It is every manufacturer’s worst nightmare – the product that the company has spent millions developing, producing, marketing and shipping all around the world may have a fault. There is a risk that some of the products – maybe a few, perhaps many – could be harmful. The company faces a stark choice: voluntarily pull the stock off the shelves or the forecourt and ask customers to return items for an immediate refund, or wait until the authorities compel them to do so, while also making potentially sensitive product information public.
Either way, the costs can easily escalate into tens of millions of pounds and leave the company reeling. One has only to look at the current recalls in the motor industry to see how cripplingly expensive and damaging the whole process can be. Three separate but related recalls of automobiles by Toyota Motor Corporation occurred at the end of 2009 and start of 2010. Toyota initiated the recalls, the first two with the assistance of the US National Highway Traffic Safety Administration (NHTSA), after several vehicles experienced unintended acceleration. The first recall, on November 2, 2009, was to correct a possible incursion of an incorrect or out-of-place front driver’s side floor mat into the foot pedal well, which can cause pedal entrapment. The second recall, on January 21, this year was begun after some crashes were shown not to have been caused by floor mat incursion. This latter defect was identified as a possible mechanical sticking of the accelerator. Toyota also issued a separate recall for hybrid anti-lock brake software in February.
As of January 28, 2010, Toyota had announced recalls of approximately 5.2 million vehicles for the pedal entrapment/floor mat problem, and an additional 2.3 million vehicles for the accelerator pedal problem. Around 1.7 million vehicles are subject to both. Certain related Lexus and Pontiac models were also affected. The next day, Toyota widened the recall to include 1.8 million vehicles in Europe and 75,000 in China. By then, the worldwide total number of cars recalled by Toyota stood at nine million. As of January, 21 deaths were alleged due the pedal problem since 2000, but following the January recall, additional NHTSA complaints brought the alleged total to 37.
At the beginning of March General Motors announced that it is recalling 1.3 million small cars in North America because of a power steering problem that has been linked to 14 crashes. The firm said four models were affected – the Chevrolet Cobalt, Pontiac G5, Pontiac Pursuit and Pontiac 4. It said the fault meant that at low speeds “greater steering effort may be required”, but that the cars could still be “safely controlled”. GM blamed the fault on a supplier partially owned by Toyota.
On March 4 Japanese car group Nissan said that it will recall 540,000 vehicles, including some Titan full-size pickup trucks, to check and repair potentially faulty brakes or fuel gauges. The recall is focused on brake-pedal pins in 2008-10 model-year Titan pickup trucks, Quest minivans and Armada and Infiniti QX56 sport-utility vehicles. Nissan is also looking into fuel gauges in 2005-08 model year Titans, Armadas and QX56s and some 2006-08 model-year Frontier pickups and Pathfinder and Xterra SUVs.
Daihatsu, meanwhile, has told the Japanese Ministry of Transport that it will recall four models, including the Atrai and the Hijet, due to airbag problems. That recall covers 60,774 vehicles, while Suzuki will recall 432,366 vehicles focusing on two models, the Every and the Scrum, sold under the Mazda brand. The ministry said it normally gets about 300 auto recall filings a year from automakers and the recalls.
This is not the first time the US car industry has been hit with a major product recall. In the summer of 2001 former Ford chief executive Jacques Nasser had to testify before Congress about the safety of its 4×4 sports utility vehicle, the Ford Explorer. The hearings took place soon after the US NHTSA announced that 203 people had been killed in accidents involving Explorers with Firestone tyres. Ford replaced around 13 million tyres at a cost rumoured to be around $3bn. Soon after, Ford’s CEO was also replaced. Even as long ago as 1959 Cadillacs had to be recalled after the steering linkage (pitman arm) failed on many cars while making a 90 degree turn at 10 to 15 mph.
To some, the furore surrounding recalls is not always consumer motivated, although they might begin that way. According to Dennis Desrosiers, president of DesRosiers Automotive Consultants, product liability cases are often stoked by class action lawyers. “The US is a legal-driven society and the lawyers see very deep pockets in these original equipment manufacturers,” says Desrosiers. “In the case of Toyota, there are more than 40 class-action lawsuits and dozens of individual actions. And most of the talking heads in the media blasting Toyota have been lawyers involved in litigation. Since Toyota still has billions in the bank, these lawyers are extremely motivated – and have deep pockets to keep this going a long time,” he adds.
