In the wake of two federal investigations — one led by the U.S. Justice Department, the other by the Securities and Exchange Commission — Fiat Chrysler has clarified the way that it reports monthly sales. As a result, the company’s 75-month-long streak of sales increases has been cut nearly in half, to 41 months.
The question is: Is this really a big deal?
A little background
In recent years, the auto industry has been rocked by more scandals than a good soap opera. Among the high low points have been Takata’s fatally flawed airbags, General Motors’ ignition switch fiasco, and Volkswagen’s Dieselgate lies, not to mention Tesla’s current Autopilot scare.
Now, some suggest that Fiat Chrysler Automobiles is joining the club. We’re not so sure.
FCA’s troubles began last year, when some U.S. dealers complained that they were being encouraged to inflate monthly sales stats. In January 2016, two of those dealers filed a lawsuit against the company.
FCA promptly denied the validity of the dealers’ claims, but behind the scenes, FCA wasn’t so sure that the allegations were baseless. The company ordered an internal audit, and leaked details of that report suggest that FCA’s published sales figures weren’t entirely accurate. Though the audit hasn’t been made public, sources suggest that up to 6,000 vehicles may have been falsely reported as “sold” during the period studied.
And so, yesterday FCA published a press release containing a lengthy explanation of its sales reporting process. Its tone is a little more defensive than most press releases you’ll read, but beneath the snark, FCA makes some valid points, including:
1. FCA’s monthly sales reports are difficult to compile, and errors are probably to be expected: Every month, “[FCA] collects sales data entered by some 2,600 dealers until midnight of the last reporting day of a month and releases the aggregate data typically within 8 hours of the final data entries.”
2. FCA hasn’t changed its reporting process since the 1980s: “FCA US believes that its current process has been in place in more or less the same form for more than 30 years, with reporting previously being made every 10 days and eventually evolving into monthly cycles.”
3. Sales by FCA to dealers and sales by dealers to customers are two very different things: “Consistent with other automakers’ practices, it is this initial sale — by FCA US to the dealer — that triggers revenue recognition in FCA US, and not the ultimate sale of the vehicle by a dealer to a retail customer. It is for this reason that the process of reporting monthly retail unit sales has no impact on the revenue reported by FCA in its financial statements.”
4. Sales are occasionally cancelled or “unwound” for a variety of reasons: “These unwinds may, and in fact do, occur for a number of reasons including: inability of the retail customer to finalize financing for the purchase or a change in customer preferences, among others. It is admittedly also possible that a dealer may register the sale in an effort to meet a volume objective (without a specific customer supporting the transaction).”
5. “Unwinds” aren’t in a dealer’s best interest, though: “It is possible for a dealer to ‘unwind’ a transaction recorded in [FCA’s New Vehicle Delivery Report] system and return the vehicle to the dealer’s unsold inventory … There is, however, no obvious economic incentive for a dealer to do so, since FCA US’s policy is to reverse all incentives due or paid to a dealer that resulted from the unwound retail sales transaction.”
That last point is perhaps the least persuasive of FCA’s statement. The dealers who filed suit against the company allege that in lieu of incentives, FCA promised advertising credits and other benefits that weren’t linked to individual sales. In other words: Yes, an “unwind” would revoke any incentives a dealer might’ve received for a particular sale, but if the falsely reported sale helped a dealer reach its sales goal, FCA might bestow other benefits on the shop.
There are four important takeaways from FCA’s clarification:
1. The company will change its reporting practices to be more transparent with regard to sales to dealers, sales to fleet customers, and dealer sales to consumers.
2. Based on the new methodology, FCA’s streak of month-over-month sales growth didn’t last 75 months, but 41 months (which is still nothing to sneeze at). The streak began in April 2010 and ran until FCA saw a decline in September 2013. Apart from that dip, though, FCA has only seen two other months with sales drops: August 2015 and May 2016.
3. From 2011 to 2016, FCA estimates that roughly 4,500 “unwound” sales were recorded as sold in monthly reports, which is only 0.06% of the 7.7 million sales recorded during the period. (It’s also fewer than the 6,000 reported yesterday.)
4. Given the new methodology, FCA has actually under-reported sales by 18,996 vehicles since 2011.
FCA’s clarification of its reporting practices is important. It helps ensure that investors and others have accurate information about the company’s financial health and can compare apples to apples when evaluating FCA’s performance.
On the other hand, the clarification doesn’t fully address some dealers’ claims that they’d been pressured by FCA to record and “unwind” sales at the end of the month. The statement does show that the 4,500 sales that might’ve been recorded by doing so would’ve had little impact on FCA’s overall numbers, but it doesn’t show that FCA wasn’t engaged in the practice. In fact, leaked info from the internal audit suggests that some company execs may still be encouraging dealers to do so.