As Gregg Easterbrook once famously proclaimed, torture numbers and they’ll confess to anything. As an accountant, I’ve always considered numbers to be a lot more malleable than most math-challenged people believe; they’ll confess the truth long before an interrogator gets out the metaphorical water board. For example, a simple analysis on a small subset of GM and Toyota’s voluminous public data can yield important insights into their relative corporate personalities. By looking at both company’s 2006 U.S. Sales and Inventory figures, the numbers sing like a canary.
Obviously, GM and Toyota’s sales and inventory stats are not 100 percent comparable. For one thing, The General is [still] largely a truck-based manufacturer. Despite a desperate shift toward CUV’s and increased investment in its passenger car brands, trucks account for 57 percent of the automaker’s 2006 unit sales. Toyota’s is far more of a car-maker. Despite upping Tundra sales to around 180k per year, 42 percent of the Japanese manufacturer’s 2006 unit sales were trucks.
In the 12 calendar months comprising 2006, General Motors sold 4.065 million vehicles in the North American market. In the same time frame, Toyota sold 2.543 million units. To achieve these sales, General Motors carried an average inventory of 1.064 million vehicles throughout the year.
If you prorate GM’s Sales-to-Inventory relationship to Toyota’s, you would be forgiven for assuming Toyota would average about 600k vehicles in inventory at any given time during 2006. In actual fact, Toyota’s average 2006 inventory was just 216,536 vehicles.
Put differently, Toyota sold about 218k cars per month last year to Americans. At any given time, ToMoCo’s average inventory never contained more than 30 days worth of product. Ceteris paribus, had Toyota stopped producing cars on June 1, 2006, it would have run out of cars before July Fourth fireworks hit the sky over Bozeman, Montana.
During the same period, The General sold 335k mainstream cars and 3k Corvettes per month. The American automaker’s average inventory stood in excess of one million and never below 919k (in July 2006). So The General kept about three months and four days worth of unsold cars on hand-– many of which were still on dealer lots (remember, once a car ships to a dealer, GM recognizes a sale). Ceteris paribus, had GM stopped producing cars on June 1, 2006, its inventory would have lasted until Labor Day.
Why did Toyota need only 20 percent of GM’s inventory to sell 60 percent as many vehicles? Theories abound. Here’s mine…
In 2006, General Motors sold 78 models over eight brands. Toyota sold 27 models over three brands. Consumers seeking a family-friendly, Toyota-made car could opt for a Camry, Prius or, if well-to-do, an Avalon. In 2006, the General offered up about fifteen Camry alternatives. Pontiac, the would-be sport brand, accounted for three Camry-class cars alone: Grand Am, Grand Prix, G6.
Enter the new Chevrolet Malibu. How many do new ‘Bu’s do you keep in stock when a loyal GM customer could easily pick another car in the same segment, at the same dealer, or cross the street to a Saturn dealer and pick a badge-engineered clone of the “original?” Sure, the new car might generate conquest sales (and we could include non-fleet GM buyers in that metric), but how in the world do you guesstimate that number?
Meanwhile, satisfied (or dissatisfied) Camry buyers can choose… another Camry. Toyota can predict potential sales with astounding accuracy simply because their tightly focused brand portfolio eliminates a large number of variables. They can also draw upon statistical analysis of retail Camry buyers’ habits stretching back to 1983.
All of which brings us to the meat of the matter. Brand focus leads to increased consumer loyalty, which leads to better forecasts, which leads to better inventory management, which leads to lower inventory. While General Motors has long championed the “whatever sticks to the wall” approach, Toyota has been content to do a few things well.
Numbers are just symptoms of the corporate culture that produces them. Years into a “turnaround”, GM refuses to give a deadline on its return to long-term, stable profitability. In that light, it should come as no surprise that the same company can not proclaim, with any credibility, how many bread-and-butter sedans from its bread-and-butter brand it will sell. Funny thing about numbers: even in their absence, they can be significant.
Interesting article Samir.
Some other factors that probably affect this situation.
Flexible manufacturing.
Union contracts (inflexible manufacturing?)
Capacity that is similar to your market share.
A lot of it is about management of resources, isn’t it?
Many have pointed to Toyota’s flat sales the last few months as a sign of problems. A few things make me doubt this.
1. It tracks with a move to lower incentives.
2. Toyota’s inventory remains in control.
3. One of their executives stated earlier this year that we should expect to see a slowdown in their growth.
It was planned.
In contrast, GM cranked up incentives and fleet sales in August to patch up the mess they had in June and July.
Proactive.
Reactive.
Who would you bet on.
TTFN,
Bunter
Pontiac, the would-be sport brand, accounted for three Camry-class cars alone: Grand Am, Grand Prix, G6.
What the heck? I thought they stopped making Grand Ams in 2006. Or do they still have leftovers sitting around waiting to be sold?
“Brand focus leads to increased consumer loyalty, which leads to better forecasts, which leads to better inventory management, which leads to lower inventory.”
I often have a counterpoint to the picture painted by others. I think its usually incomplete. Between Brand focus and increased consumer loyalty, there is choice. External things do not lead the consumer to choice anything. As for “better” inventory management or forecasts, “better” is subjective. Is treating consumers like robots part of a better inventory forecast? Purchasing is not something systematically devoid of free will, were the industry decides what someone will buy. Although some are programed to volunteer to do so without their true personal opinion. This is my version of reading between the lines.
