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A General Motors logo is seen on a Denali vehicle for sale at the GM dealership in Carlsbad, California January 4, 2012. (© Mike Blake / Reuters)
A General Motors logo is seen on a Denali vehicle for sale at the GM dealership in Carlsbad, California January 4, 2012. (© Mike Blake / Reuters)

GM profit tanks on costly recalls of 29 million vehicles and victims' compensation Add to ...

The costs of recalling 29 million vehicles – including those with defective ignition switches that led to the deaths of 13 people – sent profit for General Motors Co. plunging in the second quarter.

The largest Detroit-based auto maker reported final profit of $190-million (U.S.) in the three months ended June 30, compared with $1.2-billion a year earlier. Share profit fell to 11 cents from 75 cents.

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The massive expense of recalling and repairing so many vehicles is hitting GM at a time when it should be reporting healthy profits because of a hot North American vehicle market that is generating plenty of black ink for cross-town rival Ford Motor Co. and other auto makers. GM officials said Thursday that financial results should improve in the second half of 2014 once costs from recalling some vehicles that were sold more than a decade ago are in the rear-view mirror.

Those costs amounted to $1.2-billion in the second quarter and boosted the hit to GM’s results to $2.5-billion in the first six months of the year.

In addition, the costs of a fund set up to compensate victims and families of victims involved in the crashes caused by defective ignition switches will amount to at least $400-million and could go higher. At least one Canadian driver died in a crash related to the ignition switch recall.

GM chief executive officer Mary Barra reiterated comments she has made several times that changes in processes, an increased focus on safety and the dismissals of 15 employees will help make sure the ignition switch crisis is not repeated.

“We are not going to be satisfied simply by solving our current problems,” Ms. Barra told analysts and investors on a conference call Thursday.

The 29 million recalls are about 1 million fewer than the 29.91 million vehicles sold by all manufacturers in the U.S. market in the past two years combined. GM sold 2.8 million vehicles in the U.S. market last year.

Auto industry consulting firms J.D. Power and Associates and LMC Forecasting said Thursday that U.S. sales are expected to hit 16.6 million vehicles this month, marking the highest level since 2006.

Sales in the Canadian and U.S. markets combined are expected to top 18 million vehicles this year for the first time since 2007, Bank of Montreal said in a forecast released Thursday.

Nonetheless, analysts expressed disappointment about GM’s profit margins in North America in the quarter, which stood at 9.2 per cent, lower than the analysts expectations of 10 per cent.

Pricing and the mix of vehicles sold were both positive in North America in the quarter but costs were surprisingly higher, Citibank analyst Italy Michaeli said in a research note.

The 9.2 per cent margin excluding the costs of the recalls is “the best GM has done in years, but compares to Ford, which earlier this morning reported 11.6 per cent margin in North America despite a comparatively aged vehicle lineup,” J.P. Morgan Chase & Co. analyst Ryan Brinkman said in a note to clients Thursday.

Ford also reported its first pre-tax quarterly profit in Europe in three years, while GM said it is still losing money in the European market.

The European results helped drive Ford’s final profit to $1.31-billion, up from $1.23-billion a year earlier.

That result, however, may be the peak this year, said Morgan Stanley analyst Adam Jonas.

Ford plans to launch 23 new vehicles globally this year, including a redesigned version of its highest-selling vehicle, the F-Series pickup truck, which will lead to several weeks of downtime at some of its plants. New vehicle launches also lead initially to higher costs and lower revenues because of the time necessary to return to full production at assembly plants.

With files from Bloomberg

Follow on Twitter: @gregkeenanglobe

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