GM pays the price for faulty ignition switches as profits nosedive

Following an unprecedented recall of more than 2.6 million GM-manufactured vehicles earlier this year, a new quarterly report indicates that General Motors’ profits took a tumble during their second quarter of production this year.

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Net profit for the quarter fell from $1.2 billion in 2013 to $190 million this year; that’s a 64 cent-a-share difference in just one year’s time.

Nonetheless, despite company stock falling 3.3. percent upon the release of the report, GM maintains a positive outlook as to the prospects of an improved profit margin for the remainder of the year.

The latest numbers are a direct consequence of GM’s earlier recall of nearly three million vehicles because of a manufacturing defect in the ignition switch.

The company has issued 60 recalls this year alone, but the most significant occurred in February as GM commenced its recall of all vehicles with the ignition switch malfunction. The production glitch affected all aspects of car handling and safety as it frequently resulted in stalled engines, unreliable air bags, and undependable brakes.

While it’s impossible to accurately calculate the amount of lives lost because of the ignition switch deficiency, sensible estimates by independent observers and lawmakers place the figure upwards of 100.

As a result, GM has been forced to dole out approximately $400 million in compensation to the families of those affected by the faulty vehicles.

Further, as Bill Vlasic and Hilary Stout of The New York Times explain, “G.M. also took an $874 million charge to cover future recall costs. [Including the $400 million in compensation to families] The two charges come on top of the $2.5 billion the company has already spent on recalls this year.”

The $400 million compensation payment, however, is not final as the cap for the fund could eventually rise up to $600 million.

In other words, there still may be money left to pay for GM. So far, the families of the victims have not been particularly satisfied with the arbitrary fee and as James R. Healey of USA Today expounds, “Lance Cooper, lawyer for some victims, said the numbers seem too small, and could serve as a signal to Kenneth Feinberg, who is administering the compensation fund, effectively capping what’s supposed to be an uncapped fund. GM and Feinberg both have said vigorously and often that Feinberg has sole authority to make awards from the fund to anyone he believes is deserving, in any amount. He is using a formula derived from the Bureau of Labor Statistics for valuing a life in the event of a mishap, effectively capping most individual awards.”

With additional costs and potential legal battles brewing in the distance, GM has begun to divert a portion of each sold car to a fund that will be used to deal with future recall costs. And yet, despite the steep price GM has been required to pay for its manufacturing and administrative inadequacies, net revenue in the quarter was actually up slightly when compared to 2013.

Overall, however, this minor development was clearly overshadowed by the massive fees which resulted in the auto giant’s dismal second quarter.

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