General Motors Death Watch 108: Stuffed?

I know it’s hard to believe that the world’s largest automaker is going down– especially when the company’s management swears up, down and sideways that revenues are up, costs are down and market share is stabilizing sideways. But understand this: GM observers will only realize the extent of GM’s peril retroactively. Meanwhile, it’s clear that GM is trying to follow the old English adage “When you’re stuck in a hole, the first thing you do is stop digging.”

Jerry Marks of the Auto Retail Informer reports that GM dealers will end January with nearly 1.1 million units on dealer lots. That’s roughly the same 80-plus days’ inventory level that preceded June ‘05’s Fire Sale for Everyone. Although GM has famously slashed production, they're still failing to cut their supply fast enough to match falling demand. Less charitably, they're still in a death spiral.

Given GM’s cash position, they can’t afford to shut down production for the month or so needed to clear the backlog. Alternatively and perhaps inevitably, GM could hold another clearance sale. A price blowout would spring clean the winter metal– and seal GM’s rep as the “come on down!” cut-price car company.

Another fire sale would also kill GM vehicles' residuals (again) and put the automaker right back where it can’t afford to be: a high-cost producer selling discount product. But what else can they do? Meanwhile, at the sharp end, GM dealers are suffering.

GM retailers are getting hammered by interest rates on their “floorplans” (unsold vehicles). To keep GM stores sweet, The General pays its dealers’ floorplan costs from day one through day 60 (standard industry practice). That’s all well and good when vehicles move off the lots in three months. When they don’t, as is the case now, dealers’ inventory costs soar.

To help GM dealers foot the bill for moribund metal, The General has agreed to pay roughly half the interest rate charges for vehicles still hanging around its dealers' lots, from day 61 to day 160. From day 151 onwards, any unsold GM vehicle is blessed with an additional $500 “consumer incentive.”

We spoke to several dealers who are unhappy with the new program. Stores who can’t afford to “age” their inventory for 150 days miss out on that $500 spiff. They claim this puts them at a competitive disadvantage. (A GM dealer’s deadliest competition is another GM dealer.)

What’s more (or less), many dealers complain that the program offers no short term help; they’re already stuffed with unsold ‘07’s and not a few ’06's. GM's program only applies to freshly ordered 2007 models– although it's good up to and including, wait for it, November 3.

One dealer described the program as a blatant attempt by GM to seduce its dealers into taking more inventory than they can sell. Even if you call it good business, sales channel stuffing has clear implications for GM’s bottom line. Well, they might be clear when GM eventually files its 2006 financial results.

According to GM CFO Fritz Henderson, the company is working on yet another restatement of earnings (that's seven restatements over the last eight financial quarters) and waiting for results from GMAC. Given that the recent sale of GM's finance unit to Cerberus must have been preceeded by some pretty rigorous due diligence, there are two possible reasons for the delay. Either GM's recent accounting kerfuffles resulted in understating GMAC's worth, or overstating it. If it's the latter, payback will be a bitch.

I digress. As we’ve stated here many times before, GM’s story these days is all about [negative] cash flow– rather than earnings (or the manipulation thereof). And here’s the thing: while Henderson confidently predicted that GM’s '06 accounts will be back in black, the overall numbers will be distorted by many factors, including the booming Chinese market and current exchange rates (the relative strength of foreign currency helps GM).

But the most important factor to consider is GM’s cash pile and the dealer situation described above. That’s because industry practice allows GM to book all vehicles sent to its dealers as “sold.” So the real results– the amount of customer cash generated by new product sales– always lags behind the reported numbers by at least one financial quarter.

As GM launched its new[ish] high margin GMT900-based pickups at the end of the fourth financial quarter, you’d expect a big old positive blip. But if sales tank, if GM’s “sold” vehicles stack up like cordwood on the dealers’ lots, the blip becomes a bust, the cash flow dries up and, well, bad things happen.