$50,000 in the US; $149,000 in China

The crav­ing by some Chi­nese for au­to­mo­biles that con­vey new wealth has opened the door for scam­mers in the US who are go­ing af­ter buy­ers with il­licit ship­ments of lux­ury ve­hi­cles, Michael Barris re­ports from New York.

China Daily (Canada) - - IN DEPTH -

The price- tags tell the tale. In the United States, the Porsche Cayenne — a mid­sized lux­ury crossover ve­hi­cle — has a sticker price of just more than $50,000. In China, the car’s base price is 922,000 yuan, or nearly $149,000 — nearly three times the US cost.

Wealthy Chi­nese want­ing the best pos­si­ble ve­hi­cles are high­light­ing re­cent news re­ports about il­licit schemes to buy lux­ury ve­hi­cles from the US. The cul­prits seek quick profit by ship­ping Porsches, BMWs and other ex­pen­sive cars to China, cir­cum­vent­ing US ex­port re­stric­tions and tar­iffs that in­clude 25 per­cent on new ve­hi­cles and a value-added tax of 17 per­cent.

Fed­eral pros­e­cu­tors have seized dozens of high-end cars at ports around the US and bank ac­counts hold­ing mil­lions of dol­lars, the Wall Street Jour­nal re­ported on Tues­day of this week, and in July, Au­to­mo­tive News re­ported that US au­thor­i­ties were seek­ing to halt “a bur­geon­ing black-mar­ket in­dus­try” that was try­ing to un­der­cut le­git­i­mate deal­er­ships in China.

At least 35,000 lux­ury ve­hi­cles a year are pur­chased at US deal­ers and sent out of the coun­try il­le­gally, the Jour­nal re­ported, quot­ing Ely Goldin, a Penn­syl­va­nia-based at­tor­ney who the news­pa­per said rep­re­sents a cou­ple al­legedly in­volved in a fraud­u­lent scheme in­volv­ing the ex­port of 2,000 lux­ury cars. The cou­ple hasn’t been charged with a crime, but some of their as­sets were seized, ac­cord­ing to the Jour­nal. Goldin could not be reached by China Daily for com­ment.

“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.”

Typ­i­cally, the scam­mers hire “straw buy­ers” in the US to pur­chase cars from deal­ers and ship them over­seas by claim­ing them as used ve­hi­cles, ac­cord­ing to au­thor­i­ties.

Even af­ter fac­tor­ing in ship­ping and other costs, the ex­porters can make “a huge profit” on each ve­hi­cle, Au­to­mo­tive News re­ported. 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. Un­der­min­ing pric­ing

Donna Boland, a spokes­woman for Daim­ler AG’s New Jersey-based MercedesBenz USA unit, said il­licit ve­hi­cle ex­ports hurt the com­pany by un­der­min­ing its “pric­ing and vol­ume po­si­tion­ing” in its global mar­kets.

“We have an ex­clu­sive dis­tri­bu­tion and li­cense agree­ment to dis­trib­ute and sell Mercedes-Benz ve­hi­cles and parts solely within the United States of Amer­ica or its ter­ri­to­ries,” Boland wrote in an e-mail to China Daily.

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.

Il­le­gal ex­ports pose is­sues for buy­ers, too, Boland wrote. A buyer’s glee over his ill­got­ten gains may turn to an­guish “since over­seas Mercedes-Benz dis­trib­u­tors may not stock parts and/or ac­ces­sories nec­es­sary to prop­erly ser­vice US spec­i­fi­ca­tion ve­hi­cles”.

Mercedes-Benz cus­tomers both in the US and abroad are en­ti­tled to “the high­est level of war­ranty and ser­vice which the lo­cal dis­trib­u­tor-dealer net­work is in the best po­si­tion to pro­vide,” Boland wrote.

Dave Zoia, ed­i­to­rial di­rec­tor at auto-in­dus­try in­for­ma­tion site Ward’s Auto, said “it is not sur­pris­ing” that il­le­gal ex­port scams are hap­pen­ing in China, which is on pace to over­take the US as the world’s No 1 lux­ury car mar­ket as sales of high-end ve­hi­cles climb to 2.7 mil­lion a year by 2020.

“The gray-mar­ket phe­nom­e­non is one we’ve seen in other coun­tries, in­clud­ing the US, where avail­abil­ity of cer­tain mod­els is re­stricted or sell­ing prices in other mar­kets are low enough or ex­change rates fa­vor­able enough to make third-party im­ports af­ford­able,” he said.

w‘ As ealth (in China) has in­creased, the vol­ume of gray mar­ket” — or il­le­gal — “lux­ury ve­hi­cle ex­ports has in­creased.” TIM DUNNE DI­REC­TOR OF GLOBAL AU­TO­MO­TIVE OP­ER­A­TIONS, MAR­KET-RE­SEARCH FIRM JD POWER AND AS­SO­CI­ATES

Zoia said such scams typ­i­cally end when cur­rency-trade bal­ance and mar­kets are “suf­fi­ciently open” to al­low au­tomak­ers to sell their com­plete model line.

