Channel-Stuffed US Car Dealers Cut Prices; Hope To "Sell Their Way Out Of This"

Tyler Durden's picture

While loathed to admit it, US auto makers have done it again. As we have vociferously explained month after month (and has been vocally denied until now by the car makers themselves), much of the recovery in auto sales has been a massive channel-stuffing make-work program (mal-investment once again triggered by 'false' signals created by Fed intervention). Now, as the WSJ reports, Detroit's big 3 are trying to sweeten discounts to clear a massive inventory of unsold vehicles from dealer lots (desparate not to start a profit-killing price war). "We believe we can sell our way out," said GM, but as Morgan Stanley warns, "the best of the U.S. auto replacement cycle is over." Good luck...


As we noted recently,

Confused why the various US manufacturing indices have been on a tear in the past few months? Perhaps the fact that GM dealer lots are so full of cars they just couldn't wait for even more deliveries has something to do with it. Which is also why in addition to reporting sales numbers for November that were largely in line with expectations, amounting to 212,060 (even if total Chevy Volts sold YTD of 20.7K were -0.6% less than in the same period in 2012), or 13.7% more than last year (estimated called for 13.% increase), of which a whopping 51,705 was in the form of "channel stuffed" units to be parked on dealer lots.


In fact, as the chart below shows, in the past three months, GM channel stuffing has exploded and soared by 150K units (the most ever for a 3 month period) from 628.6K to 779.5K. This represents the second highest amount of channel stuffing and is lower only compared to the 788.2K units "stuffed" exactly one year ago.



And now via WSJ,

Detroit's big auto makers are trying to sweeten discounts to clear unsold vehicles from dealer lots, but not so much to start a profit-killing price war.


It is a balancing act making Wall Street investors nervous. Analysts aren't sure whether the moves to counter a January slowdown in sales—particularly new discounts on large pickup trucks—will undermine the rising prices that have helped rebuild profits during the past three years.




On Tuesday, automotive sales tracking firm ALG Inc. warned industry inventory levels in January were the highest since August 2009, when the recession was in full force. It took U.S. dealers in January an average of 59 days to sell a new vehicle, nine days longer than the same period a year earlier and the highest level since the 68-day peak in 2009.



None of the auto makers say they plan to reduce production to counter the inventory overhang. Paring output would reduce pressure to discount, but auto maker's book revenue when they ship vehicles to dealers and any slowdown would hit first-quarter revenue.

But the Car makers still believe in miracles...

They are counting on dealers to cut the backlog—without a wholesale change in manufacturers' incentives or production schedules.


"We believe we can sell our way out," said GM spokesman Jim Cain.



But this is not going to end well...

GM and other car makers figure "it is cheaper to offer these incentives than to shut the plants. The problem is once you turn it on, [discounting] it is hard to turn it off, and now we are looking at another challenging month with February."


But there are signs that the pain threshold has been crossed in some models.




After four years of rapid growth, the U.S. new-car sales pace "appears to have stalled," Morgan Stanley analyst Adam Jonas said in a research note earlier this week. "We really think the best of the U.S. auto replacement cycle is over. The incremental buyer is moving from someone who needs to replace their car to one who just wants to."

Dealers are not as confident...

"With inventory levels reaching a point not seen since August 2009 and extreme weather not letting up, we fully expect a short term rise in incentives," said Eric Lyman, an ALG vice president in Santa Barbara, Calif. "The danger is that this turns into an escalating arms race for market share," Mr. Lyman said.

It would seem, once again, that we never learn...

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zaphod's picture

Funny that all three "US" manufactures are above the "Average". What does that tell you?

TruthInSunshine's picture

Yellen has formally recommended that American consumers use student loan monies, refi mortgage monies, reverse mortgage funds & credit cards to buy/lease as many new vehicles as they can.

She's working on a bailout package for the student loans, mortgage monies and credit card debts that aren't repaid, because she recommended using those funds to buy depreciating vehicles instead, as I write this.

"Go forth and consume, debt slaves. Rearrange those debt funds in your consumption portfolio."


Mrs. Debtfire (aka Janet Yellen)

CrazyCooter's picture

What is wrong with an executive order demanding all federal employees buy a new American auto?

Hell, if they get Congress to pitch in, the whole nation can be required to buy a new car every year, just like health insurance!