A very well written piece, Samir.
Who was it that said (about accounting/ numbers) “there are lies, damned lies and statistics”?
But of course, this would be referring to Detroit Inc’s shining of turds every month, quarter and year.
But facts have a sneaky way of coming out. Like the fact that a virtually unknown Indian conglomerate, Tata, has a market captitalization (is valued higher in it’s stock market) than General Motors (and this was a year ago, before the US dollar collapsed).
This could be the very first time in corporate history where the company in second place is actually the winner. Although Toyota is the second biggest car maker in the world, these figures show how far ahead Toyota are in front of GM.
Firstly, these figures show how fragile a giant GM is. GM have 10 brands which are spread over 9 million customers. That means, on average, each brand has a loyalty base of about 900,000 customers. Toyota have 3 principle brands, Toyota, Scion and Lexus; of these 3 brands, Toyota’s customers (which let’s assume are the same amount as GM) are spread over less brands which makes each brand of having a customer base of 3,000,000. Therefore, Toyota’s 3 brands are more valuable than GM’s 10.
The same principle applies to the dealer to sales’ ratio. Since GM have waaaaaayyyyy more dealers than Toyota, their dealerships have to generate more sales per dealer to generate a meaningful profit, than Toyota.
Secondly, Toyota’s lean philosophy bears fruit when it comes to inventory. Whereas GM are now in tailspin where they now making cars faster than they can sell them, which will only compound their inventory lists.
Thirdly, even though it’s not mentioned in the article, Toyota are far superior in terms of profitability; something which GM are having trouble with.
So in essence, GM may still be number one for the foreseeable future, but Toyota have higher profitability, less inventory, stronger brand caches and a good public image.
Just goes to show you, coming second isn’t always bad……..! Wink wink, boys! ;O)
Katie-
Some good points.
In buisness there is only one way to win…PROFIT.
Piles of numbers are just that, piles. The only thing that matters is if the piles are green or brown. ;^D
Bunter
Samir —
A great article.
Another way to look at things: Toyota is profitable, GM is not. Who cares what anyone calls first or second place, the point of being in business is to make money. If you don’t, the shareholders will revolt and sue (although GM’s shareholders apparently roll over and die).
I wonder how the numbers would look if GM’s fleet sales were backed out? One would think that vehicles destined for the fleet spend very little time in inventory as they are pretty much built to order, aren’t they?
Yet another way to look at a winning is progress in happiness. No not all in business are profit first. Some are in business for sustainability (as well as money)of their ideals/dreams. BMW may not sell anywhere near as many vehicles as Toyota or GM, but they have something which they may value more than the revenue/profit numbers seen by others. Their accomplishments and goals. They probably love to make and deliver (sell) great cars. One can even say that they indirectly helped produce the G35, The CTS, the AMGs, etc etc. Which was probably part of their vision in one way or another. Winning is about progress in being happy. No one can define happiness for another. True business is about being instrumental with resources for gaining happiness. I feel like a winner being on GMs side to some degree, and Toyotas to other degrees. My loyalty is to myself, and I only wish to join the side that is to my values, a winner ie. I can profit personally from.
Great article, and great comments so far. Very enjoyable. I’ve never seen the number of GM brands and models in black and white like this…78 models over 8 brands. Unbelievable.
Consider also the amount of overhead and manpower it takes to manage all of those brands, and how thinly they have to spread their continuation/”mid-cycle refresh” money. There were some comments last week about the Malibu wondering if GM would keep the car fresh and continue making meaningful improvements over it’s lifecycle. With numbers like this, it is easy to understand why their mainstream products wither on the vine after a few years.
I had never really considered the necessity that GM work to thin out their portfolio. We grew up in a world full of Chevys, Buicks, GMCs, Oldsmobiles, Caddies, and Pontiacs…with Saturn coming along relatively recently. They never considered the cold business realities of managing so many brands with so many overlapping products because GM was THE car manufacturer. Times have obviously changed, yet GM is still acting like they are have the biggest stick in the car business, like they will determine what we buy.
Like I said, I never really thought much about it…I took all the brands as part of landscape, like they’d always be there. But this weekend at Target my wife and I saw a GMC Acadia parked next to a Buick Enclave. My wife asked me “Honey, what is the point of Buick…where do they fit in compared to the other GM cars?” Now I get it…
GM reports sales upon shipments to a franchised dealer.
I thought they were still doing this, thanks for verifying, Samir. Anybody know of other auto manufacturers who do this, as opposed to report “real” unit sales?
Its a shame how people like Samir can make a living off of constantly bashing American motor companys. I understand that they aren’t meeting the numbers of MPG like you people want them too and that you’re just throwing a bunch of numbers out there against GM. But the absolute “Truth about Cars” is that GM is still out selling your foreign cars almost 2:1, thats the main “Ratio” you should be concerned about. You also always ramble about GM Death Watch or Ford Death Watch like your hoping they all go down. I know you Foreigners may not understand, but to many Americans its more than just automobiles and numbers. Quite a few of our Relatives grew up dedicated GM or Ford fans and some where (and still are)employed by them. It’s many jobs for Americans and for others its a tradition. Your not just bashing some cars here, your bashing a part of history. Like i said i know you’ve got a lot of numbers and they are true, im not arguing that, i’m just arguing some of “TTAC’s” general opinion of American Vehicles.
samir,
You are possibly misleading the people here by saying that GM counts a sale when a vehicle is sold to a dealer, and not a customer (end user).
