Guest Post: Red State, Grey Market

(Many thanks to Michael Briskie for some insight on this! — JB)

The import/export business can be confusing – just ask George Costanza. What used to be American-as-apple-pie brands like Cadillac and Buick are now putting Chinese built inventory into their patriotic showrooms, and the CT-6 Hybrid and Buick Envision are just the start. By next year, the Ford Focus will be on the list as well. This nonsensical supply chain is a head scratcher for sure, leaving us with new terms to understand like “domestic imports,” and “American designed.” However there is an even stranger case in the export markets. How can anyone explain why six figure luxury German SUVs manufactured at a Mercedes plant in Alabama, or a BMW factory in South Carolina, built by Americans and intended for Americans, end up being shipped by the tens of thousands bound for mainland China? The globalization meter is getting turned up to 11.

The other day a curious Craigslist post caught my eye while searching the classifieds for another bad financial decision. I had entered “Must Sell” in the home page keyword search, which if you don’t know, is the expert way to find interesting deals on wheels. Buried in between the listings of rotting MG’s and partially completed Chevy Nova restorations was a headline that proudly exclaimed “Luxury Auto Buyer — $3000 to $5000 per car!!!!” Along with it was a picture of a shiny Range Rover Sport.


A 500 mile radius Search-Tempest query digs up hundreds of similar posts, like this one from Omni Motors, looking for “hardworking people to call dealers, place orders and schedule time to pick up the car when it arrives.” If this is starting to sound like another troll with their caps lock stuck on, promising to pay you $95/hour while working from home on your own schedule, you may be surprised to find out just how real this opportunity is. But we’ll get there in a minute.

Here is what is going on.

China’s new money crowd has an insatiable appetite for luxury status symbols to show off their riches. And there is no excess more glorious than a hyperspeed SUV to sit in during the regular multi-day traffic jams near Beijing or Shanghai. There is a triple whammy of taxation at the point of sale for such vehicles; the standard sales tax first (17%), then another hit for expensive imported vehicles (10%), and yet again on engines displacing over 4 liters (20%), which means buying a glammed up, twin-turbo, V8 big-daddy-wagon can cost nearly 50% more than it would in most other countries due to the government’s cut alone. But Porsche, Mercedes, Land Rover, and BMW all want to cash in on the spending spree, so they jack up the pre-tax MSRP’s at local Chinese dealerships by DOUBLE or TRIPLE what we pay here in the U.S., ending up with a low-option Porsche Cayenne Turbo costing well north of $250,000 USD equivalent before taxes. Does that sound appealing to you?

The arbitrage opportunity is obvious. Buy brand new cars low in the US, sell high in China. The question is: is it legal? Exporting dealers thought so until 2014. They called it a “Grey Market.” The first headlines on the legality of the issue appeared in June of that year when feds cracked down on a few shipments, including one containing forty seven baller status SUVs being transported by Efans Trading Co. All of the cars were seized. Confiscating millions of dollars of cars would seem like a government response to an illegal act, and since the raid was led by U.S. Customs, that appeared to confirm it.

Before the seizure three years ago, it was estimated that 35,000 brand new high end cars and SUVs were being shipped from US ports to China each year. To put that in perspective, independent exporters in 2014 bought, sold, and transported more Benzes and Bimmers across the ocean in shipping containers than Chevy sold Corvettes that entire year. But after the asset forfeiture, grey market exporters went dark. The lawyers dragged the ensuing case on and on, and with no ruling in sight, other exporters were wary of their shipping containers being torn apart next. With tens of millions on the line for every shipment, the risk was just too great to continue business as usual. For most, it was better to wait for the verdict than to become another victim.

Fast forward to February 24th, 2017. Just eight months ago, a few stories made the back pages in auto trade publications announcing that Efans Trading Co. was acquitted of all wrongdoing. U.S. Customs had illegally seized their 47 cars, and would be returning each and every one of them… plus cash. The cash may have been for depreciation and damages – three years in a federal impound lot didn’t do these cars any favors.

