The scene is familiar – wide discrepancies between new vehicle prices on either side of an international border. In one country, dealers grateful for the low prices they enjoy and the opportunity of selling across the border; on the other side, dealers either complaining bitterly of unfair competition or else joining in the disputed traffic. And in the middle are indignant manufacturers threatening legal action against what they perceive as infractions of their franchise agreements. Bert Wyatt reports

The British reader might well have the sense of déjà vu, but this is not a European story, it’s a pricing anomaly in the very cradle of commercial competition – North America. The past several decades have seen a steady fall in the value of the Canadian dollar against its American counterpart. At one time almost at parity, it now rates at only 58 U.S. cents. Manufacturers, however, have done little to adjust for this devaluation, thereby progressively causing a substantial gap as expressed in US dollars.

A good example is the Dodge 1500 Pick-up truck, listed at US$22,456 in the United States and at C$22,500 (US$17,540) in Canada, a difference of US$4,916. If one factors in various popular add-ons such as automatic transmission, leather seats and a cassette/CD player, that difference widens to US$7,811 (leather seats are $889 in Canada, $1,380 in America). Studies taken two years ago showed the average difference to be US$2,515, before accessories, since which time the gap has further widened.  

Unlike Europe, the controversy on this side of the Atlantic centres less on carmakers being accused of gouging the retail customer by their lopsided pricing policies than on the damage done to those very manufacturers by wayward dealers taking advantage of the loophole. Dealers in North America may well enjoy greater legal protection than in Europe, but in this instance it is the carmakers that have resorted to the courts, not only to stop the traffic but to punish by financial sanctions those they regard as law-breakers. One can appreciate their concern; the traffic has rocketed from 15,000 vehicles in 1996 to well over 200,000 in 2001 as the currency gap has widened.  

The litigation is aimed at Canadian dealers, on the grounds that export sales (whether direct or indirect) are expressly forbidden under the terms of their franchise agreement. Legal actions take various forms. Marlborough Ford of Calgary was penalised approximately $125,000, representing the price difference on 23 vehicles (later reduced to $52,000 on ten vehicles), but the Alberta Court of Queen’s Bench handed down an injunction, heading off Ford’s action.   However, in legal circles, nothing is final until ‘the fat lady sings’, the fat lady in this case being Canada’s Supreme Court, where the case is likely to end up.

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““lack of clearly-defined procedures to establish an even playing field””

Already Ford has given notice of its intention to appeal, but it may face an uphill battle, judging by the Alberta judge’s comments. Criticising Ford for its “lack of clearly-defined procedures to establish an even playing field”, he characterised the manufacturer’s practices as a “nebulous and ill-defined state of affairs that is constantly subject to its own unilateral and arbitrary review”. So, one may ask, what’s new?

Echoing a point made by the dealer’s attorney, the judge went on: “The charge is a clear penalty, not justified by way of any credible evidence of a figure commensurate with the loss suffered by Ford of Canada or its network of dealers.” These last words have an ominous ring, perhaps casting doubt on the legality of the manufacturer’s dealer agreement, not to mention questioning the logic of its Canadian pricing policies. After all, a not inconsiderable number of vehicles retailed in Canada are made in the US.  

Certainly the precise clause in the agreement that forbids export sales will come under close scrutiny. When I spoke with Ted Babie, owner of Marlborough Ford, he conceded that these cross-border sales do contravene the terms of the agreement, but points out that the clause arose in an unusual way. Some years ago, as the price gap became significant, Ford issued a single-page addendum to the agreement outlawing such sales, asking for it to be “stapled between pages 15 and 16”. Over the years since, dealers have been instructed to interrogate potential customers, culminating in a four-page questionnaire. Not exactly the way to encourage buyers.

Babie explains that brokers across the border go to great lengths to evade being detected, using relatives’ and neighbours’ names. He therefore challenges Ford’s action, not only in its precise financial form but as an unreasonable, even unenforceable, burden on the dealer, effectively trying to prevent the buyer getting the best price.   

In terminating the franchise of a dealership in Quebec, Poirier Valleyfield, Ford accuses the dealer of being “an egregious and long-time repeat offender [in engaging in export sales]”. Ford pleads that it is merely enforcing its dealer sales and service agreement. Poirier Valleyfield, for its part, contends that there has been no contravention of its agreement, and consequently repudiates Ford’s decision. Both parties have accepted court-appointed arbitration, the hearing to take place late summer. Literally, the jury is still out.

Of course, Ford is not the only manufacturer aggrieved over this traffic. Faced with a growing problem in 1999, Honda abruptly stopped honouring warranties on the ‘grey’ cars, and claims now to have halted the traffic. Other manufacturers point to dealer support. In backing Chrysler/Dodge, Ken Zangara, owner of Zangara Dodge of Albuquerque, New Mexico, and chairman of the National Dodge Dealer Council, reserves particular contempt for non-franchise middlemen (brokers) who hover around this trade like bees around a honeypot..

One broker in Port Huron, Michigan, last year processed 10,000 cars and has set his sights on 15,000 in the current year. For his brokerage income, he merely deals with compliance and the paperwork, posting a bond and converting the speedometer to miles from metric, before passing on to a car dealer.

“Chrysler/Dodge is also threatening to withhold warranty, complaining that “thousands of cars” are finding their way across the border”

Chrysler/Dodge is also threatening to withhold warranty, complaining that “thousands of cars” are finding their way across the border. Even so, one Canadian Dodge dealer, who denies any part in the illegal traffic, doubts the carmaker’s resolve to do so, having itself for years bought off-lease and fleet cars in Canada and resold them in the United States. Then again, one dealer in Montana, just 100 miles south of the border, shrugs off the warranty issue anyway. He says he would just buy the customer an aftermarket warranty.

Whatever the outcome of the current squabbles, as long as you have a difference of several thousand dollars in adjacent countries – especially with such an open border as this one – you are going to attract buyers with an eye to the main chance.   

No one could have resisted the pressure for change more fiercely than Europe’s motor manufacturers, but the result was inevitable – a trend to more consistent pricing, which it is hoped will continue with the advent of the euro. Not only are the courts in North America traditionally pro-dealer, and these artificial pricing policies appear to be difficult to defend, but the manufacturers have chosen to air the conflict. They may well live to regret doing so.