GM Finds Creative New Ways To "Stuff Channels", Get Backdoor Taxpayer Bailouts

Tyler Durden's picture

Zero Hedge readers know that we have long followed channel stuffing trends at GM, whose month-end dealer inventory hit a record (for the post-reorg company which is completely different from the pre-bankruptcy entity) of 713K cars stuck in various dealer "channels" at the end of March 2012, and since then has been stagnant at just about 700K, with the most recent June number coming at 701K, an increase of 6K over May. It would be great to assume that the company has given up on cheap ways to cheat investors and the taxpaying public into believing it is doing better. It would also be wrong. As it turns out, GM has merely turned to more backdoor methods of stuffing channels, and getting money from its biggest shareholders, which still happens to be Joe Sixpack (and "superpriority" labor unions of course) by way of the US Treasury, with 32% of the common stock.

The NLPC explains:

It looks like General Motors will be throwing everything in but the kitchen sink to help fluff its second quarter earnings numbers. Taxpayers continue to help with the cause as President Obama campaigns on the "success" of GM following the manipulated bankruptcy process that cost taxpayers $50 billion and another $45 billion of tax credits gifted to GM to help protect powerful UAW interests. We now learn that government purchases of GM vehicles rose a whopping 79% in June.

As a reminder, this is how GM's general channel stuffing looked like for all its vehicles:

However there is a rather important data subset here:

According to a Bloomberg report, "GM said inventory of its full-size pickups, which will be refreshed next year, climbed to 238,194 at the end of June, a 135 days supply, up from 116 days at the end of May." 135 days supply is huge, the accepted norm is a 60 day supply. The trick here is that GM records revenue when vehicles go into dealership inventories, not when actually sold to consumers.

This is how pickup truck channel stuffing looked in the period that the company has released the data, or since December 2011. Not pretty.

And while we all know by now that the tried and true mechanism to channel stuff is a staple when it comes to fooling the buyside as to its business efficacy, the fact that its biggest shareholder has become a key marginal client of GM should make one's head spin at the Ponziness of the transaction:

The government's increased spending on GM vehicle purchases presents yet another conflict of interest as Treasury refuses to sell taxpayers' stake in GM and Obama campaigns on the auto bailouts. It does not appear that any members of Congress (from either party) are questioning the increased spending. Also ignored was the Department of Energy's gifting of $2.7 million of taxpayer money to GM to reduce energy consumption in its door manufacturing process by 50%. The DOE seems to be one of the main conduits to funnel taxpayer funds to cronies of the Administration. The $2.7 million contribution to GM comes after additional millions of dollars were spent by the DOE on advisory fees paid to legal firms that helped smooth the way for the GM bankruptcy process (as reported here); another move that went unquestioned.

And there is more:

GM claimed that sales increases did not rely on incentive spending, which appeared to remain in check, but one analyst during GM's sales conference call questioned whether the company's "stair step" incentive spending was accurately depicted. This incentive spending kicks in after dealerships report final sales figures for the month and may be yet another deceptive way for GM to fudge its numbers. Not mentioned was GM card rewards programs that do not get counted as incentive spending.

Why is GM forced to succumb to such increasingly more deceptive practices? Why simple presidential election politics of course: when a failed company like GM is destined to symbolize the "success" of one's administration, there aren't many straws one can latch on to.

The upcoming earnings announcement by GM is, politically, the most important to date. The pressure is on Government Motors to appear financially strong as this may be the last earnings report before November elections and sets the stage for how "successful" GM is. One of GM's past tricks to help fudge earnings numbers has been to stuff truck inventory channels. Old habits die hard at GM. 


The article goes on to quote Kelley Blue Book's Alec Gutierrez who stated "They're (GM) likely going to have a relatively high days supply of trucks moving forward and they're already placing some pretty aggressive cash incentives on the hood. It's going to eat into their profit margins..."


GM's earnings announcement comes on August 2nd. The main headwinds will be weak European operations and growing pension liabilities. The headline number for earnings should be viewed skeptically and an eye kept on the share price reaction after the conference call. Expect Government Motors to put a positive spin on its financial health as the stakes are now at their highest. The long-term health of GM remains in question and the true financial picture may not surface until well after voters decide who will be running our country. Eventually we will see just how successful GM really is.

At the end of the day, all of this is noise. If China retaliates in kind to the recen escalation by Obama vis-a-vis alleged Chinese deceptive trade practices, the GM will soon be able to kiss half of its top line, and who knows how much of its margin and bottom line goodbye. Because when half of your sales go to the one country which America's non-existent (and unionized) manufacturing base loves to hate, the last thing you want is to bite the hand the pays the bills. Yet this is precisely what is going on as the politics of this country become so misguided that in the pursuit of a few extra votes, the administration is willing to sacrifice what little clout and momentum the recently bankrupted automaker may have generated.

In the meantime, looks for channel stuffing and direct government purchases to soar to unseen levels in the weeks and months heading into the presidential election as GM (and its 40% stock price drop since the IPO) will certainly be a key debate point between the Democrats and the GOP.

