Channel-Stuffed US Car Dealers Cut Prices; Hope To “Sell Their Way Out Of This”

Channel-Stuffed US Car Dealers Cut Prices; Hope To “Sell Their Way Out Of This”

While loathed to admit it, US auto makers have done it again. As we have vociferously explained month after month (and has been vocally denied until now by the car makers themselves), much of the recovery in auto sales has been a massive channel-stuffing make-work program (mal-investment once again triggered by ‘false’ signals created by Fed intervention). Now, as the WSJ reports,

None of the auto makers say they plan to reduce production to counter the inventory overhang. Paring output would reduce pressure to discount, but auto maker’s book revenue when they ship vehicles to dealers and any slowdown would hit first-quarter revenue.

But the Car makers still believe in miracles…

They are counting on dealers to cut the backlog—without a wholesale change in manufacturers’ incentives or production schedules.

“We believe we can sell our way out,” said GM spokesman Jim Cain.

But this is not going to end well…

GM and other car makers figure “it is cheaper to offer these incentives than to shut the plants. The problem is once you turn it on, [discounting] it is hard to turn it off, and now we are looking at another challenging month with February.”

But there are signs that the pain threshold has been crossed in some models.

After four years of rapid growth, the U.S. new-car sales pace “appears to have stalled,” Morgan Stanley analyst Adam Jonas said in a research note earlier this week. “We really think the best of the U.S. auto replacement cycle is over. The incremental buyer is moving from someone who needs to replace their car to one who just wants to.”

Dealers are not as confident…

With inventory levels reaching a point not seen since August 2009 and extreme weather not letting up, we fully expect a short term rise in incentives,” said Eric Lyman, an ALG vice president in Santa Barbara, Calif. “The danger is that this turns into an escalating arms race for market share,” Mr. Lyman said.

It would seem, once again, that we never learn…

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