Car Exports Scam

China Daily needs to tighten up its fact checking.  It has a story on gray market luxury vehicles into China from USA:

"As wealth (in China) has increased, the volume of gray market" - or illegal - "luxury vehicle exports has increased," Tim Dunne, director of global automotive operations at California market-research firm JD Power and Associates, told China Daily in an interview. "It's a big business."

No it is not.  Nothing illegal there.  Gray market is not illegal. No crime committed.  And as I understand it JD Power is where the auto industry goes to buy the opinions it wants, they are not an independent source of information.

The schemes can cause big financial problems for US dealers, who are contractually prohibited from selling new vehicles to anyone who intends to export them and can be penalized by the automakers for doing so - even if they do so unwittingly, the automotive-industry news website reported.
Dealerships that sell to exporters may be forced to pay charge-backs, have incentives revoked and receive fewer vehicles from the factory in the future, according to an article on the website. Fraudulent registrations also hurt dealerships that do not sell to exporters because such registrations understate the dealerships' actual market shares, making it appear they are falling short of sales targets, the article said. That can affect bonuses paid by automakers as well as future allocations.

But causing inconvenience to others is not a crime.

Steps must be taken "to ensure that vehicles produced and equipped for the US market are sold to end consumers in the US and not operated in areas for which they were not designed or certified", she wrote.

This is a problem for the buyers, not for Mercedes benz.

Automakers place restrictions on where their vehicles can be sold so they can appropriately manage their regional production and distribution plans, protect their brand reputations, manage their pricing, and protect their dealer franchisees by guaranteeing them a sales territory that other dealers are not allowed to enter.

"Appropriately manage" contrary to customers demands.

Traders "play by different rules with a different set of responsibilities than dealers, and dealers are prohibited by their franchise agreements from playing the trader's game," he said.

How about Mercedes get in  the business of selling Mercedes?  Mercedes is complying with USA laws that benefit car dealers and harm car buyers.  Why doesn't Merecedes work to restore a free market in USA so they can make money the way these enterprising Chinese are making money?

"Dealers are the face-to-face conduit between the automaker's brand and the customer, so automakers depend on their dealers to satisfy customers in order to create good will, create repeat customers for the brand, and spread word-of-mouth recommendations about the brand," the analyst said. "Many authorized dealers get financially rewarded by automakers for keeping customers satisfied."

There is no crime here, just inconvenience to Mercedes exploiting USA enforcement of USA rules.  And enforcement, you will notice, you and I are oblige to fund.  Anyone who is successful in business gains envy from those in the same business who are not successful.  This is just envy talking.

Dunne said, "that traders don't meet the customers face-to-face, are not responsible for maintenance or repair vehicles when they need it, and are not responsible for making sure customers are happy if they have any problems with their vehicles".

And the buyers know this.

At the heart of the crime is an effort to prey on the craving by Chinese for automobiles that convey that the newly wealthy buyer has reached the pinnacle.

This is dishonest.  There is no crime here.  The Chinese buyers, the uber-wealthy, are hardly victims being preyed upon.  This is piling on advocacy.

The crimes committed have nothing to do with cars:

John Kacavas, the U.S. attorney for New Hampshire, recently announced that two California men pleaded guilty to federal mail fraud charges and violations of U.S. customs laws, in what officials say was the first successful prosecution of a major vehicle-exporting operation. The defendants admitted to scheming to export 93 vehicles worth more than $5.5 million that they and others bought in 16 states

Mail fraud is a crime, and falsifying export documents is a crime.  You can buy and sell cars on the gray market without committing these crimes.

Straw buyers are not committing fraud, since they cannot given their position.  The real buyers are not making any such representations, so they are not liable.  Wire fraud is a crime, so a but a fed prosecutor should not try to buyer fake crimes in a real crime.  If someone can get around the rules, change the rules if you can.  Don't punish people who comply with the rules as stated.