There are more GM dealers than Toyota dealers which creates more inventory.
GM often pays dealers an inventory allowance which motivates dealers to keep more inventory.
What you are saying is that one manufacturer reaches its results(moving metal)in a different fashion than the other manufacturer.
Could it be that Toyota keeps its dealers on a “shorter leash” and if they don’t perform the other dealer that performs gets more vehicles?
Have you looked into the “nuances” and “politics” associated with product allocation? Which also has an influence on inventory levels.
In the car business its never just numbers for the sake of numbers.
Is the dedication, loyalty, and/or commitment to GM or Ford or Chrysler really justified? or unreasonable?
your analysis of the numbers may be good, but I think you’re taking the theory you already believe (“GM has too many brands”) and fitting it to the facts you see. that may be the explanation for GM’s inventory woes (and it’s a plausible one), but the numbers don’t prove or disprove it — it’s pure conjecture. you’d need additional evidence to make the connection between the sales/inventory numbers and the brand/product profusion — such as an analysis of which cars are in high inventory, what cars customers are cross-shopping, and why dealers inventory the cars they do. I look forward to reading that followup ;)
here’s the standard monthly GM sales release
it says “retail deliveries”
I’m confused — can anybody explain?
http://media.gm.com/servlet/GatewayServlet?target=http://image.emerald.gm.com/gmnews/viewmonthlyreleasedetail.do?domain=6&docid=40878
Interesting editorial. I’d like to see more along these lines.
I suppose one reason for GM’s large inventories is the large number of dealers (well, duh). This is separate from whether or not GM has too many brands.
Take Chevy dealers for example. I have 6 within 10 miles. Do I really need 6 places to buy a Chevy within 5 minutes of where I live? Does anyone?
Each of these 6 dealers has to operate on the principle that a customer who can’t find what he wants on the lot will just go down the road a few miles and find it at the next Chevy dealer – which is absolutely correct. So each of the 6 have to stock dozens of examples of every model (except the Malibu). There’s a lot of unnecessary inventory sitting around simply because there are too many outlets.
the poster is getting two thinggs confused. GM counts the money as a sale when it is wholsalewd to a dealer. It is reported as a retail sale when the dealer reports the customer information to GM.
So all the cars on a dealers lot have not been repoerted sold.
Someone has bent the facts to fit the story.
As indi500fan has discovered, GM reports retail sales on a monthly basis, same as all other OEMs.
GM/Toyota/Ford/Chrysler/Nissan/Honda… count a vehicle as revenue once it rolls out the back door at the plant.
But the focus on retail sales is about keeping the pipeline flowing. Once the end of the pipe (dealership sales) slows down, it causes the mfg plants to potentially reduce/slash production (unless your Chrysler, you just park them in lots all over Detroit), which affects revenue.
I’m not an accountant, and I didn’t stay at a Holiday Inn Express, but I have a business degree, which allows me to see through the fluff.
optic
I really enjoyed the editorial and tended to agree with Samir. Then I red your post and agreed with you… that is a lot of speculation. But now I’m back to Samir.
It’s a painful fact that GM is making too many cars, and nobody knows why except for GM. So all we can really do is speculate and/or blame the unions. So after I read your post, I thought, If the challenge really came down to how many Malibus do you build when Auras are being sold across the street, then you think at some point GM would be underproducing certain cars. That is, Oops, we built too many Auras this year and not enough Malibus. But I don’t think that’s what’s happening… they’re just building too much of everything. So you can’t really blame the brand overlap for their inventory problems.
But then I imagined myself as a bean counter for Saturn. I go out and poll people and learn that 200,000 people want to buy new GM sedans this year. Chevy does the same… combined we build 400,000 cars, but only sell 200,000 Auribus between us. Now, it’s true that they could solve that issue by having the brand managements work together, but that’s gonna be an additional non-zero cost that GM has to incure and Toyota doesn’t.
It’s all speculation of course.
I don’t think that the number of cars in inventory is nearly as important as whether or not that number is growing and why. As has been pointed out, GM has many more dealers, which necessitates a greater inventory of unsold cars. However, if the number of unsold car is growing and if it is growing because GM can’t afford to reduce production (jobs bank), then you have a big problem.
Finally, profit not market share is or should be the true measure of a Company. Toyota certainly beats GM there. As far as BMW making cars for the joy of building cars and make the world a better place to live, can I have some of what you’re smoking? BMW would love to make piles of money like Toyota and have Toyota’s market share.
What the heck? I thought they stopped making Grand Ams in 2006. Or do they still have leftovers sitting around waiting to be sold?
The editorial clearly states the figures pertain to 2006.
Have you looked into the “nuances” and “politics” associated with product allocation? Which also has an influence on inventory levels.
