Impact of Recalls on the Wider Automotive Industry

The automotive industry is heading toward a record number of safety recalls, amounting to 31.4 million vehicles in the first six months of 2014. No OEM has been left unscathed in this process, and each year, carmakers issue 600 or more recalls, with the exception of a short period during the economic crisis in 2009 and 2010. The number of recalls continues to climb and this jump is the result of tighter safety scrutiny and more companies using the same parts. The slightest fault can impact millions of cars from multiple OEMs like a domino effect. Worldwide, the value of automotive warranties being called upon can be estimated at US$40 billion per year which correlates to a loss in sales of 3-5% in the OEM business.

There are countless possible reasons behind vehicle recalls. The perfect storm comes about when several OEMs share the same supplier and as a result, parts have the same defects. Sharing suppliers is a common strategy that allows car makers to save money on parts through economies of scale, but it heightens the risk of large-scale recalls. In 2014, seven major OEMs, Nissan, Mazda, Honda, Toyota, Ford, Chrysler, and BMW disclosed that they would recall millions of vehicles combined, all equipped with air bags that could explode under certain circumstances. These airbags were supplied by Tokyo-based Takata Corporation, one of the three major manufacturers of airbags and related components to major OEMs around the world. Honda, Mazda, and Nissan recalled 2.9 million cars worldwide, with Honda recalling 2.03 million vehicles, Nissan 755,000, and Mazda 159,807.

In a letter addressed to the US National Highway Traffic Safety Administration, Takata described the research being conducted to better understand the causes of incidents related to airbags. “The regions of Puerto Rico and Florida where the six potentially-relevant rupture incidents had occurred have exceptionally high levels of absolute humidity, and that exposure to that level of humidity, in conjunction with potential processing issues during certain manufacturing time periods that may influence aging stability, are the focus of Takata’s current research and investigation efforts,” read the letter.

Moreover, this particular recall highlights the increasing number of complex components in modern vehicles that can increase the number of accidents, especially when used in areas such as the engine compartment that undergoes high temperatures as well as mechanical and chemical loads. In order to work, airbags need to inflate in less than half the time it takes to blink, just 40 milliseconds on the passenger side. This requires the use of powerful and dangerous explosives in inflators that require careful handling and precise calibration. Takata uses ammonium nitrate in its inflators, an explosive compound that is volatile and highly sensitive to moisture. A Defect Information Report by Takata identified several manufacturing problems with its inflators, including at plants in Monclova, Mexico, and Moses Lake, Washington. According to Reuters, these problems were due to a glitch that meant the inflator propellant in the bags could burn too quickly and blow apart the metal casing surrounding it, sending out hot gas and shrapnel. The issues in this recall became twofold with the insufficient communication between OEMs and suppliers, and problems with record keeping. The Wall Street Journal found that Takata’s records had proven to be incomplete. The company’s representative Toyohiro Hishikawa also confirmed that it had discovered a problem with records kept at its plant in Monclova, Mexico. This forced automakers to widen the recalls to cover vehicles that might have inadvertently received the faulty equipment. The problems with the air bag inflators have led to recalls of 10 million vehicles since 2009. Despite this massive recall, it is important to note that airbags, including those made by Takata, have saved countless lives since their widespread adoption in 1990.

Recalls may wreak real damage to brand names and hurt trust in manufacturers, a situation no OEM wants to find itself in. In 2014, GM was rocked by this process of reverse logistics, having to issue 48 recalls which affected approximately 20 million vehicles worldwide, accounting for 17% of all recalls. These have varying degrees of safety concerns; for example, 3.2 million vehicles were recalled for possible faulty ignition switches. With GM under scrutiny, Chief Executive Mary Barra stresses the importance of enforcing safety measures. “We are going to continue to look at the data that we get, and we are going to take the action that we need. If we find an issue, we are going to deal with it,” she explains. The company raised its expected second-quarter charge for recall expenses from US$400 million to US$700 million. This experience has led GM to state it would change its culture, putting an ever higher priority on vehicle safety by emphasizing rigor and discipline in its analyses and decision-making process involving not only recalls but all other safety related matters. The consumer market has attached little stigma to GM’s safety recalls, with sales rising in the US by 7% in April over the same month a year ago. In Mexico, GM’s first quarter proved to be profitable as well, with sales rising 2.6% with 79,591 units compared to 2013’s 77,561 units.