BC Business
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It’s a dirty little secret among automakers that sticker prices are thousands higher in Canada than in the U.S. but thanks to the Internet and helpful brokers, buyers are importing their own cars by the thousands.
Joan started looking for a new vehicle last August and quickly decided she wanted a 2007 Subaru Outback. Frustration set in when, after weeks of searching, none of the Lower Mainland dealers could get her the car. Jubilation soon replaced disappointment when Joan discovered that she could buy the exact model she wanted in Seattle, have all the export-import paperwork and fees taken care of through a broker and drive it back to Canada. Not only that, but she says the car cost her $8,000 less than if she had bought it in Canada. Joan (not her real name) is one of thousands of Canadians – a high proportion in B.C. and Alberta – who have discovered that it’s far cheaper to buy a new or used car in the U.S. than it is to buy the same vehicle at home. This is good news for customers, but not so much for many of the major automobile manufacturers and, to a lesser extent, the local dealers who sell their cars. Manufacturers do not want buyers crossing borders to get wicked deals on new cars, and most put roadblocks in the way to try and discourage the trade. Joan’s desire for anonymity underlines local dealers’ disdain for cross-border shopping: “I’m afraid I’ll lose the one local dealer I found who will honour the warranty and do the service work,” she says. Nevertheless, the cross-border auto business is booming, buoyed by a Canadian dollar that is hovering around US$0.90 now. The North American Automobile Trade Association (NAATA) – whose members include auto brokers in the business of moving vehicles across the border in both directions – reports that 2006 was a record year for individual vehicle imports from the U.S., with 103,806 vehicles crossing the border. Those 2006 numbers are 50 per cent higher than 2005 levels, and all indications are the numbers will grow again this year – providing the value of the Canadian dollar remains around the US$0.90 range. Those national numbers are not segregated by province, but the Insurance Corporation of British Columbia’s (ICBC) statistics for out-of-country vehicles registered in 2006 show a spectacular growth curve, climbing from 6,700 in 2002 to 15,800 in 2005, and up to 24,000 in 2006. Spokesperson Doug Henderson says that, while the ICBC statistics do not include the country of origin, it is reasonable to assume that a significant majority of those vehicles came from the U.S. Why the sudden surge? “It’s consumer driven,” says NAATA’s Brian Osler. “And that’s a function of the Canadian population versus the U.S. population. Canadians have more of an awareness of the U.S., and most of us live close to the border.” Osler says Canadian shoppers might not be doing all the legwork themselves; brokers are doing torrid business taking care of all the paperwork at the border. “The Internet is a big factor,” he notes, referring to how easy it is for car shoppers to compare prices online. “Years ago, they didn’t have that.” According to Osler, the big auto manufacturers treat Canada and the U.S. as segregated markets, and they generally try to extract a much higher margin from Canadian sales than they do from U.S. sales. However, they have trouble controlling that price differential because the North American Free Trade Agreement (NAFTA) allows duty-free trade in vehicles in either direction across the border. For example, seven or eight years ago when the Canadian dollar was trading around US$0.65, it was cheaper for Americans to buy cars in Canada – and the border flow was in the other direction. Manufacturers weren’t thrilled with that scenario, either. “Generally, they want you paying $7,500 or so more in Canada,” says Osler about how high the difference can be. He adds that when NAFTA took away all the old trade barriers, “those barriers were replaced with manufacturer-imposed barriers. They play games like cancelling warranty coverage on cars; they ask certain car buyers to sign non-export agreements, or there’s a $10,000 penalty or something. There’s one manufacturer who even withholds recall information.” Americans, who are much more litigious than Canadians, formed consumer groups and launched class-action lawsuits against the car manufacturers when they tried to prevent the flow of cars from Canada into the U.S. So far, no Canadians have filed lawsuits in Canada, although Osler believes that could happen if the cross-border numbers continue to grow unabated and manufacturers turn up the heat. David Adams, president of the Association of International Automobile Manufacturers of Canada, isn’t sweating it, though. “The last time we had a discussion about this was about the middle of last year. Since then, it hasn’t been on our radar screen,” he says. When asked to explain why manufacturers price their vehicles higher in Canada than in the U.S., Adams defers to the individual manufacturers. But individual manufacturers are reluctant to discuss it in detail. Honda Canada Inc. VP Sandy Di Felice is blunt: “We don’t discuss publicly our pricing policies.” General Motors of Canada Ltd. media-relations manager Patty Faith says GM is asked about the pricing differential so often they’ve prepared a stock statement, which she sends by email. It reads, in part: “There is no market more competitive than the automotive industry and the Canadian market is mainly driven by affordability. As such our strategy in Canada is to put our resources into offering consumers a total value package at a very competitive lease or finance payment.”