On the day the verdict announced the floodgates were opened for dormant exporters and a horde of new ones. Anyone with a wealthy and connected Chinese friend or relative could start this operation almost overnight. Buy a fancy car. Send it in a shipping container to your contact. Six figure profit. Repeat. All 100% legal. The official U.S. government stance was clear. If you become the private owner of a car (thus making it a used car), you can do whatever you want with it. You can drive it like a normal person, you can sell it, you can even cut it up and turn it into a sculpture of a cow. Hey, it’s your car. This ruling was a license to print money for American-based Chinese exporters. There was, and still is, just one problem left: American new car dealers refuse to sell to exporters.

There are countless reasons for this, and none of them are due to the government. It all boils down to franchise agreements. New Car Dealers themselves cannot sell cars for export because it undercuts factory margins in other countries, especially ones with 200% markup, like China. The OEMs put clauses in the dealer contracts which specifically prohibit this act. Any attempt to sell directly abroad or to any known exporter not only violates the terms of the dealer-OEM contract, but can also result in huge financial penalties from the manufacturer, withholding of inventory, and perhaps even termination of the entire franchise. Without the sticky franchise violations getting in the way, several high line stores have said they could easily move their entire multi-million dollar inventory in a week to exporters. Instead, they are turning them away in droves.

This is where the Craigslist job shopper comes in. What the exporters have realized (all of which are set up as licensed USED car dealers, even though they are selling the cars as NEW in China) is that the only way to get their sweet, juicy profits is to recruit and train an army of fresh-faced U.S. new car buyers, who are unknown to the new car dealerships. Most trainees have no idea of what bait trap they are stepping into.

These straw-buyers need to be convincing at every dealership they enter. The key to the exporter’s success is keeping their contract army at plausible-deniability distance from the larger operation. With such subterfuge integral to the business model can anyone be surprised that exporting dealers, with the kind of margins usually reserved for high-rollers on a winning streak at a casino, don’t offer much transparency or training in this line of work? The requirements aren’t strict – good credit and over 25 years old, retirees preferred. That’s a big pool of people out there willing to take some risks when the reward could be an easy few G’s commission.

So, what would you be doing as a new buyer in order to earn that fat pay day? First, after receiving an on-boarding packet including such helpful documents like a background check and an I-9 form, you’ll be in touch with a “manager” of sorts. That manager will likely have a book of orders straight from China needing to be filled for premium class vehicles like the GLE550, X6M, Range Rover Sport, Cayenne Turbo, and more. You and all of your car buying wisdom, or lack thereof, will then be asked to try to buy one of these cars at a local dealership. At first, it may just be a phone call. You are checking inventory, scheduling a test drive, maybe even getting price quotes. Soon enough however, you’re on the way to convince your dealer you are a real player.

Ever bought a $100,000 car before, Mr. Craigslist job-shopper? Didn’t think so. Here’s why you’re likely to be sniffed out in the first 10 minutes. Sales Consultants are trained interviewers, especially at high end brands. If you aren’t prepared to answer questions like “What brought you to Mercedes/what is your experience with the brand/who else is going to be driving the car/what other cars are you considering,” etc, you’ll be suspected rather quickly. Remember, this HAS been tried at your dealer before. But let’s say your ruse works. You convince the dealer to give you a quote on the car, and it’s time to pay up. Your Manager has asked you to give him the final, out the door price of the car, including all taxes, fees, etc before agreeing to the deal. So you thank the Sales Consultant and leave, thinking the next time you’ll be back you’ll be rolling out in a blinged up beast, sneaking a couple of Snapchats to your friends before taking it to a warehouse for pickup.

Not so fast. Because the dealer hates cash, and doesn’t trust you or your money, you’ve got to finance the car… IN YOUR NAME. Yes, your new Manager promised to pay off the note the second you deliver the car, but can you even get credit approval on a $100k+ car? Maybe if you lie on your credit report. Give that a try! Even if that works, take a moment to just consider how many times you are likely to get credit approval in a month on six figure cars. Oh, did you want this to be consistent work? By the way, the dealer won’t let you finance it through another name, because that’s a definite exporter red flag.

