US Car Sales On Fire… But Who Is Doing The Buying?

Bought... but not paid-for.

Bought… but not paid-for.

With America’s Seasonally Adjusted Annual Selling Rate (SAAR) creeping  above 16 million units in November, driving the market to new post-bailout highs, the usual cheerleaders are out in force to celebrate the strength of the US auto sales. But in the rush to spread the good news, few are looking at the troubling data underlying these frothy sales numbers. In the US, automakers count sales upon delivery to dealers rather than consumers. When times get tough and demand shrinks, OEMs often force dealers to take on more inventory in order to temporarily improve sales numbers. We saw both GM and Chrysler dump huge amounts of inventory on dealers in the leadup to their 2008 collapses, and we’ve reported on a similar dynamic at play in the current European downturn.

We won’t know the extent to which dealers are stacking up inventory until we see a full December 1 report from Automotive News, but initial signs are not promising. Already in October, Wards Auto saw an uncomfortable build-up in inventories across the industry that has apparently only grown among the worst offenders. At the time Wards predicted that “the excess will be alleviated in November, when most of the lost sales are recouped,” but although pricing discipline has remained high the inventories are continuing to build as we head into December.

GM’s official inventory levels rose from 87 to 96 days over the course of November. That amounts to a 51,075 unit increase in inventory in a month when GM reported a 45,405-unit increase in YoY sales. In other words, if you strip out the extra inventory that now clutters GM dealer lots, The General actually lost sales last month. Troublingly, GM’s inventories have been growing for some time, and appear to be highest on its most profitable vehicles: Cadillac and Buick-brand luxury cars and its new, full-sized pickup trucks. Furthermore, GM is increasingly providing dealers with floorplan financing, increasing its exposure to dealer overstock risk. Meanwhile, Chrysler’s inventory grew to 91 days, although unlike GM its high-profit pickups and SUVs are selling well while its poorly-received cars are languishing on dealer lots. Ford’s inventory also edged up to 89 days.

Along with lower interest rates, longer loan terms, increased leasing and subprime lending, “channel stuffing” or loading dealers with inventory is just the latest sign that America’s auto market is overheating. For now, the danger is still solidly in the future. But, as IHS Automotive’s Joe Langely tells Bloomberg

“As the market begins to slow down and begins to peak, it’s going to get tougher for everybody. Are manufacturers going to be responsible and curb production and keep inventory in check, or are some going to resort to old, bad habits and churn it out and then throw incentives on them? That’s what’s going to be interesting, to see how that plays out.”

Ford, which has been aggressive in cutting production in troubled European and Australian markets, is already cutting production of its Fusion to prevent exactly the kind of reaction that Langely warns against. Is Ford doing a better job of reading analytics, or is it simply more disciplined? Perhaps it learned a lesson from the 2008 crisis that other automakers missed: the voluntary pain of reorganization is vastly preferable to the involuntary pain of being caught in a supply-demand imbalance. If a downturn is ahead, that lesson could quickly prove itself relevant again.