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In February, General Motors (GM) began a recall that has grown to include 2.6 million vehicles due to the installation of a defective ignition switch The switches caused the ignition key to move from a running position to an accessory or off position while the car when moving and the sudden loss of power steering, as well as the disabling of power brakes and airbags caused at least thirteen people to lose their lives. GM has come under fire for the recall since the company was first made aware of the problem in 2001 and decided that it did not warrant taking action. There is also evidence that federal regulators were aware of the faulty ignition switches but failed to do due diligence in investigating GM. Additionally, since the company is not legally liable for accidents that occurred with its products before 2009 due to the bankruptcy filing, there are questions about whether GM was forthcoming to federal officials about the switches when it was bailed out. The incident has been dubbed “Switchgate” by some of the media and the company’s new CEO (as well as first female CEO) Mary Barra is now tasked with defending the company to Congress and restoring faith in a company that has seen its share of the American market decline over the last forty years.
This topic brief will describe the roots of the current GM recall, break down the testimony of GM and federal regulators before Congress, and then analyze how GM and the federal government may respond to the scandal and the political and economic implications for the parties involved.
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Roots of the Recall
The ignition switch issue described in the preview of this brief was first discovered by GM engineers in 2001 when they were testing the Saturn Ion. CNN on March 30th reports that engineers thought they solved the issue by redesigning the ignition switch in 2002, but in 2004 another GM engineer was testing the Chevrolet Cobalt, hit the key during a test drive, and it accidentally shut down the car. It was at this point that GM realized some of the gravity of the problem, but decided that fixing the problem would have taken too long and cost too much. Sadly, Slate reports on April 1st that fixing the defective part would have cost less than 57 cents, although this does not include the labor cost of installing a new part. GM has testified that the total cost of fixing the ignition switches would have been $100 million and the company has been charged with valuing money over its customer’s lives. GM also concluded that even if the ignition switch issue was a problem that people could still handle their vehicle with a loss of power steering and therefore, a wide recall was not necessary. This February, GM finally made the decision to recall more than 800,000 vehicles over the ignition issue and that has now grown to include 2.6 million vehicles worldwide, 2.2 million of which are in the United States. GM has recalled nearly two million other vehicles due an airbag deployment defect as well.
The Los Angeles Times reports on April 1st that the models that have been included in this GM recall are the 2003-2007 Saturn Ions, 2007-2010 Saturn Skys, 2006-2011 Chevrolet HHRs, 2006-2010 Pontiac Solstices, and 2005-2010 Chevrolet Cobalt and Pontiac G5 models. This illustrates the wide scope of the recall. The victims of crashes due to faulty ignition parts in these vehicles is tough to measure, as other factors can play a role in an automobile accident. Currently, GM has identified that at least thirteen people have died in crashes linked to defective ignition switches, but the Center for Auto Safety, a Washington watchdog group, suggests that the real number is 303 deaths. The Christian Science Monitor reports on March 31st that many of the victims of the faulty switches were young people, who may have panicked when their car’s power suddenly went out since they are not used to driving cars without power steering. Many of the young victims were also women, which experts suggest may be due to women lacking the upper body strength needed to turn their cars onto a shoulder of the road after they lost power. Another reason for the demographic profile of the deceased is that the cars included in the recall, like the Chevrolet Cobalt, were marketed to younger people as entry-level cars and middle-class families bought them for their children due to their low sticker price.
The GM recall has thrown the spotlight on federal regulators who are tasked with national vehicle and highway safety. This is typically handled by the National Highway Traffic Safety Administration (NHTSA). The New York Times on March 30th reports that federal regulators received twenty-nine complaints about defective GM vehicles in 2007. The agency was aware of four fatal crashes and fourteen reports of defective airbags in GM vehicles as well, but opted not to take action. The NHTSA has claimed that it did not have enough information to demand a recall, but the Times points out that the NHTSA has acted on less information in the past when it investigated Hyundai models in 2012 based on one complaint from an owner injured when their airbag deployed after a crash. This eventually produced a recall of 190,000 vehicles. The Christian Science Monitor adds on April 2nd that an NHTSA investigation in 2007 wanted to open an investigation into fatalities tied to Chevrolet Cobalt but was denied by more senior officials. The inability of the NHTSA to effectively investigate GM has produced outrage on Capitol Hill and alarmed consumer advocates, who fear that the organization has become too lax in investigating complaints.
