Industrials

Chris Bryant is a Bloomberg Gadfly columnist covering industrial companies. He previously worked for the Financial Times.

The last thing the car industry needs after Volkswagen's dieselgate is another scandal that shakes confidence in automakers' conduct. Yet the Justice Department and SEC's investigation into Fiat Chrysler's reporting of U.S. vehicle sales threatens just that.

The federal probe follows a civil lawsuit, which alleged that the car giant paid dealers to report selling more vehicles than they actually did. Those allegations are specific to Fiat Chrysler and unproven. But the issue of how carmakers book sales is a broader concern.

In Europe, for example, manufacturers and dealers have been inflating car sales for years via a trick known as "self-registration." The carmaker sells a vehicle to a dealer and books the revenue in its accounts. But, absent a customer, the dealer then effectively sells the car to itself. The vehicle often sits on the lot for a while -- maybe it's used as a test drive or loaner vehicle --  and is later resold as "nearly new" at a steep discount to the list price.

The carmaker can boast of higher sales volumes while avoiding the brand damage from steep discounts on new vehicles. Astonishingly, self-registrations are thought to account for more than 30 percent of new car "sales" in Germany.

In the U.S. this practice is known as sales "punching" but, thankfully, it appears less prevalent than in Europe. Automotive News compiled data showing there were 290,000 more reported U.S. car sales in 2015 than the number actually registered by owners -- essentially showing the difference between those that are really sold straight away and those that sit at the dealer. That's the highest in a decade but still less than 2 percent of the market.

Sales Fog
Self-registration or vehicle"punching" arguably exaggerates the health of new car sales
Source: Dataforce

Why do it? So-called "channel-stuffing" artificially inflates monthly sales figures, which creates marketing bragging rights for carmakers. BMW and Mercedes fight it out every year for largest premium automaker crown, for example. BMW has faced repeated claims in the U.S. that it offers incentives to dealers to increase their pools of loaner and demo models to inflate sales.

Sales Race
BMW won the U.S. premium car "sales" race last year but Lexus had more vehicle registrations
Source: Bloomberg, IHS, Autodata Corp.

More important, such tricks allow the carmakers to keep plants running at higher utilization rates, postponing financially painful and politically difficult adjustments to capacity. Europe didn't cut nearly as many assembly lines as needed during the 2008-9 recession and since then dealers have been under intense pressure to hit sales targets. 

In theory, channel-stuffing is great for consumers: surplus inventory means they're more likely to get a deal at the showroom. But it almost always ends badly for the industry. By continuing to push volume, you effectively bring forward future sales, and at some point you have to pay the price when you hit saturation point. Pricing power also suffers if buyers think they can get a new vehicle for a second-hand fee. There's already plenty of concern that rock-bottom interest rates encourage carmakers to flood the market with cheap leasing.

And, of course, massaging sales figures, even if not illegal, opens up the industry to claims that they're misleading investors. Most shareholders know you shouldn't always take monthly car sales numbers at face value -- it's revenue and profit that count. But it's not absurd to think some investors will take them at their word. 

The lesson here is that carmakers should stop obsessing about monthly sales. It's the quality of those sales that matter. Until that happy day, regulators should force them to disclose how many "sales" actually leave the dealership and how many sit waiting for their first careful owner.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Chris Bryant in Frankfurt at cbryant32@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net