Vehicle recalls suffocate GM profit

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Ben Klayman Detroit

General Motors (GM) reported a much lower second-quarter profit yesterday due to numerous vehicle recalls and the expected cost of at least $400 million (R4.2 billion) for a compensation fund for those killed or hurt in crashes caused by a defective ignition switch linked to at least 13 deaths.

GM reiterated that it expected a moderately improved operating profit this year and that its future recall costs would be slightly higher than historic rates.

“We’re on or ahead of the plan we shared in January,” chief financial officer Chuck Stevens said.

“Our expectation is that the second half of the year will be better than the first half.”

Earlier this year GM recalled 2.6 million cars for the faulty ignition switches, which can cause engine stalls and stop air bags from deploying, and power steering and power brakes from operating. The company is under investigation by US safety regulators, Congress and the US Department of Justice over its failure to detect the faulty part for more than a decade.

Net income in the quarter fell to $190m from $1.2bn a year earlier. The company’s shares fell 2.2 percent to $36.60 in trading before the market opened.

One-time items included the charge for the establishment of the victims’ compensation fund, which GM said could still rise by about $200m, as well as an $874m charge for a change in how the company will account for recalls in the future.

GM previously took charges as recalls occurred, but now it will account for potential future liabilities as the cars are sold and adjust those costs up or down on a quarterly basis as it does for warranty expenses.

For the victims’ compensation fund, Stevens said the $400m figure was based on actuarial data and did not say whether the company expected the number of deaths linked to the defective part to rise.

He reiterated that the fund had no cap and that attorney Kenneth Feinberg, who is administering the fund for GM, was not consulted in setting the charge and would determine the final payouts.

Vehicle safety advocates had previously pushed for the vehicle manufacturer to put aside $1bn for the compensation fund. – Reuters

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