Cars sit on the used lot of Parkway Chrysler Mississauga on Wednesday, June 17, 2015. A number of Chrysler dealers are selling 2014 and 2015 cars, often with fewer than 200 km on the odometer as "used" vehicles.J.P. MOCZULSKI/The Globe and Mail
Chrysler widely touts its position as the No. 1-selling car company in Canada and monthly sales figures back up the claim. But an abundance of used 2015 and 2014 vehicles on dealership lots – some with just a single kilometre on the odometer – raises questions about the tactics the auto maker has used to keep sales humming.
Several sources say Chrysler, officially known as FCA Canada Inc., employs an incentive program that encourages dealers to buy new vehicles through their own leasing or rental car companies in order to meet monthly sales quotas and earn bonuses. Many of those cars, trucks, minivans and sport utility vehicles are then sold by the dealers as used, with just a handful of kilometres on them.
These new car purchases by dealers boost their monthly sales figures and have helped push FCA Canada to the top spot in the Canadian market, even though no end user has bought the vehicles.
A review of the websites of scores of dealerships in communities as diverse as Nanaimo, B.C., Estevan, Sask., and Mississauga, shows dealers holding dozens of "used" 2015 or 2014 model year vehicles – some are sitting on low-kilometre cars and trucks from both years – with between zero and 200 kilometres on them.
Auto makers compete fiercely for sales. Such tactics as offering eight-year interest-free loans, cash incentives and subsidized leases are embedded in almost every vehicle sale in Canada as auto makers battle for market and segment leadership titles and strive to meet internal sales targets as well as those set by their head offices in Detroit, Asia and Europe.
But many auto insiders believe so-called stair-step bonus systems, practised by FCA Canada and a handful of other car companies, are leading to risky and questionable sales methods that are causing tensions within the industry.
Under a stair-step program, the vehicles that dealers buy themselves are registered, triggering a sale notification to head office, said several dealers who own franchises selling vehicles for companies offering such bonuses. They are called that because the bonuses rise as percentages of the target sales amount are met.
Critics say the stair-step incentive programs distort the market, get dealers addicted to bonuses as their sole source of profits and can leave dealerships stuck with vehicles they are unable to sell if a hot market suddenly cools off, as it has in Alberta and Saskatchewan because of the plunge in the price of oil.
"There's nothing illegal about it," said one auto industry veteran, "but it undermines the brand value of any company. Why would you buy a new vehicle from a car dealer? If you just wait, you can buy it at a deep discount used."
The FCA Canada bonus system is called volume performance allocation. Other auto makers, such as Nissan Canada Inc. offer a similar program.
"You sell them to yourself and then you sell them on the used car lot as a used car," said one FCA Canada dealer who insisted on anonymity but described how fixated dealers are on hitting their targets. "The last week of the month is a gong show. In the last week, are you going to start selling cars under cost to hit that number? Of course you are."
Bonuses to dealers under the FCA Canada program can run to more than $1,500 a vehicle or $1.8-million annually for outlets that sell 100 new vehicles a month.
"Once we register them they become sold, so the next sale is theoretically a used car," another FCA Canada dealer said. "It's pervasive, it's all over."
FCA Canada president Reid Bigland refused to agree to interviews on the topic, but said in an e-mail through a company spokeswoman that he estimates a "couple per cent" of the 115,000 vehicles in dealer inventories are vehicles with fewer than 1,000 kilometres on them.
Many of the vehicles are loaners or demonstrator vehicles, Mr. Bigland said. To be counted in the company's monthly sales totals, they must be put into service, registered and have licence plates attached, he said.
He refused to say whether there are limits on the number of vehicles dealers can place in their loaner fleets.
When asked whether such deliveries should be counted as new car sales, he responded: "We 100 per cent stand behind our monthly sales numbers."
Senior executives at FCA Canada's chief rivals would not directly criticize their competitor's actions.
But Ford Motor Co. of Canada Ltd. president Dianne Craig said she is frustrated that there appears to be no industry standard as to what constitutes the actual sale of a new vehicle.
"There isn't really a robust process to be able to make sure that there's a level playing field," Ms. Craig said.
Ford Canada offers stair-step incentives, she said, but sets targets that dealers can reach with normal sales practices.
