the issue hurts it.

"It is a big part of the public's perception of the company going forward," says Mr Tynan.

Fixing Ms Genader's car so that she feels safe while driving is the first step in that direction.