Mass Recall Dents GM Profits

General Motors, the biggest US carmaker based on sales volume, reported that its second quarter net income was down by more than 80% from US$1.2bn to US$200m due to costs and special charges related to a mass recall of vehicles.

The recalls followed GM’s announcement last February that ignition switches on 2.6m Chevrolet Cobalts and other compact cars, mainly in the US and Canada, could shift out of the drive position while the vehicle was being driven and potentially cut power to the engine, power steering and power braking and airbags.

The group has admitted that the faults were responsible for 13 deaths although lawyers for victims allege the number to be much higher. GM said that it had set aside US$400m to compensate the victims of crashes and their families, although there was “significant uncertainty” over the amount and it could be as high as $600m. The group also took a further US$900m provision for the future costs of the first half’s surge in vehicle recalls.

Since announcing the initial ignition switch recall GM has extended it to a record 40m vehicles worldwide including 29m in North America, its largest market. The latest charge is in addition to more than US$2bn that GM has spent this year on recalls.

GM’s chief financial officer (CFO), Chuck Stevens, said that the group expects recall charges in the second half to revert to closer to normal levels.

GM still faces an investigation by the US Department of Justice (DoJ) into its decade-long delay in recalling vehicles with defective switches and failing to alert safety regulators about the issue. This was despite the group’s engineers identifying the problem as early as 2001 and evidence that the faults had been widely discussed within the group. Reports have suggested that the probe could lead to a fine totaling several billion dollars.

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