Automotive Recall

1

• Automotive Recall
• FKG
• David Palmer Crisis Management
• 3rd March 2005

2
Statistics

• As at 30 Sept 2004, 462 recalls of 14.3m
  vehicles
• By end of Q2 2004 already more recalls than all
  2003
• Auto industry on track to for 25 million recalled
  cars
• GM alone has recalled 10.5m in North America
• Warranty cost in US now 12bn per annum
• Source Syncata Corp

3
Recall Statistics

• Automotive Industry Action Group study
• Average time to recall / repair all vehicles -
  250 days
• Average cost - 1M per day
• One in three vehicles fails to be repaired
  following a recall notice brand integrity
  litigation issues
• Daimler Chrysler - 400M hit to third quarter
  operating profits (2004) due to recall campaign
  at majority owned Mitsubishi Fuso Truck and Bus
  Corp.
• Not perceived as quality problem issue of
  increasing vehicle complexity and vigilance

4
Changing environment

• Auto giants
• Contractual liability
• Tighter margins
• Vehicle sophistication
• Multi platforms
• Just in time
• Remote labour markets
• Consumer safety

5
Recall Costs

• Recall notices
• Withdrawal (transportation)
• Removal re-installation
• Disposal costs
• Warehousing
• Additional staffing
• Replacement of the part
• Line stoppage (business interruption)

6
Intangible Costs

• Damage to relationship
• Loss of customer
• Loss of market share
• Damage to brand
• Damage to corporate image

7
Example - Mitsubishi

• Mitsubishi lay off 1,200 US workers
• Plans to cut 11,000 jobs worldwide
• Restructure due to 9bn debt
• Output cut by 22
• Sales fell by 27 in first 6 months
• Daimler Chrysler withdraws support
• Former president and five other executives
  arrested for professional negligence
• Reason Series Of Recalls !

8
Managing The Risk

• CFOs are struggling to manage and assess recall
  risk
• Growing recognition of catastrophic consequences
• Second hand involvement in dealing
• Removed from the decision making process and
  withdrawal process
• Commercial considerations

9
January 2005 - Ford

• January 2005 - Ford recall 792,000 vehicles in US
  due to fire risk
• Pick-up trucks sport utility vehicles
• December 2004 Ford recall 600,000 vehicles due
  to dangerous accelerator cable problem
• Logistical problem example recall includes
  vehicles in US unincorporated territory of
  Guam!
• Fords shares fell 16 cents following January
  announcement

10
February 2005 BMW, Mercedes Audi

• BMW recall faulty diesel fuel-injection pump
• Supplied by Robert Bosch
• Mercedes Audi also supplied part by Bosch this
  caused production stoppages bottlenecks
• Plant closed for a week production loss of
  3,600 vehicles

11
January 2005 - Renault/ Dacia

• 15,169 vehicles made by Romanian manufacturer,
  Dacia owned by Renault recalled
• Three separate faults reported (jack, engine
  cable computer reprogramming)
• Recall affects Romania BUT vehicle was set to be
  launched in Central Eastern Europe, the Middle
  East North Africa
• Production lines planned in Russia, Morocco,
  Colombia and Iran Recall is a global issue

12
December 2004 - Porsche

• December 2004 Porsche recalls 18,000, 911
  convertibles
• Fault roofs may open unexpectedly at high speed
• 8,900 to be recalled in US and 8.200 in Europe
• Produced in 1993 1998
• Recall is a long tail business

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Continental European Insurers

• Low capacity circa 1-5m primary
• Extension to casualty policy
• Net
• Limited cover
• Bodily injury
• Accommodation business
• Low premium

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London Market

• Coverage
• Primary capacity 30m
• Recall costs
• First party recall
• Third party recall
• Repair / replace / refund
• Financial loss
• Retro-active
• Trigger
• Bodily injury
• Product guarantee

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Coverage

• Defense Costs, in addition to limits
• All reasonable necessary expenses
• Insured Product -
• Which has been designed, specified,
  formulated, manufactured, constructed, installed,
  sold, supplied, distributed, treated, altered,
  serviced, or repaired by or on behalf of the
  insured

16
Market Players

• Blended solutions