0b1knob's picture

"What is wrong with an executive order demanding all federal employees buy a new American auto?"

Why stop with FEDERAL emplyees?  Everybody in the pool, as Pelosi might put it.  In Singapore they require cars to be junked after ten years.  For safety reasons of course. Remember this Zerohedge blast from the past about how Germany deals with the problem?


NotApplicable's picture

In the US they'll do it to save the planet.

Meanwhile, I just keep my '92 Dodge Ram purring like a kitten.

TruthInSunshine's picture

If that vehicle is paid off, and especially if you're not paying interest on the underlying debt to any number of too-big-to-jail financial entities, that's awfully close to "terristy" behavior and I may have to report this my local Party Member.

Never One Roach's picture

Looks like Uncle Sam's employees are all going to get new cars, right.

Ness.'s picture

They just a got 39% raise with the stroke (off) of (with) a pen.  Wha-la!  It's magic!


But as Gob Bluth so eloquently explained to us in Arrested Development.  This is no trick.


"It's an illusion Michael.  A trick is something a whore does for money...               or cocaine."

Midas's picture

Don't call my escorts "whores."   --GOB

Fox-Scully's picture

I thought the new car was included in the price of the premium for signing up for Obamacare.

StychoKiller's picture

Well, so much for that minimum-wage raise...(annd, it's gone!)

Canadian Dirtlump's picture

for a reference honda is at 87 up from 56 last year. Mazda is at 99 up from 78. Mitsubishi is at 144 up from 107. VW is at 117 up from 95. Toyota is at 68 up from 57.


There seems to be a general trend of inventories being higher than what has been the case.

geotrader's picture

How about Acura, Lexus, and Infiniti?  Or are they lumped into Honda and Toyota?

Canadian Dirtlump's picture

Lumped in based on the chart i saw. You

walküre's picture

They will all need to idle and cut production VERY SOON. No two ways around it. Demand is NOT going to pickup and .gov is NOT going on a spending spree anytime soon.

Layoffs and plant closures will follow and BOOM we're back at 2008. Nice roundtrip with a quadrupling of the federal balance sheet and NOTHING to show for.

TeMpTeK's picture

Cash for 3 year old Clunkers..

StychoKiller's picture

All they gotta do is add some OnStar® spybot(s), Euro kill switches and customers will be swarming all over those dealerships! :>D

ugmug's picture

Obama is going to hand out 'Obama cars' to go along with all those Obama phones.


TruthInSunshine's picture

I want an Escalade with 24" wheels and a free gasoline EBT Card (one can buy postage stamps with EBT Cards, which I just learned yesterday whilst watching a FSA member buy a gigantic pack of 4ever stamps) and an Obama/Biden 2012 rear window sticker.

texas sandman's picture

New, improved, cash for the shit you're currently driving program in 5, 4, 3, 2........

disabledvet's picture

"cash for clunkers." great program actually.

the industry never liked it because...indeed "they will sell themselves out of this Depression."

and indeed...they haven't.

me thinks this rises above the level of the "community bankers association."

Never One Roach's picture

I can buy a new car with MyIra, right?

buzzsaw99's picture

imo the excess inventory won't clear as fast as last time. pretty much everyone i know (even broke people) who wanted a new car already have one. the dealer i bought my car from only a year ago calls twice a month (spam) begging me to trade it in already. never had that happen before.

NoDebt's picture

Selling a backlog of inventory at discounted prices into a weak market.  I only have one thing to say to that:  "There has never been a better time to buy a new car!"

OK, wait a month or two and then go waste some salesman's time pretending you're an interested buyer.  It's cheap fun.  I used to do it back in college- go for a test drive in a new car when you're feeling bored.  It worked OK up by Villanova (I used to tell them my rich Dad was going to give me money for a new car, all dressed up in my preppy pants and sweater vest- HA!).  Not sure if that would work everywhere, but it worked there 20+ years ago.

NOTaREALmerican's picture

In KaLi you'd have to be Chinese to pull that off.  

All the kids of the tiger moms are in college, many of them have rich parents.   Chinese are doing quite well right now.

disabledvet's picture

wait until that property market buckles.

once those zeros start getting subtracted...well...those are "assets that are borrowed against."

again. stick with land. everything else is an over inflated ego with a microphone.
well...not everything.

