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Where the World’s Unsold Cars Go to Die

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Another piece for the Wall of Fame here from Zero Hedge.  I’m nominating this piece purely more for pointing out this atrocity rather than for the actual content. If you didn’t know about these new car graveyards (like me) then prepare to be shocked. The images in this piece are the most powerful part.

“It’s hard to believe that there are so many unsold cars in the world but its true.  The worst part is that the amount of unsold cars keeps on getting bigger every day.”

There are literally hundreds of lots like the one shown above where brand new cars sit and rot. Car manufacturers buy up land to fill with cars. They know they will make more cars than people can buy so they actually plan for this nonsense. But the problem is not the recession or that people just won’t be good consumers. The problem is that manufacturers won’t let up production because it would be bad for the friggin economy.

What a cycle we’ve found ourselves in.

We are literally using up precious nonrenewable resources and taking up land for absolutely no reason. Plus, they’ll never sell these cars at a discount because then no one would buy the more expensive cars. I should be able to look up ”wasteful” in the dictionary and find the General Motors logo.

Sure, making fewer cars would hurt for a while. Many jobs would be affected if this change didn't include a paradigm shift that allowed for more people to live comfortably on working less. Or maybe even creating jobs that didn’t rely on the destruction of our natural resources. But the fact remains that our planet cannot survive this endless and pointless production-consumption cycle. “As it is, there are more cars than there are people on the planet with an estimated 10 billion roadworthy cars in the world today.” And production is only growing.

“Manufacturing more cars than can be sold is against all logic, logistics and economics but it continues day after day, week after week, month after month, year in year out.”

The article says that there is no solution, or at best that the solution is to sell them. Which I clearly disagree with. The solution for the future of this manufacturing is simply to just keep up with demand and not surpass it...and even that is still too much production! This is insane. It’s not a painless solution but we have got to stop thinking like economy driven drones that believe endless growth and consumption must continue to keep up the status quo. Because the status quo is going to be the end of us.

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  • Alexander W. Smith
    Alexander W. Smith Wednesday, 21 May 2014

    At YE 2013 GM car sales disappointed and they blamed it on the weather (surprise, surprise) rather than look at consumer debt levels, growth in durable goods sales (disappointing), the non-core CPI effects on purchasing power for Americans who do not have a significant position in Federal Reserve juiced equity markets – and thus their ability or willingness to buy cars.

    As a result, they were left with 748,125 unsold units at the end of December 2013.

    Despite poor weather already being understood, GM went ahead with above average production in January, resulting in a then-all time 2nd highest ever Month-end-units figure of 780,140, an increase of ~42k units.

    Days supply (selling day adjusted) was left at 114 vs. 81 days at the end of the year.

    The industry believes that it is prudent to maintain 60-65 Days Supply of Inventory to avoid circumstances in which an unexpected increase in demand does not leave willing car buyers unable to purchase from that manufacturer due to insufficient supply.

    The author of the Snopes article claims that this was a rehash of a prior article he had written and made the very correct observation that cars sit on lots in ports waiting for shipment (and thus allow an author with ill-intent to use these snapshots as proof of over-production and channel stuffing.) The April 2014 SAAR number was 16.2M. So, with 60 days inventory, that would equate to industry wide ‘excess’ inventory standing at 2.66M cars in April. So anyone wanting to take pictures of giant car lots could do so in any given month of the year at port terminals.

    Fair enough.

    Unfortunately, he’s either not very good at math, had no interest in doing the work, or was not interested in thinking about the correlation between growth and climate change despite the fact that he blames current high inventory levels on the bad weather (i.e. Falling sales? Blame the weather! And then, produce more, so that when the weather improves (which it will inevitably do in Spring, but long term month-over-month averages perhaps not so much), the company will be able to make up for all of that excess demand from car buyers there weren’t able to get out to the dealer to purchase a car in Texas because of the snow storms in New England.
    This story gets a bit more complicated as one digs deeper, but for the sake of shedding some light on all of this, let’s keep digging…
    At the end of the bad weather winter, one would expect buying demand to pick back up (if you believed the weather narrative in the first place, that is) and thus we would see a reduction in Days Supply.

    What actually happened is this:

    Month-end Dealer Inventory continued to ramp growing from 780k units at Jan-14 end, to 825,805 units or 85 Days Supply at the end of April.

    This, DESPITE the fact that GM reported a YoY increase of 4% in Sales in the month of April.

    15% growth in inventory – 4% growth in sales leaves you with a Delta of 19% increase in overall pre-sales inventory. So while GM should have been dialing back production they instead decided to keep running at high production levels and see if they could fill the difference with incentives.

    As a result, GM currently has the highest incentive level of any major auto-OEM, running at $3,562 in April 2014 vs. industry average of $2,751 in same month, and 2x Toyota at $1,713.

    Total incentives were $901,000,000 for GM in an industry with $3.7B in total incentives.

    All this while losing market share (18.5% in April ’13 vs. 17.2% in April ’14.)

