How Believable Is Fiat Chrysler's Unbelievable Turnaround?
The U.S. arm of Fiat Chrysler Automobiles (FCAU) - Get Report , left for dead during the Great Recession, has turned into a stunning success story, churning out monthly sales figures that would have been all but unthinkable just a few years prior. U.S. regulators are now digging in to see how real those sales figures really are.
Fiat Chrysler said it is cooperating with a Justice Department and Securities and Exchange Commission investigation into sales reporting, with the company previously calling allegations of inflated sales "baseless." Investigators, according to reports, have met with a number of regional managers, seemingly following a trail laid out in a civil suit filed by two Chicago-area Chrysler dealerships.
Chrysler, the runt of the U.S. auto industry, would have been left to fail as part of the 2008-2009 government-backed bailout that was more focused on saving the larger General Motors (GM) - Get Report . Fiat, an Italian manufacturer that lacked a U.S. presence, stepped in with a plan to combine with Chrysler and share some of its technology.
In the years since, the company has ridden an industry-wide sales wave, generating some of the best single months in Chrysler's history and boasting more than 70 consecutive months of year-over-year sales gains.
Sales data in the U.S., blurred by separate stats on deliveries and registrations, has always been the subject of considerable finagling. Car buyers know automakers love to roll out extra incentives to try to juice sales near month's end, and on the backside the manufacturers can offer similar inducements to try to get dealers to take hard-to-sell vehicles out of inventory to be used as loaners.
Those vehicles sometimes end up sold as used by the same dealers with few miles on them. And automakers argue that there are solid marketing reasons for keeping a dealer's loaner fleet updated with the newest and best models, giving additional customers an opportunity to see what they are missing out on by driving something older.
The question at hand is whether Fiat Chrysler crossed the line between sales gimmicks and outright deception. In the civil suit, the DOJ is seemingly basing its investigation on a Fiat Chrysler regional manager who allegedly instructed a dealership to falsely mark 40 vehicles as sold in exchange for a $20,000 advertising support credit. The sales were then to be backed out of the system after the first of the month, before all of the processing on the vehicle was done.
Chrysler, in a regulatory filing earlier this year, said an internal investigation had concluded that such allegations were baseless and the result of disgruntled dealers. The company has requested the civil suit be dismissed, though separate cases are fermenting elsewhere.
The company also noted this week that in regulatory filings it records revenue based on shipments to dealers and customers, and not based on reported unit sales to end customers. It is possible then that even if investigators do find inappropriate use of incentives they will not find any errors or fraud on financial statements.
Worth noting that this alleged sales padding came during a period where Fiat Chrysler CEO Sergio Marchionne was actively trying to sell the company, publicly lobbying for a deal with General Motors among other potential suitors. Marchionne has argued that for all of the progress made turning around both Fiat in Europe and Chrysler in the U.S. the combination still lacks the global scale needed to compete, and due to its relatively smaller size will have a harder time investing the billions needed to develop new driver-train technologies and in-cabin systems.
Though the M&A effort to date has been unsuccessful, it is pretty easy for a company skeptic to make the case that management had ample reason to want to make sure sales momentum looked as strong as possible.
No matter what the investigators find, the Chrysler resurgence since 2008 remains one of the more unlikely rebounds in the history of the U.S. auto sector. In the months to come we'll find out just how impressive the turnaround really was.