Who's to blame for luxury vehicle gray market? Planning for trouble

A booming gray market of mostly European luxury vehicles being exported from here to China is unnecessarily roiling the U.S. auto market. Specialized brokers enlist straw buyers to purchase specific new vehicles from U.S. dealers, then resell them to international customers. The new owners ship the vehicles to China, where authorized imports often retail for double or triple U.S. prices.

Luxury-car makers hate gray marketers, saying they undercut legitimate Chinese dealers and slash automaker profits there. The automakers have only themselves to blame.

Gray markets exist only where market forces are being manipulated. Without huge differentials between U.S. and China retail prices, middlemen couldn't make a profit.

To combat the practice, Mercedes-Benz, BMW, Porsche, Land Rover and others financially punish their U.S. franchise holders and demand that U.S. law enforcement intervene. The methods of discouraging U.S. dealers from selling to gray marketers range from per-unit financial penalties to threats to revoke franchises. Carmakers forbid U.S. dealers from selling to a list of known exporter buyers.

But the exporters may not be breaking U.S. laws. Most U.S. enforcement activity has been civil rather than criminal.

Gray markets are always ugly. They stain participants and are a breeding ground for other sharp practices. But the way to eliminate them is by making them unprofitable.

The high-end brands cannot play victim. Automakers should clean up their own practices instead of demanding that U.S. courts and U.S. dealers act as their enforcers.



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