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fuu's picture

Paging Max Fischer, Max Fischer please pick up the white courtesy phone.

Jay Gould Esq.'s picture

"Get Becky on the line. We have to set up another dog and pony show in Omaha. Make sure they supply the Cherry Coke. I don't do this stuff pro bono."

dracos_ghost's picture

I guess it's going to be "corn-dog like" meat for the Omaha geek show.

idea_hamster's picture

Well, now it's a securities class action.

Scott v. GM, 12-cv-05124, (SDNY June 29, 2012).

From the complaint:

In connection with the IPO, and in order to assuage concerns that GM was predicting revenue based on production rather than actual sales, GM falsely assured investors that it was actively managing its production by monitoring its dealer inventory levels. Additionally, GM assured investors that in 2011 it would improve inventory management, which would improve average transaction price.

These statements were false when made. In July 2011, reports began to surface that GM had engaged in an extraordinary inventory build-up. In particular, an article published by Bloomberg on July 5, 2011 revealed that GM may have been unloading excessive inventory on dealers, a practice known as "channel stuffing," in order to create the false impression that GM was recovering and sales and revenues were rising. The Bloomberg article stated that GM's truck inventory swelled to 122 days worth of average sales whereas, by comparison, GM's less profitable car inventory was limited to 60 to 70 days of average sales, Ford was maintaining only a 79 day inventory on comparable trucks, and GM's truck inventory during the years 2002-2010 had similarly averaged only 78 days of average sales. By November 2011, GM dealer inventories were 30% higher than they were on September 30, 2010 (the end of the last full quarter before the November 18,2010 IPO) and 62% higher than they were at the end of 2009.

Dr. Sandi's picture

People stupid enough to buy GM stock should be in court fighting efforts to have them made wards of the state.

Instead, they're trying to get paid back for greedy stock buys that anybody with enough brain cells to open a bag of Cheetos knew were, and still are, a bad idea.

Temporalist's picture

"Warren Buffett’s Berkshire Hathaway Inc. (BRK/A) acquired its largest stake in General Motors Co. (GM) before the automaker slumped 16 percent...

Berkshire accumulated about 8.47 million shares of GM through Feb. 3 at an average price of $24.35, according to National Association of Insurance Commissioners data compiled by Bloomberg. The automaker closed at $20.54 yesterday in New York."


ihedgemyhedges's picture

Every time I try to get creative in stuffing the channel, my wife says "What the hell are you doing back there???  STOP IT!!!"

veyron's picture

You need to try stuffing the backdoor more often

fuu's picture

Or not talking about her on the internet...

Dr. Sandi's picture

Thanks to Photoshop, it doesn't even have to happen to happen.

veyron's picture

GM is now selling on backpage

q99x2's picture

What's wrong with the Government promoting one of its largest free enterprises? Or, what's right with that question?

BTW that new guy the FED hired is a lot slower than Brian Sack.

adr's picture

But the media told me car sales were the best ever in June. They also claim sales are counted as vehicles actually sold to consumers. Why would the media lie?

I try to explain channell stuffing to people but they never seem to get it. They always say, "They can't count something as sold if it hasn't been sold." I tell them, yes they can.

I tell them, go look at the sticker on a car in the lot. Right on the top it says, Sold to dealer X. A Chevy dealer that wants 20 Sonics is forced to take 100 Silverado HDs if it wants the 20 Sonics.

Everyone of course does it, just to different degrees. Doesn't make it right.

azzhatter's picture

June is an important month to stuff for end of quarter results. 3rd quarter always sucks in automotive bus.

I saw a Silverado advertised yesterday with a $6K incentive, roughly 15% of sticker

n9lhm's picture

It would be interesting to see a comparison of other manufacturer's dealer's inventory levels vs. GM's.

AustriAnnie's picture

I'd love to see various manufacturers with not only inventory levels but also a ratio that shows, say, rate of flows into dealers over rate of flows from dealer to consumer.  If dealer info can be obtained, not sure how.

Would also like to see the changes in the # of dealerships for different manufacturers over the last 5 years.  The number of dealerships going out of business or declaring bankruptcy would show a clearer picture of car sales to consumers.  

bigdumbnugly's picture

well there are channels out there that need stuffing.

i'm going down to the green energy rally tonight to see if i can do just that. 

TrainWreck1's picture

I would drive a Trabant before I would purchase another GM vehicle.

i-dog's picture

A one horsepower Trabi ... that's the sports model!

TrainWreck1's picture

When the TSA (Trabant Securitzenschmitzenschmatzen Apparatchik) tases the pony, it qualifies for the electric vehicle rebate.

Uncle Remus's picture

Until they have to eat the horse...

A Nanny Moose's picture

In the former German Democratic Republic (do they even read these titles?), the horse eats you.

hidingfromhelis's picture

CliffsNotes version:  GM...Backdoor...Taxpayer.  Yup, my ass hurts too.

dirtbagger's picture

ZH seems to post a GM channel stuffing article every quarter.  By now you would think GM would quit making cars for the next10 years and just sell the excess inventory.   Makes you wonder about the accuracy of these posts.

