Wheeling-Dealing Gray Market Hits the Skids : Bad Publicity, Corporate Action, Legislation Put Brakes on Car Conversions

Last year, a Saudi vice consul in Los Angeles purchased a used, black, very fast Ferrari Boxer from an importer in Northern California. He knew he was buying a gray-market car, a model manufactured by Ferrari for sale and use outside the United States.

But the importation and purchase was perfectly legal, the Ferrari could be modified to meet U.S. safety and pollution standards, and so the diplomat paid the dealer $65,000 for the car.

Depreciation Plus

In May, he resold the 1984 Ferrari to Michael Sheehan of European Auto Restorations of Costa Mesa. For $48,200 and a substantial loss. It was the best price he could get. Sheehan promptly brokered the car to a Swiss client. For $52,000 and minimal profit. It was his easiest way out.

And within that depreciation, Sheehan says, is proof of the sudden deterioration of the nation’s once enormously profitable gray market in Mercedes-Benz, BMW, Porsche, Ferrari and other European automobiles.

“It is dead,” said Sheehan, whose principal business remains the restoration and trading of elderly Ferraris. “Two years ago I’d have sold that Boxer (in California) instantly by picking up the phone . . . and probably for $75,000. Now there’s no profit in gray market.”

It has been a 90-day collapse, gray marketeers say, showing about an 80% drop in business. The number of California dealers selling gray-market cars, or modifying them to comply with government pollution and safety standards, another said, has fallen “from 150 to 50 on its way down to 20.”

A 30% drop in the 1985-86 value of the dollar against European currencies, tighter regulation, publicity exposing conversion rip-offs and fatal crashes of gray-market cars, subtle campaigns against non-franchised dealers by Mercedes, Porsche and BMW in North America . . . all have combined to revise the official projection of gray-market imports for 1986 from 100,000 to 30,000 cars. Or less.

For many dealers, the only route to reduced losses has been to return stocks of cars from whence they came. Or to sell them in other overseas markets where demand and prices remain strong.

Ray Oja, owner of Express One, currently refining its Long Beach operation to handle only custom work on specialized BMWs, knows of several dealers who were left holding expensive inventories of yesterday’s bargains.

“I recently helped ship some 30 Mercedeses and BMWs, cars that I’d converted, out of state,” he said. “I know there are a great deal of gray-market cars going to Japan.”

Added Sheehan: “Los Angeles retail has become Swiss wholesale.”

Among other consequences and casualties of the gray market crash:

- In response to consumer concerns, the Department of Motor Vehicles now is stamping “Non USA” on certificates of title for gray-market cars. Similar “title branding” is used on pink slips issued to former police cars and taxis.

- Allen Hardy, owner of H&B; BMW Performance Inc. of Berkeley, has been charged by the California Air Resources Board with violating anti-pollution laws in the sale of 12 BMWs. In a telephone interview, Hardy said the prosecution has “little or no merit” and is part of an ARB campaign against gray-market importers. At the time the suit was filed, Hardy was president of a gray-market trade group, the Automotive Importers Compliance Assn. of Fairfax, Va.

- Three other California companies (Trend Import Sales of Newport Beach; Custom Engineering Inc. of Garden Grove and Fairway Environmental Engineering of Torrance) that handled the majority of gray-market conversions in the state have closed after the Environmental Protection Agency said it would no longer accept their test results as part of the EPA certification process.

- Last month, a federal grand jury indicted the president and two other executives of Custom Engineering on 36 counts of perjury, mail fraud and falsifying statements to EPA. Certification packages for about 2,000 cars, an EPA spokesman said, were left in limbo by the action.

- Albert Mardikian of Corona del Mar, millionaire president of Trend Import Sales, once said to be the largest gray-market importer-converter in the country, pleaded guilty to charges that he submitted phony smog-test results to the EPA. Mardikian, 40, and ironically the man who designed the replica Ferrari Daytona used in the television series “Miami Vice,” is serving a six-month prison sentence.

- A Van Nuys dealer has been arrested on multiple counts of grand theft and perjury for importing gasoline-engined Mercedes that he documented as diesel-powered cars exempt from pollution testing. “Statewide, we have 11 or 12 gray-market cases pending,” said Dennis Dawson, a San Diego prosecutor for the attorney general’s office.

- California spokesmen for Bank of America and Security Pacific say the banks will no longer finance gray-market cars because their titles are too shaky to be considered collateral. The Kelly Blue Book, the bible of used-car pricing, does not list gray-market cars and warns that they “will have substantially lower used values.”

And without established values, many insurance companies reason, it is impossible to write policies on gray-market cars.

Soon, however, most problems and protests, at least in California, may well become academic.

For the Air Resources Board--in a move that both sides of the issue describe as the coup de grace for slipshod gray marketeers--recently announced a new set of anti-smog rules.

Tougher Standards

Commencing next month, all California companies importing new and used cars and modifying their anti-smog systems must meet the same emission standards as those imposed on the original manufacturers of the car.

