GM Recall: General Motors Stock Still at Risk

Congressional hearings raise specter of 'cover-up' around fatal flaw

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GM Recall: General Motors Stock Still at Risk

Strong fundamentals have helped General Motors (GM) stock hold steady in recent weeks amid the GM recall crisis involving faulty ignition switches tied to at least 13 deaths and more than 30 crashes over the past decade. But as Congress demands answers and accountability from GM over why it took so long to issue a recall, a darker question is emerging:

GeneralMotors185 GM Recall: General Motors Stock Still at RiskDid a cash-strapped General Motors deliberately cover up the defect — and could GM’s inaction rise to the level of criminal behavior?

That’s why both Congressional subcommittees that grilled GM CEO Mary Barra this week want to know what top GM executives knew about the ignition switch defect — and the decision to assign the same number to a redesigned part — and when they knew it.

General Motors Pounded in Hearings Over GM Recall

In Wednesday’s Senate subcommittee hearing over the GM recall, Sen. Claire McCaskill, D-Mo., fired a shot across General Motors’ bow, alleging the company’s “culture of cover-up” led a GM engineer to lie in a deposition for a lawsuit against the company last year.

That engineer, Ray DiGorgio, said in the deposition he never approved changes to the ignition switch; in fact, GM documents prove DiGorgio personally signed off on the changes in 2006. GM did not make DiGorgio, who still works for the company, available for comment.

On Tuesday, House Subcommittee Chair Tim Murphy, R-Pa., asked Barra an even more pointed question:

“Did GM purposely, willfully negotiate during the bankruptcy issues, or in the process of obtaining the loans did they purposely withhold any information, that they may have known about pending lawsuits or things that would emerge in the future about the Cobalt or other cars?”

Barra’s stunning answer: “I personally did not withhold any information … I am not aware of [that], but I can’t speak to every single person.”

Congress and federal regulators almost certainly will reach out to more GM executives, and this line of questioning should chill the blood of GM stock holders. Should any proof emerge that General Motors deliberately failed to disclose such a serious defect, that would pose a huge problem for the automaker.

Where Things Went Awry

Faulty parts and vehicle recalls are fairly common, but what sets this case apart is the highly unusual way GM chose to deal with the problem.

As early as 2001, GM was aware of a defect in an ignition switch produced by parts manufacturer Delphi (DLPH) for the Saturn Ion that could suddenly cause the small car to stall, which also disabled airbags; the new Chevy Cobalt experienced the same problem in 2004.

In 2005, GM rejected a 57-cent-per-car plan to fix the problem, citing cost issues and the lack of an acceptable business case. (Reuters obtained a separate document that indicated the cost would be “an extra 90 cents per unit and additional tooling costs of $400,000.”) At the time, GM was losing billions of dollars on labor costs and the impact of high gas prices on SUV sales.

But that’s where it gets interesting: GM did redesign the faulty ignition switch in 2006 — but kept the same part number for both the original and the redesigned part. According to a senior engineering expert I spoke with, if there is any change to a part’s “form, fit and function” — a manufacturing term that encompasses the physical, functional and performance characteristics — that part must be assigned a different number that identifies it as a revision. GM clearly did not follow that standard engineering practice with the redesigned part.

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Article printed from InvestorPlace Media, http://investorplace.com/2014/04/gm-recall-stock/.

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