April 4 (Bloomberg) -- The chatter on the showroom floor of John McEleney’s Chevrolet dealership this week focused more on defects than deals.
General Motors Co.’s chief executive officer faced two days of congressional hearings this week about the automaker’s slow response to fatally flawed ignition switches. That has McEleney, whose store is in Clinton, Iowa, worried about his business.
“It’s a little bit unnerving because GM is on the front page -- not of the business section, but the front page of the paper and the lead story on the news every day,” he said. “People are concerned because they’re GM owners and they see all this publicity regarding GM.”
GM dealers are gearing up for an onslaught of owners returning to their stores next week to receive repairs on the 2.59 million cars the automaker has recalled for faulty ignition switches linked to 13 deaths. The dealers have already had to act as therapists to customers who’ve been flooding phone lines with worries about the flaw that allows the ignition key to fall out of the “on” position, disabling the engine and air bags.
McEleney has been down this road before. Sales swooned at his adjoining Toyota store back in 2009 and 2010 when the Japanese automaker recalled more than 10 million vehicles for defects linked to unintended acceleration. He’s hoping it will be different this time because the Toyota recall involved cars on his showroom floor, while GM’s recall is for older models such as the Chevy Cobalt that he no longer sells.
“There was a much higher percentage of Toyota owners that were concerned and impacted directly,” McEleney said.
Customers are “confused and concerned,” said Nicole DeNooyer, general manager of Robert DeNooyer Chevrolet in Holland, Michigan. “They want to know, ‘Is my car part of the recall? And if it is, how bad is it?’”
DeNooyer has been telling customers not to drive their Cobalts, Chevy HHRs and Saturn Ions and has put about 30 owners of the small cars into free loaner vehicles. GM CEO Mary Barra told two congressional committees this week that the cars are still safe to drive as long as owners don’t use a key ring, which could be heavy enough to pull the key out of position. Barra said she would be comfortable if her teenage son drove a recalled model.
There’s less comfort among customers, who are suddenly worried about their safety and the value of their GM car, dealers said.
“This stirs our owners who are in possession of those cars into a panic,” Jim Stutzman, a Chevrolet-Cadillac dealer in Winchester, Virginia, said of the congressional hearings. “It’s setting this thing up like it’s this catastrophic emergency situation and that they could be killed at any moment driving their car. And that’s not the case.”
Senators this week accused GM of “criminal deception” and a “culture of coverup” because the automaker for years passed on proposed fixes from its engineers because, according to one memo, it could have cost an extra 57 cents per car. Barra apologized for GM’s slow response and pledged to make changes so “this never happens again.”
The congressional questioning is hurting GM’s reputation in the same way that hearings leading up to its government bailout and 2009 bankruptcy were a setback, Stutzman said.
“It’s like reliving the bankruptcy experience all over again,” he said. “There are people who have walked away from General Motors products and dealers because they felt the bailout was wrong.”
Now Stutzman sees consumers turning away because of the recall, which came after the U.S. government sold its final GM shares in December and as the automaker was shaking the stigma of what some bailout critics called “Government Motors.”
“We had great momentum coming out of February,” Stutzman said. “Then we definitely saw a slowdown in our traffic and people’s interest in our products. I don’t think we’re alone. When we talk to other dealers in our region, I think a lot of people are feeling it.”
That’s contrary to what GM reported for its total U.S. sales last month. Nationwide, GM’s sales rose 4.1 percent in March and its current small-car models, the Chevy Sonic, Spark and Cruze, jumped 14 percent to 46 percent.
“This has certainly been a trying month for GM, but you wouldn’t know it by looking at its sales,” said Jessica Caldwell, a senior analyst for auto researcher Edmunds.com. “Nothing in our data shows that shoppers are shying away from new GM vehicles -- at least for now.”
The hit to sales, though, could come later as the blaring headlines generate more awareness of GM’s problems and create uncertainty about the quality of its products, dealers said.
“Some of that you don’t see right away,” said Paul Krajnik, service manager of Krajnik Chevrolet in Two Rivers, Wisconsin. “People choose a different make of car and we don’t always see that right away. I’m sure that will happen some.”
The critical moment will come when owners begin to come in for repairs April 7, dealers said. How well they are treated and how quickly their problem is resolved will determine if they ever return, the dealers said.
“Having 10-year-old cars come back in the service lane is an opportunity to show how we operate today,” said Mike Bowsher, president of Carl Black Automotive Group in Kennesaw, Georgia, which operates four Chevy, Buick and GMC stores in Atlanta; Orlando, Florida; and Nashville, Tennessee. “I’m telling our folks this is a time to shine.”
Flow of Parts
A complicating factor is dealers’ confusion over how repair parts will flow into their service bays. GM hasn’t told dealers how many switches each will receive and anxious customers all want to be first in line, dealers said.
“Just because the first shipment comes in April 7, doesn’t mean everybody’s car is going to get fixed April 7,” DeNooyer said. “We might not get enough parts to cover all the people we have in loaner vehicles.”
Dealers said they are assigning extra service staff and extending hours to make the repairs. Replacing the ignition switches should take less than an hour, McEleney said.
“We can only do them as fast as we can get the parts,” Krajnik said. “If there’s limited availability, we might not be able to do 10 a day. We might only be able to do two a day.”
The free repairs are actually a temporary boon to dealerships because GM pays for those parts and service. The Detroit-based automaker said it’s taking a $750 million charge in the first quarter to cover the small-car recalls and others. GM has recalled almost 7 million vehicles already this year.
Dealers are also trying to get some extra business for their sales operations by persuading Cobalt owners to replace their old cars with a new model. GM is offering owners of the recalled cars $500 toward the purchase of a new vehicle.
DeNooyer is matching the GM deal with another $500 and that has convinced two Cobalt owners to buy new models, she said.
“GM wants us to be careful,” DeNooyer said. “They said, ‘Please don’t call them and barrage them with a sales pitch.’ So we’re trying to be very respectful and let them know they have the opportunity to get this extra money.”
A young college graduate took advantage of the GM deal to trade in her Cobalt for a Malibu mid-size sedan at Krajnik’s Chevy store. He said he hopes that’s a sign that any damage Chevy’s reputation is taking will be temporary.
“That’s a wound that heals,” Krajnik said. “If GM steps up to the plate and takes care of things, I think the consumer can accept that.”
Stutzman, though, said he’s worried that the trust GM has rebuilt with consumers since its bankruptcy is now being broken. And the timing couldn’t be worse, now that GM is producing its best cars in a generation, which are receiving accolades in J.D. Power & Associates quality surveys and Consumer Reports reviews.
“I’ve been doing this for almost 35 years and I’ve watched us at our absolute worst and now I’m seeing us at our absolute best as far as the quality of the product,” Stutzman said. “It’s very, very frustrating for us to sit here and watch this. One step forward and two steps back.”