Auto Sales: Channel-Stuffing or True Recovery?

Recent numbers present arguments for both sides

    A 2013 Chevrolet Malibu Eco is loaded onto a truck at a General Motors plant in Fairfax, Kan., Jan. 18, 2012. (Susan McSpadden/Chevrolet via Getty Images)

    A view of October auto sales tells different stories, depending on which source one looks at. Some say sales increases were OK, but at the same time didn’t meet analyst expectations. So how is this important sector of the U.S. economy doing? 

    For example, Business Insider reported that Ford Motor Co.’s total sales were 2.1 percent less than analysts expected, Chrysler Group LLC sales were 3 percent below expectations, while Toyota Motor Corp. and Nissan Motor Co. were off 4.2 percent and 2.8 percent, respectively. 

    General Motors Co. (GM) was the only manufacturer among the big five that managed to beat expectations—it did so by 7.8 percent.

    However, not many of the other media compared the numbers to analysts’ expectations or looked at different time horizons. 

    Compared to last year, most companies reported strong sales or even double-digit sales despite the U.S. government 16-day shutdown.

    It appears one can view the glass either as half full or half empty when it comes to auto sales in October, but different approaches have different merits.

    Taking a Different Approach

    “If you sift through data that does not make the headlines or most news reports, it turns out the actual sales for all three auto makers [GM, Ford, and Chrysler] were not what they seem,” said a November article on the Seeking Alpha website. 

    The year-over-year sales numbers were good. But, looking at it from a different angle, the sales trend might not be noteworthy at all. 

    When looking at month-on-month sales, with the numbers taken from tables in the International Business Times, the sales increase is not remarkable. 

    For example, when comparing September forecast numbers with October sales, only Ford increased sales—by 5 percent—in October. Toyota experienced a 0.1 decrease and Chrysler a 2.04 percent decrease. 

    Like other parts of the U.S. economy that seem to be expanding slowly, there are different opinions about the pace of growth and short-term direction of the auto industry. The next few quarters should be very revealing.

    Channel Stuffing

    GM reports it delivered 226,402 cars in the United States during October. However, the company states in the same press release that dealer inventories went up by 8.6 percent or 57,621 cars. In addition, the time it took the company to sell its existing stock of inventory increased to 87 days from 82 days in September.

    This method has been dubbed “Channel Stuffing.” If companies can’t sell to the end consumer, they just park their cars at dealerships, yet can still record them as sales. 

    This will likely negatively affect GM’s future sales. 

    “It is clear at least to me that auto makers are stuffing the dealer sales channel to make headline sales numbers look better,” the Seeking Alpha article said. 

    To sell cars, the dealers will have to give discounts and other incentives, such as manufacturers’ discounts and lower financing rates, reducing the profit that can be made on each car. 

    “It can even be argued that GM has effectively cannibalized early 2014 sales, as dealers will be focusing on trying to clear out 2013 inventory. Based on some of the incentive deals advertised, many dealers are still trying clear out 2012 inventory,” according to Seeking Alpha. 

    Furthermore, people will take advantage of the incentives and buy a car earlier than originally intended. If more people buy now, there are fewer people left to buy in the future, resulting in a reduction in car sales over the coming months.

    Upside

    The Seeking Alpha article is rather pessimistic concerning future car sales, while a November Kiplinger report predicts just the opposite. 

    “We expect vehicle sales to pick up by almost 5 percent, to 16.3 million units, up from about 15.6 million at the close of 2013. That will be the best showing for the industry since 2007, when 16.5 million vehicles were sold,” the Kiplinger report states. 

    Edmunds.com Inc., a car-shopping website, agrees with Kiplinger and predicts that the auto industry will experience its highest car sales since 2006. Edmunds reasons that many car leases will expire in 2014, requiring leasing companies to buy new cars for their customers.

    Like other parts of the U.S. economy that seem to be expanding slowly, there are different opinions about the pace of growth and short-term direction of the auto industry. The next few quarters should be very revealing.




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