The Truth About Cars » channel stuffing The Truth About Cars is dedicated to providing candid, unbiased automobile reviews and the latest in auto industry news. Wed, 16 Apr 2014 05:18:32 +0000 en-US hourly 1 The Truth About Cars is dedicated to providing candid, unbiased automobile reviews and the latest in auto industry news. The Truth About Cars no The Truth About Cars (The Truth About Cars) 2006-2009 The Truth About Cars The Truth About Cars is dedicated to providing candid, unbiased automobile reviews and the latest in auto industry news. The Truth About Cars » channel stuffing The Truth About Channel Stuffing Mon, 04 Mar 2013 06:00:22 +0000

Zerohedge chart shows GM stuffing the channel at a frightening rate

Zerohedge, the website that caters to short sellers, has been monitoring GM for symptoms of a relapse to the Bad Old. One of these symptoms is channel stuffing, defined by Investopedia as “a deceptive business practice used by a company to inflate its sales and earnings figures by deliberately sending retailers along its distribution channel more products than they are able to sell to the public.”

Zerohedge has a chart depicting an increasingly overflowing channel, and it looks bad. Let’s have a closer look.

Zerohedge sees “a near record 743K cars” sitting in the lots of GM dealers in February, – “the second highest ever.”

If you want to come to the defense of the General, you can simply say: “Second highest February, ever? Not true at all! In February 02, 988K were out there.  In February 03, dealers drowned in 1.13 million GM vehicles. In  February 04, there were 1.2  million – shall I go on?”

Point taken. Those were the days of 17 million units a year, and we all know what happened after the channel got stuffed.

Inventories go up for GM and its peers

Let’s put the  matter in perspective by recreating the same chart for GM and its peers. Dealer inventories sure are rising. They rise for all makes, some rise more than others. A simple reason for dealer inventories to rise is that sales are up.

A better, but still confusing picture

To get a grip on this (and on inventories), the industry uses a metric  usually called “days to turn” (or “days of sale” etc.). It goes like this: “If business stays like last month, how many days will it take to move the inventory?”  Days to turn should not go up as business increases. Sure, total inventory goes up. By selling inventory faster, days to turn should stay relatively even.

In the industry, a two month inventory, or around 60 days, is considered reasonable.  As we can see from this chart, GM appears to be far removed from that 60 days ideal.

Days to turn also is a metric that must be used with care. Take GM’s  December 1 inventory of 788K. Looking at the sales rate of November, it was determined that it would take 106 days to move.  GM did put cash on the hood, year-end sales  did their part. On January 1, there was an inventory of 717K. Now suddenly, it would take only 76  days to move that inventory? It would, if January sales pace would be the same as December. Of course it was not. So we land on 738K inventory at the beginning of  February, which suddenly is said to take 95 days to turn. Confused?

We are not trying to predict inventory levels, we are trying to establish a trend. For that, we take a simple three month moving average of the days to turn to smooth out the confusing ups and downs.

GM accumulates more and more inventory, while Toyota’s remains relatively flat

This chart is less dramatic than that of Zerohedge, but it tells us a lot.  We see that days to turn trend up for all  Detroit makers. GM however remains the most profligate  inventory oinker.  On a three month averaged basis, GM has  nearly three weeks more inventory out there than Ford. Of the Detroit3, Ford looks most disciplined, especially considering its high share of trucks. In Febuary, Ford’s three month average for trucks was 77 days, that of cars was 68 days – not a large difference.

I have added Toyota as a reference.  With Toyota still  importing some 30  percent of the cars it sells in the U.S., one would assume that Toyota’s inventories should be higher. They are not.  Quite interestingly, all four of them had inventory levels slightly above 60 days  in March 2011.  After the Tsunami hit, Toyota’s inventories decreased, but they did not increase a lot in 2012. Lean inventories do not seem to be in favor in Detroit, with GM topping the obesity scale.

