The Gray Ferrari I t all got started when Robert L. Johnson had dinner at Mr. K’s Chinese restaurant with Michael Jordan of the Washington Wizards and David Falk, the leading sports agent. When the discussion turned to cars, Johnson mentioned his interest in getting a Ferrari. Both Falk and Jordan recommended their respective dealers but Johnson found the going tough. Only a select number of Ferraris are made annually, and the automaker limits how many are sold through U.S. dealers to about 1,000 units. In practice, anyone placing an order would have to wait over two years for delivery for a car that would cost $200,000 to $300,000 depending on the model. A New Jersey dealer had a Ferrari available, but, at $300,000, Johnson felt the price was too high. Michael Jordan’s dealer had a 360 Modena available for $160,000. Although he bought it, it was not exactly what he had wanted because the Modena is not a convertible. Franco Nuschese, the owner of Georgetown’s Café Milano, referred Johnson to a dealer in Munich who had Ferrari 360 Spiders available at $190,000. Johnson wired the money to Munich and expected to have delivery within days. The Standards Only after the purchase of the 360 Spider did Johnson discover that it needed to conform to certain government standards, mainly those relating to emissions and safety (a fact that led to Johnson’s Ferrari sitting in a dealer warehouse for months). The greatest obstacles were in satisfying the rules of the Office of Vehicle Safety Compliance (OVSC), a branch of the National Highway Traf- fic Safety Administration (NHTSA) in the Department of Transportation (DOT). Nonconforming import cars (from outside the United States and Canada) have to be reported to the OVSC by registered importers (RI) on behalf of the buyer. In 2002, the NHTSA reported 23 registered importers who “specialize in European or gray-market cars.” The RI submits a petition explaining how they will replace foreign parts with U.S. parts and adjust the engineering. The bumpers, for example, are thicker on the North American versions; seat-belt warning systems have to be added; and speedometers must be adjusted from kilometers to miles. Petitions are available for public comment, although they are extremely rare. From 1991 to 2001, fewer than ten objections were filed. There has been a substantial increase in the number of nonconforming vehicles entering the United States. An ever-growing gray market for automobiles, especially luxury models, has emerged. Gray-market goods are de- fined as items manufactured abroad and imported into the United States without the consent of trademark holders. Gray-market goods are not counterfeits; however, differences may exist between these goods and those goods produced for U.S. or North American sale. In 2001, a total of 199,431 nonconforming vehicles were imported (up 15 percent from 173,841 in 2000). The number of RIs has also increased as a result. Automakers, while aware of the practice, could not look away as they had done in the past. The interest in gray-market Ferraris was the result of the low number of cars authorized for import and the high value of the dollar (from 1997 to early 2002). The strong dollar meant savings of 30 to 40 percent in most cases. Ferrari’s Response In late June 2001, Ferrari took the unprecedented step of asking the DOT to halt importation of 2001 model Ferrari Modenas and 550 Maranellos until the company could prepare its objections to gray-market imports. On August 6, Ferrari’s formal brief stated that gray-market imports differ from their North American counterparts in “hundreds” of ways and cannot be readily modified to meet U.S. requirements. This meant a request for federal intervention in denying imports of Ferraris not originally intended for the United States. In the technical documentation provided by Ferrari, a total of 234 parts, with a suggested retail price of $56,584, are needed to bring a 2001 non-U.S. model 550 into compliance. A total of 306 parts ($68,021) are needed for a 360. As a result, Ferrari had serious reservations about whether modifications to non-U.S. cars proposed by RIs would be sufficient to meet needed emission and safety requirements. For example, the RI’s petition may state that doors on all 550s are identical, but doors on non-U.S. cars are not fitted with side-impact protection bars. Enzo Francesconi, Ferrari NA’s director of technical services, said the company was not taking the action for business reasons but because it was concerned about safety. In a related move, Ferrari informed potential buyers of its limited-production $258,000 550 Brachetta that they would be required to sign an agreement prohibiting them from reselling the car to anyone but their Ferrari dealer within the first year of ownership. The reported rationale is to prevent speculation in these exotic cars. Ferrari alleges that gray imports have no impact on authorized dealers’ profits and that the actions taken are really to protect the company’s reputation. It categorically rejects owner and dealer complaints about allegations of control for profit. The Reaction Reaction from RIs as well as (would-be) owners was swift and vehement. Rich Goings, a Ferrari owner and chairman of Tupperware Corporation, filed a letter with the OVSC stating: “The case currently being presented by Ferrari NA is nothing more than an attempt to continue to artificially influence market demand to support inflated profit margins. Should this continue, I feel compelled to leverage the influence of companies such as mine with the legislative branch to launch an investigation.” In a letter to his congressional representative, Doug Pirrone, president of Berlinetta Motocars in Huntington, New York, alleged that Ferrari’s goal “is to control the market, ensure a monopoly, fix the prices, and eliminate all competition.” In the meantime, many RIs have felt the strangling effect of Ferrari’s action on their businesses. “It’s on lifesupport now,” said Lois Joyeusaz, CEO of J.K. Technologies, one of the RIs registered with the DOT. The dealer had to