An investigation has been initiated by Mercedes-Benz and BMW on the recent surge of unauthorized exports of luxury cars from the U.S. to China, according to its senior officials. These gray imports to China are a threat to profit in the biggest auto market in the world.
German automakers are feeling the pressure to reduce their prices amid the increase of these gray imports to China after the country permitted dealers who are registered in Shanghai's free trade zone to import cars without the approval of foreign carmakers.
Daimler said that one year ago, it increased its efforts to stop the exports of U.S. Mercedes-Benz models to China. Steve Cannon, head of Mercedes-Benz USA, said that they became “concerned” when the number of imports to China from the U.S. reached 4,000 units.
Mercedes is able to impose a penalty on U.S. dealerships who knowingly participate in the sales of cars to gray-market exporters, who operate via unauthorized channels. Cannon said that the automaker has been urging dealers to evaluate those who wish to buy exclusive models like the GL large SUV.
They’d have to utilize online resources like Zillow to verify the addresses of potential buyers. Dealers are also asked to discourage cash payment for the vehicles. Cannon however claims that the gray imports have been “nipped in the bud” and have been taken down to “almost nothing.” The gray market in China has been around for quite some time.
It has been taking place mostly in the northern port city of Tianjin, where about 50% of China's total car import deals are made. About 70-80% of the share in this premium segment is owned by Audi, BMW and Mercedes. In the U.S., the starting price of a BMW 650i xDrive convertible is at $97,900 but in China, the price can be nearer to 2 million yuan ($320,179).
According to Ian Robertson, BMW Group's sales chief, the company is worried about the impact of new Chinese laws that make parallel imports legal. The company is currently cooperating with law enforcement from the U.S. to probe the source and direction of the money used to buy these vehicles.
It’s hard to know the exact number of vehicles brought to China from the U.S. via the unofficial means. According to Robertson, "It's not a single entrepreneur."
BMW has observed that in China, there are vehicles that are installed with navigation systems and engines that are meant for the United States, not China. One major problem is that the gray-market BMWs perform poorly since they’re built to run on fuel that isn’t commonly available in China.
The unexpected decline in China auto sales has intensified the tensions between the local dealerships and the global automakers.
In early 2015, BMW has agreed to pay 5.1 billion yuan ($823 million) to its established China dealers who are struggling to survive amid sluggish sales as the economy cools down and there’s unfair competition from unauthorized dealers.