P.S.: Before the usual “GM needs to prepare for the truck shutdown” arguments come: In February, GM’s truck inventory stood at 94 days, that of cars stood at 95 days.

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Chart Of The Day: GM Full-Size Truck Inventory, 1/2010 – 8/2012 Thu, 30 Aug 2012 11:59:31 +0000

Only one more day until we get August sales data, and September 4th will bring us the latest inventory numbers. Here at TTAC, we’re keeping an eye on GM’s full-size truck inventory, which is as high as 145 days for the GMC Sierra – well above the 100 day supply that’s considered safe for full-size trucks.

GM has long maintained that they are ramping up truck production to help keep inventories high in advance of the weeks long plant re-tooling to build the next-generation of full-size trucks. The story always truck us as odd; the claimed 21-week idle struck us as awfully long, and the wisdom of stacking ‘em high would almost certainly lead to having to selling cheap, right? We’ve heard the call for incentives before, and now we’re hearing them again.

“My concern would be thatif inventory levels don’t improve, GM will need toraise the incentive level tomove the vehicles,” said Joseph Spak, an auto analyst with RBC Capital Markets LLC. A report in The Detroit News offers a less than flattering assessment.

July incentives on GM’s Chevy Silverado and GMC Sierra at $4,200 and $4,800, respectively, were down substantially from the same month a year before, according to But they were higher than incentives Ford Motor Co. offered for the F-150 and what Chrysler Group LLC offered for Ram 1500, says

As the chart above shows (click on it to see a full-size version), inventory levels are not only high now, but they were high at this time last year. Not quite as high as 145 days, but well above the 100 day threshold on a consistent basis that lasted from April to December, with a brief reprive in October. GM is apparently banking on strong sales in Q3 and Q4 2012 to clear up some of the excess truck inventory, with the News stating

Company executives have said they expect to sell down the stockpile of trucks throughout the second half of the year — traditionally a stronger period for truck sales — and have no plans to change production strategy.

Unfortunately for GM, the inventory data paints a different picture. This same time period in 2011 showed consistent inventory levels of 100 days or more, save for a brief downturn in October. 2010 levels were somewhat different. Sierra inventory hovered right around 100 days in August and September, then rose through the year end, while the supply of Silverados was relatively low.

The truck inventory story isn’t new – Ed examined it last year, when it was making headlines even without a plant changeover. Bertel has delved a bit deeper into “channel stuffing” and how the unsold inventory pushed onto dealers can actually count as a “sale” for financial reporting purposes.

The best we can do for now is to keep an eye on inventory and sales levels to see how it all pans out. Or tell me I’m an idiot in the comments.

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Chinese Consumers Rebell Against Channel Stuffing, Punish Carmakers Mon, 13 Aug 2012 14:59:37 +0000

Channel stuffing is taking its toll on China. Customers fight back against “increased sales pressure and an insufficient supply of experienced staff, driven by a disconnect between the dealership network expansion and the market slowdown, “ and punish car manufacturers where it hurts second most: On the J.D.Power Sales Satisfaction Survey. The survey, published today, notices “a notable deterioration in overall sales satisfaction among new-vehicle owners in China.”

Audi ranks highest in that study that measures customer satisfaction with the new-vehicle purchase process. Dongfeng Nissan ranks second, followed by Beijing Hyundai, Dongfeng Citroën and Dongfeng Honda. The preeminence of joint ventures of the state owned enterprise Dongfeng cannot be overlooked.


J.D.Power wants the car companies that rate below industry average to keep face, and does not list them. Easy: If you don’t see major makers listed above average, they are below average.

According to J.D.Power’s Liza Wang,

“manufacturers have not aligned production with current demand, but have instead continued to add production capacity and open new dealerships in anticipation of stronger growth in the future. In the current market, this has led to increased inventories at dealerships and acute pressure to sell vehicles.

