General Motors Air Bag Footdragging Adds Unnecessary Risk To GM Stock

Josh Enomoto

Mon, Jun 24, 2019, 3:01 AM

No matter where you stand on the automotive spectrum — foreign or domestic — the industry itself is undergoing significant changes. Unfortunately for General Motors (NYSE:GM), a lot of the changes aren’t beneficial for GM stock. Although shares are up 14.5% year-to-date — compared to a 10.4% gain in the Dow Jones Industrial Average — the company faces strong headwinds.

General Motors Air Bag Footdragging Adds Unnecessary Risk To GM Stock

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Now, another distraction threatens to disrupt the General Motors stock price. For the fourth straight year, GM is appealing to federal oversight agencies to avoid recalling their cars due to deadly Takata air bag inflators. While the sentiment is certainly understandable — no one wants to deal with such massive liabilities — this move is risky.

Here’s the reality with the automotive industry: no one manufacturer is perfect. The paragon of reliability, Toyota (NYSE:TM), has incurred several high-profile recalls that detracted from its hard-earned image. And Japanese companies in general have a reputation for quality, but again, this is not a 100% accurate pronouncement. After all, Takata is a Japanese company.

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But evidence exists that consumers (and investors) are willing to forgive these defects, so long as companies take responsibility quickly. According to Zacks, major recalls don’t necessarily spell doom for automakers. That’s the good news for GM stock.

The not-so-pleasant news for the General Motors stock price is that consumers expect action and accountability. In 2014, GM recalled vehicles that suffered from an ignition-switch defect. Initially, management stalled for time. Eventually, though, the company cleaned house at the highest level. They also set up a $675 million victims-compensation fund.

GM stock recovered relatively quickly from the scandal, probably in no small part to the strong compensatory measures. But with these Takata air bags, GM is going in reverse.

Self-Imposed Race Against Time Hurts GM Stock

I’m not seeing the upside for either the automaker or the General Motors stock price. The public already knows about the problem as Takata air bags have dominated the headlines for years now. By avoiding the issue, GM saves some costs today, but risks bankrupting its tomorrow.

Moreover, the pressure is two-fold. First, Takata used a volatile chemical to catalyze the air bag-deployment process. However, high humidity and hot temperatures can cause the chemical to deteriorate. Potentially, this results in shrapnel exploding inside the cabin during a deployment, severely injuring or killing drivers and passengers.

Obviously, the passage of time — more instances of heat and humidity — don’t help matters. GM footdragging on this crisis could hurt its reputation, sinking GM stock.

The second pressure point is Takata. Having incurred more liabilities than is possible to pay back, Takata filed for bankruptcy protection in the U.S. and Japan. But rather than a complete dismantling of the organization, the dissolution will occur in stages.

That gives time for Takata to help support liability cases and assist the recall process which benefits General Motors stock. However, the underlying company must act quickly to advantage Takata’s support.

Eventually, all of this reaches a conclusion. After that, Takata will not exist, and that means zero support from that point forward.

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From the consumer’s perspective, that doesn’t really matter. Affected automakers have an obligation to repair their Takata-air bag equipped vehicles. But some problems may not become apparent until years down the line, well after Takata is gone. Then, automakers will have to repair their cars without Takata’s critical input. That’s a huge risk for GM stock, which hasn’t gone anywhere since the fall of 2017.

Recalls a Kick in the Teeth for General Motors Stock

Still, I concede one reason why management seeks its recall exemption: the air bag crisis directly impacts GM’s flagship vehicles.

If the company didn’t appeal, the recall would affect multiple variants of the Chevrolet Silverado, along with this year’s GMC Sierra heavy-duty pickup truck. Additionally, air bag risks exist with certain years of Chevy Tahoe and Suburban SUVs, along with GMC Yukons and Cadillac Escalade SUVs.

In other words, we’re talking about the big money makers for GM stock. American cars have all but given up making sedans, having lost too much ground to Japanese automakers. Where domestic cars remain relevant is with big trucks and SUVs.

That’s why it’s absolutely vital for GM to protect their image here. If they start sending out recall requests to millions of owners, they might not get return business.

However, it’s still the wrong play. GM already learned its lesson with the ignition-switch defect: get right with the public or face its wrath. That they’re blatantly ignoring past mistakes makes me concerned about General Motors stock.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.