In the wake of Toyota's massive auto recall, Honda, GM, and Nissan have all issued recalls of their own. This begs the question: are these companies interested in consumer safety or are they simply taking care of business? We'll look at why these recalls may be a little bit of both. (Get the latest news on the recall and more in Water Cooler Finance: My iPad Beats Your Toyota.)
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Paramount among any company's concerns is the issue of consumer safety. No company, no matter what industry they are in, can survive for long if their products imperil customer safety. Because of their nature, automobiles in particular have the potential to threaten the well-being of customers. An unsafe automobile can tarnish a company's reputation for years or even decades while at the same time exposing it to massive liability.
A famous example was the Ford Pinto of the 1970s, a car that was responsible for many passenger deaths. Ford reportedly decided that paying off claims following accidents would be more cost effective than issuing a recall, a decision that severely damaged the company's reputation when it became public. Eventually, Ford was forced to issue a recall anyway, adding insult to injury. (Learn about the right and wrong of finance in Standards And Ethics For Financial Professionals.)
The Tylenol Killer
In addition to business concerns, most companies are also genuinely interested in protecting consumers. Despite their occasional portrayal in the media as evil and avaricious, most companies have no desire to harm people regardless of whether or not it is good for profits. Therefore, there is a long history of recalls not only in the auto industry but also in other industries. For instance, Johnson & Johnson recalled all of their Tylenol pills across America in the 1980s after it became apparent that criminals had poisoned some pills in the Chicago area. The company's swift response limited the damage they suffered and may have even enhanced the company's reputation. (The right drug can propel a pharma stock to new heights. Find out more in Stocks On Drugs: What It Takes To Get High.)
Of course, consumer safety is not the only concern when initiating a recall. Prompt response to potential problems makes good business sense both from a financial and reputation perspective. Most companies will consider a situation in which they can protect the consumer and also enhance their reputation a win-win situation.
The Recall Bandwagon
Although it is impossible for outsiders to know the true rationale for the recent recalls by Honda, GM and Nissan, it seems likely that a combination of factors were involved. According to media reports, the problems in question were serious but not critical. However, having seen the damage Toyota has suffered by delaying its recall, other companies may have decided to get ahead of the problem. That motivation becomes even more likely considering the close attention the US government has been paying to the Toyota situation - other companies have no desire to anger the government.
Toyota has also suffered a wave of bad press as a result of its recent problems. Honda, GM and Nissan may believe that a proactive approach will generate good publicity while also enhancing their reputations among consumers. Finally, Toyota's delayed response may ultimately cost the company billions of dollars. Other automakers may be attempting to save money by addressing their problems while they are still manageable.
The Bottom Line
Many factors can be at the heart of any recall, but the desire to protect the consumer is always involved. In the case of recent auto recalls, the desire to avoid potentially dangerous situations has likely been exacerbated by a desire to avoid the kind of negative publicity Toyota has recently suffered. Furthermore, Honda, GM, and Nissan may have seen an opportunity to be proactive in a situation where one of their main rivals has appeared to be reactive. In the long run, these competitors may be able to enhance their competitive position relative to Toyota. In that sense, recent auto recalls are both good for the consumer and good for the companies.