What Is Recall Clustering?
Norman Taylor & Associates
January 27, 2021
Recall clustering is a phenomenon that occurs when automakers delay recalls to minimize stock penalties and avoid being the first safety issue in a news cycle. Researchers at Notre Dame recently uncovered the problematic trend in a study called, “Hiding in the Herd: The Product Recall Clustering Phenomenon.”
After analyzing 3,117 auto recalls over a 48-year period, researchers found that 73% of announced recalls occur in clusters. On average, about 8 recalls are announced in a 34-day period, and the company that issues the so-called “leading recall” takes the biggest hit on the stock market.
For this reason, many manufacturers wait for a recall cluster to announce potential defects and dangers. The average gap between clusters lasts about 16 days, which means consumers are unknowingly driving potentially dangerous vehicles for weeks at a time.
The Fuel Tank Example
On August 21, 2017, Ford announced a recall due to leaky fuel tank valves. Honda followed suit by recalling a fuel tank, and Chrysler jumped in the bandwagon, recalling an oil hose. By issuing the leading recall, Ford took a bigger loss.
According to the author of the study:
“Leading recalls are associated with as high as a 67 percent larger stock market penalty than following recalls.”
Defect Awareness Dates
The National Highway Traffic Safety Administration (NHTSA) does not require manufacturers to provide defect awareness dates when issuing a recall. This means automakers can recall dangerous products at any time. Thanks to the study, however, the NHTSA is looking to follow in another regulatory agency’s footsteps. The U.S. Food and Drug Administration (FDA) uses defect awareness dates to make it more difficult for companies to delay a recall decision. The authors of the study believe this strategy could work for the NHTSA, too:
“requiring auto firms to report the date that they first became aware of a defect may discourage them from hiding in the herd and prompt them to make more timely and transparent recall decisions, reducing the prevalence of clustering, which creates unnecessary delays in removing harmful products from the market.”
The NHTSA has already been in touch with the authors of the study and indicated that this relevant new research could help improve the agency’s recall process.
Hiding Recalls May Hide Lemons, Too
Major vehicle manufacturers are wary of recalls because it puts their reputation on the line. Nevertheless, many of these automakers create lemons or defective vehicles and send them out to consumers.