Thursday, 6 December 2012

Chinese companies face tough sell on US IPOs

 
 August 22, 2012 9:35 pm

By Rebecca Wen in Shanghai


http://www.ft.com/intl/cms/s/2/61daa2fe-ec93-11e1-8e4a-00144feab49a.html#axzz2EI59w2Yd

This article is provided to FT.com readers by dealReporter—a news service focused on providing insightful intelligence on event driven situations to investors. www.dealreporter.com
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Chinese companies continue to aim for initial public offerings in New York despite facing a tough sell with skeptical investors that have rejected foreign and domestic deals alike.
“There is no fundamental change to the problems haunting this market,” an equity capital markets banker told dealReporter. “High valuations the companies ask for, legal structure issues and the economic slowdown in China all raise concerns among investors.”
Add to that ongoing market volatility, corporate governance scandals, privatizations and cut-throat domestic competition and Chinese entrepreneurs have their work cut out for them.
Nasdaq-listed Changyou.com said earlier this month it plans to spin off its internet game unit 7Road.com in a US IPO. Liu Qiangdong, chairman of Chinese e-retailer 360buy.com, said the company would raise as much as USD 5bn on the Nasdaq next year, and Beijing-based mobile internet services provider UC Browser’s CFO Rong Shengwen said the company is planning an IPO in the US, according to media reports.
Drug maker Newsummit Biopharma and auto rental services eHi Car Rental are planning US listings, while Lashou, a discount website operator, Cloudary, the online publishing arm of Shanda Interactive, and China Auto Rental all plan to try to come back to the market after shelving previous US IPO attempts, sources familiar with the matter said.
“It is not a problem with any particular industry, but a difficulty confronted by companies from across different industries,” the banker said.
VIPshop [VIPS: NYSE] was the last Chinese company to get listed in the US. Since its IPO in March its shares have dropped 6.73%, while the Dow Jones Index is up 0.94% and the S&P 500 is up 1.14%.
That and the consecutive failures of IPOs from discount website operator Groupon [GRON:NASDAQ], Zynga [ZNGA:NASDAQ], a gaming firm that distributes over social media, and social networking site Facebook [FB:NASDAQ] have helped to cast a pall over Chinese companies, which have often looked to ride on the coat tails of deals done by their US counterparts.
Groupon’s shares are down 82.18% since listing in November last year. The Nasdaq Index is up 14.51% over the same period. Zynga’s are down 44.84% since listing in December last year while the Nasdaq is up 14.73%. Facebook’s are down 47.34% since listing in May this while the Nasdaq Index is up 9.33%.
“Foreign investors usually value IPOs from Chinese companies based on what they are familiar with in the US, as many of them copied their business model from the US,” said one banker that has worked on several Chinese IPOs bound for New York.
Such issues didn’t plague an earlier generation of Chinese Internet companies. Chinese web portals Sina [SINA:NASDAQ] and Sohu [SOHU:NASDAQ] successfully followed Yahoo [YHOO:NASDAQ], online travel agency Ctrip.com International followed Expedia [EXPE:NASDAQ] and web search engine Baidu [BIDU:NASDAQ] followed Google [GOOG:NASDAQ].
In the years when these companies kicked off, the internet was a much newer business model and there were far fewer venture capitalists looking to put money to work in China.
Now however the number of investor-backed technology firms has mushroomed and it can be far from clear which one has an advantage, or who actually leads the market.
Competition has become so fierce that companies are locked in vicious price wars that sap profitability, making them even less popular with investors.
The offshore legal structures Chinese companies use to list in the US also continue to create uncertainty. In the most recent example, the Securities and Exchanges Commission started an investigation in July into New Oriental Education & Technology Group [EDU:NYSE]. It is focusing on the company’s accounting for offshore businesses and wholly-owned subsidiaries.
A number of US-listed Chinese firms have also opted to go private, citing investors, particularly short sellers, that the companies say don’t understand their business.
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SEC Probe Puts China Listings in Doubt

more in Business »

By KATHY CHU, MICHAEL RAPOPORT and BEN DUMMETT


 http://online.wsj.com/article/SB10001424127887323401904578158652523742958.html

The U.S. Securities and Exchange Commission, investigating alleged accounting fraud in China, has charged the Chinese affiliates of five major accounting firms for refusing to produce audit work papers. The WSJ's Ken Brown talks about how this may affect multinational companies.
HONG KONG—The U.S. Securities and Exchange Commission's high-profile attack on the Chinese affiliates of five major accounting firms calls into question the future of China-based companies listing on the U.S. stock exchanges at a time when accounting scandals have eroded investor appetite for these companies.