But ok, you managed to get approval somehow and now you are so close to picking up your AMG G-Class that you can almost smell your fat commission. The last thing the dealer presents you with is a Non-Export Agreement, which you need to sign, with your name. It looks like a contract. Would it hold up in court? Who knows… so you go ahead and sign it. Assuming all boxes have been checked, you get the keys in your hand, and you’re on the way to the rendezvous point. As far as paperwork goes, the title is with the bank, but your new registration is in the glovebox, also with your name on it. Did you know that most states only allow you to register five cars in a year? Otherwise you are automatically considered a dealer, and then you are operating a business without a license.

No matter, pay day is coming! Well, soon-ish, after the exporter signs a purchase agreement with you, pays off the bank, and gets their title in hand. That only takes a week… what could go wrong in that time? Not much, luckily, but if your company is one of the many exporters engaging in tax evasion or money laundering, you could find yourself unemployed at any time. I hope you really liked that AMG, because if that happens, it’s yours now. Yep, you’re saddled with a $100k car loan you have no hope of affording. This scenario is unlikely, but what recourse do you have? You’re a 1099.

A final piece to consider – even if you’ve got your routine on lockdown, and you’ve scored a couple of cars and made a couple of grand, how many more times do you really think you can revisit these dealers to buy more cars? Are you going to show up two months later in your Kia Sephia after just dropping full sticker on a Range Rover Autobiography, asking to buy another one? Do a quick search of all the luxury dealers in your area, and find out just how many you can easily get to, and how many are independently owned. More than likely, your neighborhood Porsche store is owned by the same guy who owns the Audi Store, and maybe even the BMW and the Benz store too. So your name is in the retail system, and good luck getting through future lines of questioning. Before you know it, you are blacklisted as an exporter… permanently. You will never be allowed to buy another car at that dealer group again, regardless of how legitimately you may make your money in the future.

Doesn’t your grey-market trainer/manager care about this conundrum? A manager should look out for his own staff, foster their growth, improve their odds at success, right? Maybe not. Ask yourself, how did that guy become a manager in the first place? What we have here, everyone, is the LuLaRoe business model for buying luxury cars. Multi-level marketing rears its head again, albeit in one of its most exciting incarnations yet. Your manager just needs you to make one sale. If you make more than one, that is just gravy for him. If you make none, it was your risk anyway Mr. 1099. He’s got dozens of guys just like you running around lying to dealers for him, and the more of you out there the better the odds at closing some deals. In fact, you may be manager material yourself… how do you feel about putting together a team of car buyers? All you have to do is advertise on Craigslist, Monster, LinkedIn, heck, you could even hire your Mom and Dad and all of your friends, because it is SUCH A GOOD OPPORTUNITY!! MAKE $10,000/MONTH PART TIME!
And that is how we’ve ended up with tens of thousands of German-engineered, American-made vehicles (and some Indian-owned, British-built, American-sold ones too) all being shipped to China, completely legally, by way of an ever growing team of greedy but clueless pawns in an intricate MLM scheme. Happy job hunting, auto enthusiasts.

24 Replies to “Guest Post: Red State, Grey Market”

  1. Rick T.

    Very interesting. I was vaguely aware of this going on but had no idea as to the details. I’m curious on how the exporter gets the funds to you for paying off the loan. Because if it’s through a wire transfer, I suspect all kinds of scamming mischief could take place as well as “legitimate” business.

    Reply
    • Don Curton

      this exactly. I actually wouldn’t mind wasted a few weekends a year for a decent pay-off. I could easily secure a loan or two per year for that amount. I’m of the right age and income bracket to be shopping for my “first luxury car” that I deserve, dammit. So fooling the sales staff shouldn’t be a problem.

      But the high risk of a) being stuck with a loan and a car I don’t won’t, or worse b) being stuck with a loan and no car, really puts the damper on this.