The “Switchgate” scandal also comes at a bad time for GM, which is still in the process of recovering from bankruptcy in 2009. The American Enterprise Institute, a conservative think tank, on April 1st writes that between 1980-2009 GM’s share of the American market fell from 62.6% to 19.8% and that it was outmaneuvered by foreign competitors like Toyota that designed more efficient, cost-effective vehicles. The 2008 economic crisis did significant damage to credit markets and GM, which had fallen on hard times, was headed towards bankruptcy. The federal government provided a controversial bailout of the company, along with Chrysler, in 2009 under the Obama administration (the process was begun under his predecessor George W. Bush) and restructured the company to make it more economically viable. The GM restructuring produced a “new” GM that bought the “old” GM’s assets, while using parts of the bankruptcy process to shed the company of its old debts and legal liabilities. The Economist reports on April 2nd that prior to the recalls, GM’s share price was rising and its profits were exceeding expectations. The company was also receiving some good reviews of its new vehicles, but the recent crisis might undermine that. The company made waves in December by naming its first female CEO, Mary Barra, who, as The Economist on December 14th reports, is an engineer and pledged to retain GM’s position in the Chinese market and fix Opel, the company’s European operation that has operated at a loss. Now, Barra finds herself answering for the mistakes of her predecessors and she has said that she was not aware of the ignition switch problem before it was brought to her attention shortly after she took over, which prompted the initial recall.
Congressional Testimony
Extempers are aware that Congress loves to grill CEO’s and other prominent figures when things go awry. It is more of a form of political theater than creating long-lasting solutions, but Congressional hearings can make legislators more aware of a problem or provide clues into how scandals are unfolding. In recent years, Congress has held hearings on steroids in Major League Baseball, the death of Americans at the U.S. consulate in Benghazi, and whether the Internal Revenue Service (IRS) was used as a political tool by the Obama administration against conservatives. Last week, Barra went before the House Energy and Commerce Committee and a Senate subcommittee on consumer production and product safety to answer questions about GM’s operations and what it plans to do to fix the recalled vehicles. The hearings were attended by the families of victims who died in GM cars due to faulty ignition switches and/or defective airbags creating a very emotional atmosphere at the hearings.
Barra found herself grilled by members of Congress over why GM did not fix the parts earlier, why it took so long to issue a recall, and whether they were going to compensate victims families. Senate hearings ended up very testy and Politico on April 2nd attributed that to the fact that four former prosecutors were on the Senate subcommittee Barra appeared in front of. Chairwoman Claire McCaskill (D-MO) argued that GM had a “culture of cover-up” and questioned Barra about why she had not fired anyone yet over the scandal. McCaskill brought up the fact that Ray DeGiorgio, a switch engineer for the Chevrolet Cobalt, testified in a civil trial in April 2013 that he never approved of changes to the ignition switch for the vehicle even though GM’s internal documents show that he did sign off on a change with the ignition switch in April 2006. This insinuated that DeGiorgio perjured himself in 2013. Senator Barbara Boxer (D-CA) also generated controversy and charges of sexism by saying that she was disappointed in Barra “as a woman” because she was representing the “culture of the status quo.” The New York Daily News on April 1st reports that House members appeared stunned at Barra’s response that she had not reviewed tens of thousands of pages of documents that were tied to the ignition switch issue and Representative Henry Waxman (D-CA) said that staff members of the House Energy and Commerce Committee found 133 warranty claims customers filed with GM over faulty ignition issues that arose after customers brushed their keys with their knees or hit a bump in the road. Waxman wondered why GM did not act sooner when it was clear that a pattern was emerging of customers having problems with stalled engines. USA Today on April 2nd writes that Barra declined to answer specific questions about the years leading up to the recall until GM has an internal probe completed (the probe is being handled by former U.S. Attorney Anton Valukas), after which she said that she would return to Congress to answer more questions in 45-60 days. The Los Angeles Times on April 1st reports that Barra did mention that GM might establish a compensation fund for victim’s families and that it hired Washington, D.C. lawyer Ken Feiberg, who administered compensation funds for victims of September 11th, the BP oil spill in the Gulf of Mexico, and the Boston Marathon bombings, to look into the issue.
