Despite weathering one of the most widely reported stories of alleged auto manufacturer negligence ever, General Motors Co. just had one of its best sales months ever.
As Greg Smith, branding expert and chief creative officer for Portland, Me.-based VIA Agency told Auto Finance News, since the recession, people have grown accustomed to hearing bad news, whether it is oil spills, aspirin recalls — and the seemingly never-ending GM recall story.
Smith said consumers will always buy a product brand, especially when it comes to automobiles.
“In the end, sales will cure all and GM needs to focus on the next six months to get out of the woods now,” said Smith.
As Congress turns up the heat on GM and as more and more allegations of a corporate culture steeped in cover ups come to light, a question emerges: Will continued media coverage of GM’s allegedly egregious behavior begin to damage the company’s bottom line, and if so, how might that further impact the capital markets?
At least 13 people, and possibly more than 70, have died, allegedly as a result of faulty GM ignition switches. And yet sales at GM were up 13% in May compared to the same time last year.
GM went so far as to say in its June 3 SEC filing that “it was the best May in seven years and the best total sales since August 2008. GM retail sales were up 10% while fleet sales were up 21%. GM expects to increase its total market share year over year.
“Despite the strong sales figures, what we don’t know is how many more cars GM might have sold if they did not have all those recalls,” said Robert Barrows, of R.M. Barrows, Inc. Advertising & Public Relations in San Mateo, Calif.
“The only reason you don’t see a lot of ‘negative advertising’ blowback like you would see in a political campaign is because just about every brand has had its major recall along the way,” Barrows told AFN.
Incentivizing Sales
GM sales have remained high despite incentives staying mostly flat.
The company’s incentive spending as a percentage of average transaction price was 10.4%, down 0.5% from a year ago, according to J.D. Power PIN estimates. The industry average for May was 9.9%.
A total of 44 recalls for 20 million vehicles have been issued this year by GM, which is more than the total U.S. vehicle sales so far this year.
But owners of the recalled GM cars are getting juicier incentives to return to GM brands for their next new car. The automaker has quietly been offering employee pricing on its models. Previously, GM was only offering a $500 discount if customers bought a new 2013 to 2015 vehicle.
“The $500 is in certified pre-owned vehicles,” said James Cain, spokesman at General Motors. “The employee pricing is new. We don’t disclose take rates because we are not marketing the program but it is low.”
Past Recalls
Cars.com chief analyst Jesse Toprak said that what has been learned from other major recalls throughout history is that, in the majority of cases, unit sales and marketshare are barely affected.
“The numbers tell us that consumers seem to care very little about automotive recalls and that automakers are able to bounce back fairly quickly,” Toprak said.
The most tangible impact of recalls is on the undecided buyer. Toprak said if a consumer is a loyal GM customer, they most likely won’t be impacted by the recalls. But with consumers who might also be considering Ford or Toyota as well as GM, more bad news related to recalls could likely take GM out of consideration.
Jason Lancaster, editor of AccurateAutoAdvice.com told AFN that negative perceptions of a recall usually resonate with consumers who already had a low opinion of the automaker in question. People who like the brand will see recalls as proof the automaker is taking care of customers, Lancaster said.
“GM recalls aren’t impacting sales because they’re not impacting the opinions of loyal GM customers, they’re bringing millions of potential customers to dealerships, and the story behind the recall isn’t that compelling,” said Lancaster.
Residual Values and Portfolios
What effect will the recall have on the value of the older GM cars? If the values of older vehicles decrease in direct correlation to the recall, will loan portfolios be hurt as well?
Jesse Toprak said that may indeed prove to be the bigger question, since loan portfolios are tied to valuation.
“There’s some expectation that there will be some weakness in resale values of GM vehicles in the coming months,” Toprak said. The true impact on those valuations might get delayed, he said, and it could take up to three months before that weakness plays out in the market.
But in a new lawsuit filed in a California court on June 18, new charges emerged alleging that the impact on values is already happening.
The complaint says that General Motors Co. should compensate millions of GM owners for lost resale value, which could exceed $10 billion. The plaintiffs say the recalls and the company’s delay in recalling cars with defective ignition switches has damaged the brand’s value.