“What the public needs to understand is that vehicles have become so complex that it’s inevitable that every original equipment manufacturer will eventually be hit with a serious recall – with no exceptions,” says Desrosiers. “Most people don’t realise it but there are literally thousands of vehicle complaints filed with regulators each year. The vast percentage can’t be replicated, leaving open the question of whether there was a problem with car or driver. Many motorists can’t admit or don’t know they were at fault. Pedal misapplication – frantically pressing the accelerator, thinking it’s the brake – is a recurring issue on most brands. Poor emergency response by motorists is an even bigger problem, but elections aren’t won by telling voters that they are bad drivers.”
Of course, cars are not the only products that have been the subject of costly recalls. The Yo Yo Ball, a once-popular kids’ toy, had to be recalled in 2003 following at least 410 reports of near-strangulation of young children. The toy’s stretchy cord proved excessively dangerous to younger children who unknowingly wrapped it around their throats. Countries like Canada and the UK instituted outright bans of the product in 2003: Canada’s health department even recalled over 2,000 of the toys before its ban went into effect.
Food scares are among the most common product recalls. The Nestle Toll House cookie recall of 2009 arose from scares of an E. coli contamination that made several consumers ill after eating the dough in its raw, uncooked state. Fears of a more widespread contamination prompted Nestle to recall 300,000 packages of the cookies after the Wall Street Journal revealed a total of 65 reported illnesses (with at least 25 people being hospitalised in connection with eating the poisoned cookies, including seven with severe complications that could cause kidney failure). Some food scares have been particularly grim. A design flaw with boutique chocolates made for sweet-toothed South Korean and Chinese consumers was uncovered in August 2007 – the chocolates were laced with “little white worms”. What’s worse, the chocolates were actually counterfeits of a popular brand, and the worms were larvae of a common moth. Chinese businesses feared that the worm scandal would lead to a weakening of the already questionable “made in China” brand.
In the past five years Europe has become much more stringent in recalling or withdrawing products from the market, as well as making consumers aware of their associated dangers. In 2005 the General Product Safety Directive came into effect to improve the safety of consumer products. The directive can force European companies from all 27 EU member states to carry out a total recall of products deemed to put consumers at risk. The rules also allow the European Commission to make commercially sensitive information public if it believes that there is an unnecessary health risk relating to a company’s product.
The directive requires member states to ensure that producers place only “safe” products on the market and applies to all products intended for consumer use. While this definition includes products used in the context of service provision, such as hairdryers used in hair salons, gym equipment used in health centres and lifts in shops and offices, it could also include aeroplanes, trains and cars used for public transport.
The directive applies to both manufacturers and distributors. Both have a duty to “immediately” inform the authorities if they conclude that a product that they have placed on the market is dangerous, and must provide details of their response plans. Producers must also take “appropriate action” in the event of a product crisis, including withdrawing products from the market, adequately and effectively warning consumers and – as a “last resort” – recalling products from consumer hands. If they fail to do so voluntarily, national authorities can order them to take action. This means that producers must take steps to ensure that they are kept aware of any product risk and that their goods are sufficiently traceable. Relevant measures include compulsory product reference/batch marking and, if appropriate, sample testing, investigations and the maintenance of complaints registers.
From January 1, 2004, when the directive came into force in most other EU member states, up until October 1, 2005, when the UK enacted the rules, there were over 900 recall notifications on the European Commission’s website. These ranged from the usual faulty electrical goods to carcinogenic underwear from Slovakia and trumping figurines from Poland that contain cyclohexanone, a substance indicated on the EU’s list of dangerous substances.
Given the spate of product recalls – voluntary as well as forced – IT firms have realised that there is a growing market to provide products that will give greater assurance. Hewlett Packard, along with the Canadian arm of GS1, a non-profit organisation dedicated to improving supply chain efficiencies, launched a new cloud-based recall service late last year that can trace and remove potentially harmful food products from the supply chain.
According to HP, the GS1 Canada Product Recall service will run on its cloud computing platform for manufacturing, which allows companies to see and share information across the supply chain. Food and consumer products organisations can use the service to reduce errors, decrease the amount of time it takes to respond to a recall, and mitigate the costs associated with managing the recall process.
But relying on software may not be enough. Lawyers warn that companies should be under no illusion that the directive can be strictly enforced at the highest level. The European Commission, for example, has considerable powers to ensure compliance and enforcement. National authorities must notify details of product crises and response measures to the Commission, which in turn disseminates that information to other member states. Where problems arise in a number of member states, the Commission may take steps at a Community level itself, including ordering that public warnings be given about risks posed by a product, requiring an EU-wide withdrawal or product recall, and imposing a temporary or permanent sales ban.
