Dealer Suit Rattles FCA Shareholders

Edward Napleton is no lightweight when it comes to automotive sales. His company, the Napleton Group, owns dealerships in Illinois, Florida, Pennsylvania, Missouri and Indiana. It ranks 32nd on Automotive News’ list of the 150 top U.S. dealership groups. Total sales in 2014 were 21,550 new vehicles.

Last week, two dealerships — Napleton Arlington Heights Chrysler-Jeep-Dodge-Ram in suburban Chicago and Northlake Chrysler-Jeep-Dodge-Ram in Lake Park, FL — filed a civil racketeering suit against Fiat Chrysler. The suit alleges that FCA routinely falsifies sales reports by offering dealers large sums of money to report unsold vehicles as sold. The suit alleges specifically that

• FCA officials rewarded district sales managers for hitting sales targets — even though they knew the sales goals had been met only by way of false sales reports.

• One of FCA’s business center managers at one point allegedly offered Edward Napleton a disguised $20,000 payment “to falsely report the sales of 40 new vehicles” at the end of an unspecified month.

• An unidentified competitor conspired with FCA and reported 85 false new-vehicle delivery reports and received “tens of thousands of dollars as an illicit reward” as a result.

Fiat Chrysler, for its part, strongly denies Napleton’s claims, calling them “baseless” and “the product of two disgruntled dealers who have failed to perform their obligations” within their dealer agreements. Now the matter will be turned over to people who make more money per hour than most people earn in a week to resolve.

Suits between auto dealers and manufacturers are not uncommon. So why did this particular legal action drag down FCA’s stock enough for it to lose over a billion dollars in value in one week? Primarily because it may rip the cover off a practice in the auto industry that is far more widespread than a few Chrysler dealers.

“In our opinion, the emergence of these allegations point to a possible weakness in sales quality,” David Lim, senior analyst with Wells Fargo Securities told Automotive News. “We would not be surprised if other OEMs followed a similar tactic to varying degrees.” An unnamed dealer executive added, “Everyone has been doing it for years. If you go after FCA, then you’ve got to go after every [automaker], because everyone does it to some extent.”

Fiat Chrysler is saddled with enormous corporate debt. It has an ambitious goal to reduce its indebtedness by the end of 2018. “The immediate focus for all of us [at FCA] … is to achieve the 2018 plan,” FCA CEO Sergio Marchionne says. “That is the key priority for this house, because achieving the 2018 plan puts this house in a completely different condition about consolidation that must happen.”

The allegations in the Napleton suit have made investors question whether those plans are realistic. Arndt Ellinghorst, analyst at Evercore ISI, says FCA may have more to worry about than just the Napleton suit.

“To be clear, we have no reason to believe that FCA has breached any law in the U.S.,” Ellinghorst wrote. “What we can say though is that FCA carries among the highest dealer inventory level in the industry with passenger car stock of 109 days of supply. In a U.S. market where customer preference is materially shifting towards SUVs and light trucks, [FCA] carries a worryingly high level of dealer stock.”

Even though the auto industry sold a record number of cars last year, everyone is looking nervously down the road. Tougher fuel economy and emissions standards, coupled with the changes some think self driving cars will cause, have many industry observers predicting lower sales in the years ahead. Add in a penchant for shady practices in the car business going back generations — the Volkswagen diesel emissions scandal is just the most recent example — and confidence in the integrity of the industry as a whole is at an all time low.

The auto industry could do without yet another scandal right now.


Steve Hanley

Closely following the transition from internal combustion to electricity. Whether it's cars, trucks, ships, or airplanes, sustainability is the key. Please follow me on Google + and Twitter.