What’s Driving the Recall Surge?
In a Q&A with Automotive Fleet, analysts from financial advisory firm Stout Risius Ross provide insight into the ongoing surge in vehicle recalls.
GM CEO Mary Barra, shown here at the company's annual shareholders meeting, has vowed to bring "greater rigor and a sense of discipline to our analyses and our decision making" on recalls. Photo courtesy of GM.
This year has seen a surprising number of vehicle recalls from automakers. General Motors has already issued 60 recalls in 2014, covering more than 25 million vehicles in the U.S. alone — and nearly 29 million worldwide.
But GM isn't the only OEM keeping its dealership mechanics busy. The industry is on pace to break the 30.8 million recall record set in 2004. Recent Takata air bag inflator recalls have also illustrated what kind of impact one major parts supplier can have on recall figures for multiple OEMs.
Automotive Fleet recently conducted an email interview with Neil Steinkamp and Jake Reed of Stout Risius Ross, a global financial advisory firm that earlier this year released a study on automotive warranty claims and OEM recalls. Steinkamp is the managing director of the firm's Dispute Advisory and Forensic Services Group. Reed is manager within the same group. The two answered a number of questions Automotive Fleet posed via email, shedding light on a range of factors fueling the trend.
AF: What are the primary factors that appear to be contributing to the increase in vehicle safety recalls?
SRR: We believe there may be a variety of factors contributing to the rise in safety recalls — and recalls in general — recently. Certainly, increased NHTSA scrutiny and harsher penalties may be increasing the willingness of certain OEMs to institute recalls. However, a larger factor at play may very well be the increase in vehicle technology and component complexity. We believe this has contributed to an increased number of recalls in many instances.
Further, OEMs are becoming more adept at utilizing advanced data analysis to identify potential issues and issue more timely and potentially more focused recalls. Recently, we believe, large-scale and negatively publicized recalls may be leading other OEMs to act more proactively in instituting recalls to avoid negative publicity themselves while knowing their recalls may be overshadowed by others. Going forward, we are interested to see whether the unprecedented increase in new model introductions will lead to increased recalls in coming years.
AF: Looking back over the past 14 years, how would you assess the auto industry’s overall response to the TREAD Act?
SRR: As with many factors impacting the automotive recall landscape, it is a challenge to isolate the direct impact of the TREAD Act. When the TREAD Act was instituted in 2000, significant increases in the number of recalls, and the number of units affected by these recalls, had already been occurring since the early- to mid-1990s. We suspect that rise itself was due to a variety of factors, including increasing vehicle technology and features (e.g., widespread air bag usage) and increased consumer access to information.
Certainly, recalls have continued to increase after 2000. While we believe the TREAD Act has had a real impact, isolating the impact of the TREAD Act from that of other factors — technology, new model introductions, increased access to information, etc. — is a challenge, given the steady increase in recalls observed over the last 25 years.
AF: What long-term impact will NHTSA's fines on GM and Toyota have on how the auto industry addresses safety recalls?
SRR: We believe the combination of these fines, as well as the strong negative publicity directed towards these OEMs, may impact the behavior of other OEMs and will likely help perpetuate the already steady rise in recalls and units affected by these recalls in the near term.
In determining the appropriate action, we suspect OEMs may modify their approach somewhat and will make a more concerted effort to incorporate not only the potential for these fines from NHTSA but also the less tangible costs of negative publicity in the event of a failure to act.
This is not to say OEMs were not already considering these factors. However, given the current landscape, OEMs may become more cognizant of these risks and related intangible costs and take a more subjective approach to their decision-making.
AF: Do you anticipate any changes in how automakers choose and negotiate contracts with parts suppliers?
SRR: Quality, price, and a variety of other factors are constantly balanced by OEMs in making their supply decisions. Generally, OEMs incorporate terms in their agreements relating to acceptable failure tolerances and also the responsibility with respect to warranty and recall costs incurred.
Many OEMs have already taken a strong stance in their negotiation with suppliers. However, as OEMs react to increased NHTSA scrutiny and the potential for negative publicity, they may be less tolerant of defective parts. Consequently, we may see lower failure tolerances incorporated into agreements, and more aggressive apportionment or assignment of warranty and recall costs to suppliers, which may place more pressure on suppliers.
AF: What have you observed through the first half of 2014 in terms of recall trends specific to components and OEMs?
SRR: We monitor the NHTSA recall data closely throughout the year. We have certainly seen a rise in the number of recalls and units affected this year. In fact, through the first five months of the year, for the large domestic and foreign light vehicle OEMs we typically analyze most closely — GM, Ford, Chrysler, Honda, Toyota, Volkswagen, Volvo, Hyundai, BMW — the units affected by recalls have already exceeded the total for all of last year (which was itself an annual high from the prior four years).
This has certainly been impacted by several large-scale recalls for GM and other automakers. In terms of components affected, we continue to see more of what we have seen in recent years: a number of electrical-related recalls and several recalls related to traditional safety components — air bags, seat belts, etc.
AF: What are some related issues you’re interested in monitoring in the coming months and years?
SRR: Recently, there has been an unprecedented increase in new model introductions. We believe there is evidence to suggest that historically, the first model years following new model introductions have been at a greater risk for recalls in the years that follow the introduction. It will be interesting to see whether the significant number of new introductions we have seen recently will have an impact on the recall landscape in coming years.
Also, there are several areas of analysis that many people are interested in but that, to our knowledge, nobody has analyzed in detail due to significant data limitations and time requirements. One of these areas is tying recall trends to suppliers, and determining which suppliers’ parts are subject to the greatest number of recalls. This is one area we will be looking into over the coming year to see if any interesting trends or insights can be gathered.
A second area is considering the overall take rate for recalls for the major OEMs, or the vehicles that are actually repaired as a percentage of the affected population. NHTSA has historically encouraged OEMs to target higher take rates to ensure that vehicles on the road are safe and free of known defects. However, an analysis of actual take rates across the OEMs is not something that has received a lot of attention — again due to data limitations and time requirements. This is another area we will be analyzing this year.
AF: What is the magnitude of cost associated with warranties and recalls in the automotive industry every year? To what extent are suppliers held responsible for these costs?
SRR: There are billions of dollars in costs incurred by OEMS and suppliers relating to warranties and recalls each year. While recalls may get more of the attention, warranty costs are actually significantly higher for most OEMs.
Further, in most cases, there is a significant uneven split between OEMs and suppliers relating to which party has recognized these costs. Certain studies indicate that OEMs have historically incurred approximately 90 percent of the total costs while suppliers have incurred the other 10 percent.
The recent developments and increased NHTSA scrutiny may contribute to greater pressure being placed on suppliers for higher quality parts and greater responsibility in the event parts fail. In the coming years, it will be interesting to see whether there will be a shift in the burden of warranty and recall costs from OEMs to suppliers as OEMs continue to place greater focus on these costs, which can be a very significant component of the OEM's overall cost structure.