Furthermore, all information that is available to national authorities or to the Commission relating to risks to consumer health and safety will generally be made available to the public. In fact, the directive expressly provides that trade secret information may be disclosed, if necessary, to protect consumer health and safety.
As of March 5, 2010, there were a number of new additions to the EU’s RAPEX website, the rapid alert system for all dangerous consumer products. A number of baby clothes made in Bulgaria were ordered to be withdrawn from the market because there was a risk of strangulation as the hoods of the tops had functional cords included. A bicycle tyre repair kit from the Netherlands has been banned and the product withdrawn after the product was found to pose a chemical risk because it contains 14 percent by weight of benzene and 1.1 percent by weight of toluene, which do not comply with the EU’s safe chemicals rules. Fairy lights produced in China but marketed from Hungary have also been withdrawn from the market with a consumer recall ordered by the Commission as there is a danger of electric shock.
So far, most recalls (in Europe especially) have been made voluntarily by producers. But the costs can be phenomenal. In 2001 a shipment of Sony Playstation games consoles fell foul of Dutch law relating to the Restriction of Hazardous Substances directive in electrical and electronic equipment. Acting on a tip-off, customs officials seized 1.3 million Playstations worth $160m because their cabling contained too much cadmium. The company spent $110m replacing the parts. In the UK, Coca-Cola’s recall of its bottled water product Dasani in 2004 is estimated to have cost £50m. The overall costs of the Sudan 1 red food dye recall earlier this year are reported to be in the region of £100m.
The Association of Manufacturers of Domestic Appliances (AMDEA) says that product recalls can be massively expensive. This is because a recall – as opposed to a product withdrawal, which means clearing shelves and stopping sales – can mean manufacturers and suppliers having to personally visit individual consumers and retrieve the faulty goods. UK business lobby group the Confederation of British Industry says that affordable insurance coverage to deal with product recall is “hard to find”. Insurers agree that recall policies are not popular among most manufacturers and suppliers, although the market is growing.
A difficulty facing EU companies is that even though each member state will have implemented the directive into their own legal system, it is likely to lead to 27 different versions of the same legislation, with punitive measures varying from one country to the next.
Companies need to be aware that while their products may comply with safety standards in Germany, they might infringe Italian, Spanish, Dutch, Swedish, or Polish regulators even though the local law is based on the same directive. Because member states will have some latitude on how to implement the directive, there may be significant differences between different national safety regimes.
Experts say that companies should err on the side of caution. One lawyer says that companies need to wise up. “Many businesses will need to overhaul their product monitoring and crisis management capabilities to ensure they comply with international rules on product recalls as it is increasingly likely that regulators will become involved at an early stage and seek assurances about the company’s controls and the traceability of the products. There are going to be large penalties if companies fail to comply.”
The 10 worst product recalls of all time
1: Simplicity and crib deaths
More than 400,000 drop-side cribs made by Simplicity were recalled in July 2009 after an 8-month-old child in Houston suffocated. The Chinese-made cribs had a detachable side that easily broke, creating a gap between the side of the crib and the mattress where a child could potentially become trapped and suffocate. It wasn’t Simplicity’s first problem with the cribs. In September 2008, the company recalled 600,000 cribs of the same type; in 2007 a million older-model cribs were recalled after two children became trapped and suffocated.
2: Chinese milk powder
In 2008, China’s largest provider of milk powder recalled 700 tons of baby formula after one child died and more than 50 others developed kidney problems. Melamine, a chemical used in the making of plastic, was found in the baby formula; it later emerged that unscrupulous manufacturers had been adding it to food products to cheaply boost protein values. Two men were eventually sentenced to death for their role in the scam. The revelations only further damaged China’s reputation in production. Melamine had been a problem a year earlier, in March 2007, when the FDA recalled more than 60 million cans of cat and dog food after the death of 14 pets.
3: Merck’s Vioxx
On September 30, 2004 pharmaceutical giant Merck announced it would voluntarily recall its worldwide stock of Vioxx, an arthritis drug that had brought in $2.5bn in sales the previous year. Merck executives said the recall was a precautionary measure spurred by a study that found patients who took the drug for at least 18 months incurred more heart attacks and strokes. However, in 2007, Merck paid $4.85bn to settle 27,000 lawsuits from people affected by injuries or death associated with the drug.