NHTSA Administrator David Friedman also appeared before the Senate and the House, although he did not encounter as many hostile questions as Barra. In fact, it was reported that many members of both committees left after Barra’s testimony and did not stick around for Friedman’s comments. Friedman denied that the NHTSA was lax in its investigations of GM and The Christian Science Monitor from April 2nd wrote that he charged GM with not giving the body enough critical information to make a connection between engine problems and faulty ignition switches. He noted that GM also failed to show that its vehicles had crash rates that were significantly higher than similar vehicles and did not specify whether passengers were wearing their seatbelts or not, which would be important for the NHTSA to narrow down the causes of certain deaths. The Detroit Free Press on March 27th writes that the Transportation Recall Enhancement, Accountability, and Documentation Act requires automakers to give regulators safety information about their vehicles “in a timely manner.” The legislation was passed after Firestone manufactured tires produced 270 deaths and 700 injuries in vehicles in 2000 and was meant to prevent future problems, but the ignition switch problem at GM reveals that it may not be enough. The NHTSA does recall nine million vehicles a year, so this would appear to back Friedman’s point that the NHTSA’s reputation should not be based on one incident. The Economist on March 13th adds that the NHTSA has sent GM a list of more than 100 questions that it wants answered about its vehicles in light of new evidence about its ignition switches and airbag systems. However, The Monitor explains that Calvin Scovell, inspector general for the U.S. Department of Transportation, will be auditing the agency’s handling of GM complaints and assessing whether the organization did what it was supposed to.
Responses and Fallout of the Recall
GM has issued a widespread recall to fix the ignition switch problem (as well as airbag deployment problems), but its handling of the recall has angered customers and consumer advocates. First, GM’s recall of vehicles with defective switches is arguably wider than it should be because, as Forbes reports on March 28th, GM redesigned the faulty ignition switch in 2006 but did not create a new part number for it, so the company has no idea which cars have the “good” switches and which ones have the “bad” parts. Families of the victims and consumer advocates want GM to immediately ground all of its models that carry the suspicion of having the bad switches, but GM has refused to do so. Instead, it has taken to telling customers that they should make sure that no other keys are on their key rings when they drive. CNN on March 30th writes that GM’s refusal to ground its vehicle fleet has caused a GM car owner in Texas to ask a federal judge to force GM to tell other GM car owners not to drive their cars. GM says that auto dealerships will be able to start repairing the faulty switches on April 7th and that owners of recalled vehicles can get “loaner” vehicles from the company as their cars are repaired. Barra also told Congress that the company will give these vehicles to anyone who is afraid to drive their current model because of the switch issue.
Some of the biggest questions that GM will face is how these recalls will affect its reputation among Americans and whether they plan to compensate victims. On the question of its economic standing, GM has taken a hit to its stock, which lost 5% of its value after the federal government stepped up its scrutiny of the recalls, and Americans might be way of buying its products until the current recalls subside. The politics of the bailout, which tied the company with the Obama administration, has already caused some Americans to swear off the company for good. However, GM could emerge from this in good shape. Toyota went through a similar recall mess with its vehicles over sudden acceleration problems in 2010 and recently paid a $1.2 billion fine to the U.S. government over the issue. The Economist on April 2nd points out that GM has appeared to borrow some of Toyota’s playbook by having its CEO appear before Congress, establishing a worldwide safety czar, and recalling a large number of vehicles, but adds that GM has less goodwill with the American public than Toyota, who’s vehicles remain very popular with segments of the U.S. population and which did not need a federal bailout after the economic crisis. GM also faces a lawsuit from customers of its recalled vehicles who are seeking $10 billion in damages due to the impact the recall has had on the resale value of their vehicles.
