GM warns allocation scammers

DETROIT -- General Motors is cracking down on dealers who it says are "gaming" its vehicle-ordering system to finagle more cars and trucks than they deserve -- a problem that has grown as retailers struggle to get popular models in light of GM's tighter production schedules.

In a Jan. 9 memo to its 4,500 U.S. dealers, GM said it has uncovered "significant ordering and reporting abuses" by some dealers trying to snag more vehicles. GM acknowledged that a shift to a "lean-inventory environment" is prompting some dealers to break the rules.

The memo threatens to punish violators with fines of $500 per incident, cutting off incentive cash or terminating their dealer agreements.

One practice cited by GM: "false transfer of products," which can inflate dealers' sales figures or artificially shrink their inventory. Both result in a higher number of units being allocated under GM's so-called turn-and-earn system, which parcels out vehicles based on past sales volumes and inventory levels.

A sham transfer could work like this: A dealer moves five GMC Acadias from one of his stores to another, or even to a fellow dealer's lot, just before GM takes its monthly survey of his inventory. The dealership's inventory will appear smaller than it truly is, so GM will direct more Acadias his way the following month.

Another tactic: bogus "sold orders." When a dealer places an order for a customer who has put down a deposit, that order moves to the front of the line of GM's allocation system. But often there's no buyer waiting, and the vehicle simply goes onto the lot. GM estimates that 30 percent of its supposedly sold orders arrive at dealerships with no customers waiting to buy the vehicles, says one person familiar with the matter.

The crackdown underscores just how sharply GM's production strategy has changed from a few years ago, when the company was stuffing dealers' lots with more vehicles than retailers could handle. That led to profit-eroding discounts that crippled resale values and contributed to GM's 2009 bankruptcy.

Now dealers often are begging for hot models, with some resorting to phony orders and other sleights of hand to juice their allocation.

"We're clamoring for cars. The production system right now can't keep up with what dealers want," says Greg Heinrich, a dealer with three Chevrolet stores in Nevada.

GM's memo, signed by the vice presidents of sales for Chevrolet, Cadillac and Buick-GMC, says dealers who use "falsely reported transactions" are violating their dealer agreements. An accompanying document adds: "The leaner production and inventory environment has unfortunately resulted in extensive 'gaming' of the system."

Officially, GM worries about liability exposure: If dealers report false transactions, it makes it harder for GM to notify customers of safety recalls, the memo says.

But it's also a potential sales problem. GM's allocation system is designed to get cars and trucks to dealers who can turn them fastest. If some dealers are intercepting vehicles destined for others, it could impede overall sales.

"It's important that GM gets the product where it's going to turn most quickly," says Steve Hurley, dealer principal at Stingray Chevrolet in Plant City, Fla., and co-chairman of the Chevrolet National Dealer Council. Hurley says the council supported GM's scrutiny of the gaming issue because "dealers are concerned about fairness."

Two main factors are driving dealers to bend or break GM's rules to get more vehicles.

1. Tighter inventory. GM and the other Detroit automakers have abandoned their previous "push" model of jamming dealer lots and are more closely matching production with demand. GM dealers still are getting used to having fewer models and trim levels on their lots.

As of Jan. 1, GM dealers across all brands had a 67-day supply of vehicles, down from 86 a year earlier -- but above the days supply levels at Chrysler, Ford, Volkswagen, Toyota, Honda and Hyundai.

Dealers always fight to get hot products, but it's gotten tougher over the past year. The Chevy Equinox and GMC Terrain crossovers, as well as the GMC Acadia, Chevy Cruze and some trim levels of the Chevy Silverado and Suburban were scarce at certain times last year, dealers say.

2. Volume-based bonus cash. Most GM dealers get cash for every retail vehicle they order under an incentive program GM started in late 2009. To reward dealers for improving customer service through better employee training or for facility renovations, for example, GM's Essential Brand Elements program pays quarterly cash bonuses based on order volumes. The more vehicles dealers are allocated, the bigger their bonuses.

That program has become a lifeline for dealers. It can mean $50,000 a year for small dealers and $1.5 million or more for large ones. Many dealers say it can make the difference between staying in the black or not.

GM spokesman Tom Henderson says the automaker has found only a "small number" of dealers who have been cheating. He says GM routinely scans for improper vehicle transfers and other methods dealers might use to inflate their allocations.

"There was a pattern that was identified. We decided to go ahead and issue the policy to nip it in the bud before it became pervasive," Henderson said.

Lynn Thompson, a Springfield, Mo., dealer who sells Buick, GMC and Cadillac vehicles, says it has taken time to adjust to GM's tighter inventories. He relies on dealer trades -- a common practice that doesn't violate GM's rules -- far more than he did in the past.

He still ends up short occasionally. Over the past year, Thompson has gone more than a month at a time without any GMC Terrains on his lot, although availability has improved recently.

"If dealers are working the system to get more inventory than they deserve, that's hurting me," he says. "I guess down here in the country I'm not smart enough to work the system, nor do I want to."

But when he calls his zone rep about getting more cars, he says, "I'm not against begging."