Boilermaker's picture

It's really a problem with ZH on this topic.  It is massively exaggerated but it's good to get people 'fired up', I guess.

Frankly, there are so many good articles, I don't understand why they do it either.

All I need is a follow up article about the obesity problem and they can call it a day with the Amerikka haters.

Jeff Lebowski's picture

Yeah, well, you know, that's just, like, your opinion, man.


zanez's picture

ZH does tend to be a little all-or-nothing, I believe some of it is meant to be sarcasm. (middle of the road doesn't 'sell papers'.) From my understaning of the past 40+ years, U.S. automakers traditionally re-tool for the next model year in Jul/Aug, so as to have the sales lots full of new model year vehicles by Thanksgiving. Which is also time for 'end of model year closeout' sales. As people tend to want the newest model when getting a 'new' car, and require a deep discount to settle for 'last year's model', lots of inventory at the tail end of year's production run may be a problem for profits. But as I have only worked in automotive and manufacturing industries for 30 years, what do I know? 

Boilermaker's picture

Don't even try it.  There are so many authorities on GM, dealer inventory levels, model changeover, SAAR rates, and all the other complexities of the auto industry that you'll be mobbed in no time.

Just look at the comments.  There are some really really bright people here.  It's not just hollow empty-minded hate mongering. 

Everyone in the entire industry is a UAW jackbooted thug and is somehow tied to the Corvair.

It's astonishing that people can be so f'ing stooopid.  Alas, they are.

Uncle Remus's picture

Oh, you must have missed the part about "command" economy and the transition of GM's UAW locals to public union status.

Boilermaker's picture


Oh for fuck sake.  Shut up.

AustriAnnie's picture

Yeah, shut up for fuck sake.  The funnelling of taxpayer money to GM and unions is overly exaggerated and shouldn't concern any of us even the slightest bit.  Just bend over and take it and stop complaining.

Boilermaker's picture

So, you mix apples and oranges then tossed in a banana.  The old fruit salad approach to an arguement.

Boilermaker's picture

Truck supply.  Yea, that's right.

It also goes on to say that truck production will be slowed in the second half of the year to ween off the inventories and that the (3) truck assemply plants are taking an extended shut-down until July 15th.

That's in perfect agreement with our order books (EDI planning figures) in then next months to those plants.

But, let's get back to the mob mentality.  Swarm, swarm, swarm...GM, GM, GM...Volt, Volt, Volt.

Jeff Lebowski's picture

This is great news.  Luckily, trucks grow out of the ground fully assembled, they just need to be to harvested.  There should be no ramifications or ripple effect to any of the suppliers who can simply idle their operations due to government backing.

Are you in the automotive supply business?  I am, and we see a shit storm coming...

Boilermaker's picture

Say what? So, your premise is that automotive parts suppliers would specicially and solely supply parts to only the 3 truck producing GM facilities?

I don't know of ANY suppliers that exclusively supply to GM (or any other OEM) nor supply to one specific type of vehicle.

Cdad's picture

You do not burn your equity holders, and your bond holders, and then take tax payer money on top...without pissing off a great big chunck of the country.  This company is dead.  It just does not know it yet.  

I'll never buy a GM product again...and I know millions of Americans feel exactly as I do.

The Grip's picture

Ditto. Owned them and leased them for years, and defected in early 09.


New_Meat's picture

Cdad: it is UNAMERICAN to buy anything associated with GM. - Ned

MachoMan's picture

I, and the rest of folks, wouldn't buy them in the first place...  which is why they needed a bailout...  they're just  not competitive in the slightest with japanese/korean counterparts... 

Maybe if they discount their trucks by about 50-60% I'll take a look... 

TheCanadianAustrian's picture

I don't own a vehicle. I rent them on weekends from an agency a few blocks away from where I live. It usually costs me $15 a day, plus gas, to rent on the weekend. That includes all day Friday AND Monday if I so choose. Just last weekend, I reserved an economy car for $12,99 a day plus tax and VLF for 4 days. They offered me a 2012 Corolla, but they said if I wanted, I could have a free upgrade. Any car on the lot. I went with a year-old Ford Flex, limited edition, full leather seats, bells, whistles and all. Got to be at least a $50k vehicle. It rides 7 people comfortably. 60 bucks for 4 days.

They rarely have vehicles more than 1 year old for rent. I asked the salesperson there how I was able to rent such clean, new cars for such a low price. She said they buy the vehicles brand new, rent them out until about 25K miles, and then sell them on the premium used market. They buy them bulk (100s or 1000s at a time) and actually get enough of a discount to sell the vehicles at a profit after renting them out for a year.

The way it is now, I could rent a brand new vehicle every single weekend, and it would still be cheaper than owning and being responsible for the upkeep of my own rustbucket.

Explain to me how this would happen in a normal, unmanipulated market.