Ever wonder how car sales have been so remarkably strong over the past 7 years as the economy has seemingly stagnated? Sure, a massive subprime auto lending bubble has helped fuel auto sales as $0 cash down, 0% interest and 70 month terms have become the norm for people looking to "manage" monthly payments...though we're sure that buyers making $30k a year really can afford that new $80,000 vehicle. And, of course, government programs like "cash for clunkers" has also helped to fuel the recovery.
But, as Bloomberg points out today, there might be a little more to the story, at least at Fiat Chrysler. It seems that the FBI has become interested in whether or not Fiat Chrysler forced dealers to falsify vehicles purchases in order to manage monthly sales figures. Apparently, all fraudulent activities were handled through Fiat Chrysler's "Department of 'unnatural acts.'" Per Bloomberg:
Investigators are examining whether Fiat Chrysler improperly adjusted monthly numbers to show growth over the prior year, a person familiar with the matter said. They are looking into allegations the company ordered dealers to create false vehicle purchases, some of which were made in the names of friends and relatives of salespeople, including underage family members, the person said.
The allegations get even stranger. Investigators are probing calls from Fiat Chrysler officials to dealers saying its department of “unnatural acts” was open for business, the person familiar said. The question is whether those calls had any relationship to allegations that company officials were urging dealers to falsify sales to meet reporting targets, the person said.
Of course, it's a pretty common tale in bubbly industries as neither management nor investors recall the negative ramifications from previous bubbles bursting...what housing collapse? Coming out of the "great recession" auto sales growth was fairly easy for the OEMs given the new low base of sales. Cash for clunkers helped provide a boost that got the the multi-year party off to a start. Gradually, over the years, extra financial incentives have been added ($0 down, 0% financing) and payment terms have been stretched to help buyers manage monthly payments. Meanwhile, credit quality has deteriorated as automakers have stretched to reach that incremental buyer.
But what do you do when you've provided every stimulus you possible can and it still doesn't drive sales growth because the consumer is just tapped out (seriously, Yellen would like to know). After all, wall street only rewards sales growth, not sales "plateaus" as Ford recently described the auto market. Well, you start to play games. You have dealers sale vehicles to relatives that are promptly returned, or you push vehicles on to rental companies or, better yet, you force dealers to "sale" vehicles to their own loaner fleets.
One such game was exposed by an Illinois dealer, Ed Napleton, who filed a lawsuit against Chrysler in January. Napleton's lawsuit alleges he was offered $20,000 in "cooperative advertising support" by Fiat Chrysler to falsely report 40 vehicles as sold. The scam would then have the sales "unwound" in the subsequent month as if due to normal consumer return activity.
The government criminal probe follows two lawsuits filed against Fiat Chrysler earlier this year. In one of the suits, Ed Napleton, who owns more than 50 dealerships in five states, alleges a Fiat Chrysler district manager in June 2015 offered him $20,000 if one of his dealerships falsely reported 40 vehicles as sold. The money would be credited to the dealership’s account as “cooperative advertising support,” the suit alleged.
Fiat Chrysler would then mark those same vehicles as unsold at the beginning of the next month, according to the lawsuit. The practice is known as “unwinding” a sale. Unwinding is a normal practice for returned cars either when customers change their minds about their purchases or fail to get financing.
Fiat Chrysler denied Napleton’s allegations, issuing a statement in January claiming an internal investigation found no evidence of wrongdoing. But in July, the company said that “unwound” sales had not been subtracted from later reports. The subsequent revision shortened to 40 months Fiat Chrysler’s previously reported 75-month record streak of monthly sales growth.
But the problem is that the sales were never unwound and a subsequent "adjustment" by Chrysler reduced its sales "growth" streak by about 3 years.
Another game, as described by Wes Lutz, a dealer in Jackson Michigan, allows dealers to "sale" vehicles to their own vehicle loaner programs. The "sales" can be recorded to extract higher incentive payments from the OEM with the cars later sold as used vehicles.
Interviews with dealers around the country show how such tactics work. With a few days left in June, Jackson, Michigan, dealer Wes Lutz’s Extreme Chrysler-Dodge-Jeep dealership needed to move 10 more cars to hit headquarters’ goal that month of 78 sales. He was highly motivated by the lure of receiving $900 from the automaker for each sale. But if he missed the target in the so-called stair-step program by even one car, he would forfeit his entire $70,200 payout.
To avoid that happening, Lutz turned to another Fiat Chrysler program that allows dealers to count loaner cars as sold vehicles. Not only was Lutz able to reach his target, he says he received $5,500 per car for placing 10 in his loaner fleet. Those models were then accounted for as sold. Lutz later sold them as used vehicles.
But where there's smoke there's typically fire (except in Hillary's case...all smoke there folks) as deal Wes Lutz assures that the “other car makers are also doing this in some way.”