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Heard on the Street

The SEC's decision Monday to bring an administrative proceeding against the accounting firms, alleging they refused to hand over documents sought in investigations of suspected accounting frauds at nine Chinese companies, deals a blow to China-based companies already listed in the U.S. as well as those looking to raise capital in the country.
The regulatory action will put a "further damper on Chinese listings in the United States," said Rocky Lee, a Hong Kong- and Beijing-based partner at the law firm Cadwalader Wickersham & Taft, which does due diligence on Chinese assets for foreign institutional investors.
It also significantly increases the chances that China-based firms whose American depositary receipts trade on the U.S. exchanges will be delisted, if regulators in the U.S. and China can't reach an agreement over the disclosure of information, according to Paul Gillis, an accounting professor at Peking University's Guanghua School of Management in Beijing.
"I'm not optimistic that a solution is reachable," Mr. Gillis said. "The biggest loser if it goes down this road is the American exchanges because it makes the U.S. a much less attractive place to raise capital."
Dozens of Chinese companies have raised billions of dollars in the past decade listing their shares on U.S. and Canadian exchanges, before their share prices plummeted following questions about their bookkeeping and disclosures. The 110 largest Chinese ADRs listed in the U.S. have a market cap of $998 billion and average daily turnover of $1.29 billion, according to Macquarie Securities.
The SEC action, if an administrative law judge rules in its favor, could lead to the Big Four accounting firms' Chinese affiliates being barred from auditing U.S.-traded companies—something that could complicate the audits of multinational companies doing business in China. The regulatory moves also stand to heighten a U.S.-China confrontation over how much U.S. officials can do to ensure that Chinese audit firms adhere to U.S. regulatory standards.
"It definitely is ratcheting up the pressure another notch," said Jack Ciesielski, publisher of the Analyst's Accounting Observer.
Chinese audit clients paid the local affiliates of the Big Four $175.2 million in fees in fiscal 2011, according to figures compiled by Audit Analytics, a consulting firm.
U.S. regulators have attempted to investigate alleged fraud at some Chinese companies, and the SEC has filed several lawsuits. But they have been unable to get information from the China-based firms that audit many of these companies, including Chinese affiliates of the Big Four—Deloitte Touche Tohmatsu, PricewaterhouseCoopers, Ernst & Young and KPMG.
SEC Commissioner Luis Aguilar said in a speech Monday that the agency is investigating "accounting irregularities at dozens of China-based companies that are publicly traded in the United States," and that some of the probes "have been hampered by the lack of access to relevant documents."
The SEC maintains that firms that audit U.S.-traded companies have to follow U.S. law, and the Sarbanes-Oxley Act requires foreign audit firms to hand over documents about U.S.-listed clients at the SEC's request.
The firms counter that China's laws treat their auditing documents as akin to state secrets, and that their auditors could be thrown in jail if they turn the documents over to the SEC without permission.
"While it is unfortunate that the two countries have not yet been able to find common ground on these issues, we remain hopeful that a diplomatic agreement can be reached, and we stand ready to assist that effort in any way we can," Deloitte said.
PricewaterhouseCoopers said its Chinese affiliate "has cooperated with the SEC at every opportunity," but "PwC China will, and must, comply with its legal obligations under China law." The fact that the action is against all the major firms "demonstrates that this is a profession-wide issue, not unique to one firm," and should be resolved by negotiations between U.S. and Chinese regulators, PwC said.
KPMG's China affiliate said in a statement that it is "hopeful" that discussions between U.S. and Chinese regulators "will result in a positive diplomatic resolution" to the matter.
Ernst & Young Hua Ming said it "supports close working relationships" with regulators and that it hopes "an agreement can be reached between U.S. and Chinese regulators that will enable our compliance with all applicable laws and regulations."
The commission's administrative proceeding against the China affiliates of the big accounting firms, plus the China affiliate of second-tier firm BDO, alleges that they haven't handed over documents for nine of their Chinese audit clients who are under SEC investigation for potential fraud. The nine companies weren't identified.
BDO referred questions about the case to its Chinese affiliate, which hasn't commented.
The SEC had previously filed two cases against Deloitte's Chinese affiliate over the same issue, but Deloitte hasn't handed over the requested documents. One case has been suspended while the SEC attempts to negotiate with Chinese regulators, according to court documents.
An SEC administrative law judge will hear the commission's cases against the China-based accounting firms. If the judge decides against the firms, they could be suspended from seeking new U.S.-traded clients, or even blocked entirely from auditing U.S.-traded companies.
Separately, in Canada, Ernst & Young agreed to pay $117.8 million to settle separate shareholder allegations that it misled investors of Sino-Forest Corp., a timber company that filed for bankruptcy protection this year amid questions about its disclosures. The settlement disclosed Monday was the largest ever by an auditor in Canadian history, a plaintiff's attorney said. Ernst & Young didn't admit wrongdoing in the settlement, which must still be approved by the bankruptcy court.
The Ontario Securities Commission alleges Ernst & Young didn't exercise enough skepticism in verifying the ownership and major assets of Sino-Forest. According to the commission, for instance, one Ernst & Young auditor in its Canadian affiliate acknowledged in an email to another auditor that the firm had no way of knowing that the trees the audit firm was inspecting were actually owned by Sino-Forest: "I believe they could show us trees anywhere and we would not know the difference." In addition, the commission said, several of Ernst & Young's senior partners at the affiliate involved in auditing Sino-Forest couldn't read or speak Chinese.
Ernst & Young's Canadian affiliate said it was "confident" its Sino-Forest work had met all standards and that the firm "did extensive audit work to verify ownership and existence of Sino-Forest's timber assets."
Ernst & Young said its settlement with shareholders "is without admission of liability" and "will reduce the uncertainty and future burden on our business, and allow us to focus on our people and our clients."
Sino-Forest was one of the largest forest-product companies listed in Canada when a report last year by U.S. short-seller Muddy Waters LLC alleged fraud at the company. Since then, the Ontario Securities Commission has started administrative proceedings against Sino-Forest, and several of its former executives already face allegations from the commission that they inflated timber purchases; the company is currently trying to restructure under bankruptcy protection. Sino-Forest last year conducted an internal investigation into the allegations, but executives have denied fraud.
—Jean Eaglesham contributed to this article.


