Another Year, Another Automaker, but the Same Story in 2015

Automakers’ woes

In the previous part, we looked at the stringent environmental regulations for automakers. We saw how companies like Ford (F) are reshaping their portfolios to meet the upcoming standards. US automakers are required to have a corporate average fuel economy (or CAFE) of 37.8 miles per gallon (or mpg) by 2016.

In this part of the series, we’ll see why General Motors (GM) may have to shell out a hefty fine for a faulty ignition switch that has resulted in more than 100 causalities.

Another Year, Another Automaker, but the Same Story in 2015

The recall process

The above flowchart of a vehicle’s recall process shows that a recall can be initiated voluntarily by the manufacturer or enforced by the National Highway Traffic Safety Administration (or NHTSA), based on consumer complaints.

The memories of last year’s $1.2 billion fine imposed on Toyota Motors (TM) are still alive among consumers and investors. The case involved the sudden acceleration of some of Toyota’s vehicles, which caused several fatalities. It was a case of a faulty part, which Toyota initially contested only to relent later on.

General Motors this time

Now General Motors is facing a Justice Department inquiry into faulty ignition switches. Unlike Toyota, General Motors is not contesting the charge and is cooperating with investigators. General Motors may possibly have to pay a fine in excess of $1 billion in this case.

General Motors currently forms 2.04% of the SPDR S&P Consumer Discretionary ETF (XLY) and 0.25% of the SPDR S&P 500 ETF (SPY).

Recalls have a huge impact on automakers. There’s a direct financial cost as well as indirect costs that impact the company’s brand value. In the next part of this series, we’ll see how vehicle recalls impact automakers.