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Discussion Starter · #1 ·

I don't know how many SHO'ers are interested in the economics of the auto industry but I thought this was kind of a neat article.

Here comes the auto black market: And it's never going to work


Want to get into arbitrage but worried you're not quick enough at the computer to take advantage of tiny discrepancies in the price of things like cocoa futures?

Try the North American auto industry. It may be more time-consuming to spend your days buying cars cheap and driving them to the United States where they'll bring a much higher price, but the profits seem virtually guaranteed -- profits caused largely by the low value of the Canadian dollar and Canadians' lower standard of living compared with Americans.

But better do it fast, before the car companies turn what is now a "grey market" in vehicle exports into a "black market" banned by contract that resembles nothing so much as side-street currency trading in Myanmar.

As the debate over the Canadian dollar's value has grown in recent months, those who feel the loonie's decline isn't a big problem have noted that many of the things Canadians buy don't reflect the present exchange rate.

The price of a CD purchased in Canadian currency in Toronto may be only 20 per cent more than what you would pay in U.S. currency in New York, although the loonie is worth just 62 cents (U.S.). The same is commonly true in the auto industry -- one recent article noted that an Impala sedan listing for $24,000 south of the border can be purchased in Canada for $29,500 (Canadian).

That sounds like a bargain for Canadians.

But the main reason why vehicles sold here cost so little in U.S. terms, according to auto analyst Dennis DesRosiers, is that Canadian buyers would desert the showrooms if cars were priced at something approaching the real exchange rate.

"They [car companies] have no choice but to sell them at significantly lower prices," he said.

"Canadians are more conservative in their buying habits, but they also can't afford to pay more."

Profit is profit, and plenty of people are taking advantage of this extreme outbreak of cross-border shopping. Americans find it worth their while (even after paying for such items as a new speedometer calibrated in miles) to fly north and drive south with a new car. The latest edition of Automotive News details the business strategy of David Pierce, who has dealerships in Great Falls, Mont., about 150 kilometres south of the border.

"Do I buy cars from Canada? Absolutely. It's the only way I can compete with dealers already doing it."

Mr. Pierce pays $7,500 (U.S.) less for every Dodge Ram he gets from Canada as compared with his usual dealer invoice price. "I figure every fifth truck I buy is free."

As the Canadian dollar has declined, the grey-market trade has accelerated -- from 16,000 vehicles in 1996 to 200,000 last year (of which about 40,000 were new vehicles and 160,000 used).

Now, the car manufacturers are trying to take action. It might make more sense to narrow the huge price gap, but instead they're trying to stamp out the arbitragers. As reported Monday in The Globe and Mail, Ford Motor Co. of Canada has begun "termination proceedings" against one dealer and is tracking vehicles more closely, possibly with an eye toward cutting off supply to other dealers found acting as brokers.

Meanwhile, BMW Canada is making prospective purchasers of the new Mini sign contracts promising not to resell them in the United States right after gaining possession. They are just the latest companies to move in the direction of invoking legal sanctions.

The whole issue, in fact, was examined by the federal Competition Bureau as early as 1986 (when the dollar set a new low of 69 cents) but no cause was found then for action under the Competition Act.

Ford Canada's get-tough attitude, not coincidently, comes as parent Ford Motor Co. complains that the brokering business is hurting U.S. dealers. As far as those U.S. dealerships are concerned, the price differentials smack of subsidization aimed at maintaining Canadian dealers' sales volumes.

The auto industry is renowned as North America's most integrated business -- with vehicle parts and assembly companies operating largely as if the border doesn't exist. That is, except in instances where major variances between Canadian and U.S. consumer markets are forcing a new median to be built along the 49th parallel.

Industry analysts note that Americans always have had a greater love for the open road than Canadians, who essentially buy cars for utility rather than pleasure. But higher disposable income has expanded the differences -- Americans' most popular car is the mid-range Honda Accord; Canadians' is the compact Honda Civic. Twice as many expensive sport utility vehicles and three times as many luxury automobiles are purchased in the United States on a comparative basis as in Canada.

The solution to this latest outbreak of cross-border inequity, though, isn't to drive profit-seeking exporters underground. The solution is to treat a North American market like it really is one.

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28 Posts
Discussion Starter · #2 ·
More examples of cross-border pricing wackiness:

Model,Canadian Retail Price in Cdn$, Canadian Retail Price Converted to US$, US Retail Price in US$, Difference in US$

Altima 3.5SE - $27698, $17203, $22349, $5146

Accord Coupe V6 - $31100, $19316, $25300, $5984

Acura RSX-S - $31000, $19255, $23170, $3915

VW GTi 1.8T - $25895, $16084, $18910, $2826

Audi A4 3.0Q - $44495, $27922, $32090, $4098

To convert the Cdn$ price to US$ I used a rate of 1.61, which was the average rate this morning (as per

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i believe the auto manufacturers knew about this from the get go. I mean, it's not hard to believe. For e.g. I bought my maxima for $2,000 canadian. 5speed, power everything, remote starter, keyless entry, heated seats, leather, 200,000km, etc... At the same time, my cousin in Chicago bought a 92 Maxima with 140,000miles, leather, and all the goodies for $3555 USD. So I can see how the auto industry in Canada gets a break. But then again, the article was clear to say that Canadians buy for utility not pleasure, unlike Americans, which is true nonetheless. Then again, you'd also have to take into account the population factor, 30mill compared to 300mill and the GNP, etc. At the end, we do get the better deal, and it is cheaper to buy from us, but with all honesty, I dont think anything will change. I mean, I think the auto manufacturers will keep there prices the same for along time to come, except for the odd model here and there (e.g. S2000 and such).
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