Nearly 80 percent of dealers indicate that high inventories are their greatest challenge, which means dealers are under immense pressure to sell more vehicles at a faster pace, This clearly has had a negative impact on the quality of the purchase experience for new-vehicle buyers.”

An increasing number of customers complained about excessive pressure from salespersons. In addition, i customers are more demanding and have higher expectations during the sales process than before. Says J.D.Power:

“The increasing availability of vehicle information on the Internet—particularly regarding vehicle features and pricing and incentive information—has given new-vehicle buyers more leverage when negotiating their purchase. “

China – looks more and more like home. Except for the girls over the hood, sadly.

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Chart Of The Day: Channel Stuffing Bonanza Wed, 25 Jul 2012 15:15:07 +0000

Today’s Chart comes from finance blog Zero Hedge, which has taken a periodic interest in General Motors channel stuffing endeavors. While we don’t normally report on stock prices here at TTAC, this one is worth mentioning.

The chart, using an inverted axis, shows the relationship between GM’s month-end inventory levels, and their post-IPO share price. The lower it goes, the more inventory The General seems to have.

Channel stuffing is an addiction that GM is unwilling to get help for, and it’s always the same nasty habit of loading up dealers with big full-size trucks and SUVs (to the tune of 130 day supply levels, or more), even though that’s what got them in to the whole bankruptcy mess in the first place. But that’s ok, because their sales numbers look great, even if their share price is in the toilet.

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General Motors, Channel Stuffing And The Return Of 2008 Mon, 09 Jul 2012 16:52:09 +0000

A lawsuit filed by a Florida investor against General Motors over the age-old practice of “channel stuffing”, or sending inventory to dealers and recording it as a “sale”, so that revenue numbers can be pumped up while the vehicles languish on dealer lots. The practice of channel stuffing is universal in the auto industry, but in this case, the consequences are much broader.

The specifics of the lawsuit, which hinge on specific phrases in the IPO prospectus, can be found here. The class action suit is unlikely to do any serious damage to GM, and will likely be the site of a long, protracted legal battle. The implications of channel stuffing are what really matter, and may provide a glimpse into both General Motors, and its government stewardship.

While General Motors is touting their 32 percent year-over-year increase in sales, a closer look at the numbers reveals a couple of things.  According to Bloomberg, inventory for full-size trucks was at a 135 day supply, as GM ostensibly cranked out profitable pickups and sent them off to dealers across the land, allowing them to book sales of their most lucrative vehicles just in time for the half-way mark – and coincidentally (or not), government purchases of GM vehicles rose 79 percent in June. Retail sales were up a mere 8 percent, while fleet sales rose by 36 percent.

There is a political argument to be made for all of this, with GM’s financial health being integral to President Obama’s re-election, and a validation of the auto bailout and his economic policies. The Treasury still owns a 32 percent stake in GM, and selling their shares now would mean a major loss of taxpayer money. If GM’s fortunes were to reverse, than a quick exit, perhaps at a profit, might be possible.

The inflated inventories and “channel stuffing” aren’t just a manipulative way to make GM’s numbers look better than they are – they also expose GM to a potentially dangerous financial situation similar to 2008. General Motors, like any other car company, must sell the cars it builds. Its inventories are much higher than other manufacturers. Prior to the bailout, GM was caught out with large inventories of full-size trucks and SUVs at a time when a poor economy and rising gas prices made them unattractive to consumers. This same scenario occurring again isn’t inconceivable.

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GM Back To Its Channel Stuffing Ways Sat, 14 Apr 2012 15:45:37 +0000

The Nikkei [sub] comes with the good news that “Japan’s automakers have finally resolved the inventory shortages that have hindered their sales in the U.S. market.” According to the Tokyo wire, Japan’s automakers “are in a better position to compete with their Western and Korean rivals,” now that lots are stocked again.

Well, not quite. Japanese inventories are still fashionably slim compared to some Detroit chubbos. Pop some Tums and have a look.