Again, I clearly stated the numbers are not 100% comparable, but I invited you to make the leap with me. If you do not believe the numbers are comparable, that is fine. You are free to disagree.
between the sales/inventory numbers and the brand/product profusion — such as an analysis of which cars are in high inventory,
This analysis is routinely provided by Frank Williams (Look for “By The Numbers”).
here’s the standard monthly GM sales release
it says “retail deliveries”
I’m confused — can anybody explain?
Forget the press release – you need to get right at the Financials. Note 3 of Financial Statements in General Motors’ last annual report states:
“Vehicle sales are recorded when the title and risks of ownership have passed […] when the vehicle is released to the carrier responsible for transporting vehicles to dealers.”
Samir-
“Forget the press release – you need to get right at the Financials. Note 3 of Financial Statements in General Motors’ last annual report states:
“Vehicle sales are recorded when the title and risks of ownership have passed […] when the vehicle is released to the carrier responsible for transporting vehicles to dealers.””
Thank you.
Now, can we just take GM Financials word on this everbody?
Heck, it sounds like if the driver parks the truck in a river GM can still count them as “sales”. Game over.
Bunter
samir,
You are adding to the confusion with your fiancial statements and wanting folks to take a leap with you.
We understand as sales “retail deliveries” to customers (end users) what is known in the business as RDR’s.
If you are going to refer to FS, then you should clearly mention how many vehicles GM sold to dealers and how many vehicles were RDR’d by the dealers to customers. How many vehicles did GM and Toyota sell to dealers, and how many vehicles did the dealers RDR? If you are looking at 2006 its quite possible that some of the inventory on the ground was built and accounted for in 2005 as per your financial statement basis.
GM built and sold the vehicle to the dealer on Dec 28, 2005 and the dealer RDR’d the vehicle on March 3, 2006.
The old saying “You count tailights, not headlights”.
AGR, there is nothing more black and white than what I’ve posted. If it’s on the trailer on the way to a dealer, it’s a sale in the books.
I am not confusing anyone, the figures in the analysis were made public by General Motors, not compiled by me.
What you understand is one thing, what General Motors has a revenue recognition policy is another.
Cute saying, by the way.
The editorial clearly states the figures pertain to 2006.
Ah, whoops. Though, sadly, I wouldn’t be terribly surprised to find out that there’s a Pontiac dealer somewhere that’s still trying to unload some Grand Ams. . . .
Man, from some of these comments you’d think the year was 1350 and Samir just announced that the world is round. Folks, he’s not the first person in the world to point out that GM has serious manufacturing/inventory problems – every halfway decent business school has been teaching the virtues of Toyota’s manufacturing practices (in contrast to GM’s) to 1st year MBA students for years. This is not news (though I do think it’s a nice editorial).
He’s not bashing GM’s cars, let alone its history, and he’s not licking Toyota’s popsicle. Like someone said, in business it’s not about sales, it’s about profits, which Toyota produces and GM does not. I don’t think the terrorists win because someone points out the obvious.
Some companies make money, some make nice cars, some make both. Toyota makes money. VW/Audi makes (some) nice cars. Porsche does both. Maybe GM makes decent cars, but they sure don’t make money. Follow my drift?
About a year ago, I was in the Detroit area and went to the Ford Museum and took the tour they offer of the Ford truck assembly plant. I ask the Ford tour person how does Ford know how many trucks and which types of trucks to build (i.e. options, color etc.) She said Ford mandates the dealers to get the orders in at least three months in advance of manufacturing and pay for the vehicles at least three months in advance of manufacturing. Ford then considers it a sold vehicle when built and shipped.
Toyota is like Southwest Airlines is some respects, they keep it consistent, do it well and make a profit when others don’t. Southwest uses one type of aircraft, therefore maintence training, parts acquisition, pilot knowledge of the craft are all consistent. GM has to train mechanics for so many models, and different parts etc, it is very wasteful.
I own businesses, goodwill is great, providing a quality service is expected but making a profit is imperative. Toyota does just that, GM by any measure has failed.
Mr. Syed’s point is easily verified. If you look at GM’s “Vehicle Unit Sales” reported on page 6 of the 2006 annual report, it ties to the figures on the December 2006 “Sales Deliveries” report on GM’s website.
There is no secret to the difference in GM’s reporting methodology. Many automakers report “sales” based upon vehicle registrations (whether fleet or retail); GM reports a sale as soon as it gets onto the delivery truck.
This difference was highlighted during 2005, when Ford and Chevy both claimed to be the leading brand in the US. Arguably, both were correct; Ford reported it based upon registrations data reported by Polk, while GM claimed the lead based upon its deliveries.
There isn’t anything particularly wrong with what GM does, just so long as everyone understands that shipping a car from the factory is not the same as selling it from a dealer’s lot. GM’s customers are its dealers, not the public, so it’s not particularly dishonest on its face.
But clearly, this method is more easily manipulated, as it can create motivations to stick units onto trucks so that they can be claimed as “sold.” Revenues will be recognized when the vehicle get shipped, even though the dealer will not have yet paid for it. In a time of heavy losses, you have to wonder what kind of game playing can be expected to occur at the year-end.