The GM statement goes on to describe U.S. and Canadian buyers as “fundamentally different,” but it never deals directly with the price differentials, saying only, “Market conditions, which differ widely in both countries and vehicle segments, is the real defining factor in determining our marketing strategy.” Toyota Canada Inc.’s PR spokesperson Jodie Benedek takes the same approach, emailing a vague statement in response to questions about pricing policies. It says, Toyota, “like many of our competitors, sets pricing in the Canadian market to be competitive within our market. As such, our pricing can vary from that of other countries.” The statement goes on to point out that Toyota’s Canadian sales are currently setting records. Randall Reid of PNT Registered Importers Inc. runs a one-man Canada-wide brokerage from an office in Kelowna, and he has seen a dramatic increase in his cross-border-car business. Reid will handle all the paperwork, customs documents and shipping to get a U.S.-purchased car into a Canadian client’s hands. “I’ve probably tripled my business in the last couple of years,” he says. “I think, until we have a realignment in the dollar, it will keep growing. The manufacturer can’t put a stop to it. Identical pricing (in Canada and the U.S.) would end it, but they don’t really care because they are making too much money.” Reid says he brokers deals all over the country, usually for people who want the price advantage but don’t want to do all the paperwork themselves. Aileen Gibb is based in Calgary and runs a similar operation for Cross Border Trading. She’s much more matter-of-fact about this trade because she’s seen it work in both directions. “Cross-border does what it does,” she says. “We’re probably the only ones that sit and wait and go, ‘Whatever.’ People, when they call me now, they ask, ‘Are you going north or south?’ In February, we shipped about 150 cars coming north and we did 100 trucks going south. Trucks go south. Cars are always cheaper in the States than they are in Canada.” Gibb cautions that the Internet, while expanding the market and facilitating the ability to do these kinds of deals, also leaves people open to scams if they are not careful. She cites the example of a man who called with the following query: “So I bought this bike out of California and the guy is in the Philippines and I wired him the money. Do you think there might be a problem?” He never saw his bike nor retrieved his money. The other danger, Gibb says, comes from people not checking to make sure the vehicle they are buying in the U.S. is on the official Transport Canada list of vehicles suitable for import into Canada. They get the vehicle into the country, and Transport Canada makes them take it back.
B.C.’s car dealers are, to a certain extent, caught in the middle. They suffer when a B.C. resident takes the trouble to buy a vehicle in the U.S. – new or used – but they benefit from the fact that they, too, can buy used vehicles in the U.S., bring them home and sell them for a healthy mark-up on their own lots. “Obviously, we don’t want to lose business to another jurisdiction, but there’s nothing we can do about it,” admits Glen Ringdal, president and CEO of the New Car Dealers Association of B.C. “We don’t set our hair on fire about it; we try to talk to customers and remind them of the importance of having sales and service functions in the same place – or at least nearby.” Ringdal confirms that dealers themselves will often import used cars from the U.S., pointing out that the flow has always gone in both directions, depending on what the exchange rate is. But when it comes to new cars, B.C. dealers have no choices – they take their stock from the manufacturers, who determine what the pricing levels are. And he concedes that the cross-border trade is a big problem for manufacturers: “In the last big go-round when it was all going from here south, they were not at all happy. They are very strong with their dealers, saying, ‘Your pricing and your vehicles are for your market, not for the U.S.’” [pagebreak] A simple fix to stop the new cars from flowing in both directions would be for harmonized pricing on both sides of the border. That would remove the incentive for cross-border shopping. But NAATA’s Osler doesn’t see that happening for a number of reasons. “They don’t hate Canadians; they don’t hate Americans,” he explains. “They are simply trying to get what the market will bear. Manufacturers would love to charge more in Manhattan than they do in Baton Rouge, but it wouldn’t fly in U.S. business practice. “If they dropped their price here by $5,000, it might stop 30,000 new cars coming into the country, but they now lose the extra $5,000 on the cars they sell here,” he says. Osler also points out that the new-car distribution and dealership systems have remained virtually unchanged since the birth of the industry in the early 20th century. “In this day and age, it’s not the most appropriate model, but it’s the system they are stuck with. They are not going to change that either,” he says. Manufacturer roadblocks have been successful to the point that Osler estimates only 20 per cent of the imported vehicles are new vehicles. The rest are second-hand. “[Manufacturers] have no involvement in the selling of used cars. They sell new cars,” he observes. “Once it’s off the lot, the umbilical cord is cut and the baby is on its own.” Osler believes that growing consumer awareness could well change the one serious roadblock for cross-border shopping for new cars – withholding warranty coverage. Customers buying a new car anywhere would balk at taking it on without any warranty coverage.
But, as Osler is quick to point out, there are attractive options that could negate even this stumbling block. A savings of $5,000 to $10,000 dollars could buy a lot of repairs over a two- or three-year period if a customer wants to take the gamble. The other alternative is to buy independent warranty coverage at a cost of about $1,500 – a reasonable expense if you saved $5,000 on the purchase price. Osler’s association is so convinced that cross-border car shopping is a growth industry that it is publishing a directory of cross-border motor-vehicle specialists, ready for distribution sometime this year. The directory will list dealers and other companies specializing in the cross-border purchase and sale of motor vehicles, as well as provide information on shipping, transportation, foreign exchange, customs brokerage, vehicle history checks, vehicle pricing, specification information, replacement warranties, insurance and speedometer conversions. Joan, who initially had no intention of crossing the border to buy her new car, says she would not hesitate to do it again. Her experience even inspired a family member to buy a used Honda across the border, at a savings of about $3,000. “If I was buying a used car that wasn’t on warranty,” says Joan, “I wouldn’t hesitate to go across the line.”