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relations in Japan and Europe. If our companies are restricted from international component plant investments (which will require some importing from them to the States), they will be displaced in developing markets by the Japanese and others.

Second, the serious competitive problem in small cars made in the US must be countered immediately, before it can be permanently corrected. This is the most difficult area, especially in terms of public thinking, because this is where we must give up something now to get something for the long term.

It is simply impossible to change the system of production built over thirty years fast enough to eliminate the $1500 to $2000 cost disadvantage we have against the Japanese, and the smaller but significant problem in comparison to European producers. This is not a matter of technology or dollars, it is a "social system" problem based upon decades of domestic learning which has proven to be outmoded in an international market. The Japanese did not come up with their advantage overnight with the passage of some tax law, or a leap in robotics. Members of the industry performed more than 15 years of constant experimentation on the factory floor, fitting together pieces of a social system of production capable of competitive power. We can see how they did it at a conceptual level, but it will take years to discover the processes we need in our own environment.

For example "scientific management" taught us that high inventories were good. The market showed us that was wrong more than 5 years ago, and we have been working feverishly to trim inventory, but we are still 3 to 5 times above Japanese levels.

In the meantime we need some cars to sell, and we need to stem financial losses on small cars as consumer taste shifts downward in size. This requires some importation of cars where the risks of domestic production would drain resources from existing plants, threatening further those we have left. All US companies will import cars where demand would be in less-than-economic volume, or where losses would be too severe for larger cars to subsidize. Getting saleable cars also requires getting components from those who make them well already--generally overseas producers. These policies may seem destructive at first, but they are better than losing the whole loaf.

The best example of beneficial "outsourcing“ strategy is the Chrysler Omni/Horizon line. In the late 1970's Chrysler needed a small car because both the government and the market demanded it. But they did not have an engine. So they bought an engine and transaxle from VW and built the car line. Now, one can call this "outsourcing" 15% of the potential American jobs in the car, or one can call it creating 85% American employment in a car which otherwise would not have existed. Whatever one calls it, this "outsourcing“ provided tens of thousands of US jobs. Many Fords have been made because of borrowed transmissions. Many workers are being called back to work because their car models did not have to wait years for 100% American parts to be developed.

Given the severity of the competitive situation, these "half-a-loaf" strategies are quite better than the alternative---seeming comfort for a few more years, but a relentless ratcheting of an unconverted industry into a much smaller position.

Our third strategy is to figure out how we can convert the massive system which is now still our albatross. In this respect we are in a position similar to the Japanese in the 1960's, or the Europeans at earlier times. They were under great pressure from the "American threat" and were missing key elements of an internationally competitive industry.

In the case of the Japanese, they followed a "half loaf" strategy. Rather than insisting upon 100% home-grown technology, they decided to borrow technology and learn from the best in the world, the Americans and Europeans with years of experience (one could say this was "outsourcing" Japanese engineering jobs). We know the rest of the story.

We are now missing key ingredients of long term competitiveness. We are not missing technology, we lack the methods of honing a large production system, the processes of doing business which can combine our technology and skilled workers to get back on a full standing with international competitors. As the rest of the world has learned, joint ventures are an ideal way to learn processes.

And we need to pursue every avenue available.

The Toyota GM Venture is One Good Path Among Many

If the venture is successful it will have several benefits. The most obvious are the employment of laid off workers, and the rekindling of a defunct American plant with its benefits to suppliers.

But several other effects have solid worth. Many people in the US industry have expressed the attitude that we really can't match Japanese or European competitive standards, because we have vast cultural differences. It is said they have industrial policy and cooperative governments, or complacent unions, or whatever. We have all the excuses. In my opinion the excuses are damaging. We need ideas for success.

Although the moves of Nissan and Honda to the US, in my opinion, are only to be admired, they still do not eliminate our excuses. "They are greenfields plants." Or, "their workers were fresh", we often hear.

If the Fremont venture works, it will do so with American union workers, in an older American plant, with basic tooling from the host nation. And the excuses will have less validity. This may sound ridiculous to some, but after seeing most of the global auto companies I an now firmly convinced that the fundamental element of competitiveness is the attitude to move forward and to experiment positively despite whatever is supposed to be impossible. The Fremont venture can provide a powerful "demonstration" effect, giving proof positive to not only GM employees but to the employees of their competitors that learning is not so painful and that we can effectively join international competition.

The value of learning-by-doing and of adapting other's methods to one's own society have been proven through other joint ventures. An excellent example is the BL-Honda deal in Britain. The abstract knowlege of Honda's good production had little meaning until the methods and processes were experienced first hand. The system is composed of details, and they must be learned on a daily basis. There are no shortcuts.

This venture would also bring Toyota into this country, which might not exactly be the goal of all US producers, but which certainly couldn't hurt the diversity of the national industry in the long term. This is no mean feat. Of all Japanese producers, Toyota is perhaps the most conservative, and is certainly the most centralized. It has much more to lose than Honda or Nissan by going offshore, since it is most dependent upon a centralized structure in Toyota City. Breaking their attitudes of isolation can have positive effects through offshore investment and reduced trade frictions, because Toyota will demonstrate to other isolationists that it is feasible to invest in one's export markets.

Some may criticize the fact that Toyota's Fremont investment may be less than that of Honda or Nissan, but that is short-sighted thinking. Any moves to get the centralized producer comfortable (in more than just making pickup beds) in this country, could bring additional investment and jobs. Honda started small years ago, and no one seems to be complaining

In my opinion it is not good policy to say to someone, "I know you are adding jobs but we also require a minimum investment per plant."

now.

What are the Risks

It has been asserted that this deal will squelch the market.

