Automobile Recall and Liability

A CASE STUDY ON INDIAN AUTOMOBILE INDUSTRY

Group 6: Niha Mol

Nikhil S
Nilay Jayswal
Omaima Maqsood
Parthay Shah
Prashant Yadav
What is a Product Recall?
 A product recall is the process of retrieving defective
and/or potentially unsafe goods from consumers
while providing those consumers with compensation.
Recalls often occur as a result of safety concerns over
a manufacturing defect in a product that may harm its
user.
 In a recall, the company or manufacturer absorbs the cost
of replacing and fixing defective products.
Effects of Product Recall

TO BUSINESSES
 Financial : lawsuits, lost inventory , replacement costs downtime,
etc.
 Customer loyalty : quick response is key to keeping customers.
 Regulatory : non-compliance can shut your business.
 Brand image : poorly handled recall = PR disaster.
Claims relating to product liability can be made
under the following legislations

 The Consumer Protection Act, 1986 (CPA): The CPA provides protection only to a 'consumer' as defined under section 2(d) of
the Act. Individuals who purchase goods for 'commercial purposes' cannot initiate proceedings under the Act. A complaint may be made
under the Act in case of defect in goods, deficiency in service, use or sale of hazardous goods in violation of law, excessive pricing, unfair
trade practice or restrictive trade practices. It was observed in Abahaya Kumar Panda v Bajaj Auto Ltd. that the manufacturers should not
sell a product, in this case a vehicle, that suffers from any major defect, and if it escapes detection at quality check, the product should be
promptly withdrawn from the market or from the consumer, voluntarily, once the manufacturers comes to know of the defect.
 Thus, automobile manufacturers are also expected to recall defective goods or vehicles (voluntarily) on their knowledge.
 The Indian Contract Act 1872 and the Sale of Goods Act 1930 (ICA & SGA): The ICA deals with the general law pertaining to contracts
for a particular purpose, while the SGA deals with contracts pertaining to sale of goods. Under the ICA, the standards of defect depend
upon the contractual terms and conditions, along with any warranties or guarantees.
 The SGA provides for an implied warranty or condition as to the quality or fitness for any particular purpose for the goods sold, in
situations where the buyer relies on the seller's judgment; where goods are bought by description from a seller who deals in goods of that
description; or where a specific purpose may be annexed to the goods by trade usages. Thus, if a car purchased is not motorable (which is
the essential condition of purchase) the buyer has the right to rescind the contract along with the right to claim damages from the seller.
 Statues Specific to the Auto Industry: The MVA( Motor Vehicles Act,1988) and the CMVR( Center for Motor Vehicle Rules,1989) are
the primary legislations that regulate standards in the Indian auto industry. Apart from general rules on driving license, use of safety
headgear etc., the MVA also specifies provisions on maintenance and construction of vehicles and fines sale of vehicles in contravention
to the Act. For safety standards, the CMVR relies on BIS standards, such as use commercial fuel as per BIS specification (IS 1460-2000),
mentions general specifications on overall dimensions of the vehicle, and requires compliance with the Automotive Industry Standards
(AIS), i.e. standards prescribed by the Automotive Research Association of India. BIS also formulates mandatory standards for the auto
industry, for example specifications for tubes and for pneumatic tyres (IS 13098:2012). Although the Act allows complaints only by the
Central Government or by the BIS itself or a consumer recognized by these entities for such purpose, non-compliance with such
mandatory standards still attracts serious penalties including fine or imprisonment, or both.
 Tort Law & Common Law Principles: In India, courts are also heavily guided by the principles of justice, equity and good conscience,
and the common law principles. For example, negligence can be claimed if it can be shown that there was a breach of a duty to take care,
which resulted in an injury. The duty of care owed by an auto manufacturer to its customers can be easily assessed from the fact that any
defect or oversight in manufacturing a vehicle can cost the passengers dearly. Thus, a consumer can claim under the tort of negligence
against an auto manufacturer, if the auto manufacturer is found to be negligent and the injury or da mage suffered by the aggrieved
consumer is attributable to the negligent act of the auto manufacturer.
 STAKEHOLDER ANALYSIS
 SIAM: A not for profit apex national body representing all major vehicle manufacturers in India.
 SIAM and the voluntary code: Powerful ? – not backed by legislation Responsibility? – on manufacturers
 What's the role of Component manufacturers (ACMA)? – Responsibility through agreement with manufacturers.
 Multi levels of component manufacturers
 Testing agencies ( ARAI ) and collusion
 Motor Vehicle Amendment Bill 2019
a) Mandatory Regime
b) Whistle Blower structure
c) Liability of manufacturer
d) Compulsory reporting
e) Safe harbor
