Monday, July 27, 2015

Should "Cost of Doing Business" Include Product Safety?

Over the years, I've spent a lot of time thinking about the "cost of doing business".

Traditionally, that has meant a pretty simple calculation: add up all the expenses needed to run your business (renting office space, buying and supporting the tech equipment you'll need, phones, lights, insurance, your own salary and that of any needed support staff, etc., etc.); divide that by the number of days per year that you expect to have to work; and you end up with a daily break-even: make more than that, on average, and you'll be profitable; make less, and you'll go broke. The difference can be small... but the results dramatic.

As Charles Dickens' Mr. Micawber says in David Copperfield:
Annual income twenty pounds, annual expenditure nineteen [pounds] nineteen [shillings] and six [pence], result happiness. Annual income twenty pounds, annual expenditure twenty pounds, ought and six, result misery.
What else should you include in the "cost of doing business"?

For a while now, it's become apparent that fines related to failure to comply with government regulations are part of that "cost" calculation in many industries. I've written about that in regards to banking (here and here, for example), agriculture (here), technology (here), and automotive (here).

Today's New York Times has a Bill Vlasic article that sheds more light, unfortunately, on that cost calculation.

According to the article, the National Highway Traffic Safety Administration (NHTSA) has fined Fiat Chrysler a record $105 million "for failing to complete 23 safety recalls covering more than 11 million vehicles."

Let me repeat myself: 23 safety recalls, and 11 million vehicles.

Fiat Chrysler has admitted to violating federal safety rules.
...[The] civil penalty was broken down into a cash penalty of $70 million, and an agreement that Fiat Chrysler would spend at least $20 million on meeting performance requirements detailed in the consent order. An additional penalty of $15 million will be assessed on the company if an independent monitor, who has yet to be announced, discovers further violations of safety laws or the consent order. 
Under the order, Fiat Chrysler is required to buy back as many as 500,000 vehicles with defective suspensions that can cause drivers to lose control. Also, owners of more than one million Jeeps with rear-mounted gas tanks that are prone to fires will be given an opportunity to trade in their vehicles at rates above market value.
As I've written before -- about General Motors in that case -- If your product has a problem, please don't wait for people to die to address it.

As of a few hours ago, Fiat Chrysler stock was down, following the fine announcement, but who knows how seriously the penalty will affect the stock price. After all -- it's just a cost of doing business, right?