Never One Roach's picture

NotaReal is right. I swung by a BMW dealership [for the free coffee and donuts] and it was more then half full with young Chinese buying new BMWs. Some with their parents...others with classmates. I asked the sales lady where they were from mostly and she said Mainland and loaded with cash.

Crazy stuff.

walküre's picture

cash straight from the printers in their basements or some such shit

shadow banking is one helluva drug

Miffed Microbiologist's picture

My observation as well. There are 80 people at my job. I'm the only one without a new car. Most of these cars are high end, even though many of their owners make less than half what I make. I can't imagine what the financing is. Plus the increase in insurance and licensing for having a new vehicle. I get those same spams all the time as well. I'm considering dropping a new engine in my car if it goes. I learned the hard way it's the total cost of ownership, not just the purchase price.


Omen IV's picture

i dont need a new vehicle but have been waiting for the right time - the right time  - is when they give me a number that i believe........ i am stealing it

StychoKiller's picture

Praise be that no car dealers know my phone number (or the fact that my Dodge Dakota is a 1990 model!)

NoDebt's picture

"Rebate technology" and fleet sales.  The only damned thing the US auto industry has known since the 1970s.  Dumbasses.

cowdiddly's picture

What? You don't want a new luxury plastic model with planned obsolescence, @OnTracking, a black box data recorder and the new options of vehicle to vehicle communications and remote stop features for the PO Po?

My next car will be a frame off restoration 55 Cadillac Coupe Deville with 9 coats of pussy stick to the side baby blue and any kind of negro spinners my heart desires and the total build will still be cheaper. Bitchez

And yea, you can Channel Stuff em.

NoDebt's picture

My other car is a 78 Malibu with 38K original miles, a 383 stroker small block with a blower on top.  Carburetor-fed, mechanical fuel pump, no computer anything anything.  I even have a spare 60s-era points-style distributor on the shelf in case an EMP blast takes out the electronic module in the ignition.  I'm good.

Its Only Rock N Roll's picture

I only see 2 US manufacturers.  Chrysler is Italian...and their products still blow.




Its Only Rock N Roll's picture

Wonder what this does for the collateral on all those subprime ABS that were pumped out the last 18 months.  The recession gives you defaults and the collateral is crap.  Ally will need another bailout of some sort.  GM bought Americredit...what a fabulous waste of capital that will end up being. 

Auto maker shit show part duex.

caShOnlY's picture

GM bought Americredit...what a fabulous waste of capital that will end up being. 

on the contrary, a fantastic buy for GM.   Now they can hide billions in bullshit auto loans while telling the world they are number 1 in sales!!  Same old shell game as before, just going to last longer because obummer loaded them up with cash and tax credits.  Smell this corporate pile of fecal matter for what it is and don't buy the shit it produces.  ALL JUNK. 

Its Only Rock N Roll's picture

Loan book will implode and cost of capital will not stay cheap forever.  Will unwind quicker than you think.  But you are right...just a big shell game right now.  Collosal waste of capital and massive mal-investment.

FICO score of 550 and no down payment??  No problem!  We have a deal for you!  LOL


Winston Churchill's picture

A recession inside a depression.

History rhymes.

I woke up's picture

They should redesign the vehicles to shorten up their planned obsolescence timelines.  Stop offering replacement parts too <sarc>

NotApplicable's picture

Step 1) Stop putting drains in oil pans.

TruthInSunshine's picture

@I woke up - I have a client who owns a chain of new car dealerships who constantly bitches that cars don't break down often enough.

True story.

GM is introducing a new model for 2015 called the Grand Krugman which self-destructs at precisely 24 months after purchase.

swmnguy's picture

Better yet, 24 months and 1 week after, or at 50,001 miles, whichever comes first.

TruthInSunshine's picture

The Grand Krugman has no warranty.

The hood is welded shut, too.

FishHockers's picture

Losta cars, No Buyers

Cryogenic's picture

Guess the president can just make yet another executive order / laxative to clear the blockage via mandatory scrapping policy.

Its All Good's picture

No, see everyone else has it wrong.  Inventory is building up because we have had bad weather (during winter of all things...).  Just wait until spring and everything will get all better really fast. This time for sure!