It’s been a long time since former General Motors Chairman Alfred P. Sloan could credibly claim, “When GM sneezes, America catches cold.” But as one of the largest automobile manufacturers in the world, its problems still resonate across a broad spectrum of the US economy.
That’s why people in the automobile industry were focused on Capitol Hill Tuesday, when members of Congress grilled current GM CEO Mary Barra over how the company handled a problem with the ignition switch in a number of its models produced from 2003 to 2011. The defect apparently caused car engines and other components to turn off while on the road, including the passenger airbag. Evidence has emerged that the company had information about the defect as long as ten years ago, but kept the cars on the road, possibly causing the deaths of a dozen or more people.
While it is too soon to know just how big a reputational hit GM will take from the scandal, it seems likely to be significant, at least in the near term. In 2000, after it was revealed that faulty tires on Ford Explorer sport utility vehicles has contributed to rollover crashes that killed more than 100 people, the company reported that sales of that model fell by as much as 16 percent.
Given that the issue with the ignition switch affects not one model of car, but several – the company has so far recalled 2.6 million vehicles – the possibility of a loss in customer trust in GM is a real concern for both the company and the wide array of distributors and equipment manufacturers who rely on orders from GM to support their businesses.
Just how large the broader economic impact might be is still unclear.
Attorney Joseph F. Bermudez, a partner with Wilson Elser in Denver and an expert in crisis communications said, “Their biggest issue right now is brand. GM considers themselves to produce a fantastic product that is safe for consumers and immediately their concern is how is their brand impacted. That is going to be their number one concern.”
The extent of the economic damage to the company, and by extension to its suppliers and employees, will have everything to do with whether the company can get out in front of the story and create the impression that it has responded quickly and effectively.
“From an economic standpoint it depends on how the story goes and how often we’re going to hear about it,” he said. The media environment today is not the one that many of the company’s senior managers grew up in. “It’s hostile, quick, and 24/7,” said Bermudez. “You have to be able to respond to what is being said out there.”
Poor crisis management, he said, can wind up having permanent negative impact on sales and market share. Bermudez cited the case of bottled water company Perrier, which had to recall its entire US stock in 1990 after the carcinogenic chemical benzene was found in some of its water and a ham-handed recall left consumers distrustful of the company.
“Perrier never got back to where they were. They owned the sparkling water space, then they lost it and they never got it back,” he said. The question for GM, he said, after they take whatever hit the current scandal delivers will be, “can they get back to the place they were in market share?”
Automobile industry experts were less concerned about the company’s economic future, and said that a combination of factors may limit the extent to which any damage to GM as a business will cascade through the chain of equipment suppliers and other supporting companies that rely on business from GM.
“Generally speaking, if a company handles the problem well once it is identified and they fix the immediate issue and put a major effort into understanding the process failures, then you don’t expect to see a really big hit,” said Prof. John C. Taylor, chair of the Department of Marketing & Supply Chain Management at the Wayne State University School of Business Administration in Detroit.
“It’s unclear what impact it will have on sales,” Taylor said. “No doubt they make take some degree of reduced sales for some period.” However, he said, “I think the jury is still out on how they are perceived by consumers and how they respond to people who have had this problem.”
Taylor said that one reason the companies in the automotive supply chain could be insulated from an impact related to a decline in GM sales is that most companies in that space are already operating at or close to full capacity.
“All the suppliers are stretched to the max in terms of being able to meet demand. They’re all going all out right now and there is a lot of pressure to add capacity,” he said.
However, even if other business is available, the switch between supplying one part and another isn’t seamless.
“There’s going to be an adjustment period while they set up a new line,” said Bill Michels, president of ADR North America, an automotive supply chain and purchasing consultancy in Tempe, AZ.
Between creating new molds, circuit boards, and even replacing equipment, he said, the process of “re-tooling” a production line is complex. “It can take between 8 and 20 weeks,” he said.
And during that re-tooling period, many of the workers who had been employed on that production line will likely be jobless, he said.
Another mitigating factor, according to attorney Tom Manganello, who has represented companies in the industry for more than 30 years, is that the relationship between parts manufacturers and auto firms has changed dramatically over the past few generations.
Manganello, who is co-chair of the automotive industry group at the Southfield, MI office of law firm Warner Norcross & Judd, said that the industry is far less siloed than it used to be, meaning that companies that years ago may have been completely dependent on a single automaker for their business have become more diversified in their clients.
“It’s going to cascade through their supply chain,” he said, but only in a limited sense. Customers who don’t buy a GM car, he said, “are going to go buy a car from somebody else. It will benefit suppliers to Ford, Chrysler, or Volkswagen.
And in many cases, that means the same supplier will see business from one customer pick up even if GM falls. For instance, he said, the supply space is so interconnected that 65 percent of Toyota suppliers are also GM suppliers.
One wild card, said Manganello, is Washington. The industry, he said, is concerned about whether the GM ignition switch issue will result in additional rules and regulations begin applied to the automobile industry.
“It will be interesting to see how Washington is going to react,” he said. “And they have a tendency to overreact.”
Top Reads from The Fiscal Times