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26.3.2 General Motors ignition switch issues and recall

Another high-profile product liability issue arose from the recently uncovered problem with ignition switches in certain General Motors cars. In the late 1990s, GM started using new switches for small cars to make them work more smoothly. “But as it turns out, new switches in models such as the Chevrolet Cobalt and Saturn Ion can unexpectedly slip from 'run' to 'accessory,' causing engines to stall. That shuts off the power steering, making cars harder to control, and disables air bags in crashes [20]. The problem supposedly caused over 50 accidents. “GM says the problem has caused at least 13 deaths, but some members of Congress put the death toll near 100.” [20]

Apparently, GM engineers were aware of the problem before the accidents, but decided not to replace the switches. An internal email uncovered in Congressional hearings discussed the fact that a more robust design would add 90 cents to the price of the switch, and would only save 10-15 cents in reduced warranty claims [16]. “The part costs less than $10 wholesale. The fix takes less than an hour. A mechanic removes a few screws and connectors, takes off a plastic shroud, pops in the new switch, and the customer is back on the road.” [12] “[T]o many people familiar with the automaker,” the reason GM did not recall the cars sooner “is a corporate culture reluctant to pass along bad news. When GM was struggling to cut costs and buff its image, a recall of its popular small cars would have been a terrible setback.” [12] “It's pretty clear that somebody somewhere was being penny-wise and pound-foolish,' said Marina Whitman, a professor at the University of Michigan and a former economist at GM.” [12]

GM's decision not to recall the cars sooner is proving to be a costly one. Congress, safety regulators, the U.S. attorney in New York City, the SEC, Transport Canada, and 45 state attorneys general are conducting probes of GM. GM is undertaking a costly recall of the cars. Also, GM created a compensation fund for families of crash victims, which it expects will cost the company $400 million to $600 million [19].

In addition to the compensation fund, GM said that it will spend $1.2 billion to repair the cars and trucks recalled during the second quarter, on top of the $1.3 billion it identified for repair costs in the first three months of the year. In addition, the company set aside an additional $874 million in the quarter for future recalls. [19]

The total expense for GM will be huge: “All told, GM's recalls have cost the automaker nearly $4 billion this year.” [19] Presumably, GM will continue to pay more in future years as well. Moreover, GM will have to pay even more for legal fees and other internal expenses related to investigation and remedial measures.

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