Swedish auto maker Volvo has uncovered widespread cheating by its car dealers in China, where retailers inflated sales to win cash rebates from the company for hitting volume targets.
An investigation by the struggling, Chinese-owned car maker uncovered thousands of fake sales booked in 2011 -- but also an under-reporting of sales in 2012 to make the books balance. That meant it actually performed better last year than it had thought, according to a senior Volvo executive.
The executive asked for anonymity because of the sensitivity surrounding the findings of the recent investigation.
Volvo Car Corp., wholly owned by China's Zhejiang Geely Holding Group Co. since 2010, had reported an 11-percent slide in 2012 sales in China, fuelling doubts over its ambitious strategy for the key growth market.
In fact, sales rose -- by 15 percent from a year earlier -- after it uncovered what the senior Volvo executive described as "widespread falsifying" of retail sales volume by a number of its Chinese dealers. He said his best estimate was "half of the dealers" were involved in falsifying retail sales volume.
A Volvo spokesman acknowledged the company had discovered a "transparency issue" with the reporting of sales, but said it would not hurt earnings.
Volvo told dealers in its network of 151 retail sales outlets in China earlier this month that it had begun cracking down on the sales-inflating practices. The message was delivered at a meeting in Taipei on March 7 as part of an internal presentation on the state of its business. Reuters has viewed the presentation slides Volvo used in the Taipei meeting.
"We believe we fixed the problem, but it was a painful process," the senior Volvo executive told Reuters.
He said the over-reporting of sales by dealers made it hard for Volvo to assess the popularity of models and made the automaker less responsive to swings in demand for its cars -- in some cases forcing the company to over-deliver to showrooms.
However, there was little material impact on Volvo's bottom line, he said, since the company books sales when it ships cars to dealers, not when consumers buy the vehicles at dealerships.
Whether Volvo under Geely's ownership could turn around the storied Swedish brand has broader implications for corporate China's global expansion.
Chinese companies have poured tens of billions of dollars into foreign acquisitions in recent years ��� much of it into resources businesses ��� but they have had little success digesting and managing major consumer brands.
In the auto sector, for example, SAIC Motor Corp Ltd <600104.SS> purchased roughly half of South Korea's Ssangyong Motor Co. in 2004, but sold its stake in 2010 after Ssangyong's business slumped in the wake of the global financial crisis.
Volvo announced ambitious plans early in 2011 to use China's appetite for premium cars to help it nearly double its annual global sales to 800,000 cars by 2020, from 422,000 in 2012.
Those ambitious goals suffered a setback when the company reported a first-half net loss in 2012 and its chief executive, Stefan Jacoby, departed soon thereafter.
As pessimism spread last year over the turnaround plan, the China arm of Volvo was quietly investigating dealers.
Its main finding was that a number of Volvo's dealers had been routinely engaged in falsifying of sales volume, usually an over-reporting of sales, to secure extra incentive money that Volvo pays dealers quarterly when they reach targets. Retailer operators could pocket the cash or use it to discount cars and spur sales.
The company told the dealers in Taipei that this practice, which the Volvo insider said was rampant, contributed to the discrepancy in its China sales data.
It now plans to send company representatives to dealers periodically to check their stock, the executive said.
Volvo spokesman Per-��ke Fr��berg said he would not describe as "cheating" the behavior of some of the company's dealer operators in China, but said there was an issue with their sales reporting.
"Volvo Cars in China had a dealer incentive program in place with focus on retail sales, which created a retail delivery transparency issue, meaning that the reported retail sales did not reflect the actual sales situation," he said.
Frosberg said the issue should have "no effect on Volvo's earnings whatsoever", as earnings and financial results were based on wholesale deliveries. He said Volvo did not plan to adjust historic sales figures in China.
According to the executive about 7,000 of Volvo's reported retail sales of 47,140 cars in 2011 were fake, meaning Volvo dealers in 2011 collectively sold only 39,871 cars in China.
Last year Volvo reported its sales took an 11 percent fall to 41,989 cars.
That figure was also off. In fact, volume was under-reported in 2012 because dealers who had already collected the previous year's incentive money were selling those 7,000 cars they claimed to have shifted in 2011 and not reporting the sale.
All accounted, Volvo should have reported last year's sales to be 45,896 cars.
The increase in the revised 2012 number was by less than the downward revision for 2011, because there was still some false booking of sales going on in the first half of last year.
(Editing by Alex Richardson)