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GM posts small profit despite recall expenses

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GM scraped out a profit of $190 million despite booking $2.5 billion of expenses to pay for recalls
GM has turned its recalls into a plus: Dealers have sold 6,600 cars under a recall-related rebate program

General Motors Co. squeezed out a small second-quarter profit — despite setting aside billions of dollars for recall expenses and payouts to crash victims — while Ford Motor Co. reported a large profit for the quarter, helped by a turnaround in Europe and the robust U.S. auto market.

Both results underscore the strength of the auto industry, said Efraim Levy, an analyst for S&P Capital IQ.

"Globally there are different hot spots and cold spots, but the two main markets, China and the U.S., are doing well, and it looks like the worst is over in Europe," Levy said.

GM scraped out a profit of $190 million, down from $1.2 billion in the same quarter a year earlier, despite booking $2.5 billion of expenses to pay for the recall of 29 million cars in North America this year.

The charges included what GM expects to pay victims of crashes involving cars the automaker concedes it should have recalled, plus money for future recalls. Revenue rose 1% to $39.6 billion.

Many of the recalls are related to ignition switch problems that are linked to at least 50 crashes and 13 deaths — problems that GM knew about for a decade before beginning the recalls.

The 10-year delay has set off investigations of the company's actions by the National Highway Traffic Safety Administration, the Department of Justice and Congress.

The expenses include $400 million to pay crash victims, and that tab could rise by $200 million.

"This is an unfortunate situation that has and will continue to cost GM a considerable amount of money into the future," said Kaitlin Wowak, a University of Notre Dame management professor. "Setting aside a large amount of money to cover victims' payments is the responsible thing to do."

The company said that there is no cap on the program, and that the current dollar amount is GM's "best estimate" of what it might pay claimants.

But others said GM was not earmarking enough money to compensate victims properly.

"This estimation to pay claims for death and serious disabling injuries is totally inadequate, and is not consistent with a no-cap compensation fund," said Jere Beasley, a Montgomery, Ala., attorney representing crash victims.

He said hundreds of people who have been killed or seriously injured by crashes involving the recalled cars are unaccounted for by GM's compensation plan.

Mary Barra, GM's chief executive, said that the worst of the recall announcements is over and that GM has "addressed the major outstanding issues." GM has even turned it into a plus: Dealers have sold 6,600 cars under a special rebate program for customers who brought their vehicles in to have the ignition switch repaired.

But Barra 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.

"We've demonstrated resiliency as we've gone through this," Barra said. "We understand that we have a lot more work to do and we're focused on it. We are working hard to be one of the very best companies in this industry and we are committed to treating the customer right."

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.

Without all of the charges during the quarter, GM would have had a strong quarter, said Michelle Krebs, an analyst for AutoTrader.com.

GM estimated that its profit would have been $1.7 billion.

GM said its North American profit fell about 30% to just under $1.4 billion. 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. South American losses were $81 million, contrasted with a $54-million profit a year earlier. GM's international operations division, helped by strong sales in China, saw its profit 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 slipped 1% to $37.4 billion.

"We delivered a strong quarter," said Mark Fields, Ford's chief executive. "North America achieved record quarterly performance for pretax 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 — like GM — lost money.

North American operating profit 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 being manufactured to consumer demand.

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

Ford reported its first profit in Europe in years, earning $14 million compared with 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, Ford reported.

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

jerry.hirsch@latimes.com

Copyright © 2014, Los Angeles Times
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