start storing cars, such as Mercedes-Benzes, Porsches, and Ferraris, on a remote farm 90 miles away during its wait for government approval. Government in the Middle The OVSC found itself caught in a predicament between Ferrari owners and Ferrari itself. Kenneth Weinstein, associate administrator for safety assurance at the NHTSA who oversees the OVSC, stated that the office “wanted to give everyone the right opportunity to make their points” even if that caused delays in approvals and owners getting possession of their cars. As far as RIs’ complaints about ever-growing inventories of imports that could not be delivered to rightful owners, Weinstein stated: “We are doing our job, and if they made a financial commitment that we would be done reviewing their petitions by a particular time, that is not the government’s responsibility.” A Side Note In a rare comment from the public during the petition processes, the head of the Original Automobile Manufacturers’ Association, John Linder, took exception to many of the RIs’ comments. Upon investigation by a number of parties, records showed no evidence of any such association nor of a person called John Linder. A person calling himself John Linder contacted The Washington Post and stated as his motive that he was not too keen on the idea of rich people trying to bring in luxury cars, which he deemed are in violation of safety standards. He vowed no affiliation with Ferrari or with authorized dealers. The Decision On April 10, 2002, the following announcement was made by the NHTSA and became effective immediately: “This notice announces the decision by NHTSA that 2001 Ferrari 360 passenger cars not originally manufactured to comply with all applicable Federal motor vehicle safety standards are eligible for importation into the United States because they are substantially similar to vehicles originally manufactured for importation into and sale in the United States and certified by their manufacturer as complying with the safety standards, and are capable of being readily altered to conform to the standards.” The same decision was made with respect to the 550 model. The landmark petition on which the decision was based was made by J.K. Technologies and generated 21 responses, of which 19 were in favor and 2 against. Mr. Linder’s comment was not responded to given that he proved to be a “fictitious entity.” Ferrari suffered a setback with this decision. Question 1. Gary Roberts, a Costa Mesa, California, importer stated: “Ferrari’s control freaks ought to cooperate with importers and let the free market take care of itself.” Comment. 2. Does Ferrari’s case prove that requiring that products be delivered only through approved distribution channels ensures the highest quality for the customer? 3. Given its loss, what alternative actions are open to Ferrari
The Gray Ferrari
I t all got started when Robert L. Johnson had dinner at Mr. K’s Chinese restaurant with Michael Jordan of the Washington Wizards and David Falk, the leading sports agent. When the discussion turned to cars, Johnson mentioned his interest in getting a Ferrari. Both Falk and Jordan recommended their respective dealers but Johnson found the going tough. Only a select number of Ferraris are made annually, and the automaker limits how many are sold through U.S. dealers to about 1,000 units. In practice, anyone placing an order would have to wait over two years for delivery for a car that would cost $200,000 to $300,000 depending on the model. A New Jersey dealer had a Ferrari available, but, at $300,000, Johnson felt the price was too high. Michael Jordan’s dealer had a 360 Modena available for $160,000. Although he bought it, it was not exactly what he had wanted because the Modena is not a convertible. Franco Nuschese, the owner of Georgetown’s Café Milano, referred Johnson to a dealer in Munich who had Ferrari 360 Spiders available at $190,000. Johnson wired the money to Munich and expected to have delivery within days.
The Standards
Only after the purchase of the 360 Spider did Johnson discover that it needed to conform to certain government standards, mainly those relating to emissions and safety (a fact that led to Johnson’s Ferrari sitting in a dealer warehouse for months). The greatest obstacles were in satisfying the rules of the Office of Vehicle Safety Compliance (OVSC), a branch of the National Highway Traf- fic Safety Administration (NHTSA) in the Department of Transportation (DOT). Nonconforming import cars (from outside the United States and Canada) have to be reported to the OVSC by registered importers (RI) on behalf of the buyer. In 2002, the NHTSA reported 23 registered importers who “specialize in European or gray-market cars.” The RI submits a petition explaining how they will replace foreign parts with U.S. parts and adjust the engineering. The bumpers, for example, are thicker on the North American versions; seat-belt warning systems have to be added; and speedometers must be adjusted from kilometers to miles. Petitions are available for public comment, although they are extremely rare. From 1991 to 2001, fewer than ten objections were filed. There has been a substantial increase in the number of nonconforming vehicles entering the United States. An ever-growing gray market for automobiles, especially luxury models, has emerged. Gray-market goods are de- fined as items manufactured abroad and imported into the United States without the consent of trademark holders. Gray-market goods are not counterfeits; however, differences may exist between these goods and those goods produced for U.S. or North American sale. In 2001, a total of 199,431 nonconforming vehicles were imported (up 15 percent from 173,841 in 2000). The number of RIs has also increased as a result. Automakers, while aware of the practice, could not look away as they had done in the past. The interest in gray-market Ferraris was the result of the low number of cars authorized for import and the high value of the dollar (from 1997 to early 2002). The strong dollar meant savings of 30 to 40 percent in most cases.
