Auto Makers See Red Over The Gray Market

When Maria Kinshofer decided to buy a new Jeep Wrangler, the 32-year-old Bavarian housewife didn't head off for the nearest franchised Jeep dealer. Instead, she went shopping at Auto Binder, a suburban Munich gray-market importer offering discount prices. Owner Jurgen Binder didn't have the green, air-conditioned model she wanted in his lot, so he called Jeep dealers in Italy until he located one for shipment to Germany. Three weeks later, Kinshofer plunked down $28,400--$5,700 less than the conventional dealer's price in Munich--and drove off in her new car, stereo blasting. "When you can save money today, why shouldn't you?" she asks. "I recommend that everyone do it."

Lots of people are. The gray market for cars, long a nagging problem in Europe, is now flourishing as never before, with currency swings producing price gaps of up to 50% on individual models from one country to another. Fleet-footed entrepreneurs are legally snapping up autos in Italy and Spain, then shipping them to bargain-hungry buyers in Germany, France, and elsewhere (table). The result is a lucrative trade that's battering conventional dealers and putting pressure on auto makers' margins in Europe just as overall sales are softening. The situation probably won't change until Europe adopts a single currency, freezes exchange rates, or puts old-style trade barriers back in place.

TAKING LOSSES. A convergence of factors is behind this gray-market bonanza. For starters, the Italian lira's value against the mighty German mark has fallen 20% from a year ago and has tumbled as well against the Swiss franc and other European currencies. Likewise, Spain's peseta has slid against the French franc and the mark. Yet carmakers such as Volkswagen in Germany and Peugeot in France have not raised prices in Spain and Italy to compensate for these currency drops. Instead, rather than lose customers in a soft market to homegrown marques such as Fiat in Italy and Seat in Spain, the carmakers are holding the line and taking losses until the currencies realign themselves.

As a result, car "reimporters" can buy cars in Italy and sell them in Germany or elsewhere at discounts to the prices offered by local dealers. Authorized Spanish and Italian dealers for virtually every car brand, always on the lookout for any sale, are often eager to ship cars north to reimporters. A Europewide agreement to remove all barriers to the auto trade provides another big boost to the reimporters. A few years back, they would have had to rework the cars they were shipping from one market to meet different equipment standards in bordering markets. Now all cars are built to meet European Union standards, so no reworking is necessary.

The lack of trade barriers means reimporters such as Auto Binder can operate aboveboard--and thrive. Located in the village of Bad Tolz, Binder attracts clients mostly through newspaper classifieds that read: "New European Community cars, available immediately!" There's no spiffy showroom, just a warehouse and an outdoor lot with up to 130 cars, from racy Porsches to utilitarian Renaults. Binder expects his sales to grow roughly 75% in 1995, to 12,000 vehicles. That's a healthy chunk of the local market and more than what many franchised German dealers sell. The source of his cars? "A few big dealers in Italy," he says.

BILLIONS IN SALES. In Spain, meanwhile, reimporters sometimes use questionable tactics to buy cars, several manufacturers claim. They set up phony rental-car companies to purchase large numbers of cars from Spanish dealers. Instead of being rented, the cars are immediately trucked to France, Germany, or other strong-currency countries. Even some bona fide rental cars come back to haunt their makers. After ferrying vacationers around Spain for a few months, they show up on used-car lots in Paris at prices thousands below those of brand-new models. The result is a market for "nearly new" cars that weakens new-car sales. Reimporters "are making huge amounts of money on this," says Thierry Armengaud, Automobiles Peugeot's director of sales for France.

Estimates of the gray market's current share of auto sales range from 3% to 10%, depending on the country. Assuming a conservative 5% figure, the total this year could hit about 600,000 vehicles worth roughly $12 billion. The biggest source of gray-market cars is Italy, where more than 10% of the autos sold, or roughly 185,000 this year, end up in other countries, according to the European Automobile Manufacturers Assn. Reimporters also handle cars from the Netherlands and even from countries outside the EU, such as Canada. The major destination is Germany, the strong-currency fortress, where about 330,000 gray-market cars will be sold this year, estimates the German auto dealers association.

There's no question the gray market has benefited consumers while giving fits to traditional dealers and the auto makers. Competition from gray-market cars is forcing dealers to negotiate lower prices. And manufacturers have canceled or delayed planned price hikes to keep their dealer networks competitive with the gray market. "It's costing money from the bottom line," says an executive with one of Europe's largest manufacturers.

Because most of the reimporters are legitimate, the automobile manufacturers' only hope of stopping them is to block renegade dealers from selling to the gray market. Last year, for example, Peugeot asked the European Commission to ban sales to reimporters but was shot down.

Carmakers can, however, still yank a dealer's franchise if he or she has violated a contractual agreement banning sales to reimporters. That happened to a Peugeot dealer in Italy's Valle D'Aosta region who was selling to a Swiss importer. But auto executives admit it's almost impossible to spot and stop these side deals. Besides, with the Italian market down 30% since 1992, most dealers are eager for any business they can get. "If dealers didn't do some gray commerce, many would fold," says Gianni Sandri, manager of a large Volkswagen dealership in the northern town of Desenzano del Garda.

Chrysler Corp. is trying to thwart reimporters by jacking up prices in Italy on models that face limited competition. The Austrian-built Jeep Grand Cherokee, for example, jumped 15.5%, to $44,500, at the start of the 1996 model year. But as many as 20% of those sold in Italy are still ending up elsewhere in Europe. Meanwhile, "We're just pricing so high above everybody else that we're putting our market in Italy in jeopardy," says Robert A. Lutz, Chrysler's president. Indeed, the same model would cost around $30,000 in the U.S.--and Maria Kinshofer's Wrangler would be only about $18,000.

In the short run, the relatively high inflation rate in Italy and Spain should gradually erase some of the price gaps that now make reimports attractive. But long term, such currency-sparked commerce will probably continue to plague European trade, say economists.

That's why carmakers are strong proponents of pushing through with monetary union, which would eliminate currency swings. European makers of everything from dresses to dishwashers are also seeing their products sucked up into the gray market, and they want monetary

union, too. Many pundits figure, though, that monetary union cannot be achieved by the scheduled deadline of 1999. So when the time comes to replace that Jeep, Maria Kinshofer may get another good deal with Jurgen Binder.

Driving A Golf Through The Gray Market

1. Volkswagen assembles the Golf in Wolfsburg, Germany, and ships it to a VW distributor in Italy, pricing it low to compete locally

2. The distributor sells the car to a franchised VW dealer in a central Italian city such as Florence

3. An independent reimporter buys the Golf from an Italian dealer, and ships it back to Germany

4. A German consumer buys the Golf from a reimporter for $21,900, or $6,400 less than it would cost at a German VW dealership





Saving: $24,900




Saving: $3,500


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