Why the Chevy Volt Is Such a Scandal

Even though General Motors (NYS: GM) mostly seems to be doing the right things here, the issue with the Chevy Volt's battery continues to generate a lot of fuss.

Though a Reuters report late last week suggested that GM is closing in on a fix for the Volt's batteries, which could combust after an accident, reports also surfaced that the General has turned to a different battery supplier -- A123 Systems (NAS: AONE) -- and a different lithium-ion battery technology for its upcoming electric Chevy Spark model.

That suggests that there may be a larger problem with the specific type of batteries used in the Volt. And because it's not a real scandal unless Congress is involved, three House Republicans, describing themselves as "deeply troubled," accused federal regulators last week of withholding information about the car's safety.

Naturally, the members of Congress have scheduled hearings for next month. Expect them to be televised.

How big of a headache is this going to be for GM?

A bigger problem than a burning battery pack
It's worth remembering that the Volt's issue -- that a damaged battery pack could catch fire days or weeks after a serious collision -- has so far caused exactly zero injuries or problems with customers' cars. Both of the Volt battery packs that have caught fire so far were in the hands of the National Highway Traffic Safety Administration, the agency responsible for crash-testing new cars sold in the U.S. (In the case of the second fire, the battery pack was a stand-alone unit that had been deliberately damaged by a team of NHTSA and GM engineers . Only one actual Volt -- the one originally crash-tested by the feds -- has burned as a result of the problem so far.)

With another company, at another historical moment, it would be easy to write this off as teething trouble with a new technology. Lithium-ion batteries are new to autos, and several different varieties are coming into service for the first time. The battery that GM is using in the Volt (and that Ford (NYS: F) is using in its Focus Electric) is different in details from those in the latest Toyota (NYS: TM) and Honda (NYS: HMC) models, and very different from the packs used by Tesla Motors (NAS: TSLA) .

With that said, from any reasonable perspective, GM has done a good job of handling the situation: Offering to buy back the cars or give owners loaner vehicles until the problem is fixed, making executives available to the media, and working hand in hand with the feds. The company's response so far is hard to fault, and further evidence that GM's current managers are much more on-the-ball than their predecessors.

But this isn't another historical moment and it's not another company, and that's why this is turning into something more than teething trouble.

This is another consequence of the bailout
General Motors, as you may recall, was bailed out by the federal government -- infused with cash and rushed through a quick bankruptcy proceeding during the darkest days of the economic crisis. Technically, GM has already repaid the bailout loans with a combination of cash and stock, but because the stock is trading well below the government's breakeven point, the government is still a GM shareholder -- and GM is still widely perceived, with justification, as being in the taxpayers' debt.

Because the decision to bail out GM was made by President Barack Obama over Republican objections, GM is now a political football -- and in an election year, any problems, any weakness, will be painted by each party's favorite paintbrush.

That's also why the Volt fires may be an opening to attack the president for his administration's work to facilitate electric vehicle development. Because of this, I'd bet that the lurid headlines, congressional hearings, and resulting negative pressure on GM's stock price are all likely to stick around for a while longer -- no matter how well GM coordinates its response.

GM's dividend is probably still several quarters away, but you don't have to wait to put the power of reinvested dividends to work in your portfolio. In a special new report, Motley Fool analysts identify "11 Rock-Solid Dividend Stocks," all great additions to a long-term investor's portfolio. This new report is completely free for Fool readers -- click here to get instant access.

At the time thisarticle was published

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.