Volvo Says Chinese Dealers Inflated Sales to receive cash incentives

March 22, 2013, 9:07 a.m. ET

Volvo Says Chinese Dealers Inflated Sales


STOCKHOLM—Volvo Car Corp. said Friday some of its Chinese dealers inflated sales figures to receive cash incentives in 2011 skewing annual comparisons that led the company to disclose it lost ground in China last year when it had actually increased sales in the key market.

The struggling Swedish auto maker launched an internal investigation last year and found that dealers reported more retail sales than they conducted during 2011, Volvo Cars spokesman Per-Åke Fröberg said on Friday. To make the books match, the dealers didn’t report the sales executed in 2012 that were falsely booked in 2011.

Volvo, which was acquired by China’s Zhejiang Geely Holding Group Co. fromFord Motor Co. F 0.00% in 2010, has staked much of its future hopes on the Chinese auto market and highlighted disappointing sales there as a reason for firing former Chief Executive Stefan Jacoby last year.

“Our incentive program at the time created a transparency problem that meant that reported sales to end-customers didn’t reflect the actual retail sales,” Mr. Fröberg said in a telephone interview. “But this is not about cheating, the dealers acted within the rules of the incentive program at the time and that created ambiguity.”

The issue of Volvo’s sales reporting discrepancies was reported by Reuters on Friday, with the news agency citing an unnamed source claiming the auto maker misstated sales by several thousand vehicles over a two-year period.

Volvo previously reported that Chinese retail sales plunged 11% to 41,989 cars in 2012 from the 47,140 it initially reported selling in 2011.

Mr. Fröberg declined to go into detail on how many sales were erroneously booked in 2011 and 2012, and said Volvo won’t change the historical retail sales figures to reflect the actual numbers. Monthly comparisons as a result won’t be accurate until midsummer.

“We’ve decided to look forward and not adjust old numbers,” he said. “To go into an accounting exercise on how many were actually sold won’t create clarity but rather add more confusion,” Mr. Fröberg said.

The discrepancy won’t impact Volvo’s earnings since the company books profit on wholesale deliveries instead of retail sales, Mr. Fröberg said.

“It’s of course important that our sales numbers match reality as otherwise it creates ambiguity both for us and others,” he said.

Incentive schemes gone awry are common in the world’s largest auto market, Stephen Dyer, partner at management consulting firm A.T. Kearney’s Shanghai office, said. “This is typical of China, where the auto industry is based purely on a push sales model from car manufacturers to dealers instead of a pull approach from consumers.”

Auto makers stuff sales channels with cars to dealers who then offer “crazy incentives” to clear inventory, often damaging the brand, Mr. Dyer said.

China is the only major auto market in the world where official retail figures aren’t available. Instead only production and wholesale data is available.

This lack of transparency of retail sales can skew car production levels, he added. Vehicle-registration data is considered a state secret. “In the U.S. this data is published online,” said Mr. Dyer.

Mr. Fröberg said Volvo’s problem has now been fixed with the introduction of a new incentive program in mid-2012 that tied variable compensation to how many cars the company sells to its dealers rather than how many dealers sell to end-customers. Part of the problem, he said, stems from Volvo’s rapid expansion in China where the corporate culture differs from the company’s traditional western markets.

“We’ve had a very rapid expansion of our dealership network and sales organization and I think this is a result of that. Training, and introducing everyone to how Volvo works, takes time and that’s something we’re focusing on now,” Mr. Fröberg said.

The fact that Volvo actually increased its Chinese sales in 2012 hasn’t changed the auto maker’s rather pessimistic view of its own performance there. “We had a better result in China than what our official numbers show, but we are nonetheless not entirely satisfied with the result,” Mr. Fröberg said.

Volvo in February said it would cut about 1,000 jobs and slash 1.5 billion Swedish kronor ($236.8 million) in costs by the end of this year in order to reverse recent losses stemming from a sluggish European auto industry and its own struggles to keep up with rivals.

The company’s struggles come as it is looking to execute an $11 billion revamp that includes a new vehicle architecture and engine family as well as new factories in a bid to double its production to 800,000 cars by 2020. In 2012, sales fell 6% in 2012 to 422,000 cars world-wide, and the company has said it is unlikely to break even this year.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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