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Why GM’s Auto Recalls Are Worse Than You Think

Companies / US Auto's Jul 09, 2014 - 06:57 AM GMT

By: Money_Morning

Companies

Michael A. Robinson writes: I can still remember driving around as a kid in my dad’s Chevrolet sedan, one with tail fins. Later, we had a Pontiac Ventura, and my mom drove a Chevrolet Malibu.

My first car in high school was a 1966 Pontiac Le Mans that I rebuilt myself. And my brother drove a Pontiac Firebird - all General Motors Co. (NYSE: GM) cars.


Besides the cars in my family’s driveway, I broke into the financial industry as a young analyst in Detroit covering GM. As such, I talked frequently with the CEO, the heads of all the major divisions, and top auto dealers and union reps.

I visited auto plants around the country and saw how GM was leading the robotics revolution that greatly improved the quality of American-made cars. I also traveled to Germany to drive the GM’s European models and talk with top execs there.

In other words, I cannot overstate what a big role General Motorshas played in my life.

So, it saddens me when I see the headlines about recalls over the past few years – this year alone, about 29 million worldwide.

Last year, GM sold 2.8 million cars and truck. So, these recalls are the equivalent of a decade’s worth of production.

Many on Wall Street and in the mainstream financial media are saying this is a “buy” opportunity.

For instance, Daniel Howes, a business columnist at The Detroit News, says the recalls are giving GM millions of opportunities lure customers back into showrooms and show off shiny new vehicles. “You can’t buy that kind of traffic,” Howes writes.

And The New York Times recently spun slightly increased sales as a huge victory for the company.

Now you know that I’m a GM guy. So you know that I’m not making this next statement lightly.

I just can’t join along with Wall Street’s talk of a turnaround.

You should not look on GM’s recall problems as a new buying opportunity. In fact, you should avoid this stock.

And today, I’m going to tell you exactly why adding GM to your portfolio right now would be a bad decision. It hurts to do so, but I feel I owe it to you…

Bumpy Ride

Most recently, on June 30, GM said it would recall some 8.45 million cars and trucks and that it would take a total of $1.2 billion in charges this quarter. I was already writing this column when this latest announcement popped up in my in box… sigh.

As bad as all these recalls are for the company’s bottom line, GM’s corporate culture is what’s really harmful.

The company’s own internal investigations didn’t blame manufacturing or engineering problems for the faulty ignition switches that led to recalls of decade-plus-old Chevrolet Cobalts. Instead, the report focused on “cultural failings” – namely, a massive bureaucracy that led to slack safety standards. 

True, GM is coming clean on a number of safety issues, ones that have left at least 13 dead around the United States. New CEO Mary Barra, who took the job in January, recently fired 15 employees and disciplined five others involved in the faulty switches.

But GM as a whole seems to be in a state of denial about how extensive its problems really are – and I just don’t think Barra has a firm grasp on quality control at her company yet.

She’s talking tough and making quick moves, but Barra is facing, as she put it herself just last month, “a history of failures” for which “nobody took responsibility.”

Some GM officials knew of these problems and covered them up for years.

And this cuts right to the heart of my five-part system for creating wealth.

Rule No. 1 states that “Great Companies Have Great Operations.”

Just on that alone, you have to exclude GM as a possible stock.

There’s an element of irony in all this. Back when I was analyzing GM, I met with the father of modern quality control.

The late W. Edwards Deming helped revolutionize the Japanese auto industry with statistical analysis and made it a global leader. He also helped out Ford Motor Co. (NYSE: F) – but not GM.

Deming thought that car companies had to perfect the manufacturing process to make their products consistently great. Customers wouldn’t have to keep taking their cars back to the dealership or shop for repairs.

Headed Past the Repair Shop

For GM, the pileup of recalls demands much more than a trip to the auto repair shop. The company faces possibly hundreds of lawsuits that will keep its poor record in front of the public for months and years to come.

Against this backdrop, some analysts are starting to suggest that GM’s stock may be a great turnaround play. As I said before, I disagree.

See, much of the media attention about GM’s safety issues stem from Cobalts and other cars that are a decade old and had defective ignition switches. The faulty switches can cause engines to shut off while driving, leading to a sudden loss of power steering and brakes, as well as faulty air bags.

What no one is taking about right now is that a vast majority of the recalls are for newer models. For instance, all of the 1.54 million recalls GM announced in March were for 2008 or newer model years.

Most of these are cars GM manufactured after the U.S. government’s $50 billion bailout of the company in 2009 – on which the government lost $11.2 billion. That’s relevant because the “New GM” wasn’t just about saving union jobs. It was supposed to help create a better company.

One look at the long list of recalls beyond the defective ignition switches shows that quality problems are pervasive throughout GM’s manufacturing culture: problems with oil cooler fittings, fuel gauges, brake and daytime running lamps, brake rotors, driver seat belts and much more.

Long Road to Success

If you can’t buy a GM car with confidence that it’s a quality product, then you shouldn’t buy the stock either.

Now then, I’ve seen some analysts say GM will turn around like Toyota Motor Corp. (NYSE: TM) has. The world’s reigning automaker suffered a public humiliation a few years ago with its own recalls.

In 2009 and 2010, Toyota recalled more than 10 million vehicles from 12 models worldwide following complaints of sudden, unintended acceleration covering.

Toyota modified gas pedals and floor mats that were prone to moving around and jamming the accelerator. The company also installed brake override software.

In February 2011, the U.S. government ruled that Toyota’s problems were not electrical but mechanical in nature. It was a finding that rattled investors.

By the end of that year, TM had fallen from $93 to about $62, giving up one-third of its value.

But since then, Toyota has not only broke even but also hit new highs. It’s currently trading around $120.

Earlier this year, Toyota agreed to pay the U.S. government a settlement of $1.2 billion. But this occurred as Toyota once again became the world’s largest automaker by sales. And its quality ratings are excellent once again.

In March, Consumer Reports recommended 11 of Toyota’s cars in its picks for the best used vehicles for the last 10 model years. That was almost double the number for Honda Motor Co. Ltd. (NYSE: HMC) the second-best performer.

Toyota has clearly regained the confidence of its customers at this point.

I don’t see that happening for GM.

While GM’s stock has held up well over the last few weeks – rising 6% over the past three months – it remains down 10% so far this year. It rose just 8% in 2013, when the Standard & Poor’s 500 had 21.4% gains.

Based on my decades of experience in the field, I think GM still has a long road ahead. To thrive once again, it has to win back customers like my dad.

Until recently, he remained a loyal GM buyer. He drives a Buick LeSabre Custom that he says is “the best car I’ve owned in my life.”

He’s now shopping a car for my stepmom. But he’s clear on one thing.

“I would never buy a new GM car,” he tells me. “They’ve got so many problems, you just don’t know what you’re really getting.”

You all know that I’m always on the lookout for a great turnaround story. So rest assured I’ll be keeping an eye on this stock.

When General Motors gets its act together and it makes financial sense as an investment, I’ll be sure to let you know. Until then, stay away.

Source : http://strategictechinvestor.com/2014/07/why-gms-recalls-are-worse-than-you-think/

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