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Wednesday, 5 December 2012

Freeport McMoRan embraces Big Commodities

Commentary: Getting the jump on regulators

By MarketWatch
SAN FRANCISCO (MarketWatch) — Glencore International PLC’s blockbuster $62 billion merger this year with mining giant Xstrata PLC put the world’s biggest commodities-trading operations under one roof.
It also stirred a bug to get big that clearly bit Freeport McMoRan Copper & Gold Inc. FCX -16.22% .
Freeport announced Wednesday it’s buying McMoRan Exploration Co. MMR +86.05% , reuniting it with the oil and gas company it spun off in 1994, back when “unlocking shareholder value” was in vogue. The two had always remained close, even sharing a chairman.
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Will stocks drop in January 2013?

Now that we're at the beginning of a new presidential term, we should expect below-average returns for the stock market - right?
Freeport is also buying Plains Exploration & Production Co. PXP +23.88%  . Plains, a petroleum producer with a 31% stake in McMoRan Exploration, was practically family anyway. Read about Freeport's move into energy.
All told, it’s a $9 billion deal aimed at creating what Freeport calls a U.S.-based natural-resource company with a diverse portfolio of mineral and energy assets spread around the globe. The focus here is very keenly on building a “natural-resource company.”
Adding oil and natural gas to their production portfolio reflects a gnawing concern at Freeport that the gold and copper markets are looking a bit played out. Freeport is one of many miners that rode the China wave. As Chinese manufacturing cools, so does demand for the red metal. Copper prices are down about 18% from their 2011 highs.
Gold is not that perky either, falling below $1,700 an ounce this week despite all the hand-wringing over the U.S. fiscal cliff. Goldman Sachs even put out a note this morning lowering its 2013 gold price forecast. See; Goldman Sachs cuts gold outlook, sees growing risk.
None of this guarantees oil and gas prices will go up next year, but at least Freeport can tell shareholders it’s spread the risk around.
There’s probably another motivator lurking behind Freeport’s expansion, and it goes back to Glencore UK:GLEN -0.23% .
Through its Xstrata UK:XTA -0.34%  deal, Glencore has amassed enormous pricing power in key commodity markets. It was a bold move that secured the Anglo-Swiss company’s dominance of the zinc market and a huge presence in the global copper and grain trade.
At the same time, the ongoing concentration of global mining operations in the hands of a few big, multinationals and fierce competition for resources from state-controlled companies are raising widespread concerns among economists, politicians and regulators of the historically under-regulated global commodity markets. Are these companies amassing too much clout?
Freeport McMoRan, already the world’s biggest publicly-traded copper producer, isn’t waiting to find out.
The trend is clear: Expand while you still can.
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Apple is starting to falter, as expected

About Thomas H. Kee Jr.

Thomas H. Kee Jr. is the president and CEO of Stock Traders Daily (dotcom), where he offers strategies and newsletters to both institutional and individual investors, and he manages money privately for both institutional and individual investors through Equity Logic LLC. A specialist in technical analysis, Kee is also the founder of one of the leading, longer-term fundamental economic and stock market indicators in history, The Investment Rate. This proprietary tool, which is available to clients, too, predicts major economic cycles well in advance, and has been accurate since 1900. Using his broader observations of the economy to define disciplines, Kee has been able to accurately predict market cycles in advance using his multi-tiered technical indicators, and that combination has kept him ahead of the curve since starting Stock Traders Daily in January 2000.
