New GM struggles to shake off the past

Robert Wright
Pictures of people killed in GM cars with defected key switches, were put of the ledge of the hearing room as General Motors Company CEO Mary Barra (L) answers questions during a House Energy and Commerce Committee hearing on Capitol Hill, on April 1, 2014 in Washington, DC.
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When Mary Barra took office as General Motors' chief executive on January 15, she could hardly have imagined that the company's future would soon hinge for the second time in five years on decisions in New York's bankruptcy court.

But in the next few weeks Judge Robert Gerber, who steered GM through a government-managed bankruptcy in 2009, is once again likely to make decisions critical to the company's future in his Manhattan court.

One of his critical judgments will be whether General Motors' managers during its 2009 bankruptcy covered up knowledge of the safety problems that led in February and March this year to recalls of 2.6m compact cars worldwide. Politicians have expressed incredulity that Ms Barra herself, in her former job as head of GM's product development, was unaware of the gravity of the problems.

A ruling that the company deliberately hid the problems' seriousness could allow plaintiffs to sue the new, post-bankruptcy GM for their losses. The company—where Ms Barra was expected to mark a decisive break with the past—could then find itself bogged down still more deeply in its past mistakes.

Yet, as GM prepares to announce first-quarter results on Thursday, it is not clear whether conspiracy or incompetence were to blame for the problems' mishandling.

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"The question is: who knew what, when, and what did they do with that information?" says Carl Tobias, law professor at the University of Richmond in Virginia.

There is no dispute that in 2001, as they rushed to bring to market a series of low-cost compact cars, General Motors engineers recognised the vehicles' ignition switches were vulnerable to shifting from "run" to "accessory" while being driven, cutting off the engine.

GM to start replacing faulty ignition switches

There was internal debate about how to respond. In one internal email released as part of a US House of Representatives investigation, John Hendler, an engineer, wrote in 2005 that the costs of an immediate change to the switches did not justify the savings from reduced warranty costs.

"I'm not sure it's OK to wait," replied another engineer, Lori Queen.

Yet as well as cutting the engine, the ignition switch shift prevented vehicle airbags from deploying. GM believes at least 12 people died in crashes in which airbags failed to deploy because of the ignition switch problem.

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Senior GM executives—including Ms Barra—say it took only a matter of days between their learning of the link with the deaths on January 31 this year and the first recall announcements.

But Claire McAskill, a US Senator from Missouri, at a hearing on April 2 criticised what she said had been a "culture of cover-up" at GM. Ray DeGiorgio, the engineer who approved design changes to the ignition switch, denied on oath last year knowing who approved the changes, she pointed out. The company also failed—very unusually—to give the new, redesigned ignition switch a new part number.

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Other senators referred repeatedly to an email last year from Frank Borris, head of the National Highway Traffic Safety Administration's Office of Defects Administration, to GM executives about their attitude to recalls.

"The general perception is that GM is slow to communicate, slow to act and, at times, requires additional effort . . . that we do not feel is necessary with some of your peers," Mr Borris wrote.

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However, Jake Fisher, director of auto testing for Consumer Reports, the consumer information magazine, points out that the Chevrolet Cobalt and other affected cars were poor products generally.

"They were making the car not to be as good a car as possible but to take as much cost out as possible," he says.

The internal emails read as if the engineers were treating the ignition switch as one of many quality problems, unaware of the serious crashes. That would be consistent with the accounts by Steven Rattner, who steered the government's rescue effort, about how appalling communication between different departments—such as the engineering and legal arms—was at the old GM.

"I think there was plenty of firefighting at the time," Mr Fisher says. The judge's ruling will not reduce the $1.3bn costs GM faces this quarter for repair and other recall-related costs. Ms Barra has also repeatedly stressed that the new company intends to fulfil its "civic and moral obligations" to the relatives of those killed and the injured.

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But it will be an important symbolic victory if the new company can leave at least some of the liabilities at the courthouse by the shore of New York Harbour.

Questions about what GM knew when are "open at this point," says Prof Tobias.

—By Robert Wright of the Financial Times