Gray Market Cars (What are they worth)

[spurdon]

http://www.detnews.com/2002/autosinsider/0204/21/c01-470293.htm


Automakers take steps to muzzle gray market
Deluge of Canadian imports hurts firms delights dealers

By Mark Truby / The Detroit News

DETROIT -- New-car dealer David Pierce can pay DaimlerChrysler AG $28,000 for a loaded Dodge Caravan minivan and sell it for a slim profit.
Or he can buy the same minivan for $20,500 from a broker who purchases vehicles in Canada and imports them to the United States.
"You do the math," says Pierce, whose Great Falls, Mont.-based Dodge, Volkswagen, Hyundai, Lincoln and Mercury dealerships carry new and nearly new cars and trucks from north of the border.
The simple equation -- created by the weak Canadian dollar, free trade accords and the vast spending power of the American consumer -- has spawned a $4-billion "gray market" of new and used vehicles purchased in Canada and resold in America.
Last year, nearly 200,000 cars and light trucks were imported from Canada to the United States, up sharply from 16,000 in 1996, according in the National Highway Traffic Safety Administration.
It can be a nice deal for American consumers. Hot cars, trucks and sport-utility vehicles from Canada are often available sooner and cheaper than in the United States, say dealers and brokers.
But Detroit's automakers, which have ignored the importing or tacitly encouraged it by dumping excess cars in Canada, say dealers and analysts, are finally taking a hard line.
The car companies say the deluge of imports is costing them millions of dollars -- because they are selling more cars at discounts in Canada and fewer in the United States where sticker prices are higher. And the influx of vehicles is disrupting the automakers' long-entrenched distribution network.
The loudest complaints are coming from dealers who don't play the import game. Those dealers fume as new, hard-to-get models from Canada show up on America's used car lots before new model showrooms. All cars bought in Canada and resold in the U.S. -- even brand new cars and trucks -- must be marked as used.
Chrysler plans to take steps within weeks to curtail the resale of new models across the Canadian-U.S. border, but isn't prepared to discuss details.
"We have been very lax and allowed this to become a problem," acknowledged Marc Henretta, a spokesman for DaimlerChrysler's Chrysler group. "It's cost the company money."
General Motors Corp. is also close to taking action on the matter, spokeswoman Marcia McGee said.
It won't be easy to stop. No laws prohibit importing cars from Canada, though it is a violation of a Canadian dealer's franchise agreement if it knowingly sells to a third party. And there is nothing to stop individual consumers from going to Canada to buy cars.
Ford Motor Co. has started fining Canadian dealers who sell cars that become exports. The so-called "charge-backs" are usually the difference between the Canadian price and U.S. price for a car. But two recent attempts by Ford to penalize Canadian dealers have stalled. A provincial court in Alberta has blocked Ford of Canada from charging a Calgary dealer $125,000 for exporting 23 vehicles.
In another case, Ford tried to shutter a dealership in Quebec that had been exporting cars. The dealership remains open, though, pending a court-supervised arbitration.
In the meantime, Ford is training Canadian dealers to spot stealthy "gray market" entrepreneurs, even though many of them happily cooperate with the importers.
Ford is distributing lists of importers to dealers and warning them to be on the lookout for customers who pay in cash for multiple vehicles.
Foreign automakers also have cracked down. Two years ago, Honda Motor Co. stopped honoring warranties for vehicles exported from Canada.
The cross-border "gray market" trade started with a trickle of cars from Canada after ratification of the North American Free Trade Agreement in 1994. The treaty allows imported vehicles built in North America to cross the continent's national borders duty-free.
Though it is little known, automakers sell the same cars for different prices in Canada and the United States. For identical models, the average price difference is $4,000, said Toronto-based auto analyst Dennis DesRosiers. And for expensive trucks and SUVs, and hot-selling luxury cars, the gap can be as much as $10,000.
Canadian dealers often sell cars and trucks for less than the wholesale price U.S. dealers pay automakers.
GM, Ford and other automakers say the two-tiered pricing system is necessary to be competitive in Canada, where household income levels are far lower than in the United States.
"Cars are cheaper in Canada," said Henretta, the Chrysler spokesman. "It has always been that way."
Ron Walker, who runs Nationwide Auto Exchange in Clinton Township, hopes it stays that way. Both a dealer and importer, he imports about 200 cars a month from Canada and retails them himself to Metro Detroit buyers or sells them at wholesale prices to dealers in other parts of the country.
"The cars are cheaper in Canada, and everybody is trying to find a way to make a dollar," Walker said.
There are now 170 licensed automobile importers in the United States, three times the number in 1994. Add to that hundreds of dealers and brokers who actively export models.
There are a few differences between cars built for Canada and the United States. Canadian safety and emission standards differ from U.S. regulations, but automakers generally build identical cars for both markets to reduce manufacturing costs. It's fairly simple for brokers or individuals to export a new car or truck to the United States. It's usually a matter of filling out paperwork and changing the speedometer to measure miles rather than kilometers.
"I get calls from bootleggers regularly with truckloads of cars," said Ralph Seekins, chairman of the Ford National Dealer Council and a Fairbanks, Alaska-based dealer. "They can get a vehicle for $6,000 less than I buy it for from Ford. It's a nasty problem, and we have told Ford we want it stopped."
Down the road from Seekins in Fairbanks, Chrysler-Dodge dealer John Immel is pushing just as hard for new rules. He routinely sees brand new Chrysler PT Cruisers and Dodge Dakota Quad Cab pickups in used lots even when he can't get his hands on the same models.
"I shouldn't have to compete with a used-car dealer," Immel said.
Automakers could raise prices in Canada and end the problem virtually overnight, but that is unlikely, the companies say. So while the automakers are concocting a way to fight the gray-market phenomenon, the vehicles continue to stream across the border.
"The auto companies created this problem, and they should do something about it," said Pierce, the Montana dealer who buys cars and trucks imported from Canada. "But until then, I have to stay competitive and buy them out of Canada."

You can reach Mark Truby at (313) 222-2082 or mtruby@detnews.com.