Invaded by the Grays Page 4

"The 'Vietnam' goods were being gray-marketed into Singapore, Thailand, and Hong Kong. They were undercutting everybody like crazy. It cost the legitimate distributors in those countries a tremendous amount of business, and it cost us a lot of business. When we found out what was going on, we had $40,000 worth of orders in the house for the Viet Tien Sewing Machine Company---a substantial amount of money. We told them we were back-ordered. A month later we told them the same thing. We never officially cut them off, but in reality we cut them off immediately when we found out what they were doing. To simply cut them off wouldn't hurt them; not telling them means they'll continue to take orders and receive advance payments from their customers. They'll never be able to deliver, their reputation will be damaged, and hopefully they'll go out of business. It was necessary to protect our distributors in the countries they were invading."

For a small-scale manufacturer with a close-knit handful of dealers, gray marketing is not a particularly worrisome issue. But as volume increases, and the number of dealers grows from few to many, the problem can easily spill out of control. Andy Murray of Parasound, which has over 300 dealers, says, "One of our biggest problems is with these fly-by-night operations that advertise in the backs of the magazines and claim to be authorized by every manufacturer known to man. An unsuspecting customer will call us and say he has a problem. When he tells us he bought the product from 'Shady Audio,' we have to tell him, 'Sorry, he's not a dealer,' and it makes us look bad. It means that someone is sending product sideways, but who?

"You have to go to a lot of trouble to barcode items and track them. Some gray marketers are removing our serial numbers and putting on their own. This means we've got to install clandestine serial numbers inside for tracking. That's a huge expense. We play hardball when it comes to trans-shipping. If we can prove that someone is doing it, we cut them off. Fortunately, some of the big mail-order discounters have gone out of business."

The effect of taxes, import duties, and distributor markups means that the cost of any particular item can vary wildly from place to place. As Roger Skoff points out, until recently India had a 255% import duty on consumer electronics. "This means that a $1000 distributor-cost piece automatically goes up to $3500, maybe $3800 with shipping. In order for him to make a profit, he has to mark it up and so does his dealer. The product could easily end up costing over $6000 in India. A guy in India faced with paying that much could fly to the United States, buy one here, and take it home cheaper." Another audiophile mentioned having done something similar a few years ago when the North American distributor had iron-fisted control over a highly desirable exotic British tonearm, which at the time was selling for three times as much in the States as in England. This enterprising fellow simply ordered one from a dealer in London, who sent it over with an associate who was making a trip to New York.

This situation can lead to tough decisions. Cello's Mark Levinson says, "Manufacturers have two choices: to let local prices reflect local costs---including freight, duties, taxes, et cetera; or to institute a one-price policy worldwide, which means a product will be underpriced in some markets and overpriced in others."

Few in the vast readership of the used-equipment journals would disagree that high-end audio is overpriced at the retail level everywhere. A great many of them refuse to play the retail game at all for the good reason that the reselling losses are too great. In their view, a product's true value is closer to wholesale, and reliable pricing guides, such as the Orion Blue Book, back them up. When someone buys a new car, he loses 20% of its value the moment he drives it off the lot. That is the price he pays for the dubious privilege of being its first owner. For the new owner of a piece of high-end audio equipment, the unrecoverable sunk cost is more like 50%---next week, not next year; a pretty rough hit no matter what league you're in.

Veteran audiophile Gordon Hinzmann of Orlando has been trading hi-fi equipment for over 20 years. He puts it this way: "The audio hobby is populated by merchant-hobbyists, people who are continually upgrading their components piece by piece, driven by the mythical audio nirvana, always searching for the Holy Grail. Those of us who are heavily into it, and who frequently buy and sell, are sufficiently impecunious---that is, broke---that we wouldn't be able to do this if we had to pay big prices for the stuff we bought and if we took the typical trade-in beating we would get from most dealers. The gray market is what enables most of us to keep going in the hobby."

An interesting ethical question comes up, as Gordon points out, around the use of used-equipment journals such as Audiomart. "There must be a lot of dealers who hate that publication," he says, "but there are others who use it and advertise in it, not just in the commercial ads, but as private citizens. They do it to sell stuff they haven't been able to move otherwise. Is that ethical?