      Reply
  2. safe as milk

    i was approached to do this about 3 or 4 years ago. the setup was similar but i was not required to put up my own money or credit. they were going to wire the money into my business account and i was going to send it to the dealer. apparently, there were some dealers who would still take cash. they did this mostly with range rovers. i would get $1000 for my trouble. they said it was 2 visits to the dealer. one for the sale and one for delivery. i have a video company so the cover was that i need the car for a shoot in the hamptons. you could only do one car per dealer. they said that the dealers were sort of on to them but since they made money, too. the trick was not to do anything that would make the car company suspicious or they would come down hard on the dealer. unfortunately, the chinese economy took a dump about this time and i never got a chance to do it but the guy who hooked me up did it 3 or 4 times…

    Reply
  3. Compaq Deskpro

    I understand why Mercedes and BMW don’t want these cars undermining their business in China, but why would the dealers care if they sell a car to a guy who goes out and flips it? They are only contractually obligated to not send them to China themselves.

    Reply
    • Pete DushenskiPete Dushenski

      From talking to a few dealer managers up here in Canuckistan, if eg. Stuttgart (or their informants) sees a Panamera Turbo VIN registered in China that was originally allocated to a dealer in eg. Toronto, the Toronto dealer will lose two future allocations for that same car next go-around. For cars that are already relatively scarce, this isn’t an eye for an eye, it’s an eye for your whole family.

      Reply
  4. John C.

    Feel sorry for ultimate Chinese buyer, who will have trouble registering the car in China without all the paperwork showing fee payment and the vin likely not in their system.

    Reply
    • Michael B

      I wonder about this too. Curious to know how many buyers have a hard time registering these “new” vehicles which already have ownership history and can be proven to have been imported as used cars. Makes me wonder how they’re represented in China… could be another elaborate plot on the receiving end marketing the cars.

      Reply
  5. Bigtruckseriesreview

    Mercedes Benz, Audi and BMW buyers have no idea where their car is built and don’t care.
    As long as they can get “that badge” on their car – it’s all good.
    Vast majority of them wouldn’t know if their car was built in America or not (I just check the VIN code)

    Reply
  6. Will

    This is an interesting topic and one I was only tangentially aware of before. I think it presents a number of intriguing issues around how manufacturers respond to differing markets in an increasingly globalized world and how we view ownership. Are luxury car makers being greedy by charging twice as much for the same car in China? Or are Chinese consumers stupid for being willing to pay twice as much? How much contractual restriction on use are we willing to accept while still feeling that we own an object?

    Unfortunately, I think your interpretation of the Efans Trading verdict is grossly distorted, and this has also affected the rest of your analysis. The government seized the cars from Efans on the theory that they had been procured unlawfully by fraud upon the dealers, namely the Efans buyer’s alleged representations to the dealers that the cars would not be exported. In denying a motion by the government for summary judgment (i.e., before going to the jury), the court did not question the legal theory advanced by the government, but simply said that there were questions about whether Efans was actually deceiving the dealers. Essentially, there was a lot of evidence that the Efans buyer explicitly told most of the dealers he worked with that the cars he was buying would be immediately exported and that he had specifically sought out car dealers that were inclined to look the other way to make a sale. If the car dealers were not tricked by Efans, then Efans had not committed any fraud and there was no basis for forfeiture. Apparently, the jury liked this argument and found in favor of Efans.

    This verdict had no effect on the underlying law though. Saying that the Efans verdict “opened the floodgates” for exporters is like saying that the O.J. acquittal legalized murdering your ex-wife. This is not to say that the Efans decision didn’t discourage the government from seeking forfeiture in the future or encourage exporters to reopen their doors. But the same laws still exist that could justify forfeiture of vehicles procured by fraud and, as you note, there are still potential contract ramifications which could be enforced by the dealers or the manufacturers.

    While I certainly wouldn’t encourage anyone to get involved in a scheme like this, I think your hypotheticals are a bit overblown. As the Efans court noted, the buyer there worked with a number of dealers who were willing to look the other way, or even provide active help (apparently some dealers were even finding additional straw men for the Efans buyer to use). While dealers will generally prefer financing over cash, I would expect there are many who would take the cash to gain several sales they would otherwise miss out on. Given that the Chinese-end-buyer’s other option is paying a two- or three-fold markup, I doubt the exporters are expected to drive a hard bargain at this end. They may be going out and buying all these cars at sticker. I think the big question going forward will be how the manufacturers respond to this ongoing issue and whether the government decides to support the manufacturers (which seems somewhat protectionist) or support individual rights of ownership.

