Replacement part could be $2-$5 in GM recall
Analysts: Replacement part could be $2-$5 in GM recall
Wed, Mar 12
Washington — The cost of a part to fix up to 1.6 million older General Motors Co. cars for an ignition switch defect linked to 12 deaths and 31 crashes could be as little as $2 to $5 per replacement part, according to an analyst report released Wednesday.
JP Morgan auto analyst Ryan Brinkman said in a research note that the costs of repairing older Chevrolet Cobalt, Saturn Ion and other cars that have been recalled could be very low.
GM’s supplier Delphi Corp. may also bear some of the costs of the replacement parts since it designed the original faulty part.
“We learned from Delphi’s sell-side dinner Monday that actual cost to manufacture a replacement part could be as little as $2 to $5 each, and that labor costs to install the part would likely be low as well, considering it can be swapped out in a matter of minutes,” the report said.
GM spokesman Greg Martin declined to comment on the cost estimates.
RBC Capital Markets LLC analyst Joe Spak, in a research note Tuesday, also said the ignition switch itself may cost $2 to $5 each and with labor costs could run $80 million to fix all vehicles.
“The bigger risk is reputation,” Spak said. “Remember while this was (pre-bankruptcy) GM, the consumer won’t differentiate.”
Sterne Agee analyst Michael Ward, in a research note released Wednesday, pegged the potential recall cost for GM at $150 million, which could be split with the supplier. Ward says GM’s biggest risk lies with its perception among consumers.
“We believe the company has an opportunity to go above and beyond what is required and prove change has indeed occurred at the company,” he wrote.
He said the company could make an offer to customers affected by the recall to boost consumer perception such as coupons toward a new GM vehicle.
GM stock fell by 5 percent on Tuesday for its worst single day performance in two years as the fallout grows from the recall.
GM said in a letter made public Tuesday it expects to send letters to owners of the 1.37 million vehicles in the U.S. that have been recalled starting April 7 telling them they can make appointments to get them fixed.
GM hasn’t disclosed the costs of fixing the vehicles. GM first learned that some cars were abruptly stalling in late 2004 as it began selling the vehicles. Despite dozens of complaints in 2005, GM didn’t recall the vehicles but did buy back at least 13 vehicles from owners who reported crashes or near crashes from abrupt stalling.
Congress, the National Highway Traffic Safety Administration and the Justice Department have opened investigations into the issue. GM has hired two outside law firms to conduct an internal review and CEO Mary Barra vowed to hold the company accountable for mistakes made. The company has apologized, saying its handling of the recall wasn’t adequate.
GM and NHTSA say a heavy key chain can inadvertently shift the key to “accessory” or “off” instead of “run,” which can prevent air bags from deploying in crashes.
The JP Morgan report also noted that another factor in the small costs is GM’s 2009 bankruptcy restructuring “shields it from liabilities resulting from accidents occurring prior to July 10, 2009 — a significant majority of the cases in question.” Delphi also may be shielded from liability since it, too, went through a bankruptcy restructuring.
The JP Morgan note said that GM could be liable to pay a $35 million fine if it is found to have delayed in reporting a safety-related defect to NHTSA, “which, while likely costlier than the recall itself, we still consider immaterial in the context of GM’s financials.”
JP Morgan acknowledged that the costs of a Justice Department criminal probe could be significant “although not enough is known at this stage to assign a likelihood to this outcome” and “reputational risk with the potential to impact market share is, in our view, the biggest factor to currently consider; however, we do expect any market share fallout to be more minor and temporary in nature than” the impact on Toyota Motor Corp. in 2010 over its recall of millions of vehicles for sudden acceleration and Ford Motor Co. in 2000-01 over the reports of more than 270 deaths linked to faulty Bridgestone tires on Ford Explorers.
JP Morgan said the “simple reason (is) that there is not alleged to be any safety-related defects in GM vehicles currently on sale, with all of the affected nameplates (and even some of the affected brands) having long since been retired.”
Spak said GM could lose some market share: “(GM) clearly has a test on their hands and how they manage it will likely impact the reputational risk.”
GM could lose some sales in the short-term because of “constant negative headlines,” but Morningstar Inc. analyst David Whiston said the impact to GM’s reputation over a longer time will depend on how Barra and the executive team responds in the next few months.
“We expect GM will continue to take responsibility and admit fault in how it handled the process during Old GM’s existence,” he wrote in a Tuesday research note. “The vehicles recalled are old and not indicative of the quality that GM currently produces.”
Toyota has been in talks to wrap up a four-year Justice Department investigation and The Detroit News reported last month it may agree to a deferred prosecution agreement and a fine of $1 billion or more.
New records made public late Wednesday say General Motors Co. may have become aware at least as early as 2003 of ignition switch problems now linked to 12 deaths and 31 crashes in which air bags failed to inflate.