Benjamin Franklin once said, “If you fail to plan, you plan to fail.” While the thought has stood the test of time, with time, businesses have also realized that planning for accidental (yet inevitable) failure is also a failure to plan.
The National Highway Traffic Safety Administration (NHTSA) recently issued multiple recalls, with three auto giants scrambling for cover and damage limitation.
Ford Motor Company (F) is recalling 979,797 of its vehicles for not having instructions on adjusting or removing certain head restraints in the owner's manual. These include certain 2018-2023 Expedition and Lincoln Navigator models that have third-row seating, 2019-2023 F-Super Duty F-250, F-350, F-450, F-550, and F-600 SuperCab vehicles along with three-passenger front bench seat regular cab models.
In addition, the company has also recalled 16,375 select 2022-2023 F-150 BEV vehicles for a rear lightbar issue in which the lightbar may have micro-cracks in its outer lens, allowing moisture to collect, which could result in out-of-order or flickering reverse lights.
Hyundai Motor Company (HYMTF) is recalling 322 of its 2023 Palisade vehicles for a potential issue in which the brake booster diaphragm may become misaligned and cause an internal vacuum leak in the vehicle, potentially leading to a loss of power brake assist.
Nissan Motor Co., Ltd. (NSANY) is recalling 230 2022 Sentra vehicles for a potential missing or improper seal in the driver's side cowl area. This can allow water to leak inside the vehicle and corrode electrical components, which could lead to the failure of electrical systems and increase the risk of a crash and an electrical short-circuit, potentially increasing the risk of a fire.
In all three cases mentioned above of oversight, corrective actions are being taken by the concerned companies through their dealer networks free of additional cost to the customer.
However, since resources that could have been utilized to meet planned business objectives need to be diverted to execute these unplanned corrections, let’s understand the ever-growing incidents of product recall and their impact on businesses and (by extension) their stock prices.
A product recall is a process of retrieving and replacing defective goods, with the concerned company or manufacturer assuming the responsibility and absorbing the cost of replacing and fixing defective products or reimbursing affected consumers, as per consumer protection laws.
With the spread of globalization, businesses expanded and diversified their supply chains globally through offshoring and outsourcing to remain cost competitive, although often at the cost of the reliability or quality of their end products or services.
Moreover, an offering, or a component of the same, must comply with the regulations of both the country of its origin and the market in which it is supposed to be distributed. Hence, even if a product passes regulations in China, it might not be under U.S. laws. It would, therefore, have to be recalled.
Government agencies, such as the NHTSA, are responsible for testing products and recognizing faulty ones before they reach the market. With the increasing complexity of global supply chains and the frequency of tests, product recalls have also increased in frequency.
Since brand equity is built on trust and confidence, recalls can tarnish a company's reputation, translating into financial losses and consequent erosion of market capitalization. Moreover, although insurance may cover a minimal amount to replace defective products, several recalls result in lawsuits that could further dent a company’s prospects.