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By Thomas H. Kee Jr.
At the end of the first quarter of 2012, I warned that Apple may be reaching its pinnacle-point as a business. Since then, there have been warning signs, too, some top executives departed from the company, and recently I heard something much more tangible to the earnings growth that persisted throughout the year thus far.
In the first quarter, I warned that Apple was not treating its customers right, they were gouging the service providers like Verizon, Sprint and AT&T, and although that looks great to the bottom line and margins initially, it also creates a divide that can become pronounced when retail items become less favored.
My key point in the first quarter was that consumers are also fickle, products move in and out of favor regularly, trends can turn from popular to unpopular overnight, and if the situation presents itself where the divide mentioned above occurs at the same time a product starts to lose its momentum, serious problems could follow. That can lead to changes in analyst opinions and impact stock price as we know.
Specifically, in situations like the one mentioned above margins could come under even more severe pressure that what would be normal because the retailers (service providers) will promote products that afford them a better return and skew the percentage of sales even more than might otherwise occur. This is the way of business. Companies attempt to earn the most they can, it is simple capitalism, and this is part of the problem I foresaw after the first quarter of this year.
Furthermore, as the year continued, the competition — Motorola and Samsung specifically — have caught up and in many cases surpassed Apple. If nothing more, competition has become fierce, so I have recently begun to investigate using a "Random Walk" approach. I have been visiting retailers and asking a simple question: Are you selling as many iPhones as you did before?
Resoundingly, the answer starts the same way: “We sell a ton of iPhones.” However, as I dig a little deeper, I also discover that the proportion of sales are changing meaningfully. I have learned that the percentages are changing from what used to be 75% iPhone/25% others, to 60% iPhone/40% others. Others obviously include the Droid and other phones using Google's operating systems, and Blackberrys by Research in Motion, but I did not go into detail about the percentages of the others.
Whether consumers are buying a lower price-point was unclear, but it sounded as if the level of spend was the same, but they were just opting for something other than iPhones more often. In my opinion, this defines a loss in momentum for the iPhone, which is the foundation of Apple's earnings and revenue, and margins too of course. The competition has caught up with Apple, I warned about this in the first quarter, and we are seeing it unfold in front of our eyes now.
Beware of a company that has a divide with its retailers, especially when their products lose momentum. What might otherwise be a slight reduction in margins could become much worse if the retailers start to push other products more aggressively.
Although I pulled the short I had on AAPL off when the stock broke above $640, we transitioned to the two-times-short on the Nasdaq 100 QID +1.45% , which is largely influenced by AAPL, and that position is up about 10% since then. We continue to hold this position amongst others.
I am not saying that Apple will stop selling iPhones, IPads or anything else. I also expect them to sell quite a bit, and I expect the loyal followers of Apple products to keep buying as much as they can, but the momentum has shifted, I feel that Apple products are no longer cutting edge, and unless that changes, margin pressure can cause earnings and revenue to slow considerably and multiples to contract.
Disclosure: Mr. Kee is long QID for selected portfolios.
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Goldman Sachs cuts gold outlook, sees growing risk

