We got some news this
morning about a big setback for Rivian. The company recalling
nearly every. vehicle it has delivered. But this is an example of
what can happen if you don't have a completely
clean launch. And now you've got Rivian
recalling about 13,000 vehicles. In October 2022, The high profile startup
betting big on electric trucks and SUVs faced its
biggest hurdle yet. The company notified
customers that it was voluntarily recalling
13,000 out of the total, 14,317 vehicles produced
that year. Recalls happen all the
time, but this one sent shares tumbling and
raised investor eyebrows. After all, the company
had gone public just a year prior at a market
valuation of a whopping $86 Billion higher than
the market cap of legacy automakers, Ford and
General Motors. Rivian is one of
countless new carmakers attempting to become the
next big name in a rapidly changing automotive
landscape. They're new to manufacturing. They don't
have a dealership network. They're trying out new
technology. New technologies make
bold promises, but things can go wrong. And when
they do, they can be costly. At least a few
recalls have been devastating for
automakers and scores of victims. The National
Highway Traffic Safety Administration, or NHTSA,
is the government entity tasked with investigating
defects in cars. Among other things, it
issued about 1100 recalls in 2021 for 34 million
vehicles. So how do recalls work? How costly are they and
how do companies recover from them? I'm Steven Ridella. I'm the director of the
Office of Defects Investigation at the
National Highway Traffic Safety Administration,
also known as the. Day to day Ridella and his
colleagues combed through thousands of consumer
complaints and other data, looking for one of two
things vehicle features or parts that might not
comply with the federal motor vehicle safety
standards or ones that are simply defective. If NHTSA determines a
defect poses an unreasonable risk to
safety, it will require the manufacturer to
initiate a recall. That's if the
manufacturer hasn't already. Just about every
major car, commercial truck and RV maker issues
recalls, though some more than others. There have
been times where automakers have been late
to recall vehicles yielding catastrophic
results. George Ball, a business
professor at Indiana University who studies
recalls, says the recall of the Ford Pinto in 1978
is one such notable example. You know, when I when I
started researching recalls after coming to
academia, that one really caught my attention
because it's kind of a classic firm choosing
profits, unfortunately, over safety. That is an extreme
example. So I don't think it's
fair to say that every recall firm chose profits
over safety. The car was recalled
because a design flaw in the fuel system created a
fire risk. At the center of the
controversy was a memo that indicated the
company had predicted the number of injuries and
deaths, the costs of the lawsuits resulting from
them, and determined they were less costly than
redesigning the vehicle. Before academia, I was in
medical devices and I've made a lot of recall
decisions and I've advised that type of thing would
get in the FDA's regulatory regulatory
world. We'd get thrown in jail
for those types of analyzes. A storm of public outrage,
lawsuits and an official count of 27 deaths
ensued. Ford later recalled about
1.5 million Pintos and 30,000 mercury, bobcat,
sedans and hatchbacks. The Pinto has had its
defenders, though. One Law review article
from 1991 outlined a number of myths and
misconceptions surrounding the Pintos, overall
safety risks and Ford's role in the controversy. Once a recall is
initiated, manufacturers have to notify customers
of the recall and follow up with Nissa on Recall
Progress. Despite this, Rhodiola
says only about 60 to 70% of recalled vehicles get
fixed. Which we don't feel is
enough. We want 100% recall
completion. We understand that
there's a lot of reasons why people don't get
recalls done, but it's just something that you
should do, almost like you're changing your oil
or anything else on your car. Just check for
recalls on a regular basis. If you have an
open recall, you can take it in the dealer and get
it fixed. Since 2008, at least 19
automakers have recalled about 67 million airbags
made by Japanese supplier Takata after they were
found to be prone to explosion. At least 22
people have been killed and more than 400 people
injured in the US alone. Yet millions of
unrepaired cars are still on the road. In November 2022, NHTSA
issued yet another warning to owners to have their
cars checked for potentially defective
airbags after another fatal rupture. That ranger was under a
do not drive warning. Ford and Mazda had placed
on thousands of trucks back in 2018. The Ford Ranger explosion
came days after Stellantis, formerly Fiat
Chrysler, issued its own do not drive warning for
owners of 276,000 Dodge Magnums, Chargers and
challengers. The number of airbags
affected, nearly 70 million, is staggering,
as is the number of automakers. Everyone
seems to have been using parts from the same
company. According to one Bloomberg report from an
anonymous source, the scandal could cost Takata
up to $24 billion, while the company denied the
claim the criminal investigation and the
lawsuits were mounting. Its stock tumbled and the
company never recovered. In 2017, Takata filed for
bankruptcy a year later. Key safety systems and
auto components maker acquired Takata in a $1.6
billion deal. Unfortunately, if someone
had analyzed the risk that was that was being borne
by these manufacturers, you could look at the
supply chain and say, if this type of supplier has