“Deliveries” report —
http://www.gm.com/corporate/investor_information/docs/sales_prod/06_12/deliveries_0612.xls
Annual report that reports “sales” —
http://www.sec.gov/Archives/edgar/data/40730/000095012407001502/k11916e10vk.htm
samir,
Hate to tell you but you are confusing people.
The automotive industry in North America counts retail deliveries as sales, the numbers that are reported on a monthly basis are retail deliveries to end users, not wholesale deliveries from manufacturers to dealers.
If you want to count wholesale sales from manufacturers to dealers you can do so, and it makes sense on a manufacturers FS for their purposes. Once you factor inventory in the discussion the wholesale sales (manufacturer to dealer) are both a sale and a liability. They are a sale for the manufacturer, and a liability for the dealer and manufacturer, until it becomes a “retail sale” to an end user.
“For accounting purposes we count it as a sale once it gets loaded on a transport, and the invoice is assigned to the finance company that will floor plan the vehicle for the dealer…its a SOLD unit” since the manufacturer does not sell directly to the end user…fine print….until its sold to an end user its still a liability on our books we might have to apply various incentives to this unit depending on market conditions.
As an accountant if you are looking at any manufacturer’s books you need to take into consideration that whatever they are counting as a sale for accounting purposes, is still a liability and a possible expense until its RDR’d.
The selling expenses might increase, if the market shifts.
If you are going to set a new standard that the automotive industry counts sales when the product rolls out the door of the plant, you are correct in your statements.
Samir I believe you are using Clintonian parsing. At least we can all now agree that the GM monthly sales reports which are widely quoted in the media and compared company-to-company are RETAIL sales, not production numbers.
At least we can all now agree that the GM monthly sales reports which are widely quoted in the media and compared company-to-company are RETAIL sales, not production numbers.
You apparently did not read my links. What you have stated is absolutely not correct.
Compare the annual report to the monthly “deliveries” report — the “retail delivery” and “sale” numbers are exactly the same.
In GM parlance, as Mr. Syed pointed out, a GM “sale” occurs when the vehicle hits the truck leaving the factory. A “sale” is defined clearly in the financial statements, and the figures in the financial statements tie directly to the monthly reports that are circulated by GM PR and corporate.
Wow, lots more interesting stuff here…
If anything, the comments posted have me really wondering about the dealer franchise/sales structures of GM versus the b-school model Toyota. From what I’ve read so far, Toyota new car dealers are run on much more of a retail model that would look at least somewhat familiar to a Target or Wal-Mart retail “pull” system, i.e. inventories are based more on customer demand.
Are Toyota dealerships franchises? How does their dealer structure differ from GM’s? How does one go about becoming a Toyota new car dealer? How does Toyota set dealer quality standards vs. GM? Does Toyota require a certain retailing approach?
Any insight into this area would be really interesting. Why do people generally have a better experience at a Toyota or Honda dealership than they do at a Chevy dealer?
Are Toyota dealerships franchises?
Yes.
How does their dealer structure differ from GM’s?
Not by much other than the fact that Toyota dealers sell far more units per showroom than do GM’s.
How does one go about becoming a Toyota new car dealer?
In the 1960s and early 1970s it was very easy to do because Toyota was new to the US. Got cash? Got some related experience? Got an available area? Great, sign here. That was then. Today about the only way is to buy one of the ones set up way back then.
How does Toyota set dealer quality standards vs. GM? Does Toyota require a certain retailing approach?
There are plenty of horror stories about rotten Toyota dealers. In some cases people buy the cars in spite of the dealership. Generally Toyota dealers make more money and have fewer rip-roaring mad customers to deal with so it is probably easier for them to be helpful. I wouldn’t say that the quality of Toyota’s US dealer network is at all uniform.
Why do people generally have a better experience at a Toyota or Honda dealership than they do at a Chevy dealer?
As far as warranty and goodwill repairs go, my thought is that Toyota and Honda seem to generally give the dealership more leeway to make the customer happy than does GM. GM (and most other makers) seem intent on managing down warranty expenses using tactics very similar to the way health insurance companies manage down expenses.
Toyota and GM, two totally different philosophy when it comes production, leadership and management. Toyota is pretty stable right now when it comes to production and sales. On the other hand GM reminds me of Germany after WW1, the country inflation rate was so high that the government started to print more money to keep up, which of course those money didn’t worth anything all it was good for was keeping the fire burning so the people could stay warm. I see GM in similar crisis, so worry about Toyota and other companies beating them they just started producing cars left and right just to put in there record books that their production outbeat other competitors…..GM loyalist like it or not GM is going to hit rock bottom if they don’t turn around……
OK, what the heck, I’ll join in. It seems to me that if GM sells its cars, FOB origin, then, for the purposes of financial reporting, they are not carrying any finished goods inventory; the independent dealers are. Of course for marketing reporting purposes, the retail sales information is vital for promotional and production planning purposes.
It seems to me that if GM sells its cars, FOB origin, then, for the purposes of financial reporting, they are not carrying any finished goods inventory; the independent dealers are.
GM surely carries some finished goods inventory, it’s not as if every car is shipped as soon as it is built.
On the balance sheet, GM is converting inventories into accounts receivable, because it “delivers” a unit on credit. So there, it is probably a wash.
