Product recalls - the process of retrieving and replacing defective goods for consumers - can affect businesses in almost any sector. In January 2020, IKEA announced it had agreed to pay out USD 46mn in settlement to the family of the 2-year-old child in the United States, who sadly died when one of IKEA's "Malm" dressers tipped onto him in 2017. This was one of the largest settlements resulting from the wrongful death of a child in US history, according to legal experts. In addition to the payout, IKEA had to recall 17.3 million dressers.
Sadly, such product recall events are not unusual. In fact, hearing about product recalls has become a weekly occurrence. Notable events have been seen in the automotive industry, the food industry, the electronics industry and the pharmaceutical industry. Defective products can pose a massive risk to consumers, and the most serious incidents have led to multiple deaths. For large companies, the cost to repair faulty products and pay settlements can lead to multi-billion losses. In addition, business reputations can suffer badly, and some companies have been forced to file for bankruptcy following product recall events.
One of the largest product recalls in history was the Takata airbag inflator recall in 2008. This is still ongoing and, in 2017, Takata was forced to file for bankruptcy. It is estimated that 100 million airbag inflators are under recall globally and the cost so far is around USD 25bn.
Industry experts estimate that product recalls will continue to increase and so will the need for product recall insurance. Everything from the complexity of the global economic landscape and supply chains, to increase regulations and advanced technology, is posing greater risks for businesses in terms of potential product recalls. One single product recall can now affect millions of consumers and impact an entire industry.
As consumers do more online shopping, online retailers could be held liable for defective goods sold by third-party vendors via online retail websites. The "fourth industrial revolution", with autonomous electronics and 3D printers, is also estimated to lead to more product liability claims. As more products are being sourced from China, product recall insurance is expected to increase in Asia.
Some product recalls are uninsured, such as food frauds for instance. This became apparent in the 2015 horsemeat scandal in Europe and is something the insurance industry is working on to address. There has also been an increase in recalls relating to other issues than health and safety, such as child labour being used in production facilities.
Companies are obliged to reach out to consumers in the event of product recalls and social media is a great tool for this. But in 2018, the European Union undertook a product recall survey and found that the proportion of products successfully recovered from consumers remains generally low. The OECD reported in 2019 that consumer response rates to product recalls were around 3% only in some countries. The studies found that consumers are not aware of products that are recalled, nor that manufacturers are obliged to recall faulty products. Therefore, many recalled products remain in consumers homes, posing serious risks. When consumers register a product with the seller, the seller can reach out to consumers during product recalls. However, the EU found that less than 40% of consumers were aware of the benefits of registering products in the event of malfunction or safety issues. The EU advised that public authorities should address this by collaborating with large businesses.
The OECD has a "Global Recalls portal" which aims to share information about product recalls worldwide with consumers, businesses and governments. It integrates data from "SafetyGate", the EU's rapid alert system for dangerous non-food products, and from ASEAN regional recalls portals. In 2019 the database contained more than 24,000 product recall notices from 46 countries. In October 2019, 20 countries took part in OECD's "Global Awareness Campaign on Product Recalls".
Below are examples of some of the costliest product recalls. As recall cases can go on for years, the figures are the latest estimates.
In 2019, Harvard Business Administration Professor Ariel Dora Stern set out to quantify risks to innovation and opportunities that product recall pose in the medical technology industry:
Product recalls slow many types of innovation for the firms that experience them. At the same time, we see that competitors are likely to accelerate their own innovation activities to take advantage of these weaknesses. Low-risk mistakes, like a typo on a label, constitute reasons to recall a product, but those aren't driving the big responses that we see by firms and their competitors. It's the really severe recalls, where perhaps the material turned out to be unsafe or there's a major malfunction that are leading to competitor responses.