Setting up a compensation fund for victims might prove tricky for GM as well and this is something that extempers should watch closely. GM’s restructuring shed the company of its older legal liabilities so it cannot be held responsible in a court of law for damages linked to its vehicles with the faulty ignition switches as those occurred pre-bailout. Those who try to sue GM for damages would therefore have to try to put claims on the assets of the “old” GM. The New York Times on April 1st writes that although GM has announced looking into a compensation fund, legal experts see it more as a shrewd legal move than anything else. By announcing that it is looking into the fund, GM makes itself appear sympathetic and socially responsible without having done much of note. Even if Barra was interested in setting up a compensation fund, though, she may face problems from GM’s investors and shareholders who might oppose using company funds to compensate victims for actions that the company is no longer liable for. This could make Barra’s position in the company somewhat tenuous and/or ignite a war within GM’s inner corporate circle. However, if the company opts not to pay victims, it could deal a black eye to the company and could make the public wary of future corporate bailouts that protect corporations at the expense of consumers.
Fallout from the recall could result in new legislation to strengthen the NHTSA’s authority or at least provide the administration with more funding. The Politico article previously cited in this brief writes that Senators Ed Market (D-MA) and Richard Blumenthal (D-CT) are writing legislation to improve the NHTSA’s early warning system to track problems. In the House, Representative Waxman is also looking to increase the NHTSA’s funding and staffing levels and give it the authority to fine automakers higher amounts for providing misleading information or engaging in acts of misconduct. Nicholas Freudenberg, professor of public health at The City University of New York (CUNY) and Hunter College and author of Lethal but Legal: Corporations, Consumption, and Protecting Public Health, writes in Slate on April 1st that the NHTSA received less than 10% of the funding it requested for this fiscal year and that poor funding of the agency harms its regulatory oversight and power. It is unclear how House Republicans might handle the legislation, especially in their drive for fiscal austerity, so this could become a very politicized issue, especially with the midterm elections approaching, and could give some Democratic candidates a boost.
Another issue extempers should look at is how Republicans are using the GM recalls as evidence of why the auto bailout was misguided. The Politico article mentioned earlier points out that Senator Kelly Ayotte (R-NH) questioned Barra about whether the Obama administration’s auto task force was told of the defects in GM’s automobiles and Senator Dan Coats (R-IN) wants to hold hearings about whether Obama administration officials were aware of defects with GM’s products. Republicans argue that if they were and pushed the bailout anyway that these officials were complicit in harming consumers and helped GM and the United Auto Workers (UAW) union by providing it with legal protection for damages that could hurt the company. They also allege that if the administration or other officials were aware of GM’s problems that they covered them up so as not to reduce support for the auto bailout. Human Events, a conservative website, writes on April 4th that whereas the Obama administration was willing to go after Toyota for its problems they have shown very little appetite to go after GM until recently, which is an example of how the government should not take over a private business. Any supposed links between the Obama administration and GM leaders covering up evidence of automotive malfunctions have not emerged, but if they do it would provide a boon to Republicans that criticize the administration’s handling of the economy and domestic policy issues.
Finally, there is the question of whether GM’s executives that knew about the ignition switch defect should face criminal, rather than civil, liability. The Dallas Morning News on April 1st argues for this course of action and likens what GM did to a baker throwing rat poison into some of the cakes that they baked. The Justice Department has reportedly begun an investigation of GM’s executives and, to paraphrase the rhetoric of the Watergate scandal of the 1970s, “what GM executive knew and when they knew it.” Current CEO Barra could fall into this criminal trap if it is found that she is lying about her knowledge of the ignition switch defect and some have called into question her denials since she has worked her entire professional career with the company. Still, there is nothing to contradict her rhetoric at the present time. The prospect of criminal charges could happen, but might prove hard to win since it could be argued that driver panic is what caused the automotive accidents and not the defective switches, since the car could still be maneuvered after its engine cut out. It may also prove difficult to establish a clear chain of command and what executives knew about the defective switches. Even if there is not a criminal prosecution, GM could face a $35 million fine from regulators for not recalling its vehicles in a timely manner and it could face an even higher fine, like Toyota did, if the federal government really steps up the pressure (which could be unlikely considering GM’s current fiscal state relative to Toyota).
In closing, the recalls come at a very poor time for GM. It deals a blow to the company’s reputation and reinforces the skepticism of American politicians and customers toward the company and the bailout it received in 2009. Barra’s job will be to help the company avoid future negative press during the recall investigation and reporting which will be a daunting task and one that will define whether her tenure at GM will be a success or a failure.