Gray Market Wanes

Wed October 23, 2002 - Northeast Edition
Pete Sigmund

How has the economic downturn affected the “Gray Market” — imported machines usually sold at discount prices after bypassing the established manufacturer /distributor channels?

Are more contractors buying “gray iron” to help their bottom lines? How many gray machines are coming into the market in the current economy?

Observers throughout the industry, somewhat surprisingly, do not see this furtive market increasing in the present economic climate, though they acknowledge that, like death and taxes, it’s always there.

One thing everyone agrees on: The Gray Market is something that everyone — manufacturers, dealers and customers — should be aware of.

“It’s a tough problem for us and other manufacturers,” said Ben Cordani, a spokesperson of Caterpillar Inc., in Peoria, IL. “We obviously track it, watch it, and work with customers to make sure they receive regular equipment rather than taking a chance on an unknown.”

Here’s an update on the situation from interviews with experts in construction organizations, industry and government.

What It Is

The Gray Market is elusive. In many ways, it’s not black or white, but a gray area that has many shades. It’s an “underground market” in that figures on these imports are difficult to obtain, or even estimate, and a mysterious market. Pockets of activity suddenly emerge in various parts of the country while other areas remain completely unaffected for years.

Christian Klein, Washington, D.C., counsel of the Associated Equipment Distributors (AED), which is headquartered in Oak Brook, IL, told Construction Equipment Guide (CEG) of a market that fluctuates and shifts in different regions of the country with “gray activity” currently noticeable in the Pacific Northwest, Houston, TX, and Utah (see Shades of Gray).

The Gray Market usually involves a third-party broker or marketer who purchases the machines overseas. The equipment may be new or, more often, used. Because of differences in the year of manufacture, advantages in currency exchange and other factors, the broker may be able to sell the machines at a lower price here in the United States than authorized distributors can buy similar equipment from their own manufacturers. This may be done at auctions, through advertisements, or other means.

“Machines on the Gray Market are largely in the mid-size range, like hydraulic excavators or backhoe loaders,” said Cat’s Cordani. “They are logically not large machines like mining trucks with 400-ton payloads, which would entail high transportation costs from places like Asia.”

The Gray Market, it itself, is not illegal, as long as the equipment complies with emissions standards set by the Environmental Protection Agency (EPA), safety requirements of the Occupational Safety and Health Administration (OSHA), and other requirements such as proper identification by serial numbers (including engine numbers).

“Perhaps that’s why it’s called the Gray Market; it’s not as evil as the Black Market,” said one observer.

But make no mistake about it. This market is not popular, to say the least, with manufacturers and distributors.

“What we would say from our standpoint is that everybody has to play by the same rules,” said Nick Yaksich, vice president of government affairs in Washington, D.C., for The Association of Equipment Manufacturers (AEM), headquartered in Milwaukee, WI. “It’s a tough-enough and competitive-enough market playing by the rules. If people don’t do this, it skews the marketplace.”

Some contractors feel differently. If they can purchase exactly the same machines as is being sold by dealers, including engines that meet all standards, and obtain it for a much lower price, why not utilize the Gray Market, they reason.

AED’s Klein countered that argument, “There’s more to an equipment purchase than just the price. When you buy a piece of equipment from an authorized dealer, you know what you’re getting — that it will be able to do what they say it can do, that you’ll be able to get spare parts, and that the dealer has the service and support to back up his promises.”

Less Activity?

The Gray Market doesn’t seem to be as prevalent now as it was in the late 1990s, when between 3,000 and 5,000 used Gray Market machines, mostly small and medium-sized hydraulic excavators (approximately 20 percent of the U.S. market) were estimated to be entering the country. Interviewees said that one reason for this is that demand for equipment is much lower now than, say, in 1998, when construction activity was at a very high level. Although Gray Iron is selling as much as 40 percent lower than the market price, contractors aren’t taking advantage of this because their business is down. Getting bargains in the economic downturn doesn’t help you if you have no place to use the machines.

Another reason is that Gray Market activity usually increases when there’s a strong dollar and other currencies are relatively weak, and decreases as the dollar weakens.

“If the dollar is strong, it tends to help the Gray Market,” said Caterpillar’s Cordani. “As currencies level out, that market starts to dry up, which has happened as the Euro has strengthened.”

“I haven’t heard about any extraordinary amount of Gray Market activity,” said industry observer Frank Manfredi, publisher of Machinery Outlook in Mundelein, IL. “I think one reason is that currencies in other countries are not as low as they have been. Generally, when foreign currencies are lower than the U.S. dollar, it becomes very attractive for people to import into the United States. A year ago, the dollar enjoyed a big advantage. Now just the opposite is taking place. The Euro is actually priced higher than the dollar right now.”

The third party broker usually buys equipment with U.S. dollars. When the dollar is worth more than yen, for instance, he can purchase more cheaply.

AEM’s Yaksich doesn’t see much activity either.

“The Gray Market popped up a couple of years ago, mainly around the engine-emissions issue, but I haven’t heard or seen much from anybody about it lately,” he told CEG.

Emissions Problem

Thousands of Gray Market machines have been stopped at ports, and hundreds of enforcement cases have been set in motion, since the U.S. Customs Service began enforcing emissions regulations on the diesel engines of imported construction equipment in 1998.

The Clean Air Act requires that non-road engines imported into the United States display labels certifying that they meet federal emissions standards. Gray Market equipment, manufactured overseas, may have been intended for a non-U.S. market and therefore may not conform with these standards.

The regulations apply to diesel non-road engines built after a certain date. This date varies according to the engine’s horsepower range. In the 175-to-750 hp (130 to 559 kW) range, for instance, engines built after Jan. 1, 1996, must conform. In the 25-to-50 hp (19 to 37 kW) range, the regulations cover engines built after Jan. 1, 1999.

Customs inspectors therefore check that engines in the regulated areas carry a label confirming that they meet the standards. The engines also must be covered by a Certificate of Conformity certifying that they comply. Importers also must complete, and retain for five years, an EPA declaration form describing the engine.

In February 2000, when Gray Market imports were high, the EPA issued an Enforcement Alert that cited “a dramatic increase in the importation of nonconforming non-road construction and agricultural equipment from overseas,” and added that the agency “has taken many steps to inform industry of these relatively new regulations and to respond to the many industry requests for increased enforcement against illegal imports.”

EPA said its investigations in cooperation with the Customs Service suggested that “a number of imported engines fail to meet these labeling requirements, and a subset may not meet emission standards.”

The Alert added, “These ’Gray Market’ engines undermine our nation’s air quality goals and put law-abiding equipment dealers at a competitive disadvantage.”

As of February 2000, EPA had initiated more than 125 enforcement actions because of uncertified or improperly labeled engines. At the same time, Customs seized or detained more than 2,000 engines. The number seized since then hasn’t been announced.

In the case of first-time violations, the engine is detained, EPA attempts to achieve a settlement within 30 days, and penalties are reduced from the Clean Air Act’s maximum fine of $27,500 per engine. Second-time and repeat violators face seizure of their engines by customs and higher penalties.