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

Updated: 2013-12-06 11:59

By Michael Barris (China Daily USA)

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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.

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.

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

A BMW Z4 car is displayed at an auto exhibition in Shanghai on April 29, 2013. Yan Daming / Asia News Photo

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 Mercedes-Benz 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".

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

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.

Zoia said such scams typically end when currency-trade balance and markets are "suD ciently 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 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.

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 aI uent 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 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 oD cials 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. $50,000 in the US; $149,000 in China

A complaint filed against an alleged illegal luxury-vehicle export ring in April by the US Attorney's OD ce 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

(China Daily USA 12/06/2013 page19)