According to data compiled by Automotive News, Honda has a 54 day supply. Around two months are considered normal for the industry.  Toyota however has only a 32 day supply, smaller Subaru has 30.

Let’s take this opportunity to look at all lots.

Days of supply Units Days Apr 2012 Days Mar 2012
Detroit 3: 1,534,900 70 72
European 231,300 53 42
Japanese 827,400 43 46
Korean 122,200 27 34

The Detroit 3 definitely have no shortage of cars with an average of 70 days’ supply on the lots. The Europeans are at the current industry average with 53 days of supply. The Japanese have 43 days’ worth  on the lots, but “the Koreans” have only 27 days.

Units Days 1 Apr 2012 Days 1 Mar 2012
HYUNDAI-KIA 122,200 27 34
SUBARU 35,000 30 33
BMW 32,300 30 33
TOYOTA 230,400 32 36
PORSCHE 3,600 41 41
NISSAN 226,400 47 54
DAIMLER AG 44,500 51 45
HONDA 244,000 54 50
MAZDA 62,300 54 59
Industry 54 57
FORD 477,300 60 68
CHRYSLER GROUP 354,900 61 66
VOLVO 15,000 63 66
VW GROUP 116,200 67 42
SUZUKI 6,800 72 68
GENERAL MOTORS 713,200 86 80
MITSUBISHI 22,500 88 125
TOTAL 2,715,800 54 57

Indeed, Hyundai-Kia’s supply is the lowest of them all with only 27 days until empty. As indicated by the Detroit 3 number, American makers are generously stocked, but averages can be deceiving.

Ford and Chrysler carry a regulation two month supply on the books.

The absolutely worst of Detroit is GM with a nearly three month supply. Only consolation: Deadman walking Mitsubishi carries two days more. While days to sell are down industry-wide, inventory is increasing on GM lots: From March to April, it took a week longer to move an already sluggish inventory.

GM’s lot queens: Escalade EXT (144 days), Yukon (136 days), Yukon XL (133 days), Sierra (132 days), CTS (124 days), all Cadillac cars (123 days), all Buicks (121 days).

Have a look at this chart: No wonder that GM is losing market share. The cars are all sitting on the lot.



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GM Goosing Stock By Overstocking Dealers With Trucks? Wed, 06 Jul 2011 16:20:01 +0000

It has been around the net since yesterday that “trucks are piling up on auto lots” and that this could spell “trouble for GM.”

Bloomberg reports that GM did bet on a strong recovery and built more trucks to fill the imaginary demand. “The strategy is backfiring.”

The National Legal and Policy Center has more sinister suspicions. It states that “it looks like General Motors is up to its old tricks as it stuffs inventory channels with higher profit trucks.” The center is accusing GM and the Obama administration of “fudging earnings.”

All this was caused by a research note written by H. Peter Nesvold of Jefferies, a securities and investment group that just bought Prudential Bache.

Instead of regurgitating news pre-eaten by everybody from Bloomberg to Barrons, we wanted to wait until we get our hands on the original research note itself. The biass crowd is a rabid bunch, and we did not want to get caught copying mistakes.

You won’t be able to google the research note, but one of my high net worth friends is on Nesvold’s email list. My friend graciously forwarded the original report to me.

What worries Nesvold is this:

“GM’s pickup inventory continues to build (it now stands at 122 days vs Ford at about 80 days).”

Nesvold pretty much suggests that GM should stop making trucks for the year, as it has plenty standing around on dealer’s lots:

“We remain cautious about GM’s ability to continue producing GMT900 pickups given that inventory moved up marginally to 122 days. As described in more detail below, GM on the call unexpectedly announced that it would maintain pick-up truck inventories in the 100-110 day range through year end. While management offered reasons, we still struggle to understand the rationale. GM expects seasonality and a stronger second half to help bring inventories down, and reiterated its intent to clear the inventory by adjusting production if necessary.”

