Ten days ago, some of the more confused fringes of the blogosphere took great offense at our repost of an article [9]showing thousands of idle cars strewn around various ports, dealer lots, parkings, airports and any other flat surface in what is merely the world's largest ongoing manufacturing channel stuffing and working capital gimmick.
Amusingly, the most vocal critics were primarily offended by the photos which they said, correctly, were from several years ago. What the critics apparently did not do, as we will gladly demonstrate in a follow up article as soon as GM's dealer inventory numbers are released next week, was to do a quick parallel image search because all those same venues clogged to the brim with unsold cars, and whose addresses were explicitly laid out for anyone willing to do 30 seconds of work and plugging the address into Google earth for an updated aerial photo, are just as crowded today as they were in any point over the past 5 years.
The far bigger point, obviously, is that there are millions of cars clogging up the supply chain of automotive delivery - both then and now - which is precisely why we started off with the topic of GM's record channel stuffing...
[10]
... something we have been following keenly for the past three years, and of which lots parked with brand new cars around the world is merely a manifestation of the same underlying problem: namely massive inventory mismanagement, and an attempt to affect pricing through working capital goosing.
To this point we could have clarified that what is going on around the world with various car makers stuffing unsold cars in every possible nook and cranny - certainly including transit ports and continuing all the way down the supply chain and far from it - is nothing different than what Goldman and Glencore were doing with their cartel-like abuse of commodity warehousing [11] (which has now attracted even the Fed's attention), which as we showed earlier this month were at or above 700 days delivery for aluminum respectively, in what is simply an attempt to induce artificial supply shortages by keeping intermediate product from its final destination. That we didn't is because our regular readers are familiar with this topic.
Sadly most others were not.
However, the one fair criticism is that to get a truly detailed picture of just how horrific the channel stuffing problem across the US auto manufacturers, one described quite effectively by Bloomberg in its recent article "Most Autos on U.S. Lots Since ’05 Has Ford Leading Cuts [12]", what we should have done is show aerial picture of dealer lots of local car makers such as GM, Ford and (Italy's) Chrysler which are the fullest they have been in a decade. We hope to update our photo narrative with just that soon.
And in lieu of that, instead here is a verbal account of precisely what happens when domestic car-makers overestimate the purchasing power of the US, and clog channels to an epic extent. In this case, we refer to the recently launched GM Cadillac ELR, launched to much aplomb just five months ago as a competitor to the Tesla Model S for a $76,000 price point (above Tesla's $70,000), has been a complete disaster. And how is GM dealing with this latest sales disappointment (which struck even before all the recent recall scandals had hit)? Why by jamming dealers with an unprecedented 725-day supply, or exactly two years worth of cars!
So what is GM forced to do now? The same thing every vendor does when realizing they have overproduced a product and have too much in inventory - liquidate.
From MarketWatch:
The Cadillac ELR has been on sale for just five months, but General Motors is now offering dealers a $5,000 incentive to offer test drives in the Chevrolet Volt-based plug-in hybrid. To receive the incentive, dealers have until June 2 to designate ELRs in their current inventory as test vehicles, after which each test car has to log a minimum of 750 test-drive miles.
The incentives could be because 1,700 ELR coupes remained unsold in dealer inventories at the end of April. At current sales rates, that’s a 725-day supply, which is almost exactly two years’ worth of cars.
The discounts and incentives don't end there:
General Motors is also offering $3,000 in customer discounts toward the lease or purchase of an ELR, in addition to the 240-volt Level 2 home charging station with included installation that was offered to a number of early buyers this year. We noted in January that a Level 2 charger typically sells for north of $750 excluding installation, so a number of ELR buyers essentially received a $1,000 value with the purchase of an ELR.
Curious why the US economy had a mini manufacturing and inventory stockpiling boom in late 2013? Precisely due to cases like the ELR:
General Motors told Automotive News that the Detroit-Hamtramck plant that builds the ELR has been producing a higher volume of cars since the beginning of the year, which could explain the nearly two-year stockpile; industry analysts keep pointing to the price, which is twice that of the Chevrolet Volt. The ELR starts at $75,995 including destination, but before the application of discounts and state and federal credits.
And here we get a paradox:
General Motors, by its own admission, did not intend the ELR to be a volume seller in the lineup.
In other words, a car that was not supposed to be a volume seller, had its production volume cranked up to the max just to stimulate economic activity by building up inventory. And then it hit a snag: "However, it appears that the price continues to keep a lot of customers away."
So yes, while those lots filled to the brim we showed were not of ELR models, they should have been. Unfortunately stock photos of this brand new car sitting untouched on dealer premises are unavailable, at least for now. They will be in due course, unless of course GM is forced to take far more drastic price writedowns and offer much more generous incentives to move the excess inventory - incentives which will bite right into GM's bottom line.
Which really is the bottom line, pun intended: if those thousands of cars held for "inventory stocking" purposes - and nobody knows just what specific intent management has to park thousands of cars idle in plots around the country, not us, not our critics, except that it is an explicit attempt to throttle the supply chain and artificially boost prices (think diamonds) - were to be forced into the broader market and sold at clearing prices, there would suddenly be no epic inventory glut. But far more importantly it would lead to a collapse in car prices as suddenly car supply exploded and dealers were forced to apply the same liquidation methods to all their models as they are doing to the ELR right now.
Finally, since the company under discussion in this post is GM, the same company whose quality control track record has been destroyed following a recall of 50% more cars so far in 2014 than it sold in 2013, expect to see many more stories about exploding channel stuffing for all of its brands, not just the car that was - erroneously - thought would become Government Motors' own Tesla killer.