    Reply
    • Michael B

      This was a civil case. The government needed to prove there were damages or injuries to businesses caused by Efans. They could not prove this, which implicitly rules “what the dealers don’t know can’t hurt them.”

      The verdict did in fact gave tacit permission to exporters everywhere (who were dormant due to the case) to deceive dealerships and acquire cars for purposes of export without them knowing. Efans lied to dealers the same way all the new export companies are doing now.

      Reply
      • Will

        Yes, Michael B, it was a civil case (did I suggest otherwise?), but it primarily applies federal criminal law, as that was the basis for the forfeiture.

        Unless you were closely linked with the case, there is probably no way to know why the jurors found in favor of Efans instead of the government. I just gave the opinion denying summary judgment a thorough read (instead of the glance it got yesterday), and the real reason that the judge denied judgment to the government was that they had not conclusively proven that Efans actually intended to cause either the dealers or the manufacturers harm. The jury could have based their decision on this or on something else. (And, contrary to your suggestion, the entire point of a fraud claim is that what you don’t know can hurt you.)

        I’m not disputing that exporters may interpret the Efans result as “tacit permission” to resume business. But they shouldn’t interpret it this way, because a jury verdict is specific to the facts of the case. One jury verdict in no way changes the applicable law and won’t necessarily affect the government’s inclination to bring similar cases in the future. Had the judge dismissed the case as a matter of law, or if there were a pattern of jury verdicts in favor of exporters, this would be a different story.

        If, as Michael B says, the new export companies are all lying to dealers, they should take even less comfort from the Efans result. The Efans judge found “ample evidence in the record for a jury to conclude that the dealerships involved in this case were working with Efans to sell cars to Chinese customers through the use of straw buyers.” This played a large part in finding a question of whether Efans intended to harm the dealers (why would the dealers go along with a plan that would harm them?). The judge made it clear that the manufacturers were being deceived, but essentially found the relationship too remote for it to be clear that Efans intended to harm them. It appears fair to assume that if there was no evidence that the dealers were in on it, the judge would have granted judgment to the government in favor of forfeiture.

        Reply
  7. Yamahog

    My dad actually did this as a part of a deal he put together with a Chinese counterparty. I don’t know exactly what happened, but he successfully got the car to Hefei and Range Rover sent him a letter informing him that he violated the export agreement and as punishment he was that he would no longer be permitted to buy Range Rovers. The whole family got a big laugh out of that ‘punishment’.

    My Dad has driven Acuras/Hondas since 1986 and he’s kept my mom in Toyotas and Lexuses since 1990. But it makes you wonder – how much is the ‘right’ to buy a Range Rover worth to you? Probably not very much.

    Reply
  8. JustPassinThru

    I had almost gotten into this a year ago, laid off, permanently, from my “real” job.

    The problem for me was, first, in my small state, in my small city, you’re never more than three people away from knowing anyone you see. I worked for a well-known employer in town; and many of the key people hired me, knew me, laid me off, cursed me when I was awarded UC after they claimed I’d quit. So going down to Billy-Bob Mercedes-Benz/Buick (name changed but that’s the product mix) wasn’t going to do it. They’d out me in three minutes.

    Going to Seattle, 300 miles away…was problematic. I had to have a story. Also, I had to have immediate financing. Finally, I had to get the paperwork. My state’s plate fees are tied to the value of the car; and the car WILL NOT be titled until the first year’s registration is purchased.

    Then, the five-purchase rule. I could get a Dealer’s License, with some difficulty; but then I’m out there, to be outed as a dealer buying from a dealer. If I don’t identify, I’m committing business fraud.

    Without a purchase or a penny, I gave it up. Too many loose ends.

    Reply
  9. steve taylor

    So this is why they are hiring secret hoppers in Knoxville to go waste the Mercedes dealers time? Just to see if he sigs the dogs on you??

    Reply

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