# Running the due-diligence checklist on an automaker
In 2015, Volkswagen's diesel emissions scandal wiped roughly 30 billion euros off its market value in a matter of weeks and led to more than 30 billion euros in fines, buybacks and settlements over the following years. None of that showed up as a line item in the pre-scandal financials. That is the whole problem with automaker due diligence: the numbers that kill a deal are usually buried in reserves, off-balance-sheet obligations and concentration risks that a standard income statement never surfaces.
This lesson gives you a concrete red-flag checklist to pressure-test a target automaker before you commit capital.
An automaker is a capital-intensive manufacturer with a finance arm bolted on. That structure creates four recurring places where trouble hides:
1. Warranty reserves (money set aside for future repairs)
2. Channel stuffing (pushing inventory onto dealers to book revenue early)
3. Pension underfunding (promised retiree obligations that exceed set-aside assets)
4. Supplier concentration (dependence on a few critical parts vendors)
Work these four systematically and you catch most of what a glossy investor deck omits.
When a carmaker sells a vehicle, it must estimate future repair costs and book a
The red flag: a reserve that is too small flatters current profit. Deferring repair costs into a thin reserve is one of the easiest ways to inflate margins.
Compare the warranty accrual rate (new warranty provisions divided by revenue) against actual warranty claims paid. If accrualsaccrualsAccrual accounting records revenue and expenses when they are earned or incurred, not when cash changes hands, giving a more accurate picture of financial performance.Voir la définition complète → consistently run below claims, the reserve is being drained faster than it is refilled.
Worked example (illustrative figures):
The company is paying out far more than it is setting aside. Reserve balance is shrinking. Ask: is quality genuinely improving, or is the reserve being managed to hit a margin target?
Context matters. Recalls tied to electric vehicle (EV) battery packs and advanced driver-assistance software have pushed warranty costs up across the industry. A target with rising EV mix and a *falling* accrual rate deserves hard questions. Warranty details sit in the notes to the financial statements, not the headline P&L, so read the notes.
Channel stuffing means recognizing revenue by shipping more vehicles to dealers than end demand justifies, often propped up by heavy incentives (rebates, cheap financing, dealer cash).
The mechanics matter. Most automakers book revenue when a car ships to the dealer, not when the dealer sells it to a consumer. So you can manufacture a strong quarter by flooding dealer lots.
Track days' supply of inventory: dealer inventory divided by daily selling rate. In the US, Cox Automotive publishes regular industry data; a rough historical norm is around 60 days, though this swung dramatically during the 2021 to 2023 chip shortage when supply fell far below normal. Always check the current benchmark rather than assuming.
Red flags to line up together:
Registrations are the tell. In Europe, the ACEA (European Automobile Manufacturers' Association) publishes monthly new-car registration data. If a target's shipments to dealers grow faster than actual registrations, wholesale volume is outrunning real demand. That gap is where channel stuffing lives.
Cross-check with the finance arm too. If captive financing (the automaker's own lending unit, such as Ford Credit or Toyota Financial Services) is subsidizing sub-market loan rates to move metal, the "profit" is partly bought.
Legacy automakers carry large defined-benefit pension obligations: promises to pay retirees fixed amounts, funded by a pool of invested assets. When assets fall short of the projected obligation, the plan is underfunded, and the gap is a real liability.
This is where old-line manufacturers hide balance-sheet weight. General Motors and Ford have historically run pension and other post-employment benefit (OPEB) obligations in the tens of billions of dollars.
Find the funded status: plan assets minus the projected benefit obligation (PBO). This is disclosed in the pension footnote.
The critical lever is the discount rate, the interest rate used to translate future pension payments into today's value. A higher assumed discount rate shrinks the reported obligation. A small change swings the number massively.
Worked example (illustrative):
So do not accept the headline funded status. Check the discount rate assumption against prevailing high-quality corporate bond yields for the period. An aggressively high discount rate is a red flag that the obligation is understated.
In the US, underfunded plans also trigger premiums to the PBGC (Pension Benefit Guaranty Corporation), the federal agency that backstops private pensions. In the UK, the Pension Protection Fund plays a similar role and pension trustees can block or reshape M&A deals. Pension liabilities are not just accounting; they can hold veto power over your transaction.
Vérification des acquis
1. The Volkswagen example is used in the lesson primarily to illustrate which principle about automaker due diligence?
2. Why does the lesson describe an automaker as 'a capital-intensive manufacturer with a finance arm bolted on' when explaining where risk hides?
3. An analyst finds that a target automaker's warranty accrual rate has run consistently below its actual warranty claims paid for several years. What is the most likely concern this raises?
4. Select ALL correct answers. Which of the following are the recurring areas where the lesson says automakers tend to hide risk?
Sélectionnez toutes les réponses correctes.
5. Select ALL correct answers. Which statements accurately describe warranty reserves for automakers?
Sélectionnez toutes les réponses correctes.
A modern car has thousands of parts, but the risk clusters in a few critical suppliers with no easy substitute. The 2021 to 2023 semiconductor shortage forced automakers worldwide to idle plants and cut production by millions of vehicles, because a handful of chip fabs (chiefly TSMC in Taiwan) sat at a chokepoint.
Look for:
Ask for a concentration table: what percentage of cost of goods sold flows through the top five suppliers, and which components have no qualified second source? If that data is not readily available, treat the absence itself as a red flag.
🎬 [VIDEO: "How the Chip Shortage Crippled the Auto Industry" - youtube.com - clear explainer on supplier chokepoints and their production impact]
Run all four checks and look for reinforcing patterns. The dangerous target is not the one with a single weak spot; it is the one where several align. For example:
Any one of these is a conversation. Two or three together is a repricing, or a walk.
Most of this data is public for listed automakers. In the US, pull the annual 10-K filing from the SEC's EDGAR database and go straight to the notes: warranty, pensions, commitments and contingencies. For European issuers, read the annual report notes under IFRS. The headline numbers rarely lie outright. The footnotes are where the truth sits.
*This lesson is educational and not investment, legal or accounting advice.*