GM’s first-quarter profit dragged down by recalls

General Motors managed to eke out a profit and boost revenue despite writing off $1.3 billion to cover the costs of its massive recall. (Reuters)

General Motors squeezed out a small profit in the first three months of 2014 after setting aside $1.3 billion to cover the cost of recalls that followed a deadly ignition-switch defect linked to 13 deaths, the company reported Thursday.

The report marked the 17th consecutive profitable quarter for the giant automaker, which has been walloped by a storm of lawsuits, federal and congressional investigations and negative publicity since it began recalling 2.6 million Chevrolet Cobalts and other small vehicles in February. With the heightened scrutiny prompted by the ignition-switch problem, GM recalled 4.5 million more vehicles in the first three months of the year.

The recalls are taking a huge financial toll that is likely to persist, with GM facing the prospect of both civil and criminal penalties because of the slow recall. The company’s $100 million profit was just a fraction of the $900 million that flowed to its bottom line during the comparable quarter last year.

The recall charges marred what would have otherwise been an impressive quarter for GM. Overall, net revenue rose to $37.4 billion, $500 million more than during the first quarter of 2013.

“Sure, there have been setbacks,” GM chief executive Mary T. Barra said during a conference call with analysts. “That’s part of our business. Nevertheless, our overall progress has been sure and steady.”

A history of GM’s ignition problems

GM’s business has been soaring since its 2009 bankruptcy and $40 billion federal bailout that allowed it to shed burdensome legacy costs and to streamline and update its vehicle lineup. Sales have been up — rising 4 percent in 2013 and 2 percent in the first quarter of this year.

But the progress being made by what Barra and others call “the new GM” is being threatened by the legacy of the “old GM,” which Barra and others have depicted as a cash-strapped giant that fostered a culture focused more on cost savings than quality and safety.

During hearings this month before the House and Senate, lawmakers grilled Barra about why GM took so long to address the ignition-switch defect that it knew about for more than a decade. Congressional investigators, noting that GM engineers had quietly switched out the troublesome ignition switch in 2006 without documenting the change or issuing a recall for faulty vehicles already on the road, flatly said the company was characterized by a culture of coverup.

Through it all, Barra took pains to separate the “new GM” focused on customers and safety first, from the “old GM” — a distinction that failed to impress some members of Congress.

“I’m very disappointed, really,” Sen. Barbara Boxer (D-Calif.) told Barra at one hearing. “As a woman to woman, I am very disappointed because the culture that you are representing here today is a culture of the status quo.”

The faulty ignition switch caused cars to inadvertently shut off, stiffening brakes and steering and causing air bags not to deploy in collisions.

The company’s slow action to address the problem has spawned dozens of lawsuits, from accident victims as well as others who say they were deceived into buying defective cars or have been hurt because the cars they own have lost value.

GM is considering setting up a compensation fund for accident victims. The company has hired Kenneth Feinberg, who organized efforts to compensate victims of the BP oil spill and the 2013 Boston Marathon bombing, to explore options.

Meanwhile, GM has been using its 2009 bankruptcy sale to try to protect itself from other possible liabilities related to the ignition-switch defect. It has asked a federal bankruptcy judge to dismiss dozens of potentially costly lawsuits filed against the company over its handling of the defect and to bar similar cases in the future.

GM has explicitly said that it is not seeking protection from suits connected to accidents caused by the defective switch, which is linked to at least 31 accidents.

Lawyers for victims have filed several class-action lawsuits over the ignition switches in courts around the country, including in Michigan, California, Texas and Illinois.

In filings in U.S. Bankruptcy Court in New York, a group of people suing GM over the ignition-switch problem has asked a federal judge to prevent the automaker from using the bankruptcy as a shield from lawsuits. Lawyers for the plaintiffs argue that GM forfeited its right to liability protection in bankruptcy by not disclosing information about the faulty switch to the court during its bankruptcy sale.

In the wake of the recalls, Barra has appointed a top company official to oversee safety problems. GM said this week that it would double, to 55, a team of safety investigators working within engineering and that it would require its legal department to regularly brief engineering on legal complaints involving its vehicles.

Despite the ongoing problems, Barra told analysts that the recalls do not seem to be having a “meaningful impact” on sales.

Michael A. Fletcher is a national economics correspondent, writing about unemployment, state and municipal debt, the evolving job market and the auto industry.
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