And why the huge inventories? They count as sold. Nesvold comes pretty close to calling stock manipulation:

“Perhaps the most significant takeaway is the different pickup-truck inventory strategies being pursued by GM and F. Ford F-series inventories are around 79 days, while GM’s Silverado and Sierra inventories are about 122 days. Exhibit 1 shows the cumulative difference between GMT 900 pickup production and sales, which should over time roughly match. There was a clear build in front of the IPO, and now again in front of 2Q.”

What is so important about 2Q? The US Treasury is on record that they would not lighten-up on GM stock before second quarter earnings are reported. The earnings have to be high to drive the stock price up. Nesvold seems to indicate that the stock is being pumped before dumped by the Department of the Treasury.

The exhibit 2 that accompanies the report has graphic content. Don’t view on an empty stomach if you hold GM stock.

“GM’s inventory is some 40 days higher than what Ford, which has a similar product mix, is carrying as shown in Exhibit 2. On the call GM said it was looking to exit the year at 100-110 days, which is 20-30 days more inventory than the 78 days it averaged at yearend between 2002 and 2010. Management said that it structurally needs to carry more inventories going forward because it had consolidated six plants to three. We can understand around the edges why that should result in higher inventories, plus the fact that the days’ inventory looks high due to cyclically low-end sales. But we respectfully aren’t convinced that triple-digit inventories should be the new normal. Just factoring in seasonally high sales and seasonally lower production in 2H vs. 1H, inventories should be down 15+ days. That GM intends to continue producing at elevated levels remains confusing. The net impact to the financials is that the company is pulling forward 2012 earnings into 2011. It respectfully begs the question, is GM falling into old bad habits?”

Nesvold has a BUY rating on Ford and a HOLD rating on GM. In the world of analysts, a HOLD is usually understood as “sell before everybody else does.” Such as the 900 lbs gorilla in Washington, DC.

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GM Ramps Up Production. Of Cheerful Numbers Wed, 08 Dec 2010 09:32:43 +0000

Even the Detroit News, by some regarded as an extension of the Big 3 PR departments, can’t help but ask: “Are Detroit’s new automakers falling back into old habits?”

New automakers? Old habits?

Well, it sure looks like the Big 3 have drastically ramped-up production. Production of good numbers, that is. Especially one of them has been very busy in that department: GM. The General currently has a 95 day supply of cars sitting on dealer lots, up from 76 days in August.

The industry average stands at 67 days, says a Citi Investment Research report. A two month supply is considered normal. What’s more, carmakers are supposed to switch from rich to lean at this time of the year: “With December production poised for a typical seasonal slowdown, inventory should end the year around the 60-day norm,” Citi analyst Itay Michaeli wrote in his report.

GM’s answer? GM says everything is fine, they are bulking up for a strong 2012. Jim Bunnell, general manager of GM’s dealer networks, doesn’t “want to leave anything on the table. We don’t want to be short.”

The other old and new automakers are a bit more cautious.

Ford has a 71 days’ supply.

Chrysler Group LLC has a 79 days’ supply.

Both higher than the industry, but not alarmingly so.

GM desperately needs better news, and cars stuffed into the channel are considered and reported as sold. For the first 11 months, GM’s sales rose only 7 percent. Whereas Ford rose 19 percent and Chrysler 17. In November, GM’s ”sales,” despite an overstuffed channel, rose only 12 percent. Ford’s sales went up 20 percent and Chrysler’s 17 percent.

What’s more, GM could be within spitting distance of the world’s number one carmaker, Toyota. When global production numbers are counted, it will most likely be a photo finish this year, and every car made counts – even if it sits around unsold.

Good year-end numbers would be good for the newly minted stock. Overstuffing could also be its undoing. “If they don’t get it, then Wall Street will punish them in January,” said Warren Browne, a retired GM executive who now runs his own firm, WP Browne Consulting LLC.

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