Dec. 5, 2012, 8:40 a.m. EST  

http://www.marketwatch.com/story/goldman-sachs-cuts-gold-outlook-sees-growing-risk-2012-12-05
 
 
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By Francesca Freeman
Goldman Sachs Wednesday lowered its price forecasts for gold in 2013, citing growing downside risks to the metal's price.
The bank cut its three-month gold forecast by 0.8% to $1,825 a troy ounce, its six-month forecast by 7.0% to $1,805/oz and its 12-month forecast by 7.2% to $1,800/oz. It also introduced a 2014 gold price forecast of $1,750/oz.
"While we see potential for higher gold prices in early 2013, we see growing downside risks. As a result, we find that the risk-reward of holding a long gold position is diminishing," the bank said.
While gold prices should remain supported in the near-term by further economic easing in the U.S. and continued weak economic growth, medium-term, "the gold outlook is caught between the opposing forces of more Fed easing and a gradual increase in U.S. real rates on better U.S. economic growth," Goldman Sachs said.
"Our expanded modeling suggests that the improving U.S. growth outlook will outweigh further Fed balance sheet expansion and that the cycle in gold prices will likely turn in 2013," it added. 


Dec. 5, 2012, 12:55 p.m. EST

Gold tries to move higher but stays below $1,700

By Myra P. Saefong and Sarah Turner, MarketWatch
SAN FRANCISCO (MarketWatch) — Gold futures weaved in and out of positive and negative territory Wednesday, but prices for the metal held ground below the key $1,700 an ounce level, undermined by a sharp selloff in the prior session.
Gold for February delivery GCG3 -0.01%  was last down $1, or 0.1%,to $1,694.80 an ounce on the Comex division of the New York Mercantile Exchange. It had briefly touched a high of $1,708.30 and fell to as low as $1,686.
Click to Play

Why is gold selling off?

Gold has dropped sharply, falling below psychological level.
The precious metal slumped on Tuesday, falling $25.30, or 1.5%, to a one-month low. Read: Gold slumps to one-month low below $1,700,
Recent declines in gold made “absolutely no sense” to James West, portfolio adviser to the Midas Letter Opportunity Fund.
Gold prices were falling “despite the irrefutable existence of growing investor unease at the twin issues of the fiscal cliff and shortly thereafter, the debt ceiling,” he said.
“But this gold market is encumbered by the paper futures market,” West said. “There is robust contract origination among major futures-market participants selling paper gold short that far exceeds the real gold buying.” See Commodities Corner: With this volatility, is gold still a safe haven?
On Wednesday, Goldman Sachs lowered its price forecasts for gold in 2013, citing growing downside risks to the metal’s price. See: Goldman Sachs cuts gold outlook, sees growing risk.

