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This learning process is said to be the key to invigoration of the
Although these objectives are legitimate, even commendable, I believe that
a joint venture between GM and Toyota is a plainly anti-competitive strategy for
Furthermore, I believe that GM's objectives can be largely
realized through competitively innocuous alternatives.
My basic argument can be
represented in five points.
First and foremost, I believe that in the absence of the joint venture with
Toyota, GM would undertake, hasten or expand a contingency plan for U.S. assembly
1 of a vehicle originating with its Japanese affiliate, Isuzu. These so-called
"R-cars" are the same vehicles that GM hoped to import in considerable numbers
as completely-built-up units for distribution through its dealership system.
While such an undertaking is not equivalent in all respects to the Toyota joint
venture, it clearly raises none of the competitive dangers posed by association
Isuzu is a
in the U.S. or world markets, it is
already more than one-third owned by GM, and there can be no question of
anti-competitive coordination resulting from a GM-Isuzu production operation.
It is, I believe, clearly to be preferred on competitive grounds to a GM-Toyota
Let me make clear that this is not an alternative which I conjured up, but rather one for which there is much support in the factual record. 2
This contention is contained in the expurgated version of my memo released by the FTC, on page 424 of that release (page 66 of my memo), hereafter cited as "FTC
P. 424 (Kwoka Memo, p. 66)," and "Dissenting Statement of Commissioner Patricia P. Bailey," Decembe 22, 1983, p. 12.
?See FTC p. 108 (Bureau of Competition Staff Memo, ch. II, p. 41).
further note that either a Toyota
or Isuzu association would involve new
production capacity by GM, since I am convinced that their small car needs
require new sources of vehicles.
But the joint venture with Toyota raises clear
and substantial risks of coordination.
That coordination, in my view, is likely
to result in higher prices supported by diminished GM production of its other
small cars (Chevette, etc.), relative to the Isuzu alternative.
Secondly, I believe Toyota's output incentives in this joint venture are
It will profit through some combination of joint venture operations plus
the sale of major components.
But Toyota has ambiguous incentives regarding U.S.
production, since higher output here lowers small car prices and consequently
the profits it earns on imports from Japan.
Indeed, in the presence of the
Voluntary Restraint Agreement (VRA), Toyota presumably would like to see U.S.
production reduced, so as to maximize returns on its import quota.
was intended to aid u.s. companies, but it has also succeeded in producing
"exceptionally lucrative profits" for the large Japanese importers and has led
them to resist expansion or entry by the smaller Japanese companies.
Although joint venture profits moderate this incentive to Toyota to some
degree, the joint venture simultaneously gives it some measure of control over
GM's small car sales in the U.S.
This occurs because the joint venture has the
properties of a supply arrangement, with GM becoming dependent on Toyota for an
important part of its product line-up.
Such control is competitively worrisome,
because GM's sales are a decisive element in the price Toyota in turn obtains on
its imports into the U.S.
3FTC p.312 (Koch Memo, p.
). Regarding smaller Japanese companies, see "Japan Seen Accepting U.S. Compromise on 'Voluntary' Auto-Export Limits," Washington Post, October 26, 1983, p. A23.
the line between the permissable and impermissable is not clear, and the parties'
private incentives are not identical with the best interests of the market.
companies will be brought into close contact, have more consonant objectives, and
benefit from vastly improved channels of communication through this joint venture.
Here too I am not relying on abstract possibilities which I conjured up.
I stated in my memo, anticompetitive information exchanges probably have already transpired,“ involving sensitive product information and retail prices
5 differentials. Apart from the coordination these may already have facilitated,
such exchanges are indicative of precisely the sort of problems inherent in this
Arguments to the contrary - that these exchanges were necessary
for the joint venture, that the joint venture does not facilitate whatever
information the companies might want to exchange, or that the companies would
not reveal competitively sensitive information to each other - are in my view
belied by the evidence already in the record.
Fourth is a related concern over the transfer pricing formula.
supply aspects of the joint venture, some mechanism for pricing the product is
necessary. Periodic discussion between GM and Toyota would probably be the most worrisome from a competitive point of a view, since that is most likely to reveal
general pricing strategies and to spill over to a wider range of impermissable topics. At the other extreme would be some device over which the parties have
S"dissenting Statement of Commissioner Patricia P. Bailey," December 22, 1983,
See also FTC p. 252-254 (BC Staff Memo, ch. VIII, pp. 17-19).
The transfer pricing provision of the joint venture agreement falls
somewhere in between these extremes.
price changes are
automatically propogated into the cost of the joint venture vehicle to GM,
though not on a dollar-for-dollar basis.
Yet the mechanism effectively eliminates
the possibility that GM might not follow a Corolla price increase, and thus reduces
Toyota's uncertainty about its major rival's response.
Further, if other small car
producers follow Toyota's lead (not an unlikely occurrance, based on past
behavior), the market basket approach of the formula ensures a more nearly
matching increase by GM.
Apart from these inherent problems, there are two noteworthy procedural
One is that the process of devising the transfer price would seem to
require GM and Toyota to negotiate, in advance of the joint venture model
the prospective wholesale prices of the market basket vehicles, including
adjustments to eliminate "the value of equipment changes and product improvements.
This represents precisely the kind of direct discussion and
agreement on future prices and product changes that the "formula" was ostensibly
designed to avoid.
Secondly, GM and Toyota explicitly reserve the right to
reject the computed transfer price whenever it is "at significant variance with then current market conