Thrifty shades of grey

On a cluttered Phnom Penh street, the sound of a mechanic’s drill echoes through the “Kim Srun Premium Auto” shop, bouncing between the brushed-steel bodies of luxury cars and rebounding off the tin roof above them.

The saleswomen are bored, barely raising their eyes from the floor as they answer basic questions about the new cars on sale at their dealership. The majority of 2018 and 2019 models parked on the lot are Range Rovers, their bodies and interiors covered in a thin plastic sheeting to keep them free from the Cambodian dust.

The saleswomen dutifully point out the new models, repeating from memory: the new Range Rovers are priced from $195,000 to $250,000, they say, while the 2018 BMW sits at around $130,000.

It seems like a good deal: the same Range Rover model at the country’s official dealership would sell for a minimum of $255,000. And, unlike at the official dealership, there is room yet to haggle at Kim Srun Premium Auto.

But a stream of questions about the cars seem to put the salespeople on their guard. When asked, the women say they do not have access to the cars’ import histories – buyers must contact the importer for that. No, they do not know the name of their importer. And no, it would not be acceptable for a buyer to call anyone – not even the official representative of the car brand in the country – to inspect any of their vehicles prior to a sale. All buyers must purchase these cars as they are – if they want the car at all.

Down the road, at “Auto Shop V99”, the salespeople insist that they do not sell any new cars – only second-hand vehicles. But the day before, their store had advertised a brand-new Range Rover for sale on the online forum Khmer24, and reviews of their shop repeatedly mention the range of new cars for sale there.

Somebody’s being less than honest, and for good reason: many of the new cars sold on the Cambodian market, priced at far below any amount an official importer could match, found their way into the country illegally. The hefty tax meant to be levied on all new car imports – which currently stands at roughly 138% of the base price of the car – doesn’t apply to these imports.

At Kim Srun Auto, as the saleswomen become increasingly tight-lipped, the CEO of a major development company in Cambodia is seen walking through the shop’s air-conditioned front, inspecting the newest models on display. Shops like these exist in a sphere above the law, and the Kingdom’s elite are well known to frequent them.

“You don’t want to go to those shops, poking your nose around,” an anonymous source in the automotive industry told Southeast Asia Globe. “There are powerful people running these dealerships, and you’re safest staying out of it.”

Operating in a grey area

Cambodia is the only country in ASEAN to still allow used cars to be imported. As a result, about 80% of the cars on the market in the Kingdom are old and used, each charged a minimal rate at the border on the basis of their age, with tax rates dropping for every additional year of age on the car.

According to the European Chamber of Commerce’s Automotive Committee and members of the Cambodia Automotive Industry Federation (CAIF), official car importers in the country have several complaints about the continued existence of the used car market.

The first argument against the market is one of safety, and it’s an argument that is easy to make. Used cars come into the country with minimal supervision, and it’s fairly common for damaged cars to make their way to Cambodia’s shores.

According to official estimates from the customs department, 6,000 used cars enter the local market each month. Many of those cars likely come from the United States, whose largest export to Cambodia is cars – some new, some old, and some remodelled after significant trauma.

In 2017 alone, the US shipped 29,000 cars to Cambodia, or more than half of the total volume of cars in the Cambodian market. These cars, in many instances, had been caught in hurricane flood waters or involved in wrecks, written off by insurance providers and sold to exporters at US auctions. Every year after a major flood in North America, industry insiders say, car shipments from the US spike, and waterlogged vehicles end up in Cambodian car shops.

Sitting in a plush armchair in a crowded Phnom Penh Starbucks, Rami Sharaf, senior vice president of Royal Group – Cambodia’s largest and most diverse conglomerate and investment company – raised his voice over the whirring of a blender, discarded sugar packets decorating the table before him.

“I have been in meetings about this [used car market]… where I get emotional, because in many cases these cars are badly damaged,” he said, running through examples of used car imports that he had personally seen: cars that had been sawn in half and welded back together, cars that had had their bodies bent in wrecks, cars that were pieced together from parts of other cars and sold as new.

“Why should Cambodia be the trashcan of ASEAN?” He waved his hand at the massive SUVs parked on the crowded street outside. “Who is using the roads, I ask [the government officials]? It is me, and you, and all of our kids.”

Sitting in a matching armchair to the right of Sharaf, Peter Brongers – the chairman of CAIF, and formerly the CEO of BMW under the Royal Group – nodded his head in agreement. Brongers used to be especially vocal about the potential he saw in the Cambodian market, before his company chose to sell the unprofitable BMW brand to local conglomerate HGB Group.

Still acting as the head of CAIF though no longer representing a car brand, Brongers is a mouthpiece for an industry that he knows all too well is facing an uphill climb.

“There’s a really strong environmental argument here, but the Ministry of Environment doesn’t seem to work with me on this,” he said, tapping his fingers on the edge of his seat. Not only is it detrimental for the country to import old gas-guzzling vehicles; it is also a danger for unmonitored new car imports as well, which are not suited to the Cambodian road and fuel quality.

“One time a senior minister imported a Series 6 BMW against my advice,” Brongers noted. “One year later, he had to change the entire engine because the [Cambodian] fuel had destroyed it.”

He added that thousands of Prius Hybrids are being imported, but there is no processing plant for the hybrid batteries in the Kingdom, meaning that each of those batteries rot in Cambodia’s landfills.

But when it comes down to it, the old and used cars that emit noxious fumes, or the handful that prove to be dangerous on the roads, are not the main threats to the official car importers in the Kingdom. The true threat comes in the form of brand new car imports, perfectly functioning, that are brought into the Kingdom without paying the same tax as official importers.

By allowing a used car market to continue operating, Cambodia has opened its doors to a shadow market for new, luxury cars: one where most imports are legitimate and genuinely operable, but the importers have fudged the facts on how or why they are importing them. These are the grey imports that threaten to run official importers out of the country.

“I was with BMW, but we sold it,” Brongers said. “The brand is not doing well… because of grey imports.”

“An open secret”

The walls of the small conference room are glass, ensuring the three-pronged insignia of the Mercedes-Benz brand hanging above the front desk remains visible throughout the meeting. It is midday on a Friday, and two or three potential customers have made the pilgrimage from the city centre to the Star Auto Showroom, nestled on Hun Sen Boulevard to the south of Phnom Penh.

James Zemke, director general of Star Auto (Cambodia) Co Ltd and the sole licensed importer of Mercedes-Benz in the Kingdom, is soft spoken; he keeps his voice low, measuring each word.

“The used cars… are not my competition,” Zemke said. “Here, we sell new cars but… there are many new Mercedes on the streets of Phnom Penh that we have definitely not sold.”

Just about 20% of the cars entering Cambodia’s market are new or very close to new, Zemke said, but the official importers are responsible for selling fewer than half of the new cars currently on the roads. Star Auto is far from profitable, despite selling the world-renowned Mercedes-Benz brand; with the same low sales as every other official dealership in the city, Zemke estimated the brand wouldn’t be profitable for a decade or so.

“The demand is there. I know there are enough new Mercedes being imported that, if we were selling them, we’d be profitable,” Zemke added. “But we think we’re doing business the right way… we’re following the law, we’re being compliant. But we’re unprofitable.”

The answer, which Zemke and all members of the automotive industry have put their voices behind, would be a complete ban on used car imports in Cambodia. This would close the loopholes for unofficial new imports, throwing the grey imports directly into black market territory and driving the unofficial luxury market underground.

The issue, Zemke said, is that Prime Minister Hun Sen has gone on record stating that the used car market is necessary for Cambodia’s nascent middle class, which benefits from access to cheaper vehicles. Zemke was sympathetic to the argument, but countered that shutting down the used car market would not rid the country of its cheap vehicles; it would simply stop the flow of used cars from other markets, letting the Cambodian market mature naturally over time.

“The biggest issue is the political one,” said Zemke. “We have a clear position from the government that they intend to keep accepting used cars into the country, and at this point that’s what we struggle with.”

But to many, the government’s argument that the used car market benefits local people seems flimsy at best – and the motivation behind it is actually far more nefarious, according to an anonymous industry insider.

“The idea that this is for the people… I think that is just a made-up argument, so they can continue the scam,” said the source, adding that if the government were serious about providing cheaper transportation options, it would place new compact and family cars in a lower tax bracket than luxury imports. “From my point of view, it’s just a way of the government defending their illicit businesses.”

They added that the leading grey market dealers in the country, the ones patronised by Cambodia’s elite, are protected by the very officials who purchase their luxury cars there – cars that they can then buy for up to $100,000 cheaper than any officially imported car of the same year and brand.

“Kim Srun [Premium Auto Shop] is one of the major suppliers of cars for Hun Sen’s family for luxury vehicles,” they said. “It’s like an open secret that everyone knows. Nobody dares touch [the shop], not as long as Hun Sen has his hand over it.”

Much as everyone in the industry may know this, few are willing to speak to it, and even fewer are willing to go on record.

“You know how things work here… I have to be anonymous. I can’t say these things with my name attached to them, or I fear for my future,” the source said. “But we [in the industry] know they’re all true.”

“The country is losing”

Due to the grey market, Cambodia’s official car importers are struggling to maintain business activity – which at face value may not sound like a sob story for the ages.

But as the official importers see their businesses failing, owners of brands like BMW and Audi have already chosen to sell out rather than remain in a market that has been unprofitable for decades. Others, like Star Auto, remain insistent on waiting for the market to mature, but even they cannot push to expand their operations until they see an uptick in buyers – meaning that the massive showrooms, the local jobs and the training these importers have the ability to build and provide all remain on the drawing board.

“How can you lose money on BMW? The fact that someone is giving up on a franchise like that should show someone in the government that something is wrong,” Zemke said. “In this market, how could I possibly convince [Star Auto] to set up a showroom in Siem Reap, or Battambang? I can’t.”

It is also well acknowledged among car industry insiders that the taxes the Cambodian government collects from officially imported cars make up a considerable chunk of overall tax revenue in the country, though exact figures are difficult to locate. Regardless of the exact amount collected, it is nonetheless clear that, as Cambodia puts its official importers’ businesses at risk for the sake of its grey market, the country loses out on much-needed tax income for its people.

“I’m paying more taxes and they’re paying less taxes, but the country overall is losing,” said Zemke, estimating that as much as 20% to 25% of the country’s overall tax revenue is paid by the Kingdom’s official car importers. “We may not have official statistics on this, but we’re talking hundreds of thousands in tax revenue.”

And now the official importers are facing yet another challenge that could push them out of the market: the impending adoption of UN standards for all official new car imports, which the country has chosen to adopt as part of an ASEAN initiative to embrace higher regulation standards.

But for automotive companies whose cars are not built to UN standards, but rather to US or Japanese standards, this added red tape would mean having to pay to alter the cars they import into Cambodia. For companies that are already operating at a loss, paying to refurbish the handful of cars they import each year would likely prove too great a financial burden.

Nor does Cambodia have the means to effectively inspect every new car brought into the country. As it stands, official importers will either make the effort to abide by the regulations, or leave the market altogether – leaving the market for new car imports wide open to those who already operate outside the law.

The industry insider said that enforcing the 19-odd UN standards all at once was “crazy”.

“Cambodia is part of ASEAN so they say yes, we will implement these regulations, but in reality they have no idea of how,” they said. “Maybe because Cambodian officials are clueless, or maybe it’s part of a strategy to get an even bigger chunk of the market.”

Although the regulations were first set forth in 2016, the adoption was delayed three years when it became clear that car importers could not meet the regulations. Months before it would have gone into effect this year, official importers were granted yet another six-month delay. Throughout this time the government has come no closer to answering importers’ questions about the decision.

Ministry of Industry and Handicrafts director-general Chan Borin, whose ministry was responsible for the 2016 declaration, was unwilling or unable to elaborate on how these regulations would be enforced – or what the already thriving grey market stood to gain from the changes.

“This is a problem, the grey market – we need to have a government policy,” he told Southeast Asia Globe. “For now the government allows used car imports. Maybe in the future that will change.”

“Everything is silent”

Sitting in the lobby of the Sofitel Hotel, San Chey – a representative from accountability group Affiliated Network for Social Accountability- East Asia/ Pacific (ANSA-EAP) – struggled to keep his voice low. As he described it, the government’s role in the grey car market is no less than a clear and obvious example of “systematic corruption”.

“Why are [illegal imports] not illegal at the border? Why are they only sometimes found illegal when they are in downtown Phnom Penh?” he asked, his voice rising. “It is not a mouse coming across the border, it is a big car. And every border gate, they are meant to check… but they allow this illegal car smuggling anyway.”

Bribery is considered a basic aspect of business in Cambodia, Chey added, meaning that nothing the official importers do will stop the flow of new luxury cars into the country. Even the certifications granted by the Ministry of Economy and Finance, acquired by brands like Porsche and Mercedes-Benz at considerable cost and intended to secure sole import rights of these brands, will be ignored. As long as customs officials are in it to make extra pocket money for themselves, he said, the bribery and imports will continue.

“I think that businesses running in Cambodia, they cannot avoid the bribery, and as soon as there is a certificate there is more bribery,” he said. “The systematic facilitation of this corruption is still happening. The proof is driving on the streets.”

The bribery may be widely recognised among the public, but the government doesn’t seem to be interested in speaking to it. Not a single customs official agreed to comment on the issue, despite repeated calls and emails. A spokesperson from the Ministry of Public Works and Transport (MPWT), Va Simsorya, said his ministry wasn’t aware of the alleged bribery – and added that, with respect to violations of the official sole import certifications, the duty of reporting any lawbreaking rests squarely on the shoulders of the accusing party.

“For the exclusive import certificate, if the official importer has ever encountered such a case, they should report it to the responsible authorities,” he said. “So far, there is no case that has reached the MPWT yet.” He added that his ministry was not responsible for following up on any complaints, and cited three other ministries he thought might have a hand in it

According to the anonymous source, there have been many reports filed about illegal imports of official dealers’ brands, but none result in any investigation. This is because, in order to take any complaint seriously, officials require importers to provide customs documents that they are unable to obtain – as they are typically requesting the documents from the very people they are accusing of breaking the law.

For Chey, the lack of investigation is a sticking point that proves the growth of the grey market is buoyed by officials across the government.

“Otherwise we don’t know why they still ignore the criticism from the public, from the citizens,” he said. “Even now when they find illegal cars, they say everything is fine. Everything is silent.”