In early 2018, AlixPartners released a study that 2017 recalls costs in North America alone exceeded $20B annually. That only went northward thereafter in 2019 and 2020 with 24% and 32% more recalls respectively; some being extremely expensive per vehicle (e.g., Hyundai’s 2021 recall of 82,000 electric vehicles cost a whopping $11,000 per vehicle, which is 22 times the cost of the average recall ($500) over the past ten years). To put that likely $25-30B into perspective, the combined 12-month operating budget of Rivian, Lucid Motors and Mullen Automotive is only $14B, i.e., three full automotive companies could be run with only half of the waste from recalls in North America alone.
Conversely, the first half of 2023 is a vastly improved story. Recalls are on pace to be down 51% from the peak in 2020 (when there was a whopping 56,228,522 potentially affected vehicles) and down 14% from last year alone. Add in that in the last 55 years there have been a skewed 32% more recalls announced from January to June versus the second half of the year suggests the industry is on pace for 25% fewer recalls this year.
The next and obvious questions are who were the leaders and laggards of the major brands, and what’s behind the success(es) of the leaders. The three leaders in percent improvement were: Tesla (-81% potentially affected vehicles versus 2022), Porsche Cars North America, Inc. (-80%) and Mercedes-Benz USA, LLC (-75%). On average, those reduced quality issues would amount to nearly $200M in additional profits.
“Our continual product monitoring, backed up by advanced digitalization, means we are able to detect the tiniest deviations at a very early stage in the production process,” states Jason Hoff, Vice President of Quality Management at Mercedes-Benz Cars and Vans, when asked about the significant improvement in 2023. “We are well aware that each recall can often lead to our customers having to pay an unexpected visit to the service center. We certainly aim to avoid such resulting inconvenience – but nevertheless consider it our duty to act consistently and decisively in line with our brand promise.”
The three laggards all come from separate continents: Honda (1109% increase in potentially affected vehicles versus 2022), Navistar, Inc. (355% increase), and Jaguar Land Rover (JLR) North America, Inc. (239% increase). At times, such increases can be blamed in part on correlated sales volume increases (e.g., Tesla’s recalls have risen over 1700% since 2017, but sales have increased nearly 1000%) but that isn’t necessarily the cause for several companies in the red, e.g., Nissan North America has seen a drop in sales (e.g., 25.4% fewer vehicles in 2022 than 2021) but rises in recalls (e.g., projected 66% increase in 2023).
All-in, CEOs recognize the need for reducing such non-productive spends during an uncertain economy, and not just because it’s inversely proportional to the CEO’s compensation. In a 2021 investor call, Jaguar Land Rover’s previous CEO, Thierry Bolloré, acknowledged that, “…the dissatisfaction of our customers was really detrimental to our natural volume … [and] the missed opportunities are massive. It’s more than 100,000 healthy sales that we could perform.” And then Land Rover finished dead last in J.D. Power’s 2022 Vehicle Dependability StudySM for the third year in a row (with 244 problems per 100 vehicles) and Jaguar only a few spots higher. Bolloré surprisingly stepped down in November after two years (citing personal reasons) and deep financial losses, and subsequently his interim replacement admitted those same losses were actively driving down recall costs by 489 million pounds ($680M USD).
Author’s Note
Let’s be honest: product differentiation within the industry is minimal. Tesla arguably and temporarily holds that premium-pricing scepter via styling and technology, but both are fleeting as the incumbents scramble to follow suit. So eventually the competitiveness of any manufacturer’s income statement will be doubly reflected by the reliability of the vehicles: do customers actively seek the quality (a.k.a. “accounts receivable” or revenue) and does the corporation suffer the costs of rework (a.k.a. “accounts payable” or cost).
But I’m probably preaching to the CEOs who kept their jobs.
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June 28, 2023 at 03:00PM
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Auto Recalls Way Down In 2023 And Mercedes Knows Why - Forbes
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