NEWS ANALYSIS

Just how much will recall storm cost GM?

Kenneth Feinberg's victim compensation fund may be just one of GM's billion-dollar-plus liabilities.

Photo credit: REUTERS
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DETROIT -- For all of the screaming headlines about record recalls, safety lapses and victim compensation, General Motors' two most important constituencies -- customers and investors -- seem unfazed.

During the second quarter that wrapped up last week:

• The company recalled another 22 million vehicles, bringing its total in recall-related expenses this year to $2.5 billion. 

• CEO Mary Barra got flogged in three televised congressional hearings. 

• GM was ridiculed on "Saturday Night Live," "The Daily Show" and other shows revered by younger audiences that its brands want to court. 

The result: GM gained market share. And its stock price rose 5 percent.

The takeaway could be that investors think the hit to GM's reputation and balance sheet won't impede its ability to develop and sell good cars and trucks.

But what about the bills to come? There is the victim-compensation process outlined this past week by lawyer Kenneth Feinberg, which could dole out a few billion more, give or take. There's the strong possibility of a fine by the Department of Justice, which this spring docked Toyota $1.2 billion for safety-disclosure transgressions. And more recall expenses could lurk as GM purges its list of possible defects.

Total cost?

Morningstar analyst David Whiston pegs the cost of paying victims and related government fines at $7 billion, cautioning that GM's financial exposure is "very hard to know." The cost of recall repairs would come atop that, boosting the potential fallout to $9.5 billion.

That's more than a year's worth of profit: GM had pretax earnings of $8.58 billion last year, adjusted for one-time items. It's also one-third more than the $7.2 billion that GM spent last year on developing vehicles.

And even then, Whiston says: "I don't think it's a significant barrier to GM doing anything they want to do" from a capital-spending standpoint.

It's hard to believe, though, that GM won't incur a significant opportunity cost. Granted, it had $28.1 billion in cash and securities as of March 31, ample cushion to absorb the cost of lawsuits, fines and victim awards.

But those expenses will put a dent in GM's "fortress" balance sheet, a term executives have used in recent years to describe a fiscal philosophy of low debt and ample cash, so the company can comfortably invest in vehicle development even during cyclical downturns.

It's not as though GM won't have the capital to churn out the next-generation Chevy Cruze.

Collateral damage?

But will executives pause as they consider whether to greenlight a car that they don't have to do but want to do?

Take the Cadillac Elmiraj, the big concept coupe shown last year as a potential statement vehicle for a brand still struggling to define itself. GM executives have said they're mulling a production version. Sift away $5 billion to $10 billion from the corporate coffers, and how does that decision, and others like it, not become tougher?

GM CFO Chuck Stevens disputed that notion last month, telling analysts that the recall and victim-compensation costs are "having absolutely no impact on our product cadence or future capital plans as it relates to product programs."

At least in one sense, the money GM will spend to make it right with victims and clean out its closet of potential safety flaws could be viewed as an investment. Done right, it represents a down payment on a future of fewer safety defects, smaller recalls that affect fewer owners, and better vehicles that more customers might be inclined to buy.

You can reach Mike Colias at mcolias@crain.com.

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