The implications are on the income statement. When that “delivery” or “sale” is made, GM recognizes it as revenue, whether or not the cash is actually collected. This is typical — most firms report based upon accruals, not cash — but is certainly easy to manipulate when the company also provides the financing used by its stores to purchase vehicles from the mother ship. These are the very conditions that would encourage the company to use substantial year-end incentives to push dealers into buying vehicles, so that the parent company can convert those inventories into revenue, even if the cash isn’t immediately forthcoming.
I have no doubt that GM also tracks actual retail sales. But that is not what it reports in its monthly “retail deliveries” reports that it issues to the public and to the media.
On the annual report GM reports US industry sales, and their share of the US industry. These are retail sales to end users.
GM does not mention how many vehicles rolled out the plant doors, how many were sold to dealers, and how many are still in inventory.
For the US in 2006 GM dealers delivered at retail to end users 4,065,341 light duty units(cars and light duty trucks), in 2005 it was 4,454,385 units. Toyota delivered in 2006 2,542,525 units and in 2005 2,260,295 units.
These units come from different plants, in different locations, and from different countries.
The Tundra assembled in Texas, are not all sold in the US, the RX350 assembled in Canada are not all sold in Canada, the Corvettes assembled in Kentucky are not all sold in the US.
Toyota more than GM will alter the sourcing of vehicles to deal with currency fluctuations.
In 2006 GM produced as of YTD Dec 25, 2006 3,095,111 vehicles in the US, Toyota produced 829,703 vehicles. Clearly what rolled out of US plants was not enough to supply the US market.
samir,
Hate to tell you but you are confusing people.
The automotive industry in North America counts retail deliveries as sales…[]
But General Motors does not. What would be confusing is if I didn’t point this out.
If I didn’t, you’d think I’m comparing apples to apples, when in fact, I dedicated 12.5% of the word allotment in the article to a disclaimer that plainly and obviously states that General Motors accounts for a sale upon shipment.
I made it as clear as possible, and it seems the only person confused by it is you.
When a vehicle leaves the assembly plant its immediately paid to the manufacturer by the finance company that will floorplan the vehicle for the dealer. Manufacturers do not carry vehicle receivables from dealers. There is a transit time grace period where the dealer is not charged interest.
As it rolls out the door its paid to the manufacturer, and the manufacturer pays the suppliers in 90 to 150 days.
The manufacturers through its captive finance in most instances starts making money floor planning these vehicles for the dealers.
samir,
They all count the same way, retail deliveries.
But the absolute “Truth about Cars” is that GM is still out selling your foreign cars almost 2:1, thats the main “Ratio” you should be concerned about. You also always ramble about GM Death Watch or Ford Death Watch like your hoping they all go down. I know you Foreigners may not understand, but to many Americans its more than just automobiles and numbers.
I didn’t respond to this right away, because I wasn’t sure if it should be left up at all. Generally speaking, personal attacks are not allowed by TTAC’s posting policy. However, in the faint hope that you’ve returned and in the interest of fostering civil discussions, let me address this point.
Firstly, assuming I am a foreigner based on the only information you have (my name) is fallacious. The fact is, I was born in the NAFTA zone and I grew up watching the decline of American cars just like anyone else.
Secondly, GM may outsell Toyota but what really counts is profits. On that note, I’d invite you to take a look at GM’s quarterly results for the last few years and compare them to Toyota’s. I’m not bashing GM by pointing out inefficient forecasting and inventory management, I’m stating plainly obvious things and the numbers bear it out – Sales, Inventory, Profit, whatever number you pick.
samir,
They all count the same way, retail deliveries.
No, they don’t. Go look at GM’s release yourself. It’s been quoted to you by myself and PCH101
You are repeating something that is clearly in conflict with an assertion that was supported by primary evidence. Do you have evidence of your own, or will you keep repeating a point that is completely incoherent with what General Motors itself states in its financials
AGR, you clearly don’t understand what it is going on here. I will make one last effort to explain in here.
On page 6 of the annual report, GM reports what it calls “vehicle unit sales.”
On page 111 of the annual report, GM defines a sale as follows: “Vehicle sales are recorded when the title and risks and rewards of ownership have passed, which is generally when the vehicle is released to the carrier responsible for transporting vehicles to dealers.”
If you compare the figures on page 6 of the annual report with the total YTD figures on the December 2006 “deliveries” report, the numbers are the same.
Therefore, we know that a “sale” and a “delivery” are the same. Since we know what a “sale” is, based upon page 111, and since we know that a “delivery” and a “sale” are equivalent, we can see that a “delivery” is counted when the vehicle hits the truck.
Furthermore, we know that GM differs in its reporting conventions from others in the industry because of Chevy’s 2005 contest with Ford. The disparity: Ford counts registrations as measured by Polk, while GM counts “deliveries.” Note 3 of the annual report explains this quite clearly.
samir,
Please tell us how Toyota counts its sales? When they leave the plant or when the dealer delivers the car.
pch101,
How do you account for the discrepency in US production and sales?
Page 6 is industry sales which are retail deliveries to end users by dealers, the Toyota, and everyone else sales are part of the industry sales.