“The higher the cost to im­port, the less likely au­tomak­ers will be able to of­fer their full lineup prof­itably, open­ing the door a lit­tle wider to third-party ex­porters,” Zoia said.

JD Power’s Dunne says gray-mar­ket ship­ments to China have been “go­ing on for decades”.

“I re­mem­ber driv­ing around the port city of Dalian in 1994 — my first visit to China,” Dunne said. “This was at a time when very few peo­ple in China could af­ford their own per­sonal car. I re­mem­ber be­ing at a stop­light, and see­ing an In­finiti Q45 at stop­light — a highly un­usual sight in a coun­try filled mostly with trucks, bi­cy­cles and com­pact cars. This par­tic­u­lar Q45 had a li­cense plate bracket on it that read ‘Santa Monica In­finiti’. I got a laugh from that, and it opened my eyes to the way busi­ness was done”.

It takes a lot of chutz­pah for the scam­mers to try to get around car com­pa­nies’ ex­port rules, said Dunne.

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.

Dunne said deal­ers “take on an enor­mous risk” by in­vest­ing mil­lions in a brand’s dealer fran­chise, and by play­ing by the brand’s fran­chise rules.

“Deal­ers are the face-to-face con­duit be­tween the au­tomaker’s brand and the cus­tomer, so au­tomak­ers de­pend on their Ob­sessed buy­ers

A study ear­lier this year of lux­ury car buy­ers in China by man­age­ment con­sult­ing firm McKin­sey & Co por­trayed the Chi­nese lux­ury car buyer as ob­sessed with pre­sent­ing a suc­cess­ful im­age.

Eighty per­cent of Chi­nese pre­mium-car own­ers have an­nual dis­pos­able house­hold in­come of more than 200,000 yuan, ac­cord­ing to the McKin­sey re­port. By 2020, China is ex­pected to have 23 mil­lion af­flu­ent ur­ban house­holds. De­liv­er­ies to China of lux­ury cars — which JD Power de­fines as priced at $50,000 and up — are ex­pected to reach 2.25 mil­lion by 2016 in China, by McKin­sey’s es­ti­mates, surg­ing to 3 mil­lion by 2020. That com­pares with lux­ury car sales of 675,000 in China last year, rep­re­sent­ing 5 per­cent of the coun­try’s 14.1 mil­lion pas­sen­ger ve­hi­cle sales, Dunne said.

Many younger Chi­nese buy­ers see the car as a “busi­ness card” for cred­i­bil­ity, ac­cord­ing to the study. And in choos­ing a car, male buy­ers fa­vor “so­cially rec­og­nized” pre­mium brands, the study says. (In con­trast, fe­male buy­ers put a pri­or­ity on ex­te­rior styling, safety fea­tures and com­fort, ac­cord­ing to the study.)

“Au­tomak­ers and traders know that the abil­ity to pay a high price for an im­ported lux­ury item is a badge of honor for many very wealthy Chi­nese con­sumers — it sep­a­rates them from ev­ery­one else,” said Dunne, who lived in Bei­jing for sev­eral years. “There are a lot of wealthy peo­ple in China — so au­tomak­ers or traders can charge what they want.”

The re­newed fo­cus on il­licit ex­port prac­tices 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.”

Dunne said he is will­ing to lis­ten to the ar­gu­ment — of­ten voiced by traders caught in a gov­ern­ment crack­down — that they are sim­ply “sup­ply­ing a de­mand by pro­vid­ing ve­hi­cles that con­sumers want”.

But it is also true, 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”.

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.

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. 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.

“For­eign own­er­ship be­ing capped at 50 per­cent is the red line we must not cross be­cause we need to pro­tect our Chi­nese brands,” Dong said in a state­ment posted on the CAAM web­site. The state­ment was dated Mon­day.

“Cur­rent re­stric­tions have not damp­ened global car­mak­ers’ en­thu­si­asm what­so­ever to in­vest in China, so why should we be more open?” the CAAM sec­re­tary gen­eral asked.

For­eign name plates dom­i­nate Chi­nese roads, with home-grown brands cap­tur­ing only a 30 per­cent share of the mar­ket col­lec­tively.

Not­with­stand­ing China’s re­cent crit­i­cism of com­pa­nies that charge more for cars and other goods in China than else­where, Dunne said, prices — at least those that are set le­git­i­mately — are a non-is­sue.

“Prices vary by mar­ket de­pend­ing on taxes, im­port du­ties, de­mand and cir­cum­stances,” he said. “I think au­tomak­ers can charge what they want for a ve­hi­cle — that is their pre­rog­a­tive. If a con­sumer thinks the price is too high and does not want to buy, that is their right, and they can buy some­thing else”. Suc­cess­ful prose­cu­tion

In what of­fi­cials said was the first suc­cess­ful prose­cu­tion of a ma­jor ve­hi­cle-ex­port­ing op­er­a­tion, two Cal­i­for­nia men ear­lier this year ad­mit­ted to schem­ing to ex­port 93 ve­hi­cles worth more than $5.5 mil­lion that they and oth­ers bought in 16 states, from Oc­to­ber 2009 through March 2012, Au­to­mo­tive News re­ported. The men, Frank Ku, 31, and Danny Hsu, 33, were fined $5,000 and sen­tenced to three years pro­ba­tion in May.

