Automotive recall surge to continue

June 2, 2015

It is estimated that General Motors (GM) recalled 40 million-plus vehicles in 2014. Most of these recalls were caused by ignition switch failures: the switch could turn itself off during driving, shutting off the engine and power steering and potentially leading to a loss of control. To make matters worse, airbags usually fail to inflate when the engine is turned off. It was reported that over 150 deaths were linked to the faulty switch, with GM knowing about the faulty design as early as 2001.

In April 2014, United States safety regulator, the National Highway Traffic Safety Administration (NHTSA), fined GM a total of US$28,000 for failing to immediately provide the agency with the crucial information that parts of its product posed a safety threat. This is despite the fact that this is a requirement of the Transportation Recall Enhancement, Accountability and Documentation (TREAD) Act. In May, GM agreed to pay a fine of US$35 million to settle the federal investigation about its delay of the recall.

Another massive recall of 2014 was caused by Takata airbags, with over seven million vehicles from ten different carmakers recalled. The airbags in question were believed to deteriorate under high-humidity conditions, making it possible for them to explode during deployment.

It is expected that there will be even more recalls in 2015, which should come as no surprise with all the reforms currently taking place at the NHTSA. In February, United States President Barack Obama proposed tripling the NHTSA’s budget for defect investigations.

National Transportation Safety Board member Mark Rosekind was appointed by Obama as the new head of the NHTSA in late 2014 after the position had been vacant for almost a year. The NHTSA has long been criticised for its weak and inefficient enforcement efforts, and it is believed that Rosekind will be able to improve the authority’s reputation. He is certainly saying the right things, and has told senators that the NHTSA has to become the enforcer and take a tougher approach to safety enforcement actions.

In addition, NHTSA reforms that had been espoused by safety advocates for years are now being taken seriously in the wake of the recalls, with many reforms on the way. For example, the NHTSA is currently seeking approval from the United States Congress to increase the maximum penalty that can be imposed from US$35 million to US$300 million, which will hopefully give the authority greater powers to deter malpractice in the industry.

Total recall

Despite the abundance of automotive recalls in 2014, safety recall is not a new thing: GM recalled 6.7 million vehicles in in 1971, Ford recalled 7.9 million to fix ignitions switches in 1996, and, more recently, Toyota recalled 4.4 million vehicles in 2009.

Recalls do not only mean repair costs for companies; they often bring reputational damages and penalties, given that faults can cause physical injuries and even fatalities. This is especially so in instances where companies are perceived to put profit before safety by delaying recalls – a major concern in the Ford Pinto recall of the 1970s. The Pintos were found to have faulty fuel systems that could rupture easily. When deciding whether to rectify the flaw, Ford carried out a cost-benefit analysis by comparing the cost of repairs against the cost of potential settlements for deaths and injuries. In the end, Ford decided that it was not cost effective to fix the problem.

A total of 27 deaths were attributed to this fault, and the injuries and deaths led to a series of lawsuits being brought by the public which also included huge legal costs. When the memo of the cost-benefit analysis was first revealed, it drove Ford into a reputational crisis. According to former Ford executive Lee Iacocca, the resulting lawsuits almost tipped the company into bankruptcy.

Companies should always be ready to face safety issues, detect risks and prevent harm from happening. One of the important areas companies should look at is to ensure they screen their parts suppliers properly. Due diligence on suppliers and sub-suppliers is important to guarantee that the supplies meet quality standards and effectively reduce the chances of safety crises. This does not only apply to automotive companies but extends to all companies in all industries.

A quick look back in history confirms that many other industries have suffered similar kinds of disasters as a result of bad suppliers. For example, the battery scandal of the Boeing 787 in 2013 caused months of damage control and financial loss, with the National Transportation Safety Board (NTSB) criticising the poor test and manufacturing practices of Boeing’s Japanese battery supplier. Another infamous disaster was the European horsemeat scandal, where around 50,000 tonnes of meat were recalled across Europe.

These incidents are often caused by a lack of transparency over suppliers and poor supply-chain management. Third parties are typically thought to be a company’s biggest compliance risk and therefore it is important for companies to know what their suppliers are doing and have robust due-diligence processes and strong and defensible third party compliance programmes in place.

It is not enough to have sophisticated supply-chain management; companies must also understand their obligations under the law. If a company fails to comply with legal obligations it can result in huge fines. Honda was fined a total of US$70 million in January this year for failing to comply with the requirements under the TREAD Act by not reporting over 1700 injuries and deaths. While legislative efforts continue, legal obligations change from time to time. It is therefore important for companies to keep themselves up to date to ensure compliance with the law.

The United States is not the only country in the safety compliance field. The largest automotive market in the world, China, is also placing greater emphasis on car safety. In 2014, Honda recalled over 500,000 vehicles with Takata airbag problems in China. In late 2012, China enacted an automotive-recall law that imposes new obligations on manufacturers and dealers, including preserving information related to the design and manufacturing of their cars for up to ten years and submitting recall history and technical information to the Chinese quality watchdog, the State Administration of Quality Supervision, Inspection and Quarantine. Failure to comply with the law can result in a fine of up to CNY10 million.

On the other side of the planet, the European Union (EU) recalls dangerous consumer products with its rapid alert system RAPEX. RAPEX provides rapid exchange of information between EU member states to facilitate product recalls across Europe. In addition, EU law includes stringent safety requirements. Over 50 car-safety-related EU directives were consolidated into one General Safety Regulation (EC) No 661/2009 in 2009. Pedestrian Protection Regulation (EC) No 78/2009 was also introduced the same year to impose additional safety requirements on vehicles to protect pedestrians.

Carmakers should therefore be aware of the legal requirements across all corners of the world.

 

With all of the varying and complex international legal frameworks compliance can be challenging, especially as federal authorities are becoming more aggressive in their enforcement actions. The NHTSA has reformed the safety regime, the Department of Justice (DOJ) and the Federal Trade Commission (FTC) are resolving antitrust disputes, and the Securities and Exchange Commission (SEC) – alongside the DOJ – is enforcing the Foreign Corrupt Practices Act.

Companies should prepare themselves with all-rounded compliance programmes. Although building such programmes from scratch can be daunting, those companies that are unsure about their obligations are recommended to seek advice from external professional-services firms. An external adviser can help a company identify applicable regulations, train staff and develop systematic compliance controls. And this can be achieved while maintaining objectivity and providing valuable benchmarking information about what similar companies are doing internationally to enhance their compliance efforts. External advisers can also advise a company on possible obligations under the law.

Those companies that do not want to be in the 2015 recall headlines should start reviewing operations and taking necessary remedial actions now.

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