"If we were to change our plans down the road and our dealers became so addicted to that money for livelihood and their profitability, then that's not good for them long-term."
David Paterson, vice-president of corporate affairs for General Motors of Canada Ltd., said the company agrees with concerns that accuracy, consistency and transparency in monthly sales reporting are important to the integrity of the industry.
Low-mileage used vehicles can appear to be a good deal for consumers because they can purchase a "used" vehicle that has barely been driven – if at all – for a lower price than a brand-new car or truck.
But they need to be aware that the warranty clock on a new vehicle begins ticking once it has been registered as sold. That means some of the used 2014 vehicles on dealers' lots may have less than one year of warranty left on them, depending on when the initial sale was registered.
Dealers insist that part of their sales process for such vehicles is to inform buyers that they're not getting the full three-year FCA Canada new car warranty.
The warranty issue arose last year in Ontario, where the Ontario Motor Vehicle Industry Council, which regulates some aspects of car buying in the province, warned in a bulletin that consumers need to be informed that the full warranty on such vehicles may not be available.
"OMVIC has heard allegations from concerned dealers that some manufacturers are requiring them to purchase or to designate new vehicles as sold, even though no bona fide customer has actually purchased the vehicle," the bulletin said. If the full warranty is not available, that fact must be disclosed prominently on the bill of sale, the regulator added.
Beyond being able to market itself as the bestselling auto maker in the country, one motivation for FCA Canada permitting the proliferation of nearly new vehicles on its dealers' used car lots appears to be the age-old reason of keeping cash flowing amid high debt levels at parent company Fiat Chrysler Automobiles NV.
"In our view, Chrysler has prioritized volume over profit – which, thanks to long working capital terms – has allowed it to generate cash," AllianceBernstein LP analyst Max Warburton said in a research report on FCA.
Mr. Warburton noted that FCA's profit is "bizarrely poor" in light of the robust U.S. market, where, similar to its performance in Canada, the company has increased sales and market share, and benefits from the boost low gas prices has given to pickup trucks and sport utility vehicles, segments where FCA is strong.
One reason for its underperformance versus Ford Motor Co. and General Motors Co., he wrote, is aggressive sales actions that don't appear in the incentive data issued by industry analysts.
Among those actions is "flooding dealers with excessive numbers of service loaners … which are first booked as new-car sales and then flushed into the used-car market with as little as five miles on the odometer," he wrote.
His report included a link to the used-car section of the website of Parkway Chrysler in Mississauga, which lists 59 used 2015 models with fewer than 200 kilometres.
Parkway Chrysler is part of Car Nation Canada, a Burlington, Ont.-based dealership group. Car Nation president Rick Paletta did not respond to telephone messages. An e-mail sent to a "contact the president" e-mail address on the Car Nation website was not answered.
Other dealers whose websites show a number of low-mileage used vehicles did not reply to telephone messages or would not comment.
"I don't want to comment on that," said Bourk Boyd, who owns Team Chrysler and Ontario Chrysler, both located in Mississauga. "They're used cars." The Ontario Chrysler dealership shows dozens of used vehicles with fewer than 200 kilometres.
Vehicles with similar low mileage are also present on the websites of several dealerships that sell Nissan vehicles and cars and crossovers for that auto maker's luxury Infiniti brand.
Dealers said Nissan Canada is aggressive when it comes to setting targets and pushing dealers to meet them. The company bills itself as the fastest-growing automotive brand in Canada. It has a target of grabbing 8 per cent of the Canadian market by 2016, as its part of a global goal set by Nissan Motor Co. Ltd. chief executive officer Carlos Ghosn. Through the end of May, Nissan Canada's market share stood at 6.7 per cent.
Vehicles are not included in the Canadian unit's monthly sales totals until they are bought by an end user, Nissan Canada spokesman Didier Marsaud said in an e-mail exchange.
"We are aware that a few dealers choose to sell aggressively priced, new vehicles through their used channels," Mr. Marsaud said. "This is not a marketing tactic we encourage."
As far as Nissan Canada knows, he said, dealers are not buying vehicles for their own leasing or rental companies, recording a sale and then listing the low-mileage vehicles as used.