Is GM Using Inventory to Fudge Earnings?

National Legal & Policy Center ^ | December 13, 2010 | Mark Modica

[jazusamo]

 

General Motors recently reported that it has a 93 to 95 day supply of vehicles at dealerships in its latest inventory report. This is well above the industry average of a 67 day supply, as well as exceeding analysts recommended 60 day supply. According to Jim Bunnell, general manager of GM's dealer networks, the reason is because they expect strong demand for vehicles. There is a more likely reason that should be a cause of concern for GM's new shareholders.

General Motors records revenue when vehicles are shipped to dealerships. While GM has technically sold these vehicles to the dealerships, retail customers haven't yet purchased the vehicles. This stresses the dealerships as they are paying for vehicles that have not yet been sold.  There are usually incentives (paid by GM) for dealerships to accept the inventory. Once shipped, the inventory is financed (in most part) by government owned Ally Financial. It is probable that in an effort to pad their earnings prior to their IPO, GM made sure they shipped as many vehicles to dealerships as possible and continues to do so going in to fourth quarter earnings. These revenue figures would not give an accurate picture of their sales strength, or more accurately, weakness. Just as concerning is the spin that GM executives put on the reasons for building inventories. Once again, this company does not seem to be honest with investors or the general public.

Wall Street analysts are sure to pick up on any GM inventory ploy. I am sure the next earnings conference call will bring questions regarding inventories. I am less confident that television financial news networks will report the red flag. General Motors spends a great deal of money on television ads, and to this point the networks seem to give a Pollyannish analysis of GM as an investment choice. Some went so far as to suggest all taxpayers should be allowed to "benefit" from being allowed to participate in GM's IPO. This without any disclaimer suggesting viewers contact their own financial advisors. More cautious opinions can be found on internet sources' reporting, however.

Eventually a true picture of General Motors financial strength will develop. They have benefited from an influx of over $50 billion of taxpayer money to their balance sheet which buys them a good deal of time. GM's success will depend on the quality of the vehicles and marketing coming out of the company.  The sooner they get out of the habit of deception, the sooner the odds of succeeding will improve.

Related:

GM's Smoke and Mirrors Accounting

GM IPO Land Mines

[jazusamo]

Another Government Motors sham?

[rarestia]

Using inventory to fudge the books is a common tactic for MOST autos. My former roommate was a comptroller at a national auto dealership chain, and he regularly had to count inventory on-hand as a “potential sale.”

[Lazlo in PA]

GM dealers must be steamed at this. They have to carry the note on cars sitting on the lot and forcing them to carry 1/3 more inventory will really add up. If anyone thinks there is going to be a car buying boom any time soon, they are crazy. What possible incentive is there to buy a GM product?

[brownsfan]

Being a government owned operation, GM can lie, cheat and steal, and not be called for it.

Anyone who buys stock in GM deserves to lose their money!

[jazusamo]

Agreed and I’m no business person but it seems out of the ordinary to me they’d have over a third more than their normal inventory, especially when it coincides with the IPO.

[Myrddin]

This reminds meb of a past announcement by
IBM about having shipped 70,000 copies of OS/2.
The retail channel responded that, “Shipped ain’t sold”.
In fact, most of those units ended up dumped in
surplus stores with the seals intact. Nobody wanted
the product.

[jazusamo]

That’s what I was thinking. Dealers are out a lot of extra bucks and that money costs them. It might be different if the economy was booming but it isn’t.

[anglian]

GM related. Crony Car Capitalism http://www.freerepublic.com/focus/f-bloggers/2639289/posts

[<1/1,000,000th%]

Another Enron-style accounting rules waiver?

[TheBattman]

This is not an uncommon practice - especially when the government is involved...

[jazusamo]

Excellent article, thanks for posting.

No doubt that this bailout was much to do about an Obama and thugs payback to the UAW, he owed big to unions in general.

This is so blatantly corrupt it’s pathetic, the Chicago Way, and should land him and cronies in federal slammer but it’ll never happen.

[Cicero]

Well, clearly they’re going to need another cash for clunkers program pretty soon. Obama can bail out the Dealers by buying up their stock and scrapping it. Then GM can improve its balance sheet going by selling them more.

Otherwise, they’re liable to run out of room in the dealers’ lots.

Or, another idea, they could just put the extra unsold cars out in the streets with the keys in the ignition, so illegal aliens can steal them and sell them for a few bucks. After all, they’re probably worth at least the price of gas in their tanks.

[Mr. Bird]

it seems out of the ordinary to me they’d have over a third more than their normal inventory, especially when it coincides with the IPO

It's actually 58% more than the recommendation, 42% more than industry average.

[Pollster1]

One of many reasons why decent people don’t invest in corrupt companies. I am boycotting GM, both as a consumer and as an investor. Avoiding these deceptions is just a bonus on top of the pleasure in doing the right thing morally.

[jazusamo]

It’s to the point with this corrupt turkey in the WH most anything can happen. Things that used to be out of the question for a president are now common occurrences.

There’s little doubt that if dealers start going belly up due to this Zer0 and thugs will bail them out.

[ZOOKER]

Big backlog of cars, huh?

Whether the cars were actually needed or not, it kept union workers busy making them. Makework projects to keep union workers employed, that's not a new idea at all.

Question is, what to do with them? Back in the old embargo days, there were rumors that the Japanese bought US cars (as a sign of fair, two-way trade in autos) them dumped them off the transport ship in mid-ocean. I wouldn't be surprised if surplus GM cars are bought by US fleets, given away or sold for scrap having never been driven. Government ownership means government waste, after all, and we can't have all that unsold inventory depressing demand.

Alternatively, Obama may be looking for ways to MAKE people buy GM, like tax incentives or Cash-for-Clunkers II...

[jazusamo]

You’re correct and that seems a huge amount to me.

[jazusamo]

No doubt you’re right, the Criminal In Chief will come through for GMUAW.

[Skepolitic]

This shouldn’t surprise anybody who’s paying attention.

#1) GM’s IPO prospectus explicitly states that the company’s internal controls are inadequate, and that its financial statements are untrustworthy.

#2) Phony accounting is universally employed by governments and state-owned enterprises.

#3) Inventory builds reduce unit fixed costs and increase profitabily of sales. It has been a standard technique in the auto industry for decades.

#4) Under any just system of bankrupcy law (similar to that which existed before Obama), GM would be considered to be a criminal organization whose assets have been stolen from its bondholders.

[jennings2004]

Just an anecdotal example: I was in to my local GM Dealer for service last week on a very old GM product (never again, believe me!) and you could hardly get to the service department because of the absolute overload of cars in their new car sales lots and the "spillover" had spread into service customer parking area until you almost had to "take a ticket" to get a parking spot!