Insights from discussion with SIAM official on
the new bill
 Relationship between vehicle and component manufacturer and Impact on Tier-III
vendors (financially weak and unable to invest sufficiently in people, technology
and machinery)
 Holding testing agencies responsible
 Misuse of whistleblower mechanism
 Amount of fines and faulty vehicles
 Keeping the balance
Major Auto-Recalls in Indian
Automobile Industry
1. Honda
 One of Honda’s biggest issues that it is currently facing began in 2008. The
company began recalling many of its vehicles due to faulty airbags in 2008.
The recall includes many Honda and Acura models from 2003 through 2015.
The recall due to its faulty airbags continues till date.
 Honda says it will have recalled or accounted for 22.6 million inflators in
about 12.9 million vehicles as a part of their Preventive Global recall
campaign involving Takata’s malfunctioning airbag inflators.
 The high number of recall significantly impacted their profit last year, which
came down to 522.7 billion yen, from estimated 545 billion yen.
 “Honda is announcing this recall to encourage each owner of an affected
vehicle to schedule repair at an authorized dealer as soon as possible”.
“Replacement parts are available, all from alternate suppliers, to begin free
recall repairs immediately, and a free rental car is available to the vehicle
owner for the day of the recall repair or longer if a replacement part is
temporarily unavailable.”
Ethical response by Honda
 Individualism states “Business actions should maximize profits for the owners of a
business, but do so within the law”. So within the laws it was the duty of Honda to inform
its shareholders of the airbag issue.
 If Honda did not inform its stakeholders of the airbag issue, no one would be happy in the
long run because it would bring serious controversy to the company. Thus it conformed to
Utilitarianism which states that “Business actions should aim to maximize the happiness
in the long run for all conscious beings that are affected by the business action”.
 The Kantianism states that “Always act in ways that respect and honor individuals and
their choices. Don’t lie, cheat, manipulate or harm others to get your way. Rather, use
informed and rational consent from all parties”. Honda followed all four principles of
Kantianism in deciding to recall its vehicles. These principles are act rationally, allow and
help people to make rational decisions, respect people and their individual needs and
differences, and be motivated by good will.
 The Virtue Theory states “Act so as to embody a variety of virtuous or good character
traits and so as to avoid vicious or bad character traits”.
General Motors
 GM entered into Indian market by forming JV with Hindustan Motors in ‘94 and later
in 2009, with SAIC.
 By 2012, GM-Chevrolet increased its stake in Indian subsidiary by buying out SAIC
share in Indian market.
 In July 2013, General Motors recalled 1,14,000 units of its model Tavera followed by
recall of models Spark, Beat and Enjoy in 2016.
 Second to biggest recall in India, carried out by Ford in 2013.
 Internal probe revealed that the company violated testing norms. Its employees re-
fitted already approved engines used in their new Tavera models that got sent for
inspection in order that they meet the specified emission norms.
 Another ethical code of conduct had violated when the company noticed that they
manipulated the weight of several of its models in order to comply with less stringent
emission norms.
Ethical dilemmas of GM
 Heavily invested in developing a R&D centre in Bangalore, two production facilities in Halol
and Talegaon.
 Their losses swelled to INR 7460 million in FY12 from INR 1840 million in FY11.
 General Motors' investigation had identified violations of company policy and that they take
matters very seriously as they hold their leaders and employees to high standards. When those
standards were not met, they took the appropriate action to hold employees accountable.
 Products were not adapted and designed according to Indian Market demands.
 To achieve the ambitious share in the Indian market, GM India satisfied almost all stakeholders
but did not adhere to the company code of conduct; which can be justified by the Utilitarian
theory.
 Another way of interpretation is through the Kantian model that insists on the moral duty of a
individual concerning decision making for the stakeholders.
 CONCLUSION
Here, we can conclude that in any automobile recall, retaining customers is the most difficult
and comprehensive task to achieve. If recalls are not dealt with care the customers can lose
faith in the brand and it would be detrimental for that company and result in different kinds
of losses for the company. If the company is big it could bear the various costs of recall but it
is very difficult for small automobile company to deal with any such recall.
So, keeping customers by your side is the most critical aspect in any recall.
 RECOMMENDATIONS
 Refund for the faulty part
 Open lines of communication with the customers
 Educate customers about the potential hazards
 Be prepared for every vehicle to be recalled
 Co-operate with third party regulators and dealers
THANK YOU