    Could it be that they are out of touch with consumer demand shifting away from Cadillac Escalades and Trucks, to light vehicles? Perhaps the massive recalls recently announced have dissuaded buyers? Perhaps the American consumer is strained from wages not keeping pace with non-core CPI, with high overall debt levels and a continued push to reduce this household debt despite struggling with rising costs for healthcare, education, food, and fuel.

    It could be any number of factors, or all of them combined. But needless to say, GM is producing more cars than they are selling and they are doing this at an increasing pace.

    The production issue itself is somewhat complicated. (Harder to reduce shifts without losing workers if you need to cull production in the Short Run vs. overproducing at times but keeping your staff in place so you don’t have to train or re-train workers if production needs to tick back up (i.e. avoiding frictional unemployment in labor demand.) And there are politics involved…GM was rescued by the U.S. taxpayer and therefore probably has some quid pro quo to keep from announcing lay-offs to any serious degree – at least until the 2 second attention span American public forgets all about the bailout and re-focuses on Taylor Swift, American Idol, or whatever….
    So, not necessarily pointing fingers at GM. But anyone who wants to argue as to whether or not the essence of this article is correct, with full acknowledgement that the images chosen were misleading -and perhaps intentionally so – should do some homework.

    I believe the ZeroHedge poster noticed some of what has been described above but was either unequipped to do the work, or was lazy, and used old images to make their point.

    Now onto a final point…

    Channel Stuffing is in fact a real issue that is related to executive compensation and corporate governance, as well as High Frequency Trading, Wall Street forecast myopia, and short term thinking, and is a practice that should be more heavily regulated or at least understood so as to reduce the negative externalities of such behavior.

    Executive compensation at publicly traded companies is typically (but at varying degrees) tied to the underlying share price of the company. This is typically done through incentive stock options (ISOs), restricted stock, and bonuses based on share prices and results vs. forecasts.

    This makes sense to the casual observer, but fails under closer scrutiny.

    Why is this the case you ask? Shouldn’t shareholder interests (i.e. the desire to see the share price go up) be in-line with managements’ interests?

    The answer is surprisingly ‘no.’

    Practices such as channel stuffing can make sales seem higher than they are. When sales exceed forecasts (whether channel stuffing or other accounting chicanery – receivables gimmicks, etc), those singular headlines almost always mean that the share price will catch a bid on the announcement of that news. This is exacerbated by HFT who simply use algorithms to spot ‘good news’ and bid up whatever stocks are exhibiting Twitter-like positive sound bites on any giving morning.

    To use the example above, when GM reported a 4% sales increase in April, the announcement of that news sent the stock soaring.
    BUT, did anyone look to see at the growth in inventory (unsold cars carry a cost, thus lower OM, and downstream profitability), the rising incentive levels, etc? Nope. The headline was enough, the stock rose, the shareholders were happy, and therefore management got paid.

    Why is this a problem, you ask?

    Well, it is an issue because should that inventory not tick back down, it will not hurt the management team who made their coin and can parachute out of the company and leave that problem to the next guy. Meanwhile, the shareholders who benefited probably sold on the pop (or general rise over the course of the Channel Stuffing charade) and the cycle will simply repeat itself. Ah, the good old business cycle…

    But, what is the cost of those physical resources? On workers? The environment (including the climate?)

    Instead of short-term compensation schemes tied to equity prices, what about a new system of corporate governance that values long term growth over short term spikes. A system that has shareholders transitioning to stakeholders who want a wealth creating vehicle in an equity investment and not a poker chip. Who will demand that their company hire domestic workers, seek to invest in the future by diverting R&D Capex to green/clean tech projects to create a sustainable future for the company, shareholder, and drumroll…planet. The stock would get hurt in the short run as Capex/R&D is recognized as an up-front cost which hurts margins. Big changes require management teams who aren’t worried about the ‘career risk’ associated with being a leader in new opportunities as opposed to the safer path (as dictated by game theory) of squeezing the last bit of blood from the stone and bailing.

    These issues are all surprisingly interrelated and will take time to change.

    But, that all aside, the occasional dupe will occur. The internet is the wild, wild West after all. And mistakes will happen. But in this case, the numbers suggest that there is a story here that is real and deserves to be highlighted as both a possible discussion starter, and because of it sheds light on some bigger issues – the accuracy or the timeliness of the accompanying photographs be damned.

  • Dave Gardner
    Dave Gardner Wednesday, 21 May 2014

    Thanks for this very impressive analysis, Al. Nothing to add to your main points, but you did briefly touch on one of the biggest challenges we face in moving away from our growth-obsessed, over-producing, over consuming ways: Many, many people are employed by oil companies fracking our neighborhoods, mining companies pulling non-renewable resources out of the ground, car companies making cars, and shops selling all the products made possible by those workers. There is real pain to be felt if/as we scale back to a sustainable level. But scale back we must. The captain of a starship wouldn't have his crew disassembling the craft just to keep the starship's micro-economy humming. But that explains a LOT of the resistance to the shift that needs to take place.

    Reply Cancel
  • Alexander W. Smith
    Alexander W. Smith Wednesday, 21 May 2014

    Thanks for the reply to my comment (and my apologies for all of the typos and other grammatical errors. It was a bit rushed, but I felt that there were a few important points that needed to be added here.) Keep up the great work. Cheers, Al

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