GM raises recall charge to $1.3 billion, adds lock cylinder to part replacement
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DETROIT -- General Motors today said it now expects to take a $1.3 billion charge in the first quarter related to its ignition-switch recall, as it expanded the scope of the recall to fix a problem that has caused some drivers’ keys to fall out of the ignitions while their cars are on.
The amount of the charge increases GM’s March 31 estimate of $750 million by more than 70 percent. In addition to replacing the ignition switches on 2.6 million Chevrolet Cobalts, Saturn Ions and other small cars from the 2003-11 model years, dealerships also will be instructed to install new ignition lock cylinders.
GM's statement said "the redesigned key covered under the ignition cylinder recall features a new keyring hole design that replaces the old slot keyring design."
GM is aware of “several hundred complaints of keys coming out of ignitions,” it said in a statement. The company said it found one report of a car crashing after rolling away in a parking lot and one injury claim but no deaths.
GM also revealed, in the caption of a photo accompanying the statement, that it would replace all keys that have a slot for the key ring with a new design that has a much smaller hole in the center.
Engineers studying complaints of cars stalling first proposed changing the slot to a hole in 2005, but that change was later canceled before finally being implemented in the 2010 model year. The hole reduces the chance that a heavy key chain could inadvertently turn the key out of the “run” position.
The $1.3 billion charge includes the cost of repairing affected vehicles and providing loaner vehicles to customers who request them. The sum of the recall charge and a another first-quarter charge GM has said it will take -- $400 million related to Venezuelan currency exchange rates -- threatens most or all of GM’s first quarter earnings, to be reported April 24.
GM earned $1.8 billion on an adjusted basis before interest and taxes in the first quarter of 2013.
“On a preliminary basis, despite the $1.3 billion recall charge, GM currently expects to report solid core operating performance in the first quarter financial results,” the company said in its statement.
In a related matter, Standard & Poor's Ratings Services said Thursday the uncertainties associated with the recalls increase the likelihood that a potential upgrade to GM's credit rating could occur in 2015 rather than this year.
"If the recall-related developments become worse than we expect, we could consider an outlook revision or a negative rating action," the credit rating agency said.
An upgrade to an investment-grade rating -- 'BBB-' or higher -- for GM would likely result from a favorable reassessment of the company's business risk profile to "satisfactory" from "fair," S&P said.
"While certainly a negative factor, the recalls do not prevent an improved business risk assessment, given our current estimate of their likely impact on the company's overall performance," S&P credit analyst Dan Picciotto said. "However, the recalls could hurt GM's standing in the U.S. auto market, where it generates the bulk of its profits, and we are watching for any significant deterioration."
GM said dealerships would swap out the cylinder and cut new keys, in addition to reprogramming them if necessary.
A GM spokesman, Kevin Kelly, said dealerships should begin receiving repair kits on Friday containing both a replacement switch and lock cylinder. He said customers will be able to have both repairs done during the same service visit, which will take “a little longer” than previously estimated for the switch alone, and that availability of both parts will improve in the coming weeks and months.
“We just want to minimize the inconvenience to customers as much as possible,” Kelly said.
Kelly said GM already had begun planning for the lock-cylinder replacements before shipping the switches to dealers, but that it did not cause any shipments to be delayed. Many dealers had expected to begin receiving replacement switches at the beginning of this week.
The company said owners of cars with automatic transmissions should be sure the vehicle is in “park” before removing the key. It said owners of manual-transmission cars should turn the ignition to the “off” position, put the car in reverse gear and set the parking brake before removing the key.
The issue with keys falling out was among numerous ignition-system problems documented by Automotive News in a March 30 report about the Cobalt and Ion. In a 2013 deposition for a wrongful-death case in Georgia, a GM engineer described incidents in which Cobalt keys became jammed because “the key cylinder was falling apart.”
Problems with the key cylinders date to at least 2004, according to another GM engineer who was deposed for the case. That engineer, David Trush, said GM had its supplier make replacement cylinders and issued a service bulletin telling dealers to install them for customers who complained that they couldn’t rotate the key. Trush said GM then changed to a different supplier around 2008 because of quality and production deficiencies.
In April 2012, GM began a customer-satisfaction campaign in which it offered to replace the key cylinders on 2007-09 Cobalts and Pontiac G5s and 2008-10 Chevrolet HHRs for free. A letter GM sent to owners says a “binding condition” between the cylinder and its housing could prevent turning or removing the key and keep drivers from shutting off the car.
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