GM's false economy

It's not yet clear what the final tab will be on General Motors' unfolding recall mess, but it certainly will put a dent in the automaker's so-called fortress balance sheet.

Excluding the indirect costs of reputation damage and lost opportunities, GM faces three types of direct costs: making repairs to 29 million recalled vehicles, compensating victims or their families related to delayed ignition-switch recalls and the potential of substantial federal fines.

So far this year, GM's recall-related direct expenses total $2.5 billion. Morningstar analyst David Whiston estimates the eventual additional cost of victim compensation and related government fines at a combined $7 billion.

Combining Whiston's estimate and charges already taken, the total for GM losing control of its safety process and not catching it for a decade could be $9.5 billion. That's higher than either GM's 2013 pre-tax profit of $8.6 billion or the $7.2 billion GM spent on product development last year.

Post-bankruptcy, GM adopted a low-debt, ample-cash approach so it could keep spending on product development even in hard times. As of March 31 it had amassed $28.1 billion in cash and securities. The recalls will certainly test whether that reserve is enough.

GM's mess demonstrates how potentially disastrous a cost-driven culture can be. Cutting corners can come back to bite you years later. The surest way to control costs is through good engineering and good processes.



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