Translation: All add-on anti-smog systems must be good for the road life of the vehicle. Gray-market modifiers will be held liable, via bonds and insurance, for recalls due to faulty equipment or sub-par workmanship. And each anti-smog system must carry the same warranty requirements imposed on the original manufacturers, up to 50,000 miles for some parts.

Spokesmen for the Big Three of imported cars (Mercedes Benz of North America of Englewood, N.J., BMW of North America of Montvale, N.J., and Porsche Cars North America Inc. of Reno) say they are delighted with the ARB move. As goes California, they believe, so should go the nation when and if federal gray-market legislation gets through Congress.

Representatives of the Automobile Importers Compliance Assn., however, were not quite so ecstatic.

Said Ben Jackson, a former deputy assistant administrator for EPA who now heads AICA: “It is totally discriminatory.”

AICA membership, acknowledged Jackson, continues to dwindle. In October, it was at a high of 610 members. Currently it stands at 400 and sinking.

“Direct importers are either changing their ways or getting out,” he said.

The market was formed in the late ‘70s by the demands of upscale die-hards.

They wanted a turbocharged French car called the Renault R5. If Germans were touring to Cannes aboard a 500 series Mercedes, why couldn’t an American tool to Carmel in the same car?

But European manufacturers were adamant. These were cars of limited production for the high-speed touring allowed by Autobahns and Autostradas. It didn’t make economic sense to erode their performance--to say nothing of the aesthetics--with catalytic converters and the plumbing and structural reinforcement required by American safety and pollution laws.

So the official distributors of Mercedes, BMW, Porsche and Ferrari in North America remained committed to selling exactly what the European factories said they should sell in the United States.

Yet . . . it was perfectly legal for individuals and non-franchised dealers to buy a Mercedes 500SL or a Porsche 911 Turbo in Europe and ship it to the United States. Singly or by the dozen. Then, if the car was modified to meet EPA and DOT emission and safety standards (by the addition or revision of several dozen features; from catalytic converters, through internal door beams for side impact resistance, to safety bumpers and new headlights), it would be legal to drive in the United States.

Banned in California

The only glitch in the process was California. Ever smog conscious, it banned, flatly, the sale and registration of new cars not manufactured to meet California’s special emission standards. On the other hand, allowed ARB, if the import was a used car with 7,500 miles or more on the odometer and if it could be brought into compliance with EPA, DOT and then pass the California smog test. . . .

In 1980, according to EPA figures, only 1,500 gray-market cars entered the United States.

Then the dollar strengthened, and buying in Europe was like shopping at Harrods with Monopoly money.

By 1985, the total was 60,000.

And as the market began to duplicate the simple financial benefits of other gray markets in watches and cameras, Americans began importing non-U.S. versions of models already being sold in this country by franchised dealers. That’s because a new BMW 635Csi bought from a factory dealer in Los Angeles cost $41,000. But a non-export version obtained in Europe through a gray-market dealer would cost almost $16,000 less--including costs of shipping and conversion to U.S. standards.

Business Boomed

Numbers were staggering. A Congressional Research Survey reported that in 1985, the gray market had become a $1-billion business. The National Highway Traffic Safety Administration reported that of 65,000 Mercedes cars imported to the United States in 1984, 33% were gray-market vehicles.

One-third of all gray-market cars shipped to the United States came to California, where the state’s prohibition against importing and registering new cars failed to faze the shady. They, in a reversal of the auto dealer’s classic mischief, simply rolled speedometers forward .

“You could pick up the classifieds and it was amazing how many European cars there were for sale with 7,501 miles on them,” a DMV investigator said. “Getting them smogged wasn’t a problem. Don’t put my name to this, but they say that for $100 you can get an elephant smogged in the San Fernando Valley.”

Unfortunately, explained Mike Dietl of Dietl Enterprises in Mission Viejo, the sweet smell of quick bucks brought out the carpetbaggers.

Eager Entrepreneurs

“It (the gray market) exploded,” he said. “Corner service stations and people in their garages at home started doing it (federal conversions). Some of them didn’t know what they were doing and most were blatant cheaters.

“I’ve seen painted broomsticks or water pipes used for door beams. They (converters) just did the obvious that could be seen from the outside, but nothing inside the doors or bumpers.”

Seth Nadel, a special agent with U.S. Customs in San Diego, said that a year ago he knew of more than a dozen conversion shops in San Diego County and “all could be convicted of some felony.”

According to EPA spokesman Mary Smith, dealers would take photographs of engines and internal conversion work under way on one car (photographic proof being a requirement for DOT and EPA approval) and shoot each modification from several angles. The additional prints would then be used to confirm work performed on other cars applying for federal clearance . . . when, in actual fact, no internal modifications had been made to those other cars.

In 1984, U.S. Customs seized 500 imported cars that were not in compliance with federal standards. That meant thousands of other illegal, even unsafe vehicles slipped in undetected. Cars stolen in Milan and burned-out Hamburg taxi cabs and wrecks rebuilt in Paris regularly showed up on California’s gray market.

