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GM Weathering Storm Frustrates Congress as Barra Returns

With General Motors Co. (GM) so far weathering a record-setting year of recalls with strong sales and a stable stock price, U.S. lawmakers are poised to refocus attention on the automaker’s decade-long mishandling of the original ignition-switch flaw that led to hearings in Congress.

There’s frustration that the government’s fine of $35 million is too low to affect corporate behavior and the lawmakers want to make sure consumers know everything about how GM is making sure undetected defects don’t happen again, said Henrietta Treyz, an analyst with Height Analytics.

Chief Executive Officer Mary Barra can expect a contentious hearing today. She is returning to Congress 11 weeks after failing to satisfy some lawmakers about why GM didn’t act sooner to fix a defective ignition switch in 2.59 million cars that has been blamed for 13 deaths. The Detroit-based company has since recalled millions more vehicles for ignition-related fixes, actions that have yet to scare consumers away from dealer lots.

“The fact that these recalls are continuing and they’re not feeling the pain is something members are going to have a problem with,” Treyz, whose legislative research firm is based in Washington, said in an interview about lawmakers’ sentiment.

Barra, in prepared testimony released yesterday, said she plans to go over the steps the largest U.S. automaker has taken to change its culture and act more swiftly on safety defects.

“I know some of you are wondering about my commitment to solve the deep underlying cultural problems uncovered,” Barra said in her prepared remarks for the House Energy and Commerce Committee. “I will not rest until these problems are resolved. As I told our employees, I am not afraid of the truth. And I am not going to accept business as usual at GM.”

The hearing is scheduled to begin at 10 a.m. in Washington.

Valukas Report

GM has recalled a record 20 million vehicles in North America for various fixes so far this year, more than double the number of cars and trucks it sold worldwide last year. The recall that began in February covers six U.S. cars as old as the 2003 model year and as recent as the 2011 model year, including the 2003-2007 Saturn Ion and 2005-2010 Chevrolet Cobalt.

Anton Valukas, the former U.S. attorney hired by GM to lead the internal investigation, is scheduled to testify with Barra before the same House committee. In his written statement, Valukas reiterated findings from his report about how GM’s engineering and legal departments failed to connect the dots and move quickly enough on the main recall.

“I understand that while this report answers many questions, it leaves open others,” he said in prepared remarks.

No Upside

Barra is in a tough position of defending mistakes that happened before she became CEO in January, said Jesse Toprak, an analyst with Cars.com. Barra has to show she has taken control and has a convincing plan, he said.

Lawmakers are going to want to make sure the company’s plans to deal with the recall are complete, and they’re going to want to be convinced that the steps being taken will prevent future defect disasters, Toprak said.

“There’s not a whole lot of upside,” Toprak said in an interview. “From GM’s position, you’re trying to minimize the damage. That’s all they can hope for.”

House Energy and Commerce Committee Chairman Fred Upton and other lawmakers plan to focus on why it’s taking GM so long to fix the cars. GM has shipped 396,253 repair kits for the 2.59 million cars, and dealers have repaired 154,731, according to a memo released by congressional investigators.

Another question from lawmakers will be whether GM’s effort to root out potential safety defects is working, or whether the spate of additional recalls indicates the company’s troubles go much deeper than initially thought.

Record Recalls

GM has initiated two new ignition recalls in the past week unrelated to the action to fix the Cobalt, Ion and four other U.S. models. Two days ago, it recalled 3.36 million vehicles, including some model years of the Chevrolet Camaro and Cadillac Deville, because their ignitions could slip out of the “run” position.

About 9 million of the 20 million GM cars recalled this year were for ignition-related issues such as switches, cylinders and keys, according to a tracking chart GM updated June 15.

Among the questions still to be answered are how many more defective GM cars are on the road, and whether GM can be trusted to tell the truth, Jere Beasley, a lawyer who has filed lawsuits in relation to the ignition switch, said in a statement.

“This automaker has lots of explaining to do to the American people,” Beasley said. “It’s time for GM to come clean.”

Strong Sales

GM shares and sales have held up despite the publicity surrounding the recalls. GM in May had its best month of U.S. auto sales since August 2008, rising 13 percent to 284,694 vehicles. In April, it reported first-quarter net income, despite $1.3 billion in recall-related costs.

Those gains suggest consumers are separating new models on the lot from the older small cars that are part of the ignition-switch recall.

GM rose 0.8 percent to $36.36 in New York trading yesterday. The shares through yesterday had risen 2.2 percent since Feb. 12, the day before the first batch of ignition-related recalls was formally announced.

Of 24 analysts who evaluate GM tracked by Bloomberg, only 3 had negative recommendations for investors.

Design Engineer

Most of the cars involved in February’s recall were designed more than a decade ago mainly as entry-level models. Soon after the cars reached the market, GM dealers began receiving complaints about unintentional engine shut-offs. It would later be determined that the ignition switches, when jostled out of position, led to stalling engines and disabled air bags.

GM said the engineer responsible for signing off on a flawed ignition design in the Cobalts and Ions also oversaw switches in the cars recalled two days ago. While they have a different switch, they shared the same design-release engineer, Alan Adler, a GM spokesman, said in a June 16 e-mail.

Ray DeGiorgio was named in an internal report released this month as being responsible for the faulty ignition switch in cars recalled in February. He and 14 other people were ousted for their roles in the company’s mishandling and years-long delay in recalling the fatally flawed vehicles.

In June, Barra revealed to employees that Valukas found a pattern of incompetence and neglect though didn’t uncover any conspiracy to cover up facts.

GM Changes

The Valukas report didn’t contradict her previous claims that she first learned of the analysis of the stalling in December and of the recalls in January.

GM’s attempts to understand ignition-switch and air-bag failures were impeded by a 2006 DeGiorgio decision to revise a design without following proper procedures such as changing the part number, Valukas said in his June 5 report. That effectively hid the problem and made it harder for engineers later to understand what happened and address it.

“Throughout the decade that it took GM to recall the Cobalt, there was a lack of accountability, a lack of urgency, and a failure of company personnel charged with ensuring the safety of the company’s vehicles to understand how GM’s own cars were designed,” Valukas said in his written testimony.

In her statement, Barra outlined all of the steps taken to change GM including restructuring safety management with reviews at the highest levels and the roll out of a new organization for global product integrity.

To contact the reporters on this story: Jeff Plungis in Washington at jplungis@bloomberg.net; Tim Higgins in Detroit at thiggins21@bloomberg.net

To contact the editors responsible for this story: Romaine Bostick at rbostick@bloomberg.net; Jamie Butters at jbutters@bloomberg.net Michael Shepard

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