Despite recalls, GM posts small profit, Ford reports big gain

Despite setting aside billions of dollars to pay for recalls and crash victim payments, General Motors Co. squeezed out a small second quarter profit. Meanwhile, Ford Motor Co. reported a large profit for the quarter, helped by a turnaround in Europe and the robust U.S. auto market.

The results of both automakers reflect the strength of North American auto sales and growth in China.

GM scraped out a profit of $190 million, down from $1.2 billion from the same quarter a year earlier. The profit came even though the automaker booked $2.5 billion of expenses related to recalling 29 million cars in North America so far this year, setting aside money to pay for future recalls and to pay victims of crashes of cars the automaker concedes it should have recalled years ago. Revenue rose 1% to $39.6 billion.

The wave of recalls came after GM called back several million smaller cars earlier this year because they have a faulty ignition switch linked to at least 50 crashes and 13 deaths. The automaker knew about the problem for at least a decade before recalling the cars. That delay has set off investigations of the company’s actions by the National Highway Traffic Safety Administration, the Department of Justice and Congress.

GM has set aside $400 million to pay crash victims and said the tab could rise by another $200 million. The company said there is no cap on the program, but the charge is GM’s “best estimate” of what it might pay claimants.

“This is an unfortunate situation that has and will continue to cost GM a considerable amount of money into the future. Setting aside a large amount of money to cover victims’ payments is the responsible thing to do. GM is doing what it needs to do to correct wrongdoings,” said Kaitlin Wowak, a University of Notre Dame management professor.

The $2.5 billion in charges and expenses were booked as pre-tax items and slashed net income by $1.5 billion for the quarter. Without them, GM’s profit would have been $1.7 billion.

“Our underlying business performance in the first half of the year was strong as we grew our revenue on improved pricing and solid new vehicle launches,” said Mary Barra, GM’s chief executive.

She said the worst of the recall announcements are over.

“I believed we have now addressed the major outstanding issues,” Barra said.

But she cautioned that more problems could be detected with GM’s new emphasis on safety. The company now has 60 investigators on staff whose sole work is to identify safety defects in GM’s cars.

About $900 million of the charges during the quarter represented the estimated costs of future possible recalls of 30 million GM vehicles on the road today.

GM said its North American profits fell about 30% to just under $1.4 billion.

The automaker hasn’t seen a falloff in sales because of the recalls, said Akshay Anand, an analyst for Kelley Blue Book, the auto information company.

“Sales haven’t slowed as much as many people expected, thanks in part to a clear recall strategy from GM as it relates to public perception, as well as the introduction of solid, new product as of late,” Anand said.

GM sold 830,000 vehicles in North America during the latest quarter, up from 809,000 in the first quarter of the year.

Losses in Europe grew to $305 million from $114 million. GM also swung to a loss of $81 million in South America from a $54 million profit a year earlier.

Helped by strong sales in China, GM’s international operations division saw profits rise 36% to $315 million.

Meanwhile Ford said its second quarter net income rose 6.3% from the same period a year earlier to $1.3 billion. Revenue dipped 1% to $37.4 billion.

“We delivered a strong quarter,” said Mark Fields, Ford’s chief executive. “North America achieved record quarterly performance for pre-tax profit. Asia Pacific achieved a second quarter record and Europe earned its first quarterly profit since the market dramatically declined three years ago.”

The only exception was South America, where Ford lost money.

North American operating profits rose 5% to $2.4 billion.

Ford said the North America results came from healthy sales, a popular selection of models and “discipline” in matching the number and types of vehicles it is manufacturing to consumer demand.

But because of the intensely competitive U.S. auto market, especially in the important truck segment, it saw small declines in wholesale volume and revenue compared to the same period a year ago. Second quarter U.S. market share was 15.3%, down 1.2 percentage points from a year ago.

Ford reported its first profit in Europe in years. It earned $14 million compared to a loss of $306 million a year earlier.

South America swung to a $295 million loss from a $151 million profit a year earlier. The situation in South America continues to worsen because of political and economic volatility in the region and the potential for currency devaluations.

Profits also rose in the automaker’s Asia/Pacific region helped by fast growth in China. Ford made $159 million, a 22% gain.

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