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#85 – Gray Market Cars

by | Mar 2, 2017



Toyota in Japan was concerned that the Lexus LS400s in the U.S. were being sent back to Japan and re-sold at much higher prices. This sometimes happens when a car is not available in a certain market, and the LS400 was not yet being sold in Japan. The industry refers to these vehicles as “gray market cars.” Some at Lexus called them “swimmers.”


“Black market” means selling a product illegally, while “gray market” is selling a product legally but outside of the manufacturer’s intended distribution channel. Paragraph VII(B) of the Lexus dealer agreement read, “Dealer is authorized to sell LEXUS Motor vehicles only to customers located in the United States. Dealer agrees that it will not sell LEXUS Motor vehicles for resale or use outside the United States.”


Lexus dealers were selling cars to customers in the United States, but a few of those customers, typically car brokers, were turning around and selling them to customers in Japan. U.S. anti-trust laws allowed Toyota no legal or contractual authority to penalize individuals who purchased LS400s from dealers and then shipped them to Japan. In addition, there were no U.S. export laws prohibiting individuals from exporting Japanese-made vehicles from the U.S. to Japan.


The legal department and distribution department kept bringing this issue to my attention. I sent a letter to each of the dealers advising them of this problem, but it had little effect. I assumed this was a minor issue and didn’t spend a lot of time worrying about it.


The President of Toyota Motor Corporation in Japan, Dr. S. Toyoda, soon visited America. Dr. Toyoda was having a dinner with all the senior managers of Toyota, USA at the Hyatt Regency in Long Beach. Before dinner, he approached me. Sometimes he spoke in English, but other times he used a translator. This time he used a translator. I listened patiently and then waited for the translation.


Dr. Toyoda wanted to know about the “gray market” cars and what we were doing to stop them. I launched into a long defense, explaining the dealer agreement and the limited legal options available to us, while assuring him we had the problem under control. Without waiting for a translation, Dr. Toyoda fired back in Japanese. The translator was uneasy as he explained that Dr. Toyoda said his next-door neighbor had purchased an LS400 from the U.S.


I was caught completely off guard and stammered an apologetic answer, assuring him I would do everything possible to stop the flow of cars back to Japan. By March, the number of cars sent back to Japan had risen from 13 to 547. In an attempt to slow these “gray market” cars, we took one of the brokers who was sending cars back to Japan to court, but we lost.


Eventually the problem took care of itself; the Toyota Celsior, the same car as the LS400 in the U.S., finally went on sale in Japan. This eliminated the need for them to be imported. Japanese buyers, however, still changed the Celsior badging on their cars to Lexus.


“Don’t assume you know it all.” Proverbs 3:7 (MSG)


Through July 1990, the car industry was down 4.6% from 1989. Despite the luxury car segment being up, Lexus was still struggling to meet the sales goal for 1990. Fortunately, the customer satisfaction goals we had set for the year were being met.


(To be continued in “The 1990 Little Engine That Could: Mid-Year Update”)