Chrysler's Special Stock

Bracing for an anticipated third-quarter loss of $1.5 billion, and squirming under the hot spotlight of a new cost-cutting initiative, Chrysler Group now admits its vehicle stocks were higher than reported.

A pool of unsold vehicles in July and August went unreported in the auto maker's figures under a little-used practice for counting inventory, Ward's uncovers, indicating Chrysler's overall market picture was bleaker than the industry was led to believe.

Soaring gasoline prices and the resulting negative impact on pickup and SUV deliveries was blamed for Chrysler's poor sales performance in the period.

During the two months, the auto maker continued to run production, building a “bank” of up to 100,000 unsold vehicles that were not counted as inventory, a spokesman confirms.

Ward's data show the pool of unsold vehicles dropped to an estimated 77,000 at the end of August, enough to push Chrysler's stockpile over 575,000 units when added to the auto maker's reported inventory.

According to a practice adopted by Chrysler about two years ago, these vehicles were being held in abeyance until dealer orders prompted their release. This practice, which reprises a strategy that has repeatedly plagued the auto maker in decades past, is being curtailed, the spokesman tells Ward's.

“We won't do it again at the level we were doing it over the past couple of years,” he says, adding the auto maker's bank of extra inventory sits just under 50,000 units today and should be “virtually” eliminated by year's end.

At the end of September, Chrysler's reported inventory approached 529,000.

Withholding 50,000 vehicles from its reported inventory is not considered “earth-shattering,” says Brett Hoselton, senior automotive analyst with KeyBanc Capital Markets.

But failure to report a higher figure “reduces the visibility into what's going on at the company,” he says. “If you can't trust the numbers that you're being given, then it causes some concern.”

Chrysler insists the practice of stockpiling unsold vehicles is common in the industry. Competitors suggest otherwise.

“Absolutely false,” says George Pipas, Ford Motor Co. U.S. sales analysis manager. “Ford does not build to an unassigned bank. Every production unit has a dealer name attached to it.”

Honda of America Mfg. Inc. and Nissan North America Inc. say the same. “We never build to a sales bank,” adds a Toyota Motor North America Inc. spokesman.

General Motors Corp. keeps “net field stock,” which includes unsold vehicles that are available for delivery to dealers, a spokesman says. But every unit that rolls off a GM production line is counted in the auto maker's reported inventory.

“We thought our system was good,” the Chrysler spokesman says. It kept Chrysler factories “humming.”

Despite dealer outcry about slow sales, the auto maker crossed its fingers in the belief the situation would improve — as DaimlerChrysler AG Chairman Dieter Zetsche confessed when the auto maker was forced to reduce its third-quarter outlook from a previously forecasted loss of $635 million.

“We thought at the retail level they'd move,” the spokesman says of the unassigned vehicle pool. “But the mix flipped. We had this spike in gas prices and the market shifted. And we were slow on the switch (to stop production).”

As a result, dealers are in a bind as Chrysler tries to work through the glut it created, and works to assuage dealer concerns. Sales banks “always worked fairly well in the industry,” the Chrysler spokesman says, “because the last thing you want to do is not have any inventory.”

But another analyst tells Ward's sales banks have been “a recipe for disaster,” particularly for Chrysler,
— with Cliff Banks Go to www.wardsdealer.com to read auto dealer Peter Brandow's November column.