UPDATE 1-Carmakers stuff German market with self-sales
* Dealers and makers account for 3 in 10 new sales
* Dealers get cash incentives to hit registration targets
* Many such vehicles end up discounted on 2nd-hand market
* Even luxury makers' self-registrations rising
FRANKFURT, July 31 (Reuters) - Europe's largest car market is in recession, but few outside the industry would know it, thanks to a controversial sales practice that inflates official statistics and paints a flattering picture of demand.
Three in every 10 new vehicles in Germany, including luxury BMWs, are sold not to customers, but to carmakers and their dealers - a type of automotive industry pump priming known as "self-registration". At nearly half a million such registrations in the six months through June, the total is greater than the entire new car market in Spain.
So while official figures show a 0.7 percent rise in German car sales for the half year, figures from auto market research firms Dataforce and BDW Automotive show private demand fell 5 percent in the period, which would mean all the growth had been manufactured by the manufacturers.
"Essentially, the carmakers are deceiving their shareholders, since they make it look as if the vehicles were actually sold. They want to pull the wool over their eyes," said Ferdinand Dudenhoeffer, head of automotive thinktank CAR at the University of Duisburg-Essen.
Industry watchers say manufacturers across the board are paying dealers cash bonuses that can be worth 3-4 percent of a vehicle's listing price to reach targets linked to the number of new cars registered as officially sold, whether or not there is a real customer behind that purchase.
GM France President Yves Pasquier-Desvignes warned the tactic can have a "devastating cost" for dealers, who might, for example, boost their test-drive fleets to meet registration goals, but then end up caught in a vicious circle.
"If you push at the end of one month, you start the next one in deficit because you've registered a car you still have to sell," he said.
And when dealers can no longer keep it up, carmakers do it themselves. As a result, the two account for a combined 30 percent of the new car market, making the industry the second largest source of demand behind only private customers, who account for 39 percent.
"The phenomenon has really been the increasing number of vehicles registered directly by the manufacturers themselves," said Marc Odinius, who tracks the phenomenon as general manager for Frankfurt-based Dataforce, explaining that carmakers' own share of the new car market had risen to 9 percent currently from 5.5 percent in 2009.
"I have to admit I was surprised how high self-registrations are," said Gareth Hession, vice president for research at auto industry forecaster JATO. "It seems that people are burying their head in the sand."
PRICING POWER COMPROMISED
While new car sales last year were flat compared with 2007, the volume of used cars sold has been steadily growing, rising 8.7 percent over that period, which would chime with a rise in self-registration vehicles subsequently shifted as used cars at discounts that can reach as much as a third of the list price.
"If employed over a long period of time, this is an enormous danger since they completely erode all pricing power, and manufacturers can no longer expect customers will pay more for a car in the future," said Peter Fuss, Senior Advisory Partner at Ernst & Young's Global Automotive Center.
A classic example of where endemic discounting can lead was demonstrated in the United States after the Sept. 11 attacks.
"This cut-throat competition waged through rebates and incentives resulted in nearly all North American carmakers and major suppliers filing for bankruptcy protection at one point or other, with the exception of Ford and Magna," explained Fuss.
Some self-registered vehicles are legitimately needed as corporate cars for employees or test drive vehicles for dealers, and Dataforce's Odinius points out that there are more than 400,000 domestic auto workers who might run cars registered to the manufacturer's own fleet, more than three times the figure in France. And there are also more dealers relative to Germany's population than in other European countries.
But the head of the German Federation for Motor Trades and Repairs (ZDK) argues that 15 percent is sufficient to cover the natural industry needs, while the other half just wind up as used cars that have to be marked down heavily.
"If you stripped out those distressed vehicles registered only so they can gather dust on the parking lot of a dealer or manufacturer, then the size of the German new car market would have been below 3 million vehicles last year (instead of 3.17 million)," ZDK President Robert Rademacher told Reuters.
"And it's not only irresponsible but also counterproductive to use force to jam these vehicles down the market's throat, since it doesn't lead to higher sales in the end. It only creates distortions down the road."
