Large GM, Toyota recalls show value of caution

The recent spate of large-scale recalls by GM and nowToyota totalling nine million cars worldwide suggest automakersare becoming much more concerned about thepotentially much higher financial burden of lawsuits and regulatory fines.

"Companies have become extremely cautious" when it comes to recalls, says DennisDesRosiers, founder of consulting and market research companyDesRosiersAutomotive Consultants.

"Toyota perhaps is the most cautious because of their big problems in 09 and 10. Theyre terrified of regulatory risk and legal risk, he told CBC News.

In any recall, costs quickly add up because of the need to notifyowners andreplacethe faulty parts. But costs can be much higher if the issue that sparks them leads tolawsuits and the potential for regulatory fines, which rise with delayed notification.

On Wednesday, Toyota Motor Corp. issued five recalls for 6.39 million vehicles worldwide, one of itslargest recalls inhistory. None of the issues covered by the recalls caused injuries or fatalities, the Japanese automaker says, and the issues appear largely minor.

Though the cost of an individual recall is hard to know, financial analysts have estimated Toyotas losses from this move could be around $500 million due to the short repair time and relatively inexpensive component costs.

Kurt Sanger, an auto industry analystforDeutscheSecurities, suggested that the recall was a sign of Toyota continuing to be extremely proactive following their recent fines over sudden acceleration problems five years ago.

NomuraanalystMasatakaKunugimotosaid that because the faults identified are minor, fewer owners may bring in their vehicles for checks, potentially reducing the cost.Nomuraestimated the repair time might take one hour per vehicle, while component costs would be moderate.

Toyotasrecallannouncement comes mere weeks after it agreed to pay $1.2-billionUS to avoid criminal prosecution overits lack of transparency with the 2009 and 2010 problems with floor mats and gas pedals that caused some cars to speed out of control.

Ten million cars were eventually recalled for those problems. The company also paid a record $66-million in fines to the U.S. federal regulator for delays in reporting the problems, and forked over $1.1 billion in a class-action lawsuit settlement.

"Perhaps Toyotas looking at this as ... 'lets go ahead and get out as many recalls as we know about right now just so we can get this behind us and move forward'," said Alec Gutierrez, an analyst with the U.S.-based Kelley Blue Book.

'Consumers don't react'

The fallout for Toyota suggests rival carmaker GM may face similar costs in the coming years over its currentrecall regarding faulty ignition problems. The defect has been linked to several accidents, resulting in 13 deaths.

Since April 3, GM has been fined $7,000 a day for failing to answer questions from the U.S. National Highway Traffic Safety Administration aboutits recall for defective ignition switches that can suddenly cause the engine to turn off, disabling the air bags and causing steering and braking to be difficult.

GM knew about the potential problem as far back as2001, but only issued a recallthis year.

Overall, the global auto sector spends about $45-50 billion US a year on warranties and recalls, a tiny fraction of what the industry rakes in from new car sales, according to consultants group Ernst & Youngs Global AutomotiveCentre.

It suggests the increase in large-scale recalls is in large part due to the increasing complexity of vehicles and the sharing of components across many models. A typical car now has 15,000 components, says Ernst & Young.

When it comes to the costs of a recall, one place wherecarmakersdont appear to lose much is in consumer confidence.

Consumers dont really seem to react when we have these large recalls, said Gutierrez.

He says that when you look at sales volume, interest levels in the companys vehicles, resale value of the vehicles, theres little negative reaction. Things just tend to continue to flow on.

He points out that GM, while in the congressional spotlight for its own large-scale recall, saw retail sales improve by seven per cent, beating the industry average.

GM CEO Mary Barra, who recently took office, has sought to portray the automaker as a new GM a different company than when the problem was discovered, before the company's bankruptcy reorganization.But she vowed that "today's GM will do the right thing."

Shes saying the right things," said Gutierrez. "She clearly wants to establish that this is a new GM and they want to be very transparent."

In fact, a recall may be something of a PR boon to automakers.If anything, saidDesRosiers,it reinforces quality and safety with the consumer.

Long-term lessons

Josh Bailey, vice-president of research at Canadian Black Book, the pricingguide fornew and used vehicles, said consumers also tend to be influenced by how a company handles the complexities of a recall.

During Toyotas 2009-2010 recall over sudden acceleration, some owners seemed to appreciate how the company kept them informed, and the way it took care of the problem, said Bailey.

"It was done in a very professional way, he said. If it was a brand that sort of handled things in a lackadaisical manner, the outcomemight havebeen entirely different."

About 3,000 automotive recalls have been issued in Canada over the past 20 years, affecting 40 million vehicles, according to Transport Canada data crunched by Bailey.

His research suggests that Toyota sees the highest average number of units (23,000) for its recalls. However, its automobiles rank among the topin terms of retaining their value onresale.

GM, meanwhile, saw the largest sheer number of vehicles recalled in Canada, with about a quarter of the total. It ranked 11th in terms of resale value.

Though buyers may take the massive recalls with a grain of salt, or even feelbuoyed about a companys safety record, that can change if thecar companyfaces perpetual problems.

If long-term you dont seem to learn from your mistakes, eventually, you have to imagine that consumers are going to react negatively, said Gutierrez.

• Toyota recalls 6.5 million cars globally
• 5 massive auto recalls
• Another GM part found defective in ignition switch recall