Higher Than Expected Recall Costs Spell Third Quarter Loss For Fiat Chrysler

This week, Fiat Chrysler Automobiles (FCA) reported a loss of $330 million after making financial adjustments for higher than previously expected recall costs and to account for the cost of vehicles that were damaged in the Tianjin, China, port explosion in August. The automaker’s loss compares to a profit of $208 million for the same period last year.

The company explained that it recorded a one-time charge of $842 million “for estimated future recall campaign costs” and recorded a charge of $157 million to account for inventory that was lost or damaged in August, when two massive explosions in warehouses in Tianjin killed more than one hundred people and left hundreds more injured, devastating large areas of the city.

Without those charges, the automaker would have earned a profit of $303 million for the quarter or 20 cents per share, thereby meeting the expectations of analysts.

In July, the National Highway Traffic Safety Administration (NHTSA) hit FCA with civil penalties of $105 million for its poor track record of completing recall campaigns, and further ordered the automaker to offer to repurchase approximately 200,000 Ram pickups and Dodge SUVs that failed to properly or quickly fix in recalls issued in 2013. Both the penalties and the buyback program were the largest ever levied by the NHTSA.

The quarterly loss follows five consecutive profitable quarters for FCA. The automaker last reported a quarterly loss after the first three months of 2014, when it purchased 41.5 percent of the company shares that were previously owned by the UAW Retiree Medical Benefits Trust. However, despite those costs, Fiat Chrysler left its guidance for the year unchanged, saying that it still expects to earn an adjusted net profit of $1.3 billion for the year and to sell in excess of 4.8 million cars and trucks globally.

FCA’s CEO, Sergio Marchionne, has pushed for increased car industry consolidation to share technology investments and boost returns as regulatory costs rise in the aftermath of the Volkswagen diesel-emissions scandal. Marchionne said that the auto industry will “collectively pay the price” for the VW crisis as emissions regulations become “exponentially” more expensive. He believes VW’s issues have made his consolidation concept increasingly valid, explaining that he has spoken with other automakers who share his views on the need for companies to merge in order to spread costs.

“We’re not lunatics here,” said Marchionne. “There are a number of people who are in this business who understand the implications. You just have to look at their numbers. That reality is shared not just by me, but by some others. Whether they are the ideal people with whom to strike something or not is a separate question.”