Page 111 is Revenue Recognition which is when the units roll out the door of the plant, they recognise the revenue when the unit rolls out the door, they recognise the sale when the unit is RDR’d by the dealer.
On the same page they do mention the various adjustments that can impact the revenue after its been recognised.
How do you account for the discrepency in US production and sales?
I already covered this — a vehicle that is built is taken into inventory before it is shipped off. Very few are built to order.
In any case, the financial statement clearly defines what a “sale” is, and a cursory comparison of the numbers makes clear that a “sale” and a “delivery” are the same thing. I don’t see how you can debate Mr. Syed when he’s directly quoting documents available to the public.
From Page 6 its industry retail sale the number of units, on Page 111 its revenue recognition not the same as retail sales from page 6.
They are public documents, we seem to be interpreting them in different fashions.
Do we agree that industry sales are retail end user sales? If yes page 6 is retail sales.
Do we agree that when a vehicle leaves the plant all manufacturers will recognise it as a sale for revenue recognition? If yes GM recognises its revenues the same as Toyota, Ford, Chrysler, and the rest of the industry.
Where we don’t agree is the difference between a retail sale, and revenue recognition. You could say that its the same, or its not the same.
If you keep on reading on Page 111 its clear that they leave the door opened to a myriad of future adjustments, which could also then be interpreted as taking units back.
Do we agree that like it or not GM has been copied and emulated by every other manufacturer on the planet when it comes to accounting, and control systems. Much of what is in place in the automotive industry when it comes to the internal workings started at GM.
I just wanted to state for the record that
‘jmack91z28’ does not represent the opinion of all Americans.
Amazing how defensive some folks get over plainly stated facts.
There are plenty of horror stories about rotten Toyota dealers. In some cases people buy the cars in spite of the dealership. Generally Toyota dealers make more money and have fewer rip-roaring mad customers to deal with so it is probably easier for them to be helpful. I wouldn’t say that the quality of Toyota’s US dealer network is at all uniform.
But the good dealerships are out there. It took me forever to find a decent, honest Toyota dealership in the Houston area that didn’t play numbers games or have a million “pad-ons” ($800 paint and upholstery ‘protectant’ jobs “required by Toyota”). As opposed to the rip-off dealership 5 minutes from my house, we (and extended family members) have now bought over a dozen new Toyotas from the dealer 20 minutes away. Their service department is a pleasure as well – clean, efficient, and reasonably priced.
I’m waiting for the dream to end.
Hey AGR, what does an accountant call “adding to the confusion with … financial statements”? Mission Accomplished!
Now, to be serious–and fair–the confusion doesn’t arise from GM’s financial statements; it stems from GM’s refusal to report NON-financial statement data (i.e., monthly unit sales by dealers to consumers) which makes it hard to know how well the company is doing at the retail level. Presumably that quirk is an artifact from GM’s halcyon days. But I’m sure revenue is properly stated, and no leap of faith is needed. (Save that for buying GM stock.) Of course, one wonders about future expenses to help dealers move the metal.
For further reading, one might try Howard Schilit’s “Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports.”
50merc,
Its my understanding that public companies must abide by accounting rules, and by SEC regulations, its also my understanding that GM is a public company, and that unless we hear differently its abiding by the same accounting rules and regulations.
Its also my undesrtanding that “industry sales” are retail deliveries to end users by dealers. There are enough analysts tracking these figures on a monthly basis that one should conclude at 99.9% that its retail sales to end users that are reported by all manufacturers.
Its also my understanding that franchised new car dealers reports sales on a retail delivery report to their respective manufacturer on a monthly basis. Many analysts will compare Polk registration figures with retail delivery figures to see if there are any discrepencies.
The automotive industry is very competitive, and every month every one looks at what the other is doing, and every manufacturer makes sure that everyone is playing on the same field with the same playbook when it comes to retail deliveries.
Its sad when people try to confuse issues that are simple, we are all individuals and entitled to our opinions and view points.
Mr. Syed writes: I was unable to sleep because of the comments on my latest editorial and I began to wonder what if AGR was right. The numbers I used came from automotive news (www.autonews.com ), not Toyota. Around 11, I got up and went to Toyota’s Japanese site, where after some digging I found an annual report in English from 2007. Long story short, Toyota and GM have the same revenue recognition policy. Here is the direct quote from Toyota’s annual report: Revenues from sales of vehicles and parts are generally recognized upon delivery which is considered to have occurred when the dealer has taken title to the product and the risk and reward of ownership have been substantively transferred, except as described below. As a result, at Samir’s request, I’ve edited out the following graph: “Equally significant, GM reports sales upon shipments to a franchised dealer. The hundreds of thousands GM vehicles sitting on dealer lots waiting for new homes are considered a done deal, no matter how large the unsold inventory, no matter how long they linger. Toyota reports sales based on retail sales. Despite these product mix and accounting disparities, we can draw some valid conclusions by comparing their numbers” For those of you who’ve been following this debate, this change makes Samir’s editorial even MORE relevant, as both Toyota and GM report their sales in the same way. First, thanks to AGR for sticking to his guns. All of us at TTAC– including our esteemed commentators– are dedicated to telling the truth. Second, thanks to Samir for having the courage and professionalism to carefully consider criticism, investigate the facts of the matter, and make the appropriate change. Third, my bad. I apologize for not fact checking this article more thoroughly. Rest assured that TTAC is dedicated to editorial accuracy. When we get it wrong, we put it right. More than this we cannot do.
