DETROIT (Aug. 23, 2000)—When Bridgestone/Firestone Inc. absorbs the financial blow of recalling 6.5 million tires, it will hurt. But judging from the auto industry´s more than 360 product recalls last year alone, the event hardly will be a fatal punch for the Japanese-owned supplier.
Product recalls rarely, if ever, have destroyed a component manufacturer. In many cases, auto makers share in the liability and shoulder some of the cost of a recall in order to soften the blow.
Industry executives say the expense of a recall is a cost of doing business. Auto suppliers have spurned recall insurance as too expensive.
As is typical in the industry, Bridgestone/Firestone is self-insured meaning the company will pay for the Firestone recall out of its own pockets—not through an insurance policy.
Bridgestone Corp. of Japan, the North American supplier´s parent, already has revised its earnings forecast to prepare for a $350 million charge for "unusual losses."
The recalled tires are under investigation by federal officials in connection with the deaths of 62 people. Most of those recalled were installed on Ford light trucks, primarily on the Ford Explorer sport-utility vehicle.
But it appears that Ford Motor Co. will not assist in this case.
Asked whether Ford would share the financial burden, as it has with suppliers involved in previous recalls, Ford spokeswoman Sara Tatchio said: "This is a Firestone recall; this is not a Ford recall."
Industry analyst Joseph Phillippi of PaineWebber Inc. of New York expects to see recalls falling more heavily on suppliers´ shoulders in the future because of the growing role they are taking in product engineering.
Suppliers increasingly are being asked to cover warranty costs as part of their bid for new parts contracts.
Large, deep-pocketed global suppliers historically have shared recall costs, said Craig Fitzgerald, who heads the automotive consulting practice of Plante & Moran LLP in Southfield, Mich. Small to mid-sized suppliers have been exempt—until now, he said.
Smaller suppliers may have less ability to absorb such costs. But as they take on more design responsibility in exchange for higher profits, their recall risks mount. The auto makers "feel it is fair that if a supplier designs a part, `why should I, GM, be responsible for warranty or recall costs?´ " Mr. Fitzgerald said.
Ford has embraced this higher-risk/higher-reward strategy. The auto maker is adding additional recall liability to suppliers who drive a hard bargain, according to an industry source familiar with discussions between the auto maker and airbag supplier Autoliv Inc.
"Ford is saying, `If your product is so good, you should be prepared to back it up´ in the event of a recall,´ " the source said.
The Firestone bill already is more than double what Ford demanded of the former UT Automotive, a supplier involved in the massive 1996 recall of 8.7 million Ford cars and light trucks.
Ford pressed UT Automotive to pay half the estimated $300 million cost of that recall, which was blamed on allegedly faulty ignition switches, even though Ford could not prove who was responsible.
UT Automotive resisted Ford´s demand because Ford´s own engineers were unable to induce a failure in the switches after years of trying. But because the supplier was heavily dependent on Ford business, its parent, United Technologies Corp. of Hartford, Conn., paid in the end, according to a source familiar with the arrangement. UT Automotive was acquired last year by Lear Corp.
Meanwhile, on some levels, the Firestone recall already has damaged Bridgestone Corp., the world´s second-largest tire maker. Its share price is down 30 percent from the beginning of August. Its credit rating slipped when Moody´s Investors Service Inc. put the company on a negative rating outlook. Standard & Poor´s reduced the company´s long-term credit rating to single-A-minus from single-A. And Bridgestone's rating has been placed on CreditWatch with negative implications.
Bridgestone/Firestone spokesman Ned Maniscalco said the company "expects the recall to exceed $350 million." That much already has been set aside. Mr. Maniscalco said he was not aware of any forthcoming financial assistance from Ford.
Other costs are certain to arise from personal injury claims from drivers of vehicles with the allegedly flawed 15-inch ATX and ATX II and Wilderness AT tires. But manufacturers routinely carry liability insurance to mitigate product lawsuits.
Still, the recall underscores the need for automotive suppliers to consider how a recall can affect them, said Brad Murlick, national director for Deloitte & Touche´s business insurance consulting practice in Chicago. Neither the auto makers nor their suppliers have embraced recall insurance, he said.
Recall insurance is simply too expensive, he said. Instead, top companies such as Eaton Corp. of Cleveland, the world´s largest engine valve maker, produce parts and systems on the assumption they will not be recalled.
Eaton, too, is self-insured, said spokeswoman Laura Joseph. The company has never been responsible for a recall and considers the risk to be very low.
The Bridgestone/Firestone issue may prompt some companies to rethink that. Mr. Fitzgerald said suppliers take the attitude that they will not be hit by a large recall because they are responsible, quality-oriented companies. Still, he said, "They pray every night that something like this does not happen to them."
Mr. Sherefkin is a reporter for Automotive News, a sister publication of Tire Business.