The suit charges that GM knew of the deadly ignition switch defects and the dangerous consequences from the date of its inception on July 10, 2009, but the company concealed the knowledge from consumers and regulators.
“Purchasers and lessees of GM-branded vehicles after the July 10, 2009 inception of the ‘new GM’ that emerged from bankruptcy, paid more for the vehicles than they would have had GM disclosed the many defects it had a duty to disclose in GM-branded vehicles,” the complaint alleges, further noting “at least 35 separate known defects in GM-branded vehicles.”
The suit holds up several brands as examples, charging that the 2010 Chevy Camaro lost $2,200 in value; the 2011 Chevy Camaro $1,600; the 2011 Saturn Astra $1,600 ; the 2011 Pontiac Sunfire $487; the 2011 Saturn Ion $878; the 2011 Pontiac GTO $1,300 and the 2010 Saturn Sky $2,600.
As for what all this means for company liquidity and how that impacts the capital markets, the jury is still out.
Ratings
This past April, Fitch Ratings wrote that it does not expect the recalls to have an effect on GM’s ratings or outlook. Fitch left the door open, saying it would take any actions necessary if it appears that the recalls will materially impact the company’s liquidity for a prolonged period.
Fitch said the positive outlook suggests that it could upgrade GM’s ratings within the next 24 months if current trends in the company’s operating profile continue as expected. Specifically, Fitch said it will look for the GM to increase its margin performance on a sustained basis, particularly in the key North American market.
This will likely require the company to continue increasing pricing and reducing operating costs, while holding marketshare steady. Additional improvement in the funded status of the company’s pension plans would also contribute to an upgrade.
A significant downturn that drives GM’s total liquidity below $25 billion for an extended period or a poor market reception for the company’s new vehicles could lead to a negative-rating action, said Fitch in its April report.
At Standard & Poor’s, corporate credit ratings and analysts wrote in April that they believe the repair, legal and regulatory related costs, including fines and settlements, could be substantial. They said their working assumption is that the total costs will be roughly comparable to those related to the Toyota Motor Corporation’s recalls in 2009 and 2010. S&P has identified around $4 billion in costs and charges to date.
GM has the capacity to absorb these cash outflows without affecting the existing rating, S&P wrote, given its large cash balance — about $28 billion as of year-end 2013.
S&P said it still considers GM’s liquidity to be strong and expects it to remain so. The company also had about $10.4 billion of availability under its credit facilities. S&P said GM Financial, the captive, has the ability to borrow up to $4 billion of this amount.
Moody’s wrote in a May 19 market signals report that the expected default frequency, or EDF-implied rating retreated -2 notches, from Baa3 to Ba2.
The EDF-implied rating was A3 as recently as March 10, 2014, but all the new recall related news from GM, including a $35 million fine for auto safety violations eroded the EDF-implied rating by -5 notches from A3 to Ba2 since then.
Moody’s called this “a remarkably abrupt and severe descent.”
Just one week earlier, GM’s one-year EDF measure of 0.06% ranked it 67th-best among Mody’s 607-member global automotive peer group. As of the May report, GM’s one-year EDF measure of 0.10% earned it a ranking of 143rd within this group.
Moreover, Moody’s wrote that the one-year EDF measure for GM has now migrated from the best quartile of its peers into the second-best quartile.
Recalls Bring Customers to Dealers
Brand loyalty has traditionally run deep among the auto-buying public as former Ford marketing executive and current professor at the Simon Business School at the University of Rochester, George Cook, points out.
“We’re sort of a forgiving society,“ he said.
He said that if we look back over the past four or five years, auto recalls have become business as usual. “I don’t think the brand will be damaged, that is, unless this story sticks around,” said Cook.
“The big secret is that car dealers welcome recalls,” said Scott Fletcher, co-founder and partner at Tier 10, a DC-based ad agency. “Obviously, they don’t want to see anyone hurt, but they love every opportunity to have a customer come back to the dealership. Recall costs are covered by the manufacturer, so a customer that comes in can be sold on additional maintenance services. If the recall is big enough, dealers can potentially turn it into a new car sale. In fact, one recall for the dealer can turn into two car deals — new and used — two F&I opportunities, and an internal RO.”