Fiat Chrysler Automobiles NV has been manufacturing more cars and trucks than its U.S. dealers are willing to accept, at one point creating a nationwide stock of about 40,000 unordered vehicles and stoking tension with some of its retailers.
Four dealers, two of whom spoke on the condition they not be named, said Fiat Chrysler has revived what’s known in industry circles as a “sales bank.” The practice is decades old and frowned upon by investors and analysts because it can obscure an automaker’s inventory figures. Dealers don’t like it because it can amp up the pressure companies place on them to take delivery of vehicles they don’t want.
Chrysler implemented sales banks in the run-up to the two times it needed rescues from the U.S. government, in 1980 and 2009. While the company is nowhere near that sort of trouble — it just reported record quarterly profit — the surging supply of unassigned vehicles coincided with a period when the company was pursuing mergers. After efforts to combine with France’s Renault SA fell through, it announced a tie-up with Peugeot owner PSA Group last month.
Fiat Chrysler denies that it has restarted a sales bank. The company says it put a predictive analytics system in place early this year that aims to better align its supply chain and manufacturing plans with anticipated dealer orders.
“We’re producing pre-specificationed vehicles against predicted demand so the right vehicles are available when dealers need them,” said Niel Golightly, Fiat Chrysler’s global chief communications officer. The modeling has proven accurate, he said, as Fiat Chrysler has ended quarters with as few as 1,000 vehicles that it’s ordered and been unable to sell to dealers.
At the close of the third quarter, the number of unordered cars was down to roughly 5,000 vehicles. While that amounts to a rounding error for a company that sells more than half a million vehicles a quarter in the U.S., the process still left some dealers angered by pressure tactics they say can lead to bad behavior.
Fiat Chrysler recently agreed to pay a $40 million penalty related to filing years of sales reports the U.S. Securities and Exchange Commission said were fraudulent. One way the company inflated figures, the SEC said in September, was by paying dealers to report fake sales.
The predictive analytics strategy was put in place by North American Chief Operating Officer Mark Stewart, who joined in December from Amazon.com Inc. Implementing the system and increasing the required lead time for dealers to order cars saved the automaker about 400 million euros ($441 million) this year through the third quarter, according to Golightly. The company has reduced inventory by about 120,000 cars during that span, he said.
Auto sales have been slowing industrywide this year, and the Italian-American automaker started building up the bank of unassigned cars this summer. Some dealers were looking to pare back inventory after being burned by rising interest rates that increased the cost of holding cars, and what some say was a lack of incentive support from the company to boost sales of older models.
While Fiat Chrysler’s U.S. sales and market share were roughly flat last quarter, it struggled along with other automakers to move old model-year inventory off dealers’ lots. It took Fiat Chrysler dealers 101 days on average to sell each vehicle during the quarter, 24 more days than the industry average, according to market researcher Edmunds.
Chief Executive Officer Mike Manley told analysts last month the company earned record quarterly operating profit despite paring back shipments to reduce inventory. North America generated the lion’s share of income.
“Working with our dealer network to achieve and maintain discipline with stock levels continues to be one of our top priorities,” Manley said on the call, hours after a preliminary merger agreement with PSA was announced. “In North America, our dealer stock is now in line with demand.”
The sales bank concept dates back to at least the 1960s. After Chrysler secured federal loan guarantees in 1979, then-CEO Lee Iacocca swore off the practice as one the company would never resort to again. He summed it up in his top-selling autobiography as “nothing more than an excuse to keep the plants running when we didn’t have dealer orders for the cars.”
But in 2006, Chrysler started stockpiling unassigned cars again, at one point accumulating a glut of 100,000 vehicles. The U.S. government backstopped the company’s 2009 bankruptcy and arranged for Chrysler to emerge with Italy’s Fiat as a partner.
David Kelleher, a Philadelphia-area Fiat Chrysler dealer, said that while the sales bank was a problem several months ago, he’s confident the company isn’t going to fall back into bad habits.
“They’re not making this a practice. It’s a one-off,” said Kelleher, who sits on the automaker’s council. “That’s in my rear-view mirror, and I’m pleased with the way Chrysler handled it.”
Just last week, Fiat Chrysler sales representatives told certain dealers it would allocate them vehicles for both November and December all at once, and that it may restrict orders for certain models, two dealers said. They viewed this as a bid by the company to work through inventory by prodding dealers to order cars that remain in the sales bank.
Fiat Chrysler said the restrictions apply only to certain vehicle configurations where demand exceeds production capacity. The supply of unassigned vehicles will wax and wane in a predictable fashion going forward, Golightly said.
Robert Loehr, who owns a Fiat Chrysler dealership in metro Atlanta and sits on the company’s dealer advisory council, said the stock of unassigned cars has an upside — it allowed him to restock some higher-end Laramie trim Ram trucks on short notice.
“They’ll ask you to take some stuff along the way that you may not necessarily want, but you may need others,” he said. “It’s a give-and-take relationship.”