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As The Chinese Car "Channel Stuffing" Bubble Pops, "Debilitating Price Cuts" Arrive

Tyler Durden's picture




 

The fact that GM's "stunning" car sales have been in no small part driven exclusively by its eagerness to stuff dealers with unsold inventory, aka channel stuffing, is well known to Zero Hedge readers - we have been covering the subject for over a year now. What we did not know, yet what in retrospect is so glaringly obvious, is that the GM ploy of fooling the dumbest sellside analysts and investors all the time has now gone global. And while channel stuffing may have worked for a while, it is now starting to bite back. Bloomberg reports: "Chinese dealers are struggling with the rising number of unsold cars that’s threatening to deepen price cuts, according to the nation’s biggest automobile dealers’ association. Dealerships for Honda Motor Co., Chery Automobile Co., BYD Co. and Geely Automobile Holdings Ltd. carried more than 45 days of inventory as of the end of April, exceeding the threshold that foreshadows debilitating price cuts, Su Hui, vice president of the auto market division at the state-backed China Automobile Dealers Association, said in an interview yesterday.  Unsold cars are crowding dealer lots in cities from Guangzhou in the south to Xi’an to the west,” Su said in a phone interview yesterday from Beijing. “It’s like a contagious disease that will spread." Wait, so Channel Stuffing is... bad? And if 45 days of inventory "foreshadows debilitating price cuts", then what should GM with its 86 days of full vehicle days supply in the US say?

As a reminder, GM channel stuffing in the US:

And just in case one thought GM is not repeating its US mistakes elsewhere, guess again: "The warning signals that vehicle deliveries reported by companies, which have risen more than analysts’ estimates for the past two months, aren’t fully translating to consumer sales. Demand was the slowest in the first four months since 1998, weighing on automakers from General Motors Co. (GM) to Volkswagen AG (VOW), which are counting on the world’s largest auto market to offset slumping sales in Europe." Sadly, at the end of the day accounting gimmicks and misrepresentation can only get one so far: at some point, someone actually has to buy the record excess inventory. And when wholesale dumping begins, GDP growth ends.

More:

“Competition will get fiercer,” said Huang Wenlong, a Hong Kong-based analyst with BOC International Holdings Ltd. “China’s auto demand will definitely slow down with the decline of the economic growth rate.”

 

An increasing number of small-scale dealers are suffering losses after discounting cars to boost sales, according to Feng Jian, deputy general manager of Pang Da Automobile Trade Co. (601258), China’s second-largest auto dealer by market value. Competition is also leading to consolidation among dealers, Feng said.

 

China Yongda Automobiles Services Holdings Ltd., a Shanghai-based car retailer, plans to raise as much as HK$3.4 billion ($433 million) from an initial public offering in Hong Kong and plans to use 35 percent of the proceeds on potential acquisitions.

The bubble really has popped:

“While we had expected a poor first half, we did not expect to see the market deteriorate so fast that the Honda JV needed to close the factory for 16 days,” Scott Laprise, Beijing-based analyst at CLSA, said in a May 11 report.

Even so, that does not prevent channel stuffing expert extraordinaire GM to pretend all is well - after all it has lots of experience with this:

GM, the world’s largest automaker, reported sales growth accelerated last month as demand for its Wuling minivans offset a drop in Chevrolet deliveries. While Wuling helped total growth quicken to 12 percent from 11 percent in March, Buick sales growth slowed to 1.7 percent from a year earlier and demand for Chevrolet vehicles shrank 6.2 percent.

 

Inventory levels at automakers rose 3.3 percent to 757,400 units as of the end of April, the highest in at least 16 months, CAAM data show. Dealerships are holding at least the equivalent in stock, according to Cheng Xiaodong, who oversees auto price monitoring at the National Development and Reform Commission, the nation’s top economic planner.

As for the final unwind, it is only a matter of time:

“There’s pretty big pressure on auto dealers and automakers to cut prices,” said NDRC’s Cheng. “Car demand is not rigid and is easily undermined by macroeconomic conditions and the cost of owning cars.”

Finally, with autos accounting for such a disproprtionately large component of GDP and economic production, what happens when the world can no longer keep its head stuck in the sand and yet another Chinese bubble pops?

 

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Fri, 05/18/2012 - 09:29 | 2439272 Thucydides
Thucydides's picture

A new car with every account opened at JPM!

Fri, 05/18/2012 - 09:42 | 2439339 Cognitive Dissonance
Cognitive Dissonance's picture

What? No toaster?

I bet that new car comes with payments........right? But with zero interest and no money down, how could I go wrong?

Fri, 05/18/2012 - 10:03 | 2439489 hedgeless_horseman
hedgeless_horseman's picture

 

 

AAP still tanking, despite people holding on to their clunkers.