It was an excellent discussion, quite enjoyable.
Now that its cleared up, and we are going to get out of the trees, the forest that Samir is referring is the fact that Toyota can achieve results in a much “leaner” fashion than GM or other manufacturers.
By taking waste(inventory) out of the distribution system it helps Toyota make more money as well as the other stakeholders.
In the US Toyota still has wholesale distributors – Southeast Toyota is one example.
The entire process of when a vehicle rolls out the door of the plant, to when its retailed to an end user is not very efficient. It makes sense that Toyota in their constant pursuit of efficiencies constantly fine tunes the system to remove inefficiencies.
The ideal system would be one of built to order, components roll into an assembly plant on a JIT basis, but when it rolls out its a different story.
There are lean distribution systems, to out of control distribution systems, and everything in between. Most dealers order their vehicles,with the colors and specs that they want for their market. If a manufacturers just builds we know what can happen. Dealers constantly trade vehicles among themselves to facilitate a retail sale.
This is an informative link, although most of the information is for members only http://www.icdp.net/
“GM has to train mechanics for so many models, and different parts etc, it is very wasteful.”
I’m pretty sure thats why GM has always been on top because they’re parts have ALWAYS been inter-changable. They’re motors have always been the easist to work on. GM shares a lot of the same motors. The 2500 truck has (i think) a LQ9 6.0 and the Corvette has the LS2 6.0- two completely different vehicles, but motors are almost identicle. Explain to me how thats wasteful and how Toyota does better than that.
Samir – Nice piece. Valid conclusions. Too bad you took so much heat for it.
Farago – Well handled edit.
jmack91z28: I think you’re right. The analogy to Southwest isn’t really fair for something like this – Toyota and GM have about the same number of different drivetrains. The real problem with all the competing brands (IMHO) is one of marketing and confusion, not maintenance.
Why do people generally have a better experience at a Toyota or Honda dealership than they do at a Chevy dealer?
As far as warranty and goodwill repairs go, my thought is that Toyota and Honda seem to generally give the dealership more leeway to make the customer happy than does GM. GM (and most other makers) seem intent on managing down warranty expenses using tactics very similar to the way health insurance companies manage down expenses.
I had that experience when my Saturn Vue broke down while on vacation. Luckily it was in a city with a Saturn dealership (only Saturn dealerships are allowed to perform warranty work on Saturns). I was standing there listening to the dealership’s mechanic argue with GM about providing me with a rental so I could get home, as they had to order the parts and the repair was going to take a minimum of four days (actually took five days). I also had to argue with GM about getting them to pay to tow the vehicle to the dealership when it broke down on a Saturday night.
On the other hand, I read a story about the Toyota dealership in Nampa, Idaho, (just west of Boise) where they ripped off a senior citizen with a cognitive disorder (how do these people get a driver’s license)and were being sued by one of the man’s children. So, to say that GM has bad dealerships and Toyota has good ones is unfair to the individual dealerships.
Samir,
Nice piece.
You often hear that the ‘ideal’ inventory level is 60 days. Even with that GM would be at a disadvantage.
How much extra working capital does GM need because of this and what is their earnings hit?
For financials, GM and all the others report sales when they are shipped to a dealer. (There is a cost of sale liability on the books to move the metal to a retail customer.)
The manufactures in thier monthly sale reports, report retail/fleet sales – sales that were delivered to end user mainly via dealers.
So Simar and AGR were both right.
None of this matters for the analysis because GM has had the same problem for years and Toyota has not. The dealer inventory just creates a lag effect.
Bottomline the 100 days supply at GM dealers vs. 30 days at Toyota’s HOLDS.
But the analysis failed to take into account the percent of vehicles GM and Toyata sells to fleets.
GM runs around 30% and these sales are immediate and for NO profit. These numbers are in Simar’s analysis so the dealer intentory vs. sales problem is even worse than reported here given the zero days turn on fleet sales.
My guess is Toyota’s fleet sales are less than 5%. So the Toyota analysis holds pretty true.
After all, how many Toyota’s do you see at Hertz, National etc vs GM’s?
Then on top of all of this is the number of GM dealers vs Toyota franchises. GM has about 6000 vs. under 2k for Toyota.
GM – too many brands, too much production, too many dealers, too many models
Hey Samir,
Why does Gregg Easterbrook hate the Patriots so much?
jmack91z28 As I read this editorial, if it's bashing anything, it's bashing a business model that allows the average on-hand inventory to equal approximately 90 days' sales, when a top competitor has a business model that keeps average on-hand inventory to about 30 days' sales. (Of course, it would be interesting to know whether Toyotas on U.S.-bound ships counted as on-hand inventory. This would have to be balanced against how GM reported the 119k imports included in its annual sales report.) At any rate, if you can refute any of the points Samir made, I'm sure he'd be grateful to read your refutation (witness his response to the issue of how GM and Toyota sales are reported). In the absence of refutation, I must conclude that your appeal to emotion is part of the problem that is keeping American auto manufacturers from solving their problems.