a quality problem, every single manufacturers in
trouble. So investors really view
recalls as part of the cost of doing business. In the auto industry,
they're very common. And so there's not
necessarily a whole lot of surprise when there's a
recall announced. They're happening all the
time. They do, however, hurt the
overall market performance of the automotive
industry. Recalls are one of the main reasons why
car companies stocks trade at some of the lowest
earning multiples of any industry in the market in
2021. General Motors recalled
all of its Chevrolet Bolt Electric vehicles after
several reports of batteries going up in
flames. Now, that was sent major
warning flags across the industry, and especially
because GM is making such a big bet on EVs. That recall cost GM $2
billion for 110,000 vehicles, roughly. So you do the math that
it costs them about $18,000 per vehicle. That's a very expensive
one. A recall like this won't
cripple a company like GM, which has a broad
portfolio of products and sells millions of
vehicles every year. And in this case, the
problem was the battery, which was supplied by LG
Chem. Gm recouped about $1.9
billion of the $2 Billion it cost the automaker. But the cost was more
than financial. And it really shook the
confidence. And a lot of investors in
GM here, their best selling EV were having
those kinds of issues and making such as Mary Barra
and the company making such a big bet on EVs
being the future of the company was I think, sent
some shockwaves throughout the industry. Despite it all, sales have
remained strong for the two bolt models. The company reported
record sales in the third quarter of 2022. Gm said in a statement to
CNBC, The safety and trust of those who drive our
vehicles is at the forefront of everything
we do at General Motors. We have a culture where
we focus on identifying and resolving an issue as
quickly as possible to reduce the frustration
and concern of impacted customers. While the
Rivian recall involved a part that was relatively
inexpensive and easier to fix, newer upstart
companies don't have the same kind of cushion
larger automakers have. Tesla has recalled 3.8
million vehicles in the US as of November 2022 that
included a recall in February of every vehicle
equipped with its full self-driving software. Ball and his colleagues
have found recall announcements have a
curious pattern to them. They occur in clusters. When one company
announces a recall, others follow in close
succession, even though their problems are
unrelated. The team also found that the first
company to issue a recall in these clusters suffers
the greatest hit to its share price. Companies
that closely follow the leader suffer less. They can't say that
companies are doing this intentionally, but they
do see a strong association. And whether the executives
are doing it on purpose or not, they definitely get
a stock price benefit by following. And the closer
you follow, the better. The longer you wait, the
market starts to forget about that leading
recall. So if you wait a couple of weeks, you're
not going to get much of a benefit. But if you do it
the day or two after, you get the most benefit. Earlier research had found
that a company's public image suffers more when
it is otherwise associated with high quality
products. Toyota, for example, has a strong
reputation for quality, and the hit to its public
image appears to be larger than it would be for
companies with lower consumer confidence. Building on this ball
found that when companies with strong reputations
issue recalls, a high number of companies,
follow them right behind. Toyota has such a stellar
quality reputation that their clusters last
longest. So the number of days
that they'll last 37 days, and that's the longest of
any firm and they stimulate ten following
recalls. And that's more than any
of the other firms. A substantial challenge. Companies like Rivian and
Tesla face is actually fixing problems. Many of these new
automakers sell directly to customers and don't
have the franchised dealership networks older
automakers rely on for its most recent recall. Rivian claimed it could
fix the issue within 30 days. Companies that don't have
the established distribution networks, it
becomes more expensive. They just don't have the
infrastructure to deal with this. A lot of times
they'll outsource to a third party auto repair
shop in order to make that fix, or they'll have a
network of service providers that they rely
on. So but it certainly adds
to the total cost of of the labor involved. Industry analysts have
questioned whether these automakers can scale to
the level of a Volkswagen or a Toyota without the
dedicated dealership network. A major
advantage of companies like Tesla and Rivian is
their ability to diagnose and fix defects through
software updates that can save consumers a lot of
time and hassle. But it can also threaten
transparency, making it challenging for
regulators like Nissan to keep up. In addition,
tech firms can also afford to pay engineers high
salaries, whereas government agencies
can't. Many areas that have seen rapid
innovation and a lot of controversy are in
advanced driver systems. Those pose a whole new
set of questions. Has opened several
investigations into crashes associated with
Tesla's autopilot system. Yesterday, I drove a brand
new system being launched by a manufacturer, and
it's posing challenges to us because we want to
know what those systems are capable of. Are they safe when they
deploy? And if there are issues
with them, what questions do we need to ask to
ensure that if there is a defect that the
manufacturer makes the appropriate determination
and appropriate remedy?
