“I’m furious about the women’s liberationists. They keep getting up on soapboxes and proclaiming that women are brighter than men. That’s true, but it should be kept quiet or it ruins the whole racket.” —Anita Loos
Executives at Daimler-Chrysler should heed Loos’ message. Sometimes it is better to keep quiet rather than risk ruining “the whole racket.” The racket in this case involves automakers that charge radically lower prices in Canada than the United States. All major manufacturers do it, but the public is getting wise to it now.
First the facts. Recent news reports noted that Chrysler is joining Honda, Nissan and Hyundai in refusing to honor warranties on cars first sold in Canada but then resold into the United States.
The measure is not a response to different expected maintenance costs, vehicle quality or frequency of warranty claims. Rather, it is a punitive step designed to discourage U.S. residents from buying a car in Canada, where most major automakers sell identical models for less money than in the United States.
Once a firm sells a car in either country, it loses any control over what the initial purchaser can do with it. Governments may limit private cross-border sales of property with traditional trade restrictions such as tariffs or quotas, but the original manufacturers cannot.
The automakers can, however, withhold any contractual commitment to repair major defects or unexpected wear that usually accompanies the sale of a new vehicle. That is what Chrysler has just done.
A Chicago Tribune auto columnist cites a $10,000 cross-border differential on Dodge Caravans. One priced at $28,000 in the U.S. might cost $18,000 in Canada. That 62 percent premium to U.S. buyers provides a powerful incentive for someone to buy in Canada and resell in the United States.
The practice is increasing and Chrysler wants to limit it. By denying warranties to U.S. buyers of a vehicle initially sold in Canada, Chrysler and other firms reduce the economic incentives embodied in the price differential.
Why not just charge the same price in both countries? U.S.-Canadian auto manufacturing is the most tightly integrated cross-border industry in the world. Most cars sold in either country contain a substantial proportion of components made in the other. Some parts cross the border as many as five or six times before they appear in a finished vehicle.
Steel from Indiana goes to a machine shop in Ontario, where it becomes a shaft for a starter armature that is wound in Ohio, assembled into a finished starter in Ontario, and bolted into an engine in Michigan that is finally lowered into a car on a final assembly line back in Canada. The reason is that automakers can increase profits by charging different prices in countries with different demand curves. They, of course, portray the practice in terms of generosity to Canadians.
The Tribune article quotes a Chrysler spokesperson as saying that “because Canadians earn less and pay more in taxes, we price our vehicles lower there to make them affordable for that market.”
He would have been just as correct and a bit more honest if he had said: “U.S. residents earn more than Canadians and have lower taxes, so we charge more in the U.S. because those saps will take it and keep on buying.”
The practice is no more or less nefarious than drug firms that charge less in Canada than in the U.S. or chemical firms that charge less for pesticides sold to Canadian wheat farmers than for the same chemicals sold to U.S. grain producers.
These firms also act to limit gray-market re-importation. Drug companies seek state and federal regulation to limit such re-imports to the individual retail level. Chemical firms change the proportions of inert ingredients in pesticides, justifying different government approval and labeling that makes it technically illegal for an Iowa corn grower to use a product sold in Canada labeled for use on wheat even if the active ingredient is the same.
And at root, charging different prices is no different than giving senior citizen discounts in chain restaurants, offering “ladies night” reduced drinks in bars, charging different prices for adjacent seats on the same airliner, or charging higher prices for the same restaurant entrees on Friday and Saturday night than in the rest of the week.
All of these common practices raise revenues and profits above what they would be if one common price were charged to all buyers. The trick for price discriminators is not to “ruin the whole racket.” They can do that as long as they portray their practice of charging higher prices in terms of generosity or giving a “discount.”
Only a Grinch would object to retirees getting a buck off on their chicken fried steak. And what swinging single guy cares if women get reduced-price drinks if it makes happy hour more enjoyable?
But as more people become aware of thousands of dollars in price differences for the same cars on different sides of the border, the harder it will be for auto firms to maintain this differential. Senate candidates got attention by taking busloads of retirees to Manitoba or Ontario for cheaper prescriptions. People will drive great distances for $5,000 or $8,000 off on a new SUV.
Millions of U.S. citizens live within a reasonable drive of the Canadian border. Messing with warranties may reduce the financial incentives a bit, but it advertises the fact that a “racket” is going on here.
© 2002 Edward Lotterman
Chanarambie Consulting, Inc.