St. Louis, MO
Posted - 02/03/2011 : 8:19 AM
As I said in the last entry, in the normal course of events, inventory buildup in the off season would be financial insanity for dealers because of the interest charges.
But if the interest rate isn't too high and if the storage space is provided by the Motor Company warehousing then isn't necessarily bad for dealers. Especially if during the time they must buy and store, the interest rate is lower. Much lower. As in paid for by the Motor Company.
And this was, what happened, it seems:
H-D's own financial subsidiary, HDFS does a great deal, if not the majority, of the wholesale financing for the Company's dealers, and offers a "dealer participation program" which they "enhanced" in the second quarter of 2004. While I do not know the details of the original nor enhanced versions, I do know this:
According to H-D's 2004 Annual Report, HDMC paid HDFS a total of $29.4 million of interest from 2002-2004 with $11.8 million of it paid in 2004or about 40% of the total. The report says, "This interest is paid on behalf of HDMCs independent dealers as an incentive to purchase inventory during winter months" (p. 61). Iow, H-D was paying HDFS the interest on those bikes many of which were warehoused, which H-D was also paying for. (Just for the record, H-D dealers also get a financial reward for every loan/credit card that's made through their dealership).
This statement in the Annual Report cannot be reconciled with the Company's insistence that purchases met demand. Unless they meant HDI corporate demands and not dealer or customer demand. Once again, it appears that H-D is not telling the truth.
While I certainly understand the concept of incentives and agree they can be a good thing and a needed thing, paying for both the warehousing of additional bikes and the interest on those bikes seems to go far beyond the norm, doesn't it?
Whether this may or may not be legal is one issue and it very well maybe. And, and this is where the ILC of the Eaglemark Bank comes in since the parent company can influence the existence and terms of the interest rates. HDI is certainly authorizing the Motor Company to pay that interest on those bikes as well as the storage.
I suppose this may also be seen as good business strategy; winter financing removes some of that seasonal effect from HDFS, but it's, in a sense, illusory since it's robbing Peter to pay Paul - shifting money from the Motor Company to the financial services subsidiary rather than *making* additional profit.
Just like the warehousing, winter financing its smoke and mirrors that increases the illusion the Motor Company is doing better than it is - that demand is higher than it is.
The question I have is: Would an independent financial service company or bank think it was a wise practice for a Company to pay for the interest AND warehousing? Would they demand higher standards, a greater proof of that there's going to be the demand to sell the bikes quickly? Would they give the same interest rates as the Company's own subsidiary given the risk that those bikes might not sell as quickly as HDI thinks they will? Is HDI banking (ouch!) on its insider relationship with Eaglemark? Or is this the way healthy companies operate all the time?
Because, of course, even if this is legal, historically, there's always a bust after the boom and there's no reason to think it won't happen this time. But there are other economic reasons why motorcycle sales could go splat and the big box dealerships go out of business. If that happens, then eventually those bikes won't sell quickly and further orders will drop even farther and dealerships may not be able to stay in business - especially since big box ones have such high overhead.
If that happens it's HDFS that's holding the bag. But then again, they securitize the loans so losses could be pushed off on those who buy those loans from HDFS who may have pushed them off to some other entity.
The danger with both warehousing and winter financing is, as I see it, if this scheme doesn't work and demand truly and authentically doesn't rise, eventually some Peter will be robbed to pay for Paul's current illusion. Of course, there's other implications like little things like pensions and little stockholder's lifelong savings. But we won't even deal with that aspect.
And this is where the nature of the ILC could lead to abuse allowing the Company to do what other financial institutions may regard as too high risk. If it IS too high risk - I don't know. Not that H-D has abused its relationship with the ILC but then, due to the lack of transparency, we wouldn't know until it's too late, would we?
Regardless, HDI is paying out of their own pocket in two essential ways and writing it against their operating expenses. Maybe that's standard operating (ouch!) procedure, but it seems odd to me.
While Companies create demand all the time, isn't it supposed to be through marketing rather than sleight of hand?
Outside HDI, it's not known how many bikes were purchased this way - was it hundreds or thousands or ten thousand? What that number is and whether it increased, decreased in the past two years or remained the same could say a great deal about the true state of affairs at H-D.
Is it really best for dealers? Or for the Company? Or the stockholders? Who does this really serve? Well, I know some people it serves...