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News : Vehicle recalls cluster because OEMs wait for rivals to move first


Vehicle recalls cluster because OEMs wait for rivals to move first

 

Vehicle recalls cluster because OEMs wait for rivals to move first
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Many of us are familiar with the concept of the Friday night news dump, the term given to those occasions when, for example, an embattled politician announces a policy they know will be unpopular. Invariably, it happens late on a Friday afternoon, maximizing the chances that the news gets lost in the churn and forgotten by Monday. As it turns out, there’s a similar phenomenon in the auto industry: recall clustering.

For example, in August 2017, Ford issued a recall for leaky fuel tank valves, which was quickly followed by a fuel tank recall from Honda and an oil hose recall issued by Chrysler.

It’s not a new thing, either, according to new research published in Manufacturing and Service Operations Management. The researchers looked at 48 years of data, from 1966 to 2013, during which time they identified 3,117 vehicle recalls.

The intent was to test several hypotheses. Firstly, recalls cluster together, in that after one OEM issues a recall, multiple others follow in its wake (termed “following recalls”). Next, an OEM pays a greater stock price penalty for being the first to issue a recall (termed a “leading recall”). Thirdly, an OEM that waits longer to issue a recall after others have already acted will also pay a greater stock price penalty than those that follow immediately in the wake of a first mover. And finally, the longer the time interval between recall clusters, the greater the market penalizes an OEM for issuing a leading recall.

According to the data, recall clusters are indeed a thing. In fact, the authors found that of the 3,117 recalls over the 48-year timeframe, 73 percent did indeed fall into clusters. There were 266 clusters in total, lasting an average of 34 days, with an average of 7.6 competitors issuing following recalls in the wake of each leading recall. Interestingly, the average gap between recall clusters was only 16 days.

Being the first to act apparently comes with consequences. OEMs that issued a leading recall suffered a 67 percent greater penalty on the stock market than ones that issued following recalls. And the longer the time between clusters, the greater the penalty for the leading recaller on the stock market.

The solution, according to the authors, is for much greater transparency in the recall decision-making process, which they say “should make them more timely, reducing the prevalence of clustering, which creates unnecessary delays in removing harmful products from the market.”

The paper suggests that the National Highway Traffic Safety Administration could follow the lead of the US Food and Drug Administration, which requires drug and medical device makers to be upfront about the timing of when a company knows a recall is required, known as the defect awareness date. Tracking this and the date that the recall begins means the FDA can measure the time it takes for each company to issue a recall once it knows it has a problem, and that makes it harder for drug and medical device companies to sit on information the way the automakers do.

It’s possible that may even happen—the NHTSA has already been in touch with the authors, saying that their research could help improve the agency’s recall process.

Manufacturing and Service Operations Management, 2021. DOI: 10.1287/msom.2020.0937 (About DOIs).

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