GM ‘turnaround’ reports rely on ‘overbuilding,’ jam-packed dealer lots
President Obama’s campaign claim that he rejuvenated the ailing General Motors depends on practices called “overbuilding” and “channel stuffing,” critics say.
Car dealerships’ lots are filling up with unsold trucks and SUVs because GM built more vehicles than it can sell in order to inflate sales claims and artificially boost its profits, The Daily Caller has learned.
The Detroit automotive giant records sales for vehicles in dealers’ inventories before car buyers make their purchases, said Mark Modica, a National Legal and Policy Center associate fellow.
GM’s overbuilding “probably helped [GM] in the second quarter, but will hurt in the third quarter,” a Standard and Poor’s Capital IQ analyst added.
Third quarter results won’t be made public until after the November election, allowing Obama to tout the company’s short-term success while masking troubles that are not yet apparent to voters.
GM spokesman Jim Cain said the company is “overbuilding” because it plans to shutter four assembly plants for a combined 29 non-consecutive weeks in order to ready them for production of its newest models.
Cain said the scope of the closure “doesn’t matter” and “the overbuilding is necessary.”
Meanwhile, dealers are swamped with autos that they can’t sell. GM began taking plants offline in the second quarter but will close production even longer in the third quarter.
“It’s like somebody being constipated, it’s got to go somewhere,” said Republican congressman Mike Kelly, who owns a Butler, Pa., dealership that sells GM vehicles. “And who’s it going to end up hurting? Me and dealers like me.”
The American public may hurt as well, as taxpayers’ investment in GM will lose value when GM’s latest actions negatively impact its stock price.
The company’s stock currently floats around $20. Charlie Brown, president and CEO of CB3 Financial Group Inc., said that too much production is driving GM’s stock price down. Sales incentives, he warned, may do little to reverse the downward trend.
“People that are investing don’t want to see excess inventory. You can only over-incentivize people so much,” Brown said. “Their stock price could reach 16 dollars.”
Reason Foundation senior policy analyst Shikha Dalmia said GM is stable and making profits, but added that the company would need to sell stock at $55 per share in order for taxpayers to recover their investment.
GM’s channel-stuffing tactic has already prompted a class-action lawsuit in New York.
Cain declined to comment on the litigation, but insisted GM has been “very transparent on sales and earnings calls with the media.”
Modica said GM has been fiddling with the numbers for a long time, using “smoke and mirrors” to promote a positive public image.
TheDC’s Matthew Boyle has chronicled a lack of transparency between GM and the Obama administration and the extent of the government’s involvement in the company. Cain disagreed.
“The government is not involved in our operations and has not been since the bankruptcy … which was resolved in July 2009,” he said.
Obama, however, continues to claim credit for GM’s record during his tenure in office.
“When the American auto industry was on the brink of collapse, more than one million jobs were on the line, Governor Romney said we should just let Detroit go bankrupt,” the president said during a July 5 campaign rally in Maumee, Ohio. “I refused to turn my back on communities like this one.”
“It’s important to emphasize that President Obama let GM go bankrupt. He did,” said J.W. Verret, a senior scholar at George Mason University’s Mercatus Center. “It is clear that the Obama administration has used its control of General Motors as an agent for its environmental agenda.”
“It’s hard to imagine the government allowing anything to be done by GM, if they can help it, to hurt the president or his administration,” said Bill Ballenger, political commentator and editor of Inside Michigan Politics. “You’d think they’d want to do everything they could to make government intervention look like a good decision.”
Steve Mitchell, pollster and chairman of Mitchell Research, said Michigan — the longtime headquarters of the domestic auto industry — will be a battleground state all the way to November. His latest polling data suggests 47 percent of Michiganders support Obama and 46 percent back Romney.
“I don’t think President Obama expected to have to spend money in this state,” Mitchell said. “If he’s at 47 percent and leading at the end of October, he’s not going to win this election. Undecided voters almost always vote for the challenger.”
Ballenger told TheDC he thinks Obama’s handling of the automotive industry will be a big factor in November. And while Obama appears to have an advantage on the issue in Michigan, he said, it remains unclear who holds the upper hand nationwide.
“The question is if [GM] is viable enough to ever repay taxpayers,” Dalmia said. “It’s pretty clear that taxpayers aren’t ever going to be repaid.”
Rep. Kelly, the Pennsylvania car dealer, predicted an economic resurgence that would impact the auto sector if Mitt Romney becomes president.
“If Governor Romney is elected,” he said, “you’ll see reinvestment, you’ll see people come back to this economy.”