The past 3 years as global consumption has weakened by the month, bulls have dismissed concerns while citing things like roaring car sales as evidence that all is well in the real economy–especially in Canada. We have repeatedly pointed out that selling consumers things they can’t afford courtesy of creative financing is a time worn recipe for financial disaster. But there’s more…
The Globe ran with a worthwhile article Saturday shedding further light on vehicle ‘sales’ in Canada: See: ‘Used’ cars boost sales at Chrysler and Nissan Canada, on Globeandmail.com(subscribers only):
“Several sources say Chrysler officially known as FCA Canada Inc., employs an incentive program that encourages dealers to buy new vehicles through their own leasing or rental car companies in order to meet monthly sales quotas and earn bonuses. Many of those cars, trucks, minivans and sports utility vehicles are then sold by the dealers as used, with just a handful of kilometers on them.
These new car purchases by dealers boost their monthly sales figures and have helped push FCA Canada to the top spot in the Canadian market, even though no end user has bought the vehicles…
Bonuses to dealers under the FCA Canada program can run more than $1500 a vehicle or $1.8 million annually for outlets that sell 100 new vehicles a month.”
Once the dealer takes down the new car into their inventory, the manufacturer counts it as a sale and triggers the bonus incentive to the dealer who then ‘sells’ the vehicles to their used divisions and posts them as “used” on their lot. The channel stuffing system is prevalent throughout North America and beyond.
Talk about messed up sales incentives. No wonder all the car dealers have built such expensive showrooms, and the car cos have been booking record ‘sales’ numbers while unsold cars are mounting like ant hills on dealer lots and acres of other vacant land around the world. Add to record inventories, the fact that the consumers who have taken cars off the lots in recent years have been doing so courtesy of lax lending standards and crazy incentives such as zero down, zero to low rates, 7 year terms and cash back incentives. At the very least these schemes have brought forward what could have been future car sales and booked them as past sales. At the very worst, many of these ‘sales’ are more like rentals which circle back to the finance arms as soon as drivers stop making monthly payments.
And nearly all of these vehicles are dinosaurs–combustion engines–that thinking people increasingly don’t want.
Who wants to bail out mismanaged North American car manufacturers a 3rd time? The request is coming; the facts suggest we should bank on it.