(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.