Court doc­u­ments showed that Ku and Hsu found straw buy­ers in Craigslist ads posted by peo­ple who ap­peared to need money, the ar­ti­cle said. Those buy­ers, who re­ceived “a few hun­dred dol­lars” for each ve­hi­cle they pur­chased, were not charged.

The au­to­mo­tive-news web­site said the pair used the buy­ers’ lo­cal ad­dresses to ob­tain fake driver’s li­cences. They or the straw buy­ers pur­chased high-end ve­hi­cles with checks from a lo­cal bank ac­count. They ap­plied for ti­tles in New Hamp­shire, New Jersey and other states, claim­ing that each ve­hi­cle was for per­sonal use and pos­ing as the straw buy­ers when the Depart­ment of Mo­tor Ve­hi­cles ques­tioned the ap­pli­ca­tions.

(New Hamp­shire has been at the center of sev­eral large ex­port schemes be­cause it is the only state with nei­ther a sales tax nor a re­quire­ment that ve­hi­cle own­ers carry insurance, the Au­to­mo­tive News re­ported. Ex­porters max­i­mize their profit by hav­ing ve­hi­cles ti­tled there, even though many of the ve­hi­cles are bought else­where and never en­ter the state, ac­cord­ing to the re­port.)

The ve­hi­cles were shipped to the Port of Long Beach, Cal­i­for­nia. Af­ter their ti­tles were is­sued and for­warded to Cal­i­for­nia, the ve­hi­cles were shipped over­seas with ex­port dec­la­ra­tions that cat­e­go­rized them as used. When the ve­hi­cles got to China, Ku and Hsu de­liv­ered them to buy­ers who had or­dered them in ad­vance, of­ten for more than dou­ble the US price. They suc­cess­fully ex­ported 79 ve­hi­cles, and 14 more were seized in Long Beach. The av­er­age value of each ve­hi­cle was about $53,000. 3,000 ve­hi­cles

In another case, a Chi­nese na­tional, Hong Chen, who runs sev­eral busi­nesses in Mary­land and Vir­ginia, was ac­cused of il­le­gally ex­port­ing nearly 3,000 ve­hi­cles worth more than $157 mil­lion — an av­er­age of about $53,000 each — from Fe­bru­ary 2008 through March of this year. About 40 ve­hi­cles be­ing pre­pared for ex­port were seized at the Port of Ne­wark in New Jersey in April, doc­u­ments show.

A com­plaint filed against an al­leged il­le­gal lux­ury-ve­hi­cle ex­port ring in April by the US At­tor­ney’s Of­fice for the Dis­trict of New Jersey in Ne­wark said such schemes dis­rupt dis­tri­bu­tion chan­nels, in­fringe on mar­kets, hurt deal­ers abroad and make it hard for man­u­fac­tur­ers to is­sue re­call and safety notices.

In April, the US At­tor­ney’s of­fice an­nounced it had seized 20 SUVs be­ing shipped from Port Ne­wark to an undis­closed ad­dress in China. The ve­hi­cles were pur­chased be­tween De­cem­ber last year and Jan­uary from deal­ers in New Jersey, New York, Con­necti­cut and Mary­land, ac­cord­ing to the com­plaint.

All of the ve­hi­cles were in new con­di­tion, ap­peared to have not been used and had very low mileage on the odome­ter, ac­cord­ing to the fil­ing. “This new con­di­tion cou­pled with the fact that the ve­hi­cles were bound for im­me­di­ate ex­port is strongly in­dica­tive of a scheme to il­le­gally ex­port ve­hi­cles from the United States,” the com­plaint said.

Even a crack­down by US and Chi­nese au­thor­i­ties may not halt the il­licit ve­hi­cle ex­ports.

“There has been a vi­brant gray mar­ket in China, es­pe­cially for high-end ve­hi­cles, for a long time,” said Michelle Krebs, se­nior an­a­lyst at au­to­mo­tive-in­for­ma­tion web­site Ed­munds.com. “What is per­haps new now is that there are many new high-end mod­els that are par­tic­u­larly de­sir­able and there’s a grow­ing up­per class ready and able to buy them now.’’ Con­tact the writer at: michael­bar­ris@chi­nadai­lyusa.com

Au­thor­i­ties broke up six rings that smug­gled about $164 mil­lion worth of cars into the coun­try over the past three years, in­clud­ing more than 80 top-end mod­els such as BMWs and Rolls-Royces, the of­fi­cial Xin­hua news agency re­ported on Nov 28.

Po­lice ar­rested 54 gang mem­bers who had smug­gled in the ve­hi­cles from the United States, Viet­nam, Myan­mar and Hong Kong, ac­cord­ing to Xin­hua. The gangs had smug­gled in more than 3,000 ve­hi­cles, it added.

YAN DAMING / ASIANEWSPHOTO

A BMW Z4 car is dis­played at an auto ex­hi­bi­tion in Shang­hai on April 29, 2013.

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