Close Short/BTFD or Stay Greedy/NTTCAFK?*

 

 

*Never Try To Catch A Falling Knife

Fri, 05/18/2012 - 12:05 | 2440375 zaphod
zaphod's picture

I bought the wife a subaru a few months back for a dealer that does good volume and had a lot of cars on the lot. Turned out they were all spoken for and the one we wanted took a week and a half to arrive. As far as I could see they had practically no inventory on hand. Guess GM cars just suck.

Fri, 05/18/2012 - 12:38 | 2440594 fourchan
fourchan's picture

they suckered in buffett with this shell game, a ball under every cup...lol!!

Fri, 05/18/2012 - 09:45 | 2439351 smb12321
smb12321's picture

I consulted with a company that did EXACTLY the same thing, moving finished goods (AC units) to the admin parking lot and "pre-shipping" units only to be sent back.  This was they could be counted as "shipped".  For months the lot was so crowded that parking became a huge problem.  When Citibank, the foolish lender, came for a visit an investigation led to the CEO's departure (with golden parachute) and bankruptcy two years later.  

On top of this, union bosses called for a strike despite mountains of unsold inventory in the lots.  The company (Heil Quaker) had previously been a success story before its owner died and the company was sold to Canadians.  They even went "public" urging folks to buy "shares".  This kind of stuff is too strange to make up and is indeed stranger than fiction.

Fri, 05/18/2012 - 09:48 | 2439387 Tortuga
Tortuga's picture

Damn Canadians. Did they consult with the AC unit czar 1st? Cause if they did, then it's ok, business as usual, unless they used BAIN.

Fri, 05/18/2012 - 09:51 | 2439403 smb12321
smb12321's picture

LOL - it was Canadian folks in their 20's who had a "Vision" (rescuing a hick money-making company) and LOVED their health care system.  I asked about getting operated and was told they had "line insurance" meaning you could cross the US border for your operations.  Most salient comment by a young sweet thing:  "Our system is wonderful if you're not sick!"  Swear to god

Fri, 05/18/2012 - 10:07 | 2439541 Tortuga
Tortuga's picture

So then, their health system is just like ours. Well, that bust's my incentive to emmigrate all to hell. If I'd only planned better and been a buddy of face book I could be living in Singapore right now, minus $500 million or so exit tax. At least the 20's Canadians ventured but they were babes in the woods without government/squid protection they could have purchased with a donation to a re-election campaign, I hear there is one that has disabled all credit card identifiers.

Fri, 05/18/2012 - 09:55 | 2439444 Sandmann
Sandmann's picture

Datapoint was one of the most famed examples of this "Aggressive Sales Recognition"policy

Fri, 05/18/2012 - 09:53 | 2439402 Hal n back
Hal n back's picture

what was the April number for channel stuffing?

Fri, 05/18/2012 - 09:29 | 2439274 LawsofPhysics
LawsofPhysics's picture

Suck it supply siders! LMFAO!!

Fri, 05/18/2012 - 09:30 | 2439282 q99x2
q99x2's picture

Too bad you can't eat cars.

Fri, 05/18/2012 - 09:37 | 2439312 Freewheelin Franklin
Freewheelin Franklin's picture

I know someone who tried to eat a Jeep.

http://www.youtube.com/watch?v=S9ina7IOGdU

Fri, 05/18/2012 - 09:30 | 2439283 Dr. No
Dr. No's picture

What did you expect?  It is a government agency.  The only why to get promotions in a bureaucracy is through increased budgets and responsibilities.  Cutting costs is a detriment.  Cars in inventory increases budgets and peopel requried to manage them -> opportunities for promotion in the Bureaucracy.

Another prime example is the post office.  The post office presented a case for cutting costs.  They were overrulled by the Senate and given more money for their troubles.  it will go on until the default.

Fri, 05/18/2012 - 09:33 | 2439297 LawsofPhysics
LawsofPhysics's picture

You are correct, now move all those cars to the East coast ahead of Hurricane season and insure them through AIG. Winning!

Fri, 05/18/2012 - 09:40 | 2439324 Cognitive Dissonance
Cognitive Dissonance's picture

I worked for a while in a bank (Yes, shame on me) and one of my duties was cost cutting. It was like shooting fish in a barrel because there was waste everywhere. However.....I was not well liked for obvious reasons. Not only did I cut budgets, but I embarrassed department heads because I exposed their incompetence.

I was eventually pushed out. Best thing that ever happened to me.

Fri, 05/18/2012 - 09:46 | 2439369 Tortuga
Tortuga's picture

Some skeletons should remain in the closet, BANKSTER. Of course if it was a youthful discreation made in your yuth, unless you claimed American Indian forebears, we'll let it slide.