LUXURY BRANDS, TOO
"It's a problem that has continued to spiral upwards, reaching gigantic proportions," said Albert K. Still, Chairman of the multibrand dealership chain AVAG Group, which has annual turnover of 1.34 billion euros.
Few carmakers want to discuss the issue.
The German auto industry association VDA, which represents brands like Volkswagen and BMW, called figures from Dataforce and BDW Automotive that listed 480,000 self-registered cars in the first half as "exaggeratedly high".
The rival foreign carmakers' association in Germany, VDIK, downplayed the issue, saying the figures were not much above the average figure of 25 percent over the past dozen years.
"Even a small increase is hazardous, though, since it almost certainly will be a pure incremental rise in distressed vehicles as opposed to an expansion in the natural number of self-registrations," JATO's Hession said.
For makers battling for survival, even razor-thin margins are better than none at all, but successful makers selling luxury cars also rely on the practice.
"I would be somewhat more sympathetic were it just carmakers like Opel or Peugeot reaching into their bag of tricks out of desperation, since they depend so heavily on demand in austerity-hit southern Europe. But it's not," ZDK President Robert Rademacher told Reuters.
All three German premium brands sold at least a fifth of their domestic volumes back to themselves or their dealers, with BMW's own flagship marque coming in the highest at 29 percent, even eclipsing the VW brand.
When shown the data for his BMW brand, Chief Executive Norbert Reithofer said he was not involved in the specifics and deferred all questions to his sales chief, who was not present, before finally arguing such measures were encouraged by the media's focus on volume rather than returns.
"I would rather forego selling 2,000 cars with borderline contribution margins, but it's a balancing act," he said. "You also have to consider what impact this might have on market share and how long it would take before you've gained that back."
A spokeswoman for BMW later said it offered incentives to dealers to boost the number of customer test drives, and as a direct effect there was a greater number of self-registrations.
IRRATIONAL RACE FOR VOLUME
ZDK's Rademacher is scathing. "It's precisely the premium automakers that are engaged in an irrational race for volume, although they are the ones that should be avoiding even the slightest semblance of using force. Registering cars for customers that don't actually exist is not befitting of a luxury brand."
Although premium makers are in good financial health, AVAG's Still said they nevertheless had a strong short-term incentive not to follow their own advice to build one car fewer than they can sell to maintain exclusivity.
"Once they have covered their fixed costs - development, depreciation and so on - each incremental car that they sell on top reaps fat profits, since then it just needs to cover the marginal costs for some raw materials and wages," he said.
BMW is not the only successful carmaker to increase self-registrations. Hyundai's first-half volumes in Germany rose over 17 percent and its share grew to 3.2 percent - catapulting it past established European rivals Peugeot and Fiat this year.
Figures from the ZDK and Frankfurt-based market researcher Dataforce indicate, however, that the number of new Hyundais sold to either the company or its dealers nearly tripled during the period, accounting for 42 percent of overall volume.
Hyundai Motor Germany told Reuters its sharp rise was due to temporary factors like the launch of five new models and a promotional roadshow in 25 German cities to woo fleet customers. But it also admitted catering to those buyers wanting a new car for the price of a used one.
"Our dealers are also handling demand from customers seeking 'one-day registrations'. These cars are being sold on shortly after registration," said Managing Director Markus Schrick in an emailed statement, adding the process was "closely managed" by Hyundai Motor Germany and its dealers.
The extent to which self-registrations are used to inflate market figures elsewhere in Europe is difficult to estimate, since neither manufacturers nor dealers have any way of reliably tracking the development, although GM's Pasquier-Desvignes puts it also at about 30 percent.
"It's incredibly difficult getting statistics on what the number of self-registrations actually is. I don't know of any for Europe as a whole," said JATO's Hession, himself a former DaimlerChrysler sales planning manager.
Had Germany's new car market not managed a modicum of growth, western European new car registrations would have shrunk at a much faster rate than the first half's 6.9 percent. Excluding Germany, the rate of decline was 9.2 percent.
Rademacher's pleas to carmakers to "accept reality" and stop stuffing the market appear to be falling on deaf ears.
"We can only appeal to the reason of the manufacturer, something we do at every possible opportunity. But unfortunately reason is a rare commodity in this world," said Rademacher.
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