By Jeff Bennett and Joseph B. White 
 

A $2.5 billion pre-tax bill for safety recalls and the establishment of an ignition switch victims compensation fund slashed General Motors Co.'s second quarter net income by 80%, and highlighted the work Chief Executive Mary Barra must do to close the profitability gap with rival Ford Motor Co., which reported stronger results for the quarter ahead of a critical product launch.

GM said Thursday that net profit fell to $278 million during the quarter as special items offset North American operating-margin expansion and continued growth in China. The company recently launched a new family of pickup trucks and sport-utility vehicles in the U.S., but costs related to quality problems--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.

Ford Motor Co., meanwhile, said second-quarter net income 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 heightened role North American margins play as a barometer for the health of domestic auto makers that were once far more fixated on market share as a yard stick. 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 losing 1.2 points of U.S. market share.

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

GM Chief Financial Officer Chuck Stevens said Thursday the company's profitability levels "have room to run" and is confident GM can reach 10% margins in its core market by "mid-decade" as new products, cost cuts and improvements in financing and service product offerings fuel results.

Shares in GM fell 3.4% to $36.15 in trading Thursday. Ford's stock edged up slightly to $17.86.

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

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 vehicles dating back more than a decade. 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 set aside nearly a half-billion dollars to compensate victims of accidents taking place in certain small GM vehicles, including the Chevrolet Cobalt, built in the last decade with problematic ignition switches. Mr. Stevens said the $400 billion 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%.

Mr. Spak said the $400 million charge should be viewed positively as it fell well short of expectations. RBC, for instance, set a $1.5 billion "placeholder in our valuation" for the victim-fund reserve.

GM also took a $900 million noncash pretax charge during the quarter for estimated recall costs that 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 per day being called back for quality problems. GM Chief Executive Mary Barra, speaking during a conference call, said recall work is "substantially complete."

GM still faces a U.S. Justice Department probe that analysts think could end with a multibillion-dollar fine for delays in telling customers and the U.S. auto-safety regulator about safety flaws.

The company disclosed 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 earnings during the period equaled $278 million, which reflect preferred dividends, compared with $1.41 billion a year earlier. Excluding certain one-time costs, GM earned 58 cents a share, matching the 58 cents a share analysts expected, according to FactSet.

Revenue equaled $39.6 billion during the quarter, up slightly from the same period in 2013.

The company's loss in Europe grew to $305 million as the company recorded ongoing restructuring charges. In South America, GM posted a loss of $81 million as the economy remains soft in that region.

Ford's pretax operating profits edged up to $2.59 billion, with cost cutting playing a significant role in helping to offset a 1% decline in revenue for the quarter to $37.4 billion. Ford reaffirmed its forecast for full-year pretax profits of $7 billion to $8 billion, down from $8.6 billion for 2013.

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

Write to Jeff Bennett at jeff.bennett@wsj.com and Joseph B. White at Joseph.White@wsj.com

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