Good-Faith Purchase

An Orange County dealer bought 29 Ferraris and Mercedes during a two-year period. It was a good-faith purchase from a European contact. All the cars, subsequently, turned out to be stolen.

“I’ve seen speedometers rolled away from 130,000 miles to 30,000 miles,” Nadel continued. “Some European countries will not allow cars with visible rust. So they’d be shipped here, they’d be given new paint and the cars would look real nice. For 60 days.

“I’ve never before seen a Mercedes rust through its roof. Now I’ve seen three of them.”

Pete Smith, president of Bob Smith Porsche Audi in Hollywood and a spokesman for the Greater Los Angeles Motor Car Dealers Assn., remembers a customer who wanted some work done on his gray-market Porsche.

“He said the air conditioning would not get cold,” Smith said. “When we examined the car, there was no air conditioning.”

Oja said he has seen top-scale workmanship that easily enabled some gray-market cars to meet EPA standards. The anti-smog equipment was always of superior quality, even factory approved. “Then it was pulled off after the (certification) test or replaced with inferior equipment,” he said.

At best, several industry observers agreed, a buyer stood only a 50-50 chance of obtaining a car with legal equipment and satisfactory performance.

Said state prosecutor Dawson: “Only now are customers finally realizing that the bitterness of the low quality lingers longer than the sweetness of the low price.”

Battle lines quickly formed and in the forefront of gray-market countermeasures were Mercedes, Porsche and BMW, the U.S. distributors suffering the heaviest intrusion.

In early 1985, in what some claimed was a blunt and mighty salvo against direct importers, Mercedes sent a letter to banks, insurance companies and leasing companies telling them how to identify a gray-market car by its serial number. It was not, a company spokesman insisted, an attempt to upset the financing and insuring of gray-market cars. “We’re just saying make your own decision . . . but be aware.”

Porsche issued the media its 13-page “rational overview” of the situation. The document condemned its gray-market competition for supplying “potential pollution time-bombs . . . a perpetually rough-running, hard-starting, fuel-guzzling hybrid.”

Manufacturers fought back with improved U.S warranties and, in a move that many saw as a beginning of the end, began importing U.S.-legal versions of specialist marques--such as the Mercedes 500 series and the Porsche 911 Turbo--that were gray-market favorites.

Yet if there was a recurring theme to the opposition, it apparently had nothing to do with profits. It had everything to do, said distributors, with shoddy and hazardous gray-market modifications that tarnished the reputations of Mercedes, Porsche and BMW.

Earlier this year, Mercedes was snagged badly by newspaper accounts surrounding the fatal California crash of a Mercedes 500SE.

The case involved John C. (Sandy) Walker, 55, a San Francisco architect. He was driving his 1982 Mercedes when it skidded out of control on the Silverado Trail in the Napa Valley, crashed and burst into flames. His passenger was burned to death. Walker was charged with vehicular manslaughter.

During the trial in Sonoma County Superior Court, Walker’s attorney, John Keker, admitted that his client had been speeding at about 88 m.p.h. He also conceded that Walker had a blood alcohol level of .14 at the time of the accident. A driver is considered legally drunk with a .10 reading.

But the real cause of the accident, Keker said, was the Automatic Braking System on the Mercedes that malfunctioned and threw the car into a fatal skid.

Defense testimony held that there was a fire in the engine compartment of the Mercedes immediately before the accident. That, said an expert witness, destroyed the ABS computer and that in turn caused the wheels to lock.

And the fire, Keker alleged, was caused by the installation of inadequate emission hoses when the Mercedes was converted for U.S. use by the now defunct Trend Imports owned by jailed Mardikian.

Walker was found not guilty of vehicular manslaughter.

“But for anybody reading the papers, it looked like a Mercedes is self-combusting, and that doesn’t make us feel very comfortable,” Mercedes spokesman A. B. Shuman said. “The testimony to the cause of the accident was that the ABS failed. Not that he was drunk. Not that he was speeding.”

AICA’s Jackson contends that anti-gray-market maneuvering by manufacturers and government action against conversion shops is discriminatory, protectionist and an orchestrated attempt “to slam dunk the direct import industry.”

There is no doubt, he acknowledged, that the gray market has its “bad actors.” On the other hand, he said, the association is working “to migrate toward a level of acceptable (automotive) compliance” through self-policing and establishment of industry standards and procedures.

Jackson challenges Mercedes’ claim that gray-market conversions have harmed the manufacturer’s reputation.

“That’s absolute nonsense,” he said. “As long as they make a product of quality that continues to perform, that’s what counts. These isolated events (accidents) don’t tend to affect the marque.”

Jackson claims that a gray market benefits American consumers by offering them a full choice of imported automobiles at a price established by the marketplace and not by the dictates of manufacturers with a monopoly on sales and distribution.

“We don’t make cars. We are a function of the marketplace. . . . We exist so that if the manufacturer chooses to discriminate, whether on prices or model selection, than here comes the direct importer.”