The upside of GM’s recalls

June 2, 2014, 7:51 PM UTC
Photo: Bill Pugliano/Getty Images

This year could break records for automotive recalls, thanks in part to the deadly ignition switch defects found in millions of cars made by embattled giant General Motors (GM). The company has announced 30 recalls for issues ranging from minor airbag glitches to the ignition defect known to have killed 13 people.

That sounds like it should be bad news for the thousands of GM dealers across the country. But it may actually mean extra profits — at least in the short term. This year’s suite of recalled cars could pad dealers’ collective income statements to the tune of billions of dollars in additional revenue.

Here’s how: The $1.7 billion GM has set aside to cover the cost of the recalls will mostly go to compensating the dealers for the customer rentals while their car is in the shop or waiting for the correct part, as well as for repairs (about $100 for GM’s now-infamous steering column). That’s particularly lucrative. The typical automotive dealership gets about 50% to 60% of its gross profit from parts and services, says Brian Sponheimer, an analyst at Gabelli & Co.

The even-greater opportunity for dealers comes when the car is up on the lift. At that point, a repairman might notice a car owner needs bigger ticket items like new brakes or a new transmission. As any car owner knows, a trip to the shop often leads to unexpected and pricey maintenance. That is, dealerships can use the extra trip to sell car owners on other relatively high-margin repairs, which they may have either put off or completed elsewhere.

What’s more, GM has recalled more than 13 million individual vehicles so far this year. That means owners will make millions more trips to dealerships, which means more potential purchases. In an earnings call in April, GM CEO Mary Barra said the increased foot traffic represented a “huge opportunity” to woo new car buyers.

Of course, with a corporate debacle of this magnitude, there are plenty of issues no dealer would wish for. Replacement parts are taking time to come in at some dealerships, and many new cars have been sidelined. More ominously, consumers’ trust in GM’s cars and its salesmen has taken a blow. “I’m sure dealers would rather not be talking about defective parts in cars that they may or may not have sold,” Sponheimer says. “It’s a net positive for GM’s dealership group, but it’s definitely a double-edged sword.”

So far, General Motors seems to be weathering the assault on its brand. The automaker’s new car sales were up year over year in March and April, and are expected to increase in May as well.

As for dealers, their stock is up. Major players Group 1 Automotive (GPI), Lithia Motors (LAD), and AutoNation (AN) have all handily beat the S&P so far in 2014. For such a bad year, it’s shaping up to be a pretty good year.