setback for Rivian.

The company recalling nearly every.

vehicle it has delivered.

But this is an example of what can happen if you

don't have a completely clean launch.

And now you've got Rivian recalling about 13,000

vehicles.

In October 2022,

The high profile startup betting big on electric

trucks and SUVs faced its biggest hurdle yet.

The company notified customers that it was

voluntarily recalling 13,000 out of the total,

14,317 vehicles produced that year.

Recalls happen all the time, but this one sent

shares tumbling and raised investor eyebrows.

After all, the company had gone public just a

year prior at a market valuation of a whopping

$86 Billion higher than the market cap of legacy

automakers, Ford and General Motors.

Rivian is one of countless new carmakers

attempting to become the next big name in a rapidly

changing automotive landscape. They're new to

manufacturing. They don't have a dealership network.

They're trying out new technology.

New technologies make bold promises, but things

can go wrong. And when they do, they can be

costly. At least a few recalls have been

devastating for automakers and scores of

victims. The National Highway Traffic Safety

Administration, or NHTSA, is the government entity

tasked with investigating defects in cars.

Among other things, it issued about 1100 recalls

in 2021 for 34 million vehicles.

So how do recalls work?

How costly are they and how do companies recover

from them?

I'm Steven Ridella.

I'm the director of the Office of Defects

Investigation at the National Highway Traffic

Safety Administration, also known as the.

Day to day Ridella and his colleagues combed through

thousands of consumer complaints and other data,

looking for one of two things vehicle features or

parts that might not comply with the federal

motor vehicle safety standards or ones that are

simply defective.

If NHTSA determines a defect poses an

unreasonable risk to safety, it will require

the manufacturer to initiate a recall.

That's if the manufacturer hasn't

already. Just about every major car, commercial

truck and RV maker issues recalls, though some more

than others. There have been times where

automakers have been late to recall vehicles

yielding catastrophic results.

George Ball, a business professor at Indiana

University who studies recalls, says the recall

of the Ford Pinto in 1978 is one such notable

example.

You know, when I when I started researching

recalls after coming to academia, that one really

caught my attention because it's kind of a

classic firm choosing profits, unfortunately,

over safety.

That is an extreme example.

So I don't think it's fair to say that every

recall firm chose profits over safety.

The car was recalled because a design flaw in

the fuel system created a fire risk.

At the center of the controversy was a memo

that indicated the company had predicted the

number of injuries and deaths, the costs of the

lawsuits resulting from them, and determined they

were less costly than redesigning the vehicle.

Before academia, I was in medical devices and I've

made a lot of recall decisions and I've advised

that type of thing would get in the FDA's

regulatory regulatory world.

We'd get thrown in jail for those types of

analyzes.

A storm of public outrage, lawsuits and an official

count of 27 deaths ensued.

Ford later recalled about 1.5 million Pintos and

30,000 mercury, bobcat, sedans and hatchbacks.

The Pinto has had its defenders, though.

One Law review article from 1991 outlined a

number of myths and misconceptions surrounding

the Pintos, overall safety risks and Ford's

role in the controversy.

Once a recall is initiated, manufacturers

have to notify customers of the recall and follow

up with Nissa on Recall Progress.

Despite this, Rhodiola says only about 60 to 70%

of recalled vehicles get fixed.

Which we don't feel is enough.

We want 100% recall completion.

We understand that there's a lot of reasons

why people don't get recalls done, but it's

just something that you should do, almost like

you're changing your oil or anything else on your

car. Just check for recalls on a regular

basis. If you have an open recall, you can take

it in the dealer and get it fixed.

Since 2008, at least 19 automakers have recalled

about 67 million airbags made by Japanese supplier

Takata after they were found to be prone to

explosion. At least 22 people have been killed

and more than 400 people injured in the US alone.

Yet millions of unrepaired cars are still

on the road.

In November 2022, NHTSA issued yet another warning

to owners to have their cars checked for

potentially defective airbags after another

fatal rupture.

That ranger was under a do not drive warning.

Ford and Mazda had placed on thousands of trucks

back in 2018.

The Ford Ranger explosion came days after

Stellantis, formerly Fiat Chrysler, issued its own

do not drive warning for owners of 276,000 Dodge

Magnums, Chargers and challengers.

The number of airbags affected, nearly 70

million, is staggering, as is the number of

automakers. Everyone seems to have been using

parts from the same company. According to one

Bloomberg report from an anonymous source, the

scandal could cost Takata up to $24 billion, while

the company denied the claim the criminal

investigation and the lawsuits were mounting.

