Chrysler's high-stakes 'no' to NHTSA

DETROIT -- For 17 years, automakers have complied with every request for a recall, no matter how costly, from the National Highway Traffic Safety Administration.

And then last week, in a startling decision, Chrysler Group said no. It refused a request from NHTSA to recall 2.7 million 1993-2004 Jeep Grand Cherokees and 2002-07 Libertys for an alleged fire risk caused by fuel tanks mounted behind the rear axle.

Chrysler's "no" was a high-risk answer and one that came directly from CEO Sergio Marchionne and his top lieutenants at Chrysler, company sources said.

The refusal to recall the Jeeps could damage the company's recovering reputation for quality and cost more, ultimately, than doing the recall immediately.

In addition, Chrysler executives are wary of agreeing to a deal in which NHTSA requires an automaker to retrofit old vehicles to meet current notions of safety.

Industry analyst Jim Hall, of 2953 Analytics in suburban Detroit, says "no" is the right answer sometimes, despite the risks.

"There are times when the manufacturer's data doesn't jibe with NHTSA's data, and that's the case here," Hall said. "NHTSA is overreacting. Manufacturers started rolling over sooner than they have needed to, and now the pendulum is swinging back. It will be interesting to see how this shakes out."

Rules of engagement

Chrysler took a rare step by refusing to initiate a recall, but NHTSA has a standard process for such a safety showdown.

1. Chrysler has until June 18 to reply formally to NHTSA's request.

2. If Chrysler stands its ground, NHTSA may release a defect finding.

3. The agency then must hold a public hearing to gather comments.

4. After making a final determination, NHTSA may order a recall.

5. An automaker may file a lawsuit to challenge that order.

6. NHTSA also may sue to compel a recall.

Source: NHTSA

The stakes are high for the first recall refusal in the industry since Chrysler successfully fought a recall of the Dodge Stratus and Chrysler Cirrus in 1996. A federal appeals court ruled in Chrysler's favor.

Chrysler's refusal in the current case could leave its vehicles' owners and customers with the impression that the company places profits above safety. A similar narrative wounded Toyota during and after its unintended-acceleration debacle of early 2010.

Chrysler contends that the vehicles have no defect and met or exceeded the safety standards in place at the time of their manufacture. And the safety record of the vehicles in question does not stand out statistically, the company says.

Engineers could design ways to shield the Jeeps' fuel tanks from rear collisions. Third-party estimates of a possible modification vary from $200 to $1,000 or more per recalled vehicle, though an accurate estimate is not possible until a procedure is agreed upon by NHTSA and Chrysler.

Recall history

Chrysler is the first automaker to refuse a NHTSA recall request since 1996.

• In 1996, Chrysler appealed NHTSA's demand to fix 1995 Dodge Stratus/Chrysler Cirrus seat-belt anchors. In 1998, a federal appeals court ruled in Chrysler's favor.

• Recall completion rates vary, but GM says its composite rate is about 80%. Chrysler won't say what its rate is. At 80%, Chrysler would fix 2.16 million of the 2.7 million Jeep Grand Cherokees and Libertys subject to a recall.

• Automakers have initiated more than 1,500 recalls in the United States since 2010.

Dennis Virag, an auto engineering consultant, estimates that the recall would cost Chrysler $500 million, Bloomberg reported.

That would be expensive -- a big chunk of Chrysler's projected $2.2 billion profit in 2013 -- but at least a known quantity. By saying no, Chrysler is potentially exposing itself to the costs of performing the fixes eventually, plus the cost of potential litigation with NHTSA and damage to its image.

The episode has left some Chrysler executives by turns steadfast, puzzled and optimistic.

"It's unfortunate how this occurred," said Reid Bigland, head of U.S. and Canadian sales for Chrysler Group. "We're certainly not in the business of being at odds with any federal agency, but our vehicles are safe. We've articulated our position in a tremendous amount of detail why we consider them to be safe."

Bigland told reporters last week that "ongoing dialogue continues with NHTSA, and hopefully we'll come to a resolution on this matter and go from there."

In an interview last month, Doug Betts, head of quality for Chrysler, spoke about the company's recall policy and how it deals with quality issues. The issue with the Jeeps' fuel systems has been ongoing at Chrysler and NHTSA since mid-2010. Betts said Chrysler's analysis of NHTSA's data came to conclusions that were different from the agency's.

"We're really pretty puzzled on this one," Betts said. "We don't know why we're at this point."

You can reach Larry P. Vellequette at lvellequette@crain.com.

(Chrysler's high-stakes 'no' to NHTSA originally appeared on Automotive News)

By Larry P. Vellequette- Automotive News