Ferrari’s Response
In late June 2001, Ferrari took the unprecedented step of asking the DOT to halt importation of 2001 model Ferrari Modenas and 550 Maranellos until the company could prepare its objections to gray-market imports. On August 6, Ferrari’s formal brief stated that gray-market imports differ from their North American counterparts in
“hundreds” of ways and cannot be readily modified to meet U.S. requirements. This meant a request for federal intervention in denying imports of Ferraris not originally intended for the United States. In the technical documentation provided by Ferrari, a total of 234 parts, with a suggested retail price of $56,584, are needed to bring a 2001 non-U.S. model 550 into compliance. A total of 306 parts ($68,021) are needed for a 360. As a result, Ferrari had serious reservations about whether modifications to non-U.S. cars proposed by RIs would be sufficient to meet needed emission and safety requirements. For example, the RI’s petition may state that doors on all 550s are identical, but doors on non-U.S. cars are not fitted with side-impact protection bars. Enzo Francesconi, Ferrari NA’s director of technical services, said the company was not taking the action for business reasons but because it was concerned about safety. In a related move, Ferrari informed potential buyers of its limited-production $258,000 550 Brachetta that they would be required to sign an agreement prohibiting them from reselling the car to anyone but their Ferrari dealer within the first year of ownership. The reported rationale is to prevent speculation in these exotic cars. Ferrari alleges that gray imports have no impact on authorized dealers’ profits and that the actions taken are really to protect the company’s reputation. It categorically rejects owner and dealer complaints about allegations of control for profit.
The Reaction
Reaction from RIs as well as (would-be) owners was swift and vehement. Rich Goings, a Ferrari owner and chairman of Tupperware Corporation, filed a letter with the OVSC stating: “The case currently being presented by Ferrari NA is nothing more than an attempt to continue to artificially influence market demand to support inflated profit margins. Should this continue, I feel compelled to leverage the influence of companies such as mine with the legislative branch to launch an investigation.” In a letter to his congressional representative, Doug Pirrone, president of Berlinetta Motocars in Huntington, New York, alleged that Ferrari’s goal “is to control the market, ensure a
Government in the Middle
The OVSC found itself caught in a predicament between Ferrari owners and Ferrari itself. Kenneth Weinstein, associate administrator for safety assurance at the NHTSA who oversees the OVSC, stated that the office “wanted to give everyone the right opportunity to make their points” even if that caused delays in approvals and owners getting possession of their cars. As far as RIs’ complaints about ever-growing inventories of imports that could not be delivered to rightful owners, Weinstein stated: “We are doing our job, and if they made a financial commitment that we would be done reviewing their petitions by a particular time, that is not the government’s responsibility.”
A Side Note
In a rare comment from the public during the petition processes, the head of the Original Automobile Manufacturers’ Association, John Linder, took exception to many of the RIs’ comments. Upon investigation by a number of parties, records showed no evidence of any such association nor of a person called John Linder. A person calling himself John Linder contacted The Washington Post and stated as his motive that he was not too keen on the idea of rich people trying to bring in luxury cars, which he deemed are in violation of safety standards. He vowed no affiliation with Ferrari or with authorized dealers.
The Decision
On April 10, 2002, the following announcement was made by the NHTSA and became effective immediately: “This notice announces the decision by NHTSA that 2001 Ferrari 360 passenger cars not originally manufactured to comply with all applicable Federal motor vehicle safety standards are eligible for importation into the United States because they are substantially similar to vehicles originally manufactured for importation into and sale in the United States and certified by their manufacturer as complying with the safety standards, and are capable of being readily altered to conform to the standards.” The same decision was made with respect to the 550 model. The landmark petition on which the decision was based was made by J.K. Technologies and generated 21 responses, of which 19 were in favor and 2 against. Mr. Linder’s comment was not responded to given that he proved to be a “fictitious entity.” Ferrari suffered a setback with this decision.
Question
1. Gary Roberts, a Costa Mesa, California, importer stated: “Ferrari’s control freaks ought to cooperate with importers and let the free market take care of itself.” Comment.
2. Does Ferrari’s case prove that requiring that products be delivered only through approved distribution channels ensures the highest quality for the customer?
3. Given its loss, what alternative actions are open to Ferrari
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