Data and the dollar

ADP estimates Wednesday showed private-sector jobs growth slowing, notably in the manufacturing industry, due to fallout from Hurricane Sandy. See: U.S. jobs growth slows in November, ADP estimates.
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Following the data, the dollar was higher, but the greenback has since pulled back, easing some pressure on dollar-denominated gold prices. The ICE dollar index DXY +0.13% , which measures the greenback against six major rivals, traded at 79.750, below the day’s high of 79.845, though still above the 79.632 from late North American trading on Tuesday. Read: Dollar up as Spain problems keep pressure on euro.
The greenback pulled back a bit as U.S. stocks turned mostly higher, led by a rally in financial shares.
Deutsche Bank strategists aren’t expecting long-term weakness for gold, mainly due to the recent performance of the U.S. dollar.
The strategists said that, if investors were moving to take risk off the table, then such a move would be compatible with a rising dollar. This has not been a feature of currency markets over the past week, they said.
“We would therefore view the weakness in gold and silver as likely to be short-lived,” they said. The strategists believe the U.S. dollar could weaken before the end of the year. Such a move in the U.S. currency would likely be beneficial for gold, as commodities that are priced in dollars — including gold — tend to move inversely to the dollar.
Concerns about the billions of dollar in spending cuts and tax hikes set for the start of the year remained in the spotlight.
On Wednesday, President Barack Obama rejected a nascent Republican plan that would have extended the bitter fight over the fiscal cliff into next year. See: Obama rejects Republican ‘fallback’ budget plan.
Although Obama has “made a good appearance in his comments on the fiscal cliff and budget dilemmas, gold will depend on visibility into the reaction of equities to the fiscal cliff,” said Richard Hastings, macro strategist at Global Hunter Securities. “If there is a bunch of equity selling in January, then gold will be under pressure temporarily.”
In other metals trading, silver for March delivery SIH3 +0.48%  turned higher again, to trade 9 cents, or 0.3%, higher at $32.90 an ounce, while March copper HGH3 +0.77%  rose 3 cents, or 0.9%, to $3.69 a pound.
January platinum PLF3 +0.20%  added $1, or 0.1%, to $1,583.90 an ounce, and March palladium PAH3 +0.59%  rose $3.45, or 0.5%, to $686.15 an ounce.
Myra Saefong is a MarketWatch reporter based in San Francisco. Follow her on Twitter @MktwSaefong. Sarah Turner is MarketWatch's bureau chief in Sydney. Follow her on Twitter @SarahTurnerMKTW.

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Banks Balancing Fee Rollbacks With Revenue Needs

As customers, regulators and legislators voice opposition to new and increased banking fees, the big banks find themselves struggling to reduce losses and break even. WSJ's Shayndi Raice explains on The News
(Video Bank of America - CEO Brian T. Moynihan - mobile Smartphone)

http://live.wsj.com/video/banks-balancing-fee-rollbacks-with-revenue-needs/8A92CBCE-0C21-442C-9ABF-34CAAE1791BC.html#!8A92CBCE-0C21-442C-9ABF-34CAAE1791BC

12/3/2012 10:17:45 AM4:37
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Detroit's Unsold Cars Pile Up

more in Auto Industry News »

By JEFF BENNETT And CHRISTINA ROGERS


 http://online.wsj.com/article/SB10001424127887323401904578159601729569798.html?mod=googlenews_wsj

