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3 Signs That General Motors’ Recall Woes Are Far From Over

Last week was pretty stressful for General Motors’ (GM) CEO Mary Barra: Grilled by a U.S. Senate committee again on recalls of some 26 million vehicles in 2014 alone, she was forced to mount a strident defense of the automaker’s top lawyer and Saturday’s news of a “stop sale” order on some Cadillac models. As General Motors heads into earnings later this week, those factors clearly indicate that the GM recall nightmare is far from over.

gm recall, general motors, mary barraGeneral Motors and its executives continue to be in the hot seat with Congress, the Justice Department and federal safety regulators over what they knew about the dangerous ignition defect that was not fixed for more than a decade and that has been linked to at least 13 deaths  and scores of crashes.

It’s not all gloom and doom for GM stock, however: General Motors is still selling a lot of cars and light trucks, in part because millions of owners that brought recalled vehicles into dealerships for service are actually buying new cars. That apparent disconnect means consumers are not blaming the General Motors for the crisis — at least not yet.

When GM reports earnings on Thursday, look for second quarter sales to hold steady. That’s one reason GM stock has managed to recover most of its 21% decline year-to-date. Profits still might sag over up to $1.3 billion in recall-related charges and the adverse impact of Europe and currency troubles in Venezuela.

The bad news: The GM recall nightmare could be just beginning after Barra’s testimony before the Senate Subcommittee on Consumer Protection last Thursday.  Here are three signs that the GM recall crisis is far from over:

GM’s Engine Troubles Are Ongoing

News broke on Saturday that GM had issued a “stop sale” order to all Cadillac dealers on some of its luxury CTS and SRX models because General Motors does not yet have a fix for the problem. The order affects the 2003-2014 CTS and the 2004-2006 SRX, which had been recalled on June 30 for faulty ignition problems that could inadvertently switch off the engine. For those keeping score, GM has recalled nearly 26 million vehicles in more than 50 separate campaigns so far in 2014.

The High Cost of ‘Lawyering-Up’

For those who believe the C-suite is bereft of loyalty, Mary Barra’s defiant refusal to cut loose GM’s general counsel Michael Milliken in the face of daunting criticism is touching — and probably ill-advised. Milliken, a 37-year General Motors veteran who took over as top lawyer as the company worked through its 2009 bankruptcy, has claimed he didn’t know about the faulty ignition switch defect, blaming it on lower-level lawyers who have since been fired.

But the issue wasn’t so easy to dismiss in court…

An investigation by former U.S. attorney Anton Valukas, hired by GM in April to get to the bottom of the debacle, found that Milliken’s team was warned multiple times since 2010 that failure to fix the ignition problem could open up GM to massive damages, but no action was taken. Valukas let Milliken off the hook and Milliken himself put the blame on legal team members who “didn’t do their jobs.”

The Senate panel, however, wasn’t buying. Sen. Claire McCaskill (D-MO) decried Barra’s refusal to fire Milliken, characterizing the top lawyer’s actions as “either gross negligence or gross incompetence”. Sen. Richard Blumenthal (D-CT) put it even more pointedly: noting that GM lawyers actually “enabled cover-up, concealment and fraud.” That’s an ugly charge in a mid-term election year — particularly for an automaker bailed out of bankruptcy by U.S. taxpayers.

Brand Damage to GM May Be Greater Than Fines and Compensation

GM already has been fined $35 million — the maximum under current law. Earnings will continue to feel the pinch of recall costs, and civil damages — or potentially even criminal penalties — will continue to be a concern over the next six quarters.

The biggest risk to GM, however, is the damage to its brand — which, to this point, has been negligible. When it comes to brand damage, critical mass is an important concern. Consider Johnson & Johnson (JNJ), whose massive quality-control problems in 2010 and 2011 involving everything over-the-counter medications to hip prostheses and insulin syringes caused the company’s brand image to plummet.

JNJ wasn’t able to right its ship until it hired new captain in 2012: Alex Gorsky. Gorsky’s leadership has made a big difference in a short time — and JNJ’s brand image and share prices have since rebounded. But while the rest of the market was beginning its recovery in 2010 and 2011, JNJ stock went nowhere. GM has much to fear from the lingering effects of a tarnished brand.

Bottom Line

There are a lot more potholes ahead for General Motors — particularly given CEO Mary Barra’s refusal to cut loose Milliken. The GM recall crisis will remain a short-term advantage for rivals like Ford (F), Toyota (TM) and Fiat’s (FIATY) Chrysler who have a real shot at increasing market share — just as GM managed to do after Toyota’s recall crisis in 2010.

As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.

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