Not true. Assuming the cars sell out (something which is not yet proven), the net value of this deal is less than 3% of the still depressed car market and about 2% of the total market (competitive outcomes depend on all vehicles sold, not just cars). This is no more than any past sucessful product lines sold here. The venture will be subjected to competition from more than 20 other models delivered by 10 producers.

Assertions of price fixing abound. The number of ventured units is not enough to control this expanding, fragmented, multi-million unit market segment. And contrary to some common assertions, neither Toyota nor GM is the price leader in this internationalized segment of our market, nor is the venture large enough to let them be. Any historical reading of either lowest prices offered, or of trends in prices by model, will show that the "lead" changes hands often in this market segment, depending largely upon new model introductions by the more than 12 competing companies. The most aggressive price positioning, if one must pick a winner, is generally done by Honda, but Mazda, Renault, and Nissan have all made substantial moves.

The power of many producers against one was also demonstrated by the launch pricing of GM's J cars. They moved with a "Honda Accord" strategy of premium pricing an options-loaded car, only to have been forced to drop base prices over two years by the dozen collectively more powerful producers.

It has been asserted that this venture will force the other domestics offshore for small cars or components. This is a straw man. The clear intention of all domestics has been offshore on small cars and components for years, owing to the clear international economics mentioned above. Chrysler imports whole cars and components. Ford will soon bring cars as well as components, and has its Japanese strategy unfolding in Mexico. Chrysler has been pursuing a Japanese connection for years, and intensified efforts without the impetus of GM's moves.

The existing small car lines at domestic companies are under threat from 2 million vehicles in this market, and many more coming as our market continues to internationalize---not from this one venture's worth of cars. Remove this venture and we miss its benefits, but the threat to other domestic small cars does not go away. Ford, Chrysler, and other companies face global challenges quite independent of those posed by GM, and in my opinion they will not alter their basic plans, no matter how this venture moves.

In short, this venture is a normal global event. The FTC has done well to investigate it, but even better to recognize that a continued transformation is needed in policy if our government is not to impede our companies, while others in the world are encouraged to globalize and joint venture. The benefits of moving forward, in the industry and in public policy, are very great, even if they rattle our old ideas at first.

Mr. FLORIO. If you don't mind, we have a vote and we will take a 5 or 10 minute recess.

[Brief recess.]
Mr. Florio. The subcommittee will reconvene.
Please proceed.

STATEMENT OF JOHN E. KWOKA JR. Mr. KWOKA. I am glad to be here to discuss with you the General Motors/Toyota joint venture and its implications for the auto industry. I am a long-time student of the auto industry, first at the FTC and for the past 3 years as associate professor of economics at George Washington University.

As you know, I acted as consultant to the FTC in the GM/Toyota matter, and wrote a summary report of my analysis last October. I concluded that the proposed joint venture represents a substantial threat to competition in the small car market, and while it may confer some modest efficiency benefits to GM, these efficiencies could not outweigh the greater control over prices created by the joint venture. Nothing has changed my mind in these past 4 months.

I would like to recount to you my basic concerns with this joint venture. My comments remain, I believe, within the bounds of the material released by the FTC on January 24 of this year.

Most of my basic contentions, I believe, appear in the expurgated versions, though not the factual material on which my judgment was often based.

This joint venture arises in the context of a concentrated U.S. market, only recently jarred by competition from abroad. That competition has been blunted by import quotas from Japan, leading to higher prices and profits for both domestic and Japanese companies.

This joint venture involves the first and fourth largest seller of cars in the United States, the first and third in the world. And I believe there are several basic and demonstrable competitive problems with this arrangement.

My written testimony includes some more extensive discussion. First, I am convinced on the basis of the evidence that GM has a realistic alternative to the joint venture with Toyota. This contingency plan has been reported in the press, appears in the released documents and in the statements by Commissioners Pertschuk and Bailey in December, as well as today, as a U.S. assembly operation with GM's long-standing Japanese affiliate, Isuzu.

This alternative, this contingency plan, does not raise any of the competitive dangers of a GM/Toyota association. This is true because Isuzu itself is very small size, and it is already one-third owned by General Motors.

There is no case to be made that a further affiliation between those two companies, Isuzu and GM, increases any competitive risk.

Second, this joint venture gives Toyota a greater degree of control over the pricing and profitability of cars it imports directly into this country. This results from the fact that a joint venture will become an important supplier of GM, and GM sales in this country play a crucial role in the determination of all small car prices and, hence, the profitability of Toyota's sales in this country.

Third, the proposed joint venture has already spawned what I believe to be anticompetitive exchanges of product and price information between Toyota and GM. This is an obvious danger, in this case, I believe, a proven danger of this association, and one which I believe is certain to grow over the 12-year life span, until the end of this century, really, of this association.

Fourth, the transfer price formula which has received a considerable amount of attention, I also believe to have serious anticompetitive dangers. It eliminates some of the uncertainty that Toyota would otherwise have regarding GM's response to a price increase that Toyota might initiate.

The formula, in short, guarantees a cooperative, partially matching, response by General Motors. It is true that it only sets the transfer price, but the transfer price undoubtedly is transmitted in large part into the retail price, and I think that therein lies not dollar for dollar increase, but, as I said, a partially matching increase.

Furthermore, the formula requires a process for devising the price change in each model year, and would appear to require discussions between the parties about the prices of upcoming model year cars by all the competing manufacturers, as I read the Memorandum of Understanding.

And, in any event, this calculated price can be replaced by directly negotiated price between GM and Toyota, essentially, whenever they choose.

The joint venture, of course, is said to facilitate a learning process by General Motors with regard to Japanese management and production techniques.

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