We got some news this morning about a big
setback for Rivian.
The company recalling nearly every.
vehicle it has delivered.
But this is an example of what can happen if you
don't have a completely clean launch.
And now you've got Rivian recalling about 13,000
vehicles.
In October 2022,
The high profile startup betting big on electric
trucks and SUVs faced its biggest hurdle yet.
The company notified customers that it was
voluntarily recalling 13,000 out of the total,
14,317 vehicles produced that year.
Recalls happen all the time, but this one sent
shares tumbling and raised investor eyebrows.
After all, the company had gone public just a
year prior at a market valuation of a whopping
$86 Billion higher than the market cap of legacy
automakers, Ford and General Motors.
Rivian is one of countless new carmakers
attempting to become the next big name in a rapidly
changing automotive landscape. They're new to
manufacturing. They don't have a dealership network.
They're trying out new technology.
New technologies make bold promises, but things
can go wrong. And when they do, they can be
costly. At least a few recalls have been
devastating for automakers and scores of
victims. The National Highway Traffic Safety
Administration, or NHTSA, is the government entity
tasked with investigating defects in cars.
Among other things, it issued about 1100 recalls
in 2021 for 34 million vehicles.
So how do recalls work?
How costly are they and how do companies recover
from them?
I'm Steven Ridella.
I'm the director of the Office of Defects
Investigation at the National Highway Traffic
Safety Administration, also known as the.
Day to day Ridella and his colleagues combed through
thousands of consumer complaints and other data,
looking for one of two things vehicle features or
parts that might not comply with the federal
motor vehicle safety standards or ones that are
simply defective.
If NHTSA determines a defect poses an
unreasonable risk to safety, it will require
the manufacturer to initiate a recall.
That's if the manufacturer hasn't
already. Just about every major car, commercial
truck and RV maker issues recalls, though some more
than others. There have been times where
automakers have been late to recall vehicles
yielding catastrophic results.
George Ball, a business professor at Indiana
University who studies recalls, says the recall
of the Ford Pinto in 1978 is one such notable
example.
You know, when I when I started researching
recalls after coming to academia, that one really
caught my attention because it's kind of a
classic firm choosing profits, unfortunately,
over safety.
That is an extreme example.
So I don't think it's fair to say that every
recall firm chose profits over safety.
The car was recalled because a design flaw in
the fuel system created a fire risk.
At the center of the controversy was a memo
that indicated the company had predicted the
number of injuries and deaths, the costs of the
lawsuits resulting from them, and determined they
were less costly than redesigning the vehicle.
Before academia, I was in medical devices and I've
made a lot of recall decisions and I've advised
that type of thing would get in the FDA's
regulatory regulatory world.
We'd get thrown in jail for those types of
analyzes.
A storm of public outrage, lawsuits and an official
count of 27 deaths ensued.
Ford later recalled about 1.5 million Pintos and
30,000 mercury, bobcat, sedans and hatchbacks.
The Pinto has had its defenders, though.
One Law review article from 1991 outlined a
number of myths and misconceptions surrounding
the Pintos, overall safety risks and Ford's
role in the controversy.
Once a recall is initiated, manufacturers
have to notify customers of the recall and follow
up with Nissa on Recall Progress.
Despite this, Rhodiola says only about 60 to 70%
of recalled vehicles get fixed.
Which we don't feel is enough.
We want 100% recall completion.
We understand that there's a lot of reasons
why people don't get recalls done, but it's
just something that you should do, almost like
you're changing your oil or anything else on your
car. Just check for recalls on a regular
basis. If you have an open recall, you can take
it in the dealer and get it fixed.
Since 2008, at least 19 automakers have recalled
about 67 million airbags made by Japanese supplier
Takata after they were found to be prone to
explosion. At least 22 people have been killed
and more than 400 people injured in the US alone.
Yet millions of unrepaired cars are still
on the road.
In November 2022, NHTSA issued yet another warning
to owners to have their cars checked for
potentially defective airbags after another
fatal rupture.
That ranger was under a do not drive warning.
Ford and Mazda had placed on thousands of trucks
back in 2018.
The Ford Ranger explosion came days after
Stellantis, formerly Fiat Chrysler, issued its own
do not drive warning for owners of 276,000 Dodge
Magnums, Chargers and challengers.
The number of airbags affected, nearly 70
million, is staggering, as is the number of
automakers. Everyone seems to have been using
parts from the same company. According to one
Bloomberg report from an anonymous source, the
scandal could cost Takata up to $24 billion, while
the company denied the claim the criminal
investigation and the lawsuits were mounting.
Its stock tumbled and the company never recovered.
In 2017, Takata filed for bankruptcy a year later.
Key safety systems and auto components maker
acquired Takata in a $1.6 billion deal.
