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Auto Recalls: Costs And Benefits

The number of total road vehicles recalled in 2014 was an astounding 64 million, over twice the previous record of 31 million set in 2004. A lot of the damage was courtesy of two major defects: the Takata-brand airbags which could fire metal shards at the driver when deploying and the GM ignition switches which could potentially shut the engine off randomly and were only recalled after a decade of use and 400 deaths and injuries. So far in 2015 we’ve already beaten the second-place record with over 32 million recalls, but at this rate we’re unlikely to beat last year’s all-time record.

One big reason why the number of recalls has suddenly gone up is because the National Highway Traffic Safety Administration is finally starting to throw its weight around. The NHTSA is the regulatory body in charge of making sure that road vehicles are safe to drive, and so it’s their responsibility to discover defects the manufacturer overlooked and to ensure they recall them as needed.

For years, the NHTSA has had a reputation for being toothless rubberstampers, but recently they changed their approach and went after Fiat Chrysler Automobiles in a big way, slapping the automakers with a record-breaking fine of $105 million. FCA was flaunting the recall rules in a big way, and they only promised to change their ways after the NHTSA confronted them with their actions.

But why would car companies try to pass off vehicles they know have potentially lethal defects? Well, the reason is that recalls have both costs and benefits, and a corporate executive who ignores the public welfare could decide in favor of keeping the costs low.


Costs


The most obvious cost of a recall is the recall itself. Replacement parts can cost a pretty penny, even if you make them yourself, plus each business that does the replacement bills the company for the service charge rather than the customer.

Beyond that, however, there’s the cost to consumer confidence. A year full of recalls recently dropped overall consumer confidence in the auto industry by 3.7 percent, although total purchases this year may reach heights never seen since the Great Recession began in 2008.

The last, somewhat hidden cost associated with failing to start a recall is the cost of going to court over wrongful death and personal injury lawsuits brought up by the survivors of the defect’s failure. If an accountant thinks that the cost of litigation can be kept low, an executive may decide to chance it and let the defect enter production.

 

Benefits


The role of the NHTSA in the matter of auto recalls is to change the balance of the accountant’s equation. By uncovering shady behavior, applying a fine, and forcing the company to perform the recall anyway, the regulators turn what appeared to be the more cost-effective solution into an expensive mistake. The expenses don’t end with the fine, either, since the car company becomes far more likely to be held liable in civil court once the NHTSA is through with them.

Consumer confidence also qualifies as a good reason to perform recalls. While the public doesn’t like the idea of buying shoddily built cars, the one thing they hate more is a manufacturer who lies about how shoddy its cars are. Of the 27 individual brands polled in the customer confidence survey, the bottom three were all FCA brands: Fiat, Chrysler, and Jeep.

Product recalls are always a form of damage control, since if everything were perfect there would be no need to recall a thing. However, it’s always a good idea to be timely and effective, since if you try to ignore it and you get caught, you’ll always end up paying a lot more in the end..