What Cost Recalls for Bridgestone, Ford?

The Bridgestone/Firestone tire recall has unquestionably been a big public relations pothole for the tire manufacturer. But compare that to the ditch the company is veering toward, with potentially huge financial fallout from the recall and related litigation.

To begin with, analysts who follow Bridgestone Corp. in Japan, where the company is based, say the firm expects the total cost of recalling 6.5 million Firestone ATX, ATX II and Wilderness AT tires in the U.S. to be around $351 million.

And those costs could escalate past the billion-dollar mark, some analysts say, if the mounting level of litigation against the company is successful or if the tire maker is forced to expand its recall.

Last week, for instance, the National Highway Traffic Safety Administration warned that an additional 1.4 million tires could be dangerous and recommends that drivers consider having them replaced. And in Venezuela, where Ford Venezuela issued a recall for around 150,000 Firestone tires on roughly 30,000 Explorers in May, government officials on Monday announced that all 62,000 Wilderness AT Firestone tires circulating in Venezuela would be recalled.

To top it off, investor jitters have meant that Bridgestone shares traded in the U.S. have fallen more than 37 percent since the recall was announced August 9.

Costs Mounting

A spokeswoman for Bridgestone/Firestone would not confirm cost estimates of the recall, saying only that the company’s focus right now is on the voluntary recall and the safety of its customers.

But for financial analysts, the total cost of the recall could be a cause for concern.

“We see a number of potential negatives for the company going forward, including a possible expansion of the tire recall,” wrote Nikko Salomon Smith Barney analyst Tsunemi Tachibana. “We therefore do not recommend active purchase of Bridgestone (stock).”

In a recent research report, Commerzbank Securities analyst Clive Wiggins estimated that the recall would cost about 80 billion yen, or roughly $755 million dollars — over double the initial estimated cost of the recall. In the report, Wiggins noted that the company would likely incur costs from consumers exchanging tires that were not included in the recall.

As far as litigation is concerned, Wiggins estimates that the company would have to pay out $5 million per death and $1 million per injury. Based on the NHTSA’s latest tally of 1,400 complaints involving 250 injuries and 88 deaths in the U.S. believed to be attributable to faulty tires, that total amount would add up to $690 million.

But that’s not all, writes Wiggins. “We estimate that any further finding against the company for negligence — either in a court of law or by a ruling of the federal government — would punish the company by a further $150 million.”

Spell Will Linger

Even after the recall and any litigation cases have been settled, market watchers say the company could suffer from depressed sales, especially since this is not the first recall for Firestone. The company was also the subject of what was up until now the biggest tire recall in the industry’s history in 1978.

“It’s gotten to the point where people don’t trust the brand name anymore,” says Art Spinella, vice president and general manager of CNW Marketing/Research, a Brandon, Ore.-based firm that tracks the auto industry.

Spinella says the company might be more successful if it drops the Firestone name from its tires, marketing itself under the Bridgestone name instead.

Another key for the company will be its ability to hang on to its contracts with automobile manufacturers like Ford Motor Co. So far, Ford has said that it intends to keep Bridgestone/Firestone as a supplier, but some analysts fear that situation could change.

A recent study by CNW found that 16 percent of consumers said that they would not buy a Ford Explorer with Firestone tires on it, compared to a little over five percent about two weeks ago, said Spinella.

“If [Bridgestone] loses those [Ford] contracts, they might as well cash it in,” he added.

Ford Woes Short Term

Meanwhile, analysts say the financial impact is expected to be limited on Ford, whose Explorer sport utility vehicle has been linked to most of the reported deaths and injuries of the recalled Firestone tires.

The company reported on Sept. 1 that its U.S. sales dropped 3.7 percent in August, better than Wall Street forecasts of a four to six percent fall. SUV sales fell 0.8 percent in August, based on a daily selling rate since August of this year had one more selling day than August of last year.

Though Ford’s stock price has also been suffering in the wake of the tire recall and the threat of litigation also looms over the company, analysts say they see the company’s woes as short term in nature.

“If you’re taking a long-term perspective, recalls, while painful, are short term in nature; their product will live on,” says Travis Pascavis, stock analyst at Morningstar. “That being the case, the value of the franchise or the company shouldn’t be diminished substantially.”

Contributing to this article was TheStreet.com’s Japan correspondent Kaya Laterman.

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