Unfortunately, if someone had analyzed the risk that
was that was being borne by these manufacturers,
you could look at the supply chain and say, if
this type of supplier has a quality problem, every
single manufacturers in trouble.
So investors really view recalls as part of the
cost of doing business.
In the auto industry, they're very common.
And so there's not necessarily a whole lot of
surprise when there's a recall announced.
They're happening all the time.
They do, however, hurt the overall market performance
of the automotive industry. Recalls are one
of the main reasons why car companies stocks trade
at some of the lowest earning multiples of any
industry in the market in 2021.
General Motors recalled all of its Chevrolet Bolt
Electric vehicles after several reports of
batteries going up in flames.
Now, that was sent major warning flags across the
industry, and especially because GM is making such
a big bet on EVs.
That recall cost GM $2 billion for 110,000
vehicles, roughly.
So you do the math that it costs them about
$18,000 per vehicle.
That's a very expensive one.
A recall like this won't cripple a company like GM,
which has a broad portfolio of products and
sells millions of vehicles every year.
And in this case, the problem was the battery,
which was supplied by LG Chem.
Gm recouped about $1.9 billion of the $2 Billion
it cost the automaker.
But the cost was more than financial.
And it really shook the confidence.
And a lot of investors in GM here, their best
selling EV were having those kinds of issues and
making such as Mary Barra and the company making
such a big bet on EVs being the future of the
company was I think, sent some shockwaves throughout
the industry.
Despite it all, sales have remained strong for the
two bolt models.
The company reported record sales in the third
quarter of 2022.
Gm said in a statement to CNBC, The safety and trust
of those who drive our vehicles is at the
forefront of everything we do at General Motors.
We have a culture where we focus on identifying
and resolving an issue as quickly as possible to
reduce the frustration and concern of impacted
customers. While the Rivian recall involved a
part that was relatively inexpensive and easier to
fix, newer upstart companies don't have the
same kind of cushion larger automakers have.
Tesla has recalled 3.8 million vehicles in the US
as of November 2022 that included a recall in
February of every vehicle equipped with its full
self-driving software.
Ball and his colleagues have found recall
announcements have a curious pattern to them.
They occur in clusters.
When one company announces a recall, others
follow in close succession, even though
their problems are unrelated. The team also
found that the first company to issue a recall
in these clusters suffers the greatest hit to its
share price. Companies that closely follow the
leader suffer less.
They can't say that companies are doing this
intentionally, but they do see a strong
association.
And whether the executives are doing it on purpose or
not, they definitely get a stock price benefit by
following. And the closer you follow, the better.
The longer you wait, the market starts to forget
about that leading recall. So if you wait a
couple of weeks, you're not going to get much of a
benefit. But if you do it the day or two after, you
get the most benefit.
Earlier research had found that a company's public
image suffers more when it is otherwise associated
with high quality products. Toyota, for
example, has a strong reputation for quality,
and the hit to its public image appears to be larger
than it would be for companies with lower
consumer confidence.
Building on this ball found that when companies
with strong reputations issue recalls, a high
number of companies, follow them right behind.
Toyota has such a stellar quality reputation that
their clusters last longest.
So the number of days that they'll last 37 days,
and that's the longest of any firm and they
stimulate ten following recalls.
And that's more than any of the other firms.
A substantial challenge.
Companies like Rivian and Tesla face is actually
fixing problems.
Many of these new automakers sell directly
to customers and don't have the franchised
dealership networks older automakers rely on for its
most recent recall.
Rivian claimed it could fix the issue within 30
days.
Companies that don't have the established
distribution networks, it becomes more expensive.
They just don't have the infrastructure to deal
with this. A lot of times they'll outsource to a
third party auto repair shop in order to make that
fix, or they'll have a network of service
providers that they rely on.
So but it certainly adds to the total cost of of
the labor involved.
Industry analysts have questioned whether these
automakers can scale to the level of a Volkswagen
or a Toyota without the dedicated dealership
network. A major advantage of companies
like Tesla and Rivian is their ability to diagnose
and fix defects through software updates that can
save consumers a lot of time and hassle.
But it can also threaten transparency, making it
challenging for regulators like Nissan to
keep up. In addition, tech firms can also afford
to pay engineers high salaries, whereas
government agencies can't. Many areas that
have seen rapid innovation and a lot of
controversy are in advanced driver systems.
Those pose a whole new set of questions.
Has opened several investigations into
crashes associated with Tesla's autopilot system.
Yesterday, I drove a brand new system being launched
by a manufacturer, and it's posing challenges to
us because we want to know what those systems
are capable of.
Are they safe when they deploy?
And if there are issues with them, what questions
do we need to ask to ensure that if there is a
defect that the manufacturer makes the
appropriate determination and appropriate remedy?