When will it stop?

Photographer: Alex Wong/Getty Images

Can Automakers Fix Themselves?

Edward Niedermeyer, an auto-industry analyst, is the co-founder of Daily Kanban and the former editor of the blog The Truth About Cars.
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If there were any doubts that 2014 would go down in history as a turning point for auto safety, last week's Senate Commerce, Science and Transportation Committee hearing on defective air bags erased them. Coming on the heels of the still-expanding investigation into General Motors's faulty ignition switches, the congressional grilling of air-bag supplier Takata and customers Honda and Chrysler was yet another demonstration of the auto industry's inability to find and fix deadly defects. This year's scandals have not only shattered recall records, but they also have repeatedly exposed systemic failures by automakers, suppliers and regulators alike.

As with GM's defective ignition switches, there were plenty of warning signs that Takata's air-bag inflators could prove lethal. Engineers at the company's Mexican factory identified a range of problems with the air-bag inflators as early as 2001, while Honda recognized the "unusual deployment" of a Takata air bag in a 2004 crash. Recalls of Takata's air bags have been taking place since 2008, yet three people have died from the shrapnel propelled by these defective safety devices in the last 14 months alone. The pattern emerging from the GM and Takata scandals is astounding: Not only are automakers allowing a record number of defects to slip through quality control, often with lethal consequences, but they also seem to lack the will or ability to identify and recall defective vehicles in a timely manner.

Lawmakers are considering several potential regulatory fixes for this shocking state of affairs, including new incentives for whistle-blowers, increased funding for National Highway Traffic Safety Administration investigations, and increasing fines yet again for automakers and suppliers who fail to promptly recall defective vehicles. Though some of these efforts may help the situation -- incentives for whistle-blowing seem especially promising -- none of them address the fundamental issue that keeps bringing automakers back to Capitol Hill for round after round of tongue-lashings. 

The rising tide of safety problems is a clear product of two of the most fundamental forces in the industry: scale and cost. The push to build competitive scale on a global level creates complexity and communications challenges, which allow for defects to persist undetected. The huge scale of parts purchasing, driven by the cost savings gained by using common components across as many vehicles as possible, gives each defect global reach. Because the industry has huge fixed development costs and relatively low margins, the need for scale will continue to push the risk of defects relentlessly higher.

For decades, automakers have sought to offload their massive development costs onto their suppliers, which are increasingly taking the lead in engineering and designing the parts they produce. Unsurprisingly, the relationship between automakers and their suppliers is at the heart of both the GM and Takata incidents. Takata's cheap but volatile air-bag propellant and explosion-plagued Mexican production plant bear witness to the kind of cost pressures that have been blamed for the dysfunctional relationship between GM and Delphi, the supplier of its defective ignitions. 

The bad news is that, although 2014's Recallapalooza has made every automaker take a long look at its cost-quality balance, the underlying risks that caused it will get worse before they get better. Increasing competition and consolidation will drive scale up and costs down, especially as the industry's growth moves into developing markets. And if automakers can't uncover their own defects due to their growing complexity, scale and supplier dependence, there's little chance even a better-funded NHTSA would be able to. 

The good news is that the industry will not operate in its current paradigm forever, as maturing demand and new technology will ultimately break the tyranny of cost and scale. With smartphones and (eventually) autonomous-car technology enabling new "mobility as a service" business models, the auto industry will lose huge numbers of drivers who only buy cars for occasional use and leave them parked 95 percent of the time. Indeed, some experts say a single autonomous vehicle could replace as many as 32 privately owned vehicles. And as this transition takes place, an industrywide shift toward better quality control will be absolutely necessary: The sight of auto executives stammering bewildered nonanswers in congressional hearings over gross quality lapses will have to become far less common before the autonomous-car revolution can ever hope to take hold. 

The current rash of recalls is just part of the industry's broader transition from a relatively low-tech, high-volume model into a higher-tech, lower-scale future. Not only will this reduce defects and improve quality, but it will also remove the most dangerous factor from the automotive equation: drivers themselves. Until this transition fully takes place, however, expect more scrutiny than ever of an auto industry that has become too big not to fail.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Edward Niedermeyer at edward.niedermeyer@gmail.com

To contact the editor on this story:
Brooke Sample at bsample1@bloomberg.net