Detroit auto makers are piling up big stocks of passenger cars at dealers despite brisk new-vehicle sales in the U.S.—a problem that executives vowed to avoid since their painful downturn three years ago.
Detroit auto makers are piling up big stocks of passenger cars at dealers despite brisk new-vehicle sales in the U.S.-a problem that executives vowed to avoid since their painful downturn three years ago. WSJ's Jeff Bennett reports. Photo: AP Images.
General Motors Co. GM -1.12% ended November with enough Malibu sedans and Camaro sports cars to last more than five months at the current rate of sales. Ford Motor Co. F -0.22% had more than four months' worth of Fiesta subcompacts and Chrysler Group LLC had a nearly six month stock of its 2013 Dodge Dart.
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GM's stocks of unsold cars are rapidly climbing. Above, Chevrolet Cruze and Malibu cars at a dealer in Illinois.
It's an abrupt reversal from a year ago. In 2011, U.S. auto makers' market shares, especially in compact cars, soared as gasoline prices jumped and Japanese auto makers struggled with back-to-back natural disasters. This year, production at Toyota Motor Corp. 7203.TO -0.28% and Honda Motor Co. 7267.TO -0.66% came roaring back. Both began offering deeper sales incentives, something they hadn't done for many years. That has the Detroit Three in a quandary: Do they cut production or match incentives?
"They [the Japanese auto makers] really had to get aggressive about getting their market share back and maybe that did catch some by surprise or even flat-footed," said Edmunds.com automotive analyst Michelle Krebs. Toyota and Honda "have a lot of zero-percent financing" rates.
"Look at the ads, you see a lot of zero, zero, zero," she said. Edmunds.com also estimates that 38% of Toyota-financed sales last month carried interest-free loan rates.
Toyota's average incentive per vehicle rose to $2,075 in November from $1,717 in January, according to automotive tracking firm TrueCar.com. Zero percent interest rates aren't counted in TrueCar's incentives tally.
Honda, meanwhile, has increased its average incentive to $2,428 from $1,978 in February despite releasing new versions of its top selling cars in the past year. The largest incentives offered in the U.S. last month were from Japan's Nissan Motor Co., 7201.TO +0.39% whose Altima has become a top selling sedan. Its average jumped to $4,273 a vehicle last month from $2,764 in January.
That is not to say the U.S. auto makers aren't also using incentives. Ford now offers as much as $2,895 off its 2013 Focus sedan, which had only two months' of inventory to start the month. Fiat SpA's F.MI +0.22% Chrysler has offered up to $5,000 off its Ram pickups, which had 3.5 months of inventory to start the month. GM has recently offered between $2,900 and $3,500 in average incentives for its vehicles, according to Truecar.com.
But Detroit auto makers didn't expect rivals recuperating from a tsunami and floods to go toe to toe. GM started December with 788,194 unsold cars and trucks, and warned it won't meet a target of finishing the month with a U.S. inventory of less than 670,000 new vehicles. GM executives said they were caught off guard by the heavy incentives offered by others and will idle two plants for an additional week in December. It may take more steps as needed.
GM also miscalculated demand for its pickup trucks. The industry norm for U.S. auto makers is between 60 days and 70 days of sales in inventory. GM had 138 days worth of Chevrolet Silverados at the start of this month. In passenger cars, its Chevrolet Cruze inventory jumped to 64,390 vehicles or 96 days. One of the two plants that GM will idle this month produces the Cruze.
"We thought the economy would have been further along at this point but as we look into December and 2013, we will get a tailwind from housing which benefits not only autos but the entire economy," said GM spokesman Jim Cain. "The one thing we won't do is commit the sins of the past and lose our discipline around rental cars and incentives. Our competitors may be doing it, but we have come too far to go backward and do something that may hurt our brands."
Ford, which finished November with 73 days of total inventory, insists the overall number "is right exactly where it needs to be," said U.S. sales analyst Erich Merkle. "We are very comfortable with our inventory levels for the month of November and as we approach historically the strongest selling month of the year."
In contrast, Toyota has kept its U.S. inventory at about two months of sales. For example, it finished November with 68,975 Camrys and 53,835 Corolla in the U.S., a 60 day supply of each. Its big-sedan, the Avalon, has 120 days of sales on dealer lots, or 6,266 vehicles.
Producing too many cars and trucks is a problem the U.S. auto makers have wrestled with since the late 1970s. To keep their factories humming, GM, Ford and Chrysler would build vehicles and stock them at pop-up parking lots created on vacant land throughout the Detroit area. When the stocks grew onerous, they would unleash heavy incentives that eroded profitability and brand image.
Today, all three face tough decisions on cutting production or profitability as inventories have soared. Ford, for instance, finished November with 18,336 unsold Fiestas, or 124 days worth of supply, compared with 96 days in October.
The Dart, Chrysler's most important new offering of the year and its first compact sedan since 2005, began December with a 173 day supply. Sales of the Dart slipped in November compared with the previous two months.
Reid Bigland, chief executive for the Dodge brand, said Dart sales will break through the 5,000-vehicle mark in December, typically a strong selling month for auto makers. There are no plans to offer incentives beyond the $750 in cash as part of its year-end sales promotions.
"To throw $1,000 or $2,000 on the Dart is always an option," Mr. Bigland said. "No question the car will respond from a sales perspective…We're just pretty content with where we're at right now."
Write to Jeff Bennett at jeff.bennett@dowjones.com and Christina Rogers at christina.rogers@wsj.com
A version of this article appeared December 4, 2012, on page B3 in the U.S. edition of The Wall Street Journal, with the headline: Detroit's Unsold Cars Pile Up.
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