Here is a real crime in auto exporting:  a gang that stole cars, falsified papers and exported them.  In 10% of the thefts, the cars were acquired by carjacking!  Yikes... that is pretty violent.

The auto companies say:

Auto makers say their no-export provisions are needed to ensure that cars are sold with the proper equipment and warranties for the country where they'll be driven. And they say they are entitled to set prices differently in different markets.

Of course they are, but that does not mean people must not work around their price-fixing.  Price fixing is usually illegal, except in the auto industry, and this is a perfect example of the free market responding to manufacturers abusing their customers.

An auto dealer once told me that BMW closely watches the resale value of their cars in USA and exports used cars to Mexico to keep the resale value and brand image up in USA.

The U.S. alleges that Erxin Zhou and Yifan Kong used money from a tire business to fund the purchase and export of 2,000 luxury cars—worth more than $80 million in the U.S.—to China last year. Their goal for this year was 3,000, according to the government's complaint. The couple hasn't been charged with a crime, but some of their company's assets were seized in October by the U.S.

Of course they are not charged with a crime, because there is no crime.  Now, assets may have been seized in anticipation of finding some wire fraud or customs exdec violations,  but that is a different problem.

OK... now we get to the point:

The renewed focus on illicit export practices comes amid accusations in China of automakers jacking up prices and sowing discord between dealers and auto makers. In August, China's Ministry of Commerce said it would move to change rules governing vehicle sales in the world's largest auto market. A ministry spokesman said the move could include limiting automakers' power to demand a deposit from dealers, which would give local dealers more freedom over the vehicles they sell.
This week, China's auto lobby fiercely opposed a possible move by Beijing to ease restrictions on foreign ownership in the car industry, saying that the move would seriously weaken the position of indigenous carmakers.
Dong Yang, secretary general of the China Association of Automobile Manufacturers (CAAM), said that if foreign ownership rules were relaxed, Chinese carmakers would lose control of joint ventures they now own and run jointly with global automakers.

We have the Chinese automakers trying to install a managed market in China like we have in USA.  These prosecutions in USA are directed at a political end, as usual.  C'est la vie.

Now, let's look at the real story, by going stright to the raw trade numbers.  I am the only source ofr ten digit analysis, all of the paid services only analyze at the four or six digit level, which might offer some macro-trends, but we need nitty gritty info upon which to act... so ten digit Sch B numbers when analyzing exports....  so here is part of my new car export analysis, over 3000 cc and six or more cylinders...

Source Data - USITC - John Wiley Spiers Analysis

So these are all new, USA made luxury cars, prices ranging from 35K to 50K.  Do know that BMWs and Mercedes are made in USA as well, so exports thereof are exports of USA cars. That's the law.

And here is the same thing, but used cars:

Source Data - USITC - John Wiley Spiers Analysis

So what do you see?  USA exports of used cars to China bring a price that is the same as new cars,or even as much as 25% higher.  And then note, in used cars, Hong Kong shows up, of course, since Hong Kong is a great facilitator of getting things into China, but look a the prices...  Hong Kong traders always know how to get the best deals.  There are other factors I will not go into, but here is the hard facts.  (If you want me to send you the data analysis spread sheets here, email me with you preferecne as to pc or mac versions, or for that matter, .pdf version...

Also, remember the carjacking and export ring mentioned above?  Mostly exported to Africa.  See the prices on the used cars shipped to Nigeria?  All under $10,000 about 1/3rd the going rate?  These are the same luxury cars, but prices rather low?  I am guessing no one in law enforcement noticed this because no one looked.  Since the ringleader was arrest in 2012, it will be interesting to see what the exports to Nigeria look like in 2013.

Bottom line is if you want to arbitrage the price between a BMW in USA and China, do so and make your money, just do it legally by filling out the forms correctly and complying with the law.  You are not bound by maker-dealer agreements after you own the car.  Gray market is not illegal, it just fills a need where manufacturers get greedy.

Every business has its problems, but always comply with the rules.  The alternative is just not worth it.  Money is not that important.

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