GM's Profit, Hit by Recalls, Tumbles 80%

A $2.5 billion pretax bill for safety recalls and a victims' compensation fund slashed General Motors Co.'s second-quarter profit and highlighted the work it must do to close a profitability gap with rival Ford Motor Co., which reported stronger results for the quarter ahead of a critical product launch, reported The Wall Street Journal.

GM on Thursday reported a $278 million profit, off 80% from a year earlier, as special items offset North American operating-margin expansion and continued growth in China.

The Detroit-based company recently launched a new family of pickup trucks and sport-utility vehicles in the U.S., but costs related to defects—resulting in nearly 30 million recalls this year—blunted the positive impact of new models designed to compete in the sweet spot of the American market.

Meanwhile, Ford's second-quarter profit rose 6% to $1.3 billion, propelled by record earnings in North America and momentum in Asia.

Ford, like GM, was hit by weakness in Latin America and Russia, but posted its first quarterly profit in Europe in three years even as GM's losses in the region continue to mount.

The results highlighted the role that North American profit margins play as a barometer for the health of domestic auto makers that were once far more fixated on market share as a yardstick.

After decades of citing high production costs as a competitive disadvantage in their home market, GM and Ford are capitalizing on more favorable labor deals to cash in on a resurgence in demand for their biggest vehicles.

Both companies boosted margins in North America, but Ford's 11.6% operating profit in the region solidly outpaced GM's 9.2%, overshadowing Ford's loss of 1.2 points of U.S. market share.

Shares in GM fell 4.5% to $35.74 in trading Thursday. Ford's stock edged up to $17.84.

RBC Capital Markets analyst Joseph Spak, in an investors' note, said GM's margin was "below general expectations." Mr. Spak said GM has been able to command higher prices in recent months and that may have prompted higher forecasts ahead of Thursday's earnings.

Ford is readying a new aluminum-bodied version of its best-selling F-150 pickup truck for launch later this year. Ford warned again that costs for that launch would likely depress profits during the second half.

GM finance chief Chuck Stevens said the company is confident that it can achieve a 10% operating margins in its core market by "mid-decade."

Mr. Stevens, speaking to reporters in Detroit, said GM's automotive business proved "resilient" in the face of the intense public scrutiny stemming from problems with ignition switches installed in GM vehicles dating back more than a decade.

Its North American market share was virtually unchanged, and dealers used the crisis to demonstrate the improvements GM has made to its vehicles in recent years, Mr. Stevens said.

Still, past quality problems are proving to be painful. The company last quarter set aside $400 million to compensate victims of accidents involving certain small GM vehicles, including the Chevrolet Cobalt, that were built in the last decade with defective ignition switches. Mr. Stevens said the fund, to be independently administered by compensation expert Kenneth Feinberg starting Aug 1, is based on a best-guess estimate and could grow by as much as 50%.

RBC Capital's Mr. Spak said the fund estimate was well short of some forecasts. RBC, for instance, estimated $1.5 billion in its model for the reserve.

GM also took a $900 million noncash pretax charge during the quarter for recall costs it estimates could be accumulated over the next decade on the 30 million vehicles already sold and still on U.S. roads.

The auto maker recalled 22 million vehicles in the three-month period ending June 30, setting a pace of a quarter million vehicles a day being called back for quality problems.

GM Chief Executive Mary Barra, speaking during a conference call, said the review and analysis of past quality problems is "substantially complete."

GM still faces a U.S. Justice Department investigation that analysts think could end with a multibillion-dollar fine for not telling customers or the U.S. auto-safety regulator about safety flaws.

The company disclosed on Thursday it is now also being investigated by Transport Canada and 45 state attorneys general in connection with its recalls.

"We are cooperating fully with all requests," the auto maker said in a federal filing. "Such investigations could in the future result in the imposition of material damages, fines or civil and criminal penalties."

GM's $278 million profit in the second quarter compared with $1.41 billion a year earlier. Excluding certain one-time costs.

Revenue rose slightly from a year earlier to $39.6 billion.

GM's operating loss in Europe last quarter grew to $305 million on new restructuring charges. In South America, GM posted a loss of $81 million as the economy remains soft in that region.

Ford's pretax operating profit edged up to $2.59 billion, with cost cutting playing a key role in helping to offset a 1% decline in revenue for the quarter to $37.4 billion. Ford affirmed a forecast for full-year pretax profit of between $7 billion and $8 billion. It earned $8.6 billion in 2013.

Ford's net was reduced by a $329 million write-down of an investment in a Russian joint venture. Still, Ford eked out a narrow pretax profit in Europe on favorable exchange and lower costs. Chief Financial Officer Bob Shanks said "we're clearly on the way to a profit in 2015."