Its stock tumbled and the company never recovered.

In 2017, Takata filed for bankruptcy a year later.

Key safety systems and auto components maker

acquired Takata in a $1.6 billion deal.

Unfortunately, if someone had analyzed the risk that

was that was being borne by these manufacturers,

you could look at the supply chain and say, if

this type of supplier has a quality problem, every

single manufacturers in trouble.

So investors really view recalls as part of the

cost of doing business.

In the auto industry, they're very common.

And so there's not necessarily a whole lot of

surprise when there's a recall announced.

They're happening all the time.

They do, however, hurt the overall market performance

of the automotive industry. Recalls are one

of the main reasons why car companies stocks trade

at some of the lowest earning multiples of any

industry in the market in 2021.

General Motors recalled all of its Chevrolet Bolt

Electric vehicles after several reports of

batteries going up in flames.

Now, that was sent major warning flags across the

industry, and especially because GM is making such

a big bet on EVs.

That recall cost GM $2 billion for 110,000

vehicles, roughly.

So you do the math that it costs them about

$18,000 per vehicle.

That's a very expensive one.

A recall like this won't cripple a company like GM,

which has a broad portfolio of products and

sells millions of vehicles every year.

And in this case, the problem was the battery,

which was supplied by LG Chem.

Gm recouped about $1.9 billion of the $2 Billion

it cost the automaker.

But the cost was more than financial.

And it really shook the confidence.

And a lot of investors in GM here, their best

selling EV were having those kinds of issues and

making such as Mary Barra and the company making

such a big bet on EVs being the future of the

company was I think, sent some shockwaves throughout

the industry.

Despite it all, sales have remained strong for the

two bolt models.

The company reported record sales in the third

quarter of 2022.

Gm said in a statement to CNBC, The safety and trust

of those who drive our vehicles is at the

forefront of everything we do at General Motors.

We have a culture where we focus on identifying

and resolving an issue as quickly as possible to

reduce the frustration and concern of impacted

customers. While the Rivian recall involved a

part that was relatively inexpensive and easier to

fix, newer upstart companies don't have the

same kind of cushion larger automakers have.

Tesla has recalled 3.8 million vehicles in the US

as of November 2022 that included a recall in

February of every vehicle equipped with its full

self-driving software.

Ball and his colleagues have found recall

announcements have a curious pattern to them.

They occur in clusters.

When one company announces a recall, others

follow in close succession, even though

their problems are unrelated. The team also

found that the first company to issue a recall

in these clusters suffers the greatest hit to its

share price. Companies that closely follow the

leader suffer less.

They can't say that companies are doing this

intentionally, but they do see a strong

association.

And whether the executives are doing it on purpose or

not, they definitely get a stock price benefit by

following. And the closer you follow, the better.

The longer you wait, the market starts to forget

about that leading recall. So if you wait a

couple of weeks, you're not going to get much of a

benefit. But if you do it the day or two after, you

get the most benefit.

Earlier research had found that a company's public

image suffers more when it is otherwise associated

with high quality products. Toyota, for

example, has a strong reputation for quality,

and the hit to its public image appears to be larger

than it would be for companies with lower

consumer confidence.

Building on this ball found that when companies

with strong reputations issue recalls, a high

number of companies, follow them right behind.

Toyota has such a stellar quality reputation that

their clusters last longest.

So the number of days that they'll last 37 days,

and that's the longest of any firm and they

stimulate ten following recalls.

And that's more than any of the other firms.

A substantial challenge.

Companies like Rivian and Tesla face is actually

fixing problems.

Many of these new automakers sell directly

to customers and don't have the franchised

dealership networks older automakers rely on for its

most recent recall.

Rivian claimed it could fix the issue within 30

days.

Companies that don't have the established

distribution networks, it becomes more expensive.

They just don't have the infrastructure to deal

with this. A lot of times they'll outsource to a

third party auto repair shop in order to make that

fix, or they'll have a network of service

providers that they rely on.

So but it certainly adds to the total cost of of

the labor involved.

Industry analysts have questioned whether these

automakers can scale to the level of a Volkswagen

or a Toyota without the dedicated dealership

network. A major advantage of companies

like Tesla and Rivian is their ability to diagnose

and fix defects through software updates that can

save consumers a lot of time and hassle.

But it can also threaten transparency, making it

challenging for regulators like Nissan to