4: Peanut scare
After a 2008 salmonella outbreak that sickened hundreds of people and may have killed eight, federal investigators traced the strain to peanuts processed at Peanut Corp.’s Blakely, Georgia, plant. Once there, the investigators found nightmarish conditions – mould lining the walls and ceilings, rodents and cockroaches running amok, and food supplies contaminated with waste. Worse still, the FDA found evidence that the company allowed products to ship even after internal testing discovered salmonella contamination. The result was a massive recall of the processed peanuts contained in everything from peanut butter to ice cream. The company, which denies the allegations, declared bankruptcy in the wake of the investigation. Federal criminal charges against the company are pending. Barely two months later, California-based Setton Pistachio opted to recall its entire 2008 crop of pistachios due to Salmonella fears. The company is widely credited with getting out in front of the issue before it became a major problem, acting as soon as it discovered “several types of salmonella during routine analysis of the product”. While the infection was said to be unrelated to the peanut butter scare, Setton’s executives no doubt realised that consumers were in no mood to take risks and likely opted to initiate the recall as a proactive buffer against lawsuits and criticism.
Arguably the biggest and most publicised product recall in business history involved Tylenol, whose over the counter pain relief pills killed seven people in 1982. The deaths came as a result of the pills being laced with potassium cyanide and led Johnson & Johnson to issue a nationwide recall of some 31 million bottles with a retail value of about $100m. When the FBI investigated the incident, it was found that the poisoned bottles came from different factories, but the deaths all occurred in and around Chicago, suggesting that the tampering took place at the store level. The perpetrator was never charged, but a man named James W. Lewis was caught trying to extort money out of Johnson & Johnson to “stop the cyanide-induced murders”. Lewis served 13 years in prison on the extortion charges, but was released in 1995 on parole and now lives in Massachusetts.
6: Dell notebook batteries
When a Dell laptop burst into flames at a technical conference in Japan in June 2006, no one paid much attention. But what must have seemed at the time like a freak occurrence turned out to be a systemic flaw with over four million Dell notebook batteries produced by Sony. The lithium ion batteries were prone to excessive overheating, posing a fire hazard that at least six people reported before Sony mandated a worldwide recall of the defective batteries, which were used in Dell’s Latitude, Inspiron, Precision and XPS models. To its credit, Dell exchanged the hazardous batteries with new ones, often supplying consumers with brand new machines in its place.
7: Worcestershire Sauce
A two year investigation from 2005 to 2007 in the UK found that a Worcestershire sauce manufactured by Premier Foods had been contaminated with a carcinogenic dye known as Sudan 1. The contamination was linked back to adulterated chilli powder, and the resulting products were used in everything from pizzas to ready-made meals sold on supermarket shelves. Fear of the contamination and its risks prompted the removal of over 400 suspected products from shelves, at an estimated cost of over £100m.
8: Westland/Hallmark beef
Food processor Westland/Hallmark was forced in 2008 to recall over 143 million pounds of beef after the USDA deemed it unfit for human consumption. While there were no reported illnesses (and it was later concluded that no illnesses were likely), the beef was nevertheless recalled because cattle had failed to be inspected before the resulting beef was shipped to school cafeterias and supermarkets. The recall was a major blow to the company, with as many as 150 school districts ceasing to purchase any beef from Hallmark in what is now acknowledged as the largest beef recall in US history.
9: Cadbury-Schweppes chocolate
UK based Cadbury-Schweppes, now owned by Kraft, was forced to recall over a million chocolate bars in 2006 after a widespread food scare involving Salmonella poisoning in the UK and Ireland. The company was roundly criticised for recalling the chocolate after it had taken a decision to delay informing authorities about the Salmonella problem for five months. The biggest scare at the time involved Easter eggs, which may or may not have been contaminated before children got a chance to eat them.
10: Mattel toys
About nine million toys – including Barbie dolls and items from the digitally animated movie Cars – were recalled by Mattel in 2007 amid dangers from lead paint and magnets. Mainly produced in China, the toys were recalled after it was found that deadly and illegal lead paint had been used. The magnets also created controversy because of their small size and the ease with which they could be swallowed. This recall came just two weeks after an earlier one of about 1.5 million Fisher-Price infant toys, also because of lead paint scares. At least one child died from problems with the toys and 19 others required surgery after swallowing magnets.