The automobile Industry is faced with a double edged sword called reporting faults and recalling its vehicles on time. While early reporting will prevent potentially nasty criminal lawsuits, it might also badly impact any brands long standing claims of reliability and safety.
While Toyota(NYSE:TM) is barely out of the long and painful criminal investigation over its 10 million vehicles with acceleration problems, General Motors (NYSE:GM) are finding themselves in a similar situation.
What hurt Toyota the Most?
The Justice Department's investigation, it may be recalled had revolved around a single point. Whether Toyota was forthright about disclosing the faulty acceleration in its vehicles and addressed the safety issues. What GM should have learnt from this lesson, is that reporting early was the key to minimise the damage.
- Warning! GuruFocus has detected 3 Warning Signs with GM. Click here to check it out.
- GM 15-Year Financial Data
- The intrinsic value of GM
- Peter Lynch Chart of GM
Eventually, Toyota announced a whopping $1.2 billion settlement over the investigations.
The penalty, the highest of its kind, brought an end to the four-year criminal investigation into how Toyota handled disclosures and recalls of more than 10 million vehicles for unintentional acceleration problems.
The Detroit automaker, having barely managed to come out of its 2009 crisis, is facing a similar investigation and may well be having a bumpy ride ahead.
The Ignition That Ignited GM
General Motors with its announcement of a worldwide recall for more than 1.6 million vehicles due to faulty ignition switches may have triggered something far beyond just GM’s interest. The latest news that some employees within the company may have known about the troublesome switches as early as 2001, may spell disaster not just for GM but Detroit as a whole.
None of Detroit’s carmakers can afford to see GM’s recall problems go on much longer, because their fight for stability has been too hard fought.
Everything now depends on how CEO Mary Barra handles the situation as she prepares to testify in front of the U.S. House Energy and Commerce Committee on April 1 about the company's management of the faulty switches.
Lesson To Be Learnt
Not only did Toyota pay more than $66 million in fines for the delayed disclosures of the safety concerns, it now faces another payment of $1 billion following the criminal investigation.
Remains to be seen how much General Motors needs to shell out as a result of this debacle.
While the cost in terms of figures is only indicative, the damage to the US Automobile industry as a whole cannot be estimated so easily. Let us hope that GM survives and emerges stronger still. After all, it has been revived not a very long time back, from $50 Million of tax payer’s money.