Fri, 05/18/2012 - 09:48 | 2439382 smb12321
smb12321's picture

I've consulted in a number of businesses and discovered that those who really care about the company are eager to cut costs, eliminate waste and increase productivity.   Those who wanted things to stay exactly the same were only protecting their jobs and the the jobs of their buddies (where the waste emanates).  

Fri, 05/18/2012 - 09:51 | 2439395 Dr. No
Dr. No's picture

And a Bank is a "For Profit" entity.  Imagine if it was a government entity not concerned with profit.

Fri, 05/18/2012 - 10:02 | 2439504 Cognitive Dissonance
Cognitive Dissonance's picture

Just imagine.

Or we can simply look at DC for guidance. :)

Fri, 05/18/2012 - 09:46 | 2439373 FlyoverCountryS...
FlyoverCountrySchmuck's picture

"what should GM with its 86 days of full vehicle days supply in the US say?"

STUFF MORE, BABY!!!

Obama needs the fake economic output numbers! What happens AFTER the election doesn't matter, and he doesn't give a damn. As he told the Russians, he can be a lot more 'Flexible', after his gay media minions PALINIZE Mitt Romney!

Fri, 05/18/2012 - 09:32 | 2439295 WhyDoesItHurtWh...
WhyDoesItHurtWhen iPee's picture

the curtain just keeps falling,..............hey, how big is this curtain.

Fri, 05/18/2012 - 09:33 | 2439298 Dnice0123
Dnice0123's picture

It's getting so bad, that dealerships are selling other brands for example my friend just told me last night that I can go into his Dodge dealership and ask for any car, Audi, BMW, Volvo and he will find what you are looking for and sell it to you at a good price.

If this isn't an attempt to skew report numbers I don't know what is...

Fri, 05/18/2012 - 09:35 | 2439307 midgetrannyporn
midgetrannyporn's picture

Used cars will be much cheaper in China too as many realize they can't afford what they have and try to unload.

Fri, 05/18/2012 - 11:43 | 2440172 laomei
laomei's picture

No one here is stupid enough to finance a car.

Fri, 05/18/2012 - 09:36 | 2439309 Cognitive Dissonance
Cognitive Dissonance's picture

Please, no more.

I'm stuffed.

Fri, 05/18/2012 - 09:39 | 2439322 RECISION
RECISION's picture

Peak stuffing...?

Fri, 05/18/2012 - 09:40 | 2439328 ihedgemyhedges
ihedgemyhedges's picture

That's what my wife said................................then I caught her in the act.

Fri, 05/18/2012 - 09:39 | 2439325 Normalcy Bias
Normalcy Bias's picture

This is clearly fault of Chinese Citizenism. Chinese citizens, you need buy more car. Chop chop!

Fri, 05/18/2012 - 09:40 | 2439330 tuttisaluti
tuttisaluti's picture

fabrication robots don't buy cars

Fri, 05/18/2012 - 19:42 | 2442324 Bunga Bunga
Bunga Bunga's picture

suicide workers neither

Fri, 05/18/2012 - 09:42 | 2439336 Tortuga
Tortuga's picture

What GM should do with their (eventually our) 86 day inventory is sell bonds on them, hypothecate the bonds, 100 to 1, double down and sell the 100 to 1 with HFTs 11 times between blythe and jamie in 4.5 googlenano microseconds, then AIG shadow markets them to the Treasury. Done deal. Now, we have a whole bunch of warehouses in Detroit, filled with rusty iron, to be paid for with QE5. That's my idea and I patent it Reverend Dimon, but we can talk, ok?

OK?

Dammit, he won't return my calls.

Fri, 05/18/2012 - 10:35 | 2439693 Seer
Seer's picture

+1000

Fri, 05/18/2012 - 23:11 | 2442727 BlackholeDivestment
BlackholeDivestment's picture

...I almost puked while laughing.

Fri, 05/18/2012 - 09:46 | 2439358 wisefool
wisefool's picture

Debt jubilee, Keynsian style. Choose from the following

  • Free car. But you must pay sales tax, and please forgive us for using your income tax to run GM. Also, you can pay $1500/yr for the plates and insurance.
  • Free house and/or Mortgage forgiveness. We tax you on the gain, your local taxation body gets to tax you forever
  • Free Drunk girls posting boob pics on the internet. Except we will need to tax you on facebook capital gains, cause the brilliant founder renounced his citizenship, well played sir!
  • Free Icrap made by foxconn slaves We will give the chinese $5 trillion of soveriegn debt, plus you can expense this crap from your US taxes. Its a win,win thing! But I would strongly reccomend not having children who get to pay this off.
  • Free vacation to europe. You probably wont make it through the TSA scanners, and there might be a problem with your passport, but go ahead and send your IMF cash over there. pay that parking ticket from 1983 and we might re-instate your passport.

I have an MBA. Kruggers' has got my back with a PhD. the LLM tax crew and trial lawyers are set. Speaking of which, Free College/Student loan forgiveness (as long as you say nice things about me and my freinds for the rest of your life)

Fri, 05/18/2012 - 09:44 | 2439359 GeezerGeek
GeezerGeek's picture

Someone please wake me when Ferrari decides to offer debilitating price cuts. I'm holding out for prices returning to the 1962 level: $12,500 for a 250GT Berlinetta. In a way, however twisted, the price of a Ferrari is still approximately $12,500, or even less. You just have to pay with silver dollars, not FRNs.

Fri, 05/18/2012 - 09:52 | 2439412 Tortuga
Tortuga's picture

clink, clink, clink. Dammint. I'm still $500 short.

Fri, 05/18/2012 - 09:48 | 2439378 BandGap
BandGap's picture

GM is stocking up for the holiday rush of savings! Duh.

Fri, 05/18/2012 - 09:49 | 2439384 falak pema
falak pema's picture

channel stuffing is so romantic; it needs to be explained to the pedantic and prosaic : a channel is a place where life gets very exciting, whence the urge for the surge to propagate, push and then go to shove, until all ports open and even the unclear eyed can see where their hard heads are giving head-way. Into the sack, the wet bag of suctional splurge, as it comes out in give-away fever like a sprouting geyser. Cheap as picking up coins someone threw into a fountain at Rome. You can get rich if you can accept to get wet looking for shimmering gold under les skirts of the dolce vita goddess.

You have to be a Fellini fan to understand my deliriously poetic rant.

 

Fri, 05/18/2012 - 09:51 | 2439400 Tortuga
Tortuga's picture

Did this Fellini win American Idol 7 years ago. I can't keep up. Time passes so fast these days, is it Christmas yet? (QE 5)

Fri, 05/18/2012 - 11:29 | 2440025 Miss Expectations
Miss Expectations's picture

Does pent-up supply always lead to channel stuffing?  Doesn't sound a bit romantic to me.

Fri, 05/18/2012 - 09:51 | 2439404 toady
toady's picture

I love these stories! I always forward them to my friends & family in Michigan.

They already know though, and almost all of them are out of the auto industry.

The only ones that don't get it are the financial types .

Fri, 05/18/2012 - 09:57 | 2439464 TradingTroll
TradingTroll's picture

The Chinese auto industry is gearing up to produce 30-40m cars/yr

Around last years sales.

 

But the roads are already parking lots. People will do different things with their money.

 

So the Chinese want to export these cars, with front grills that look more gaudy than the bling on a rapper video and car bodies held together with construction screws. At the latest car show in Beijing doors fell off and trim was found on the floor after customers sat in the cars. The Chinese solution was to have marching bands and dancing girls to distract the attention away from the crappy cars. More smoke and mirrors.

Fri, 05/18/2012 - 10:12 | 2439542 hedgeless_horseman
hedgeless_horseman's picture

 

 

The traffic is worse than terrible...it is deadly.  I am scared shitless everytime I ride in a vehicle there, because of those damn mules (motorized chassis with a mountain of farm goods and often no brakes). 

Sat, 05/19/2012 - 18:11 | 2443816 laomei
laomei's picture

I drive here, have been driving here for years now.  Yes it's gotten worse, but it's not really all that bad if you know what you're doing.

Fri, 05/18/2012 - 10:03 | 2439514 EBR MOD 0
EBR MOD 0's picture

Here is a short video on chinese carsn from Top Gear perspective.

http://www.topgear.com/uk/videos/chinas-car-industry-part-1-series-18-episode-2

Enjoy

Fri, 05/18/2012 - 10:10 | 2439557 disabledvet
disabledvet's picture

We're all channel stuffers now

Fri, 05/18/2012 - 10:37 | 2439710 Seer
Seer's picture

"we did not expect to see the market deteriorate so fast"

 

Save that line, as it's going to be used a LOT.  Sorry, "slow crash" folks...

Fri, 05/18/2012 - 10:55 | 2439768 Luffk73
Luffk73's picture

Could the reduction in auto production along with a possible electricity shortage this summer be the straw that breaks the back of the Japanese economy?

Fri, 05/18/2012 - 17:57 | 2442055 Seer
Seer's picture

Well, maybe, but... demographics says that their backs will quite literally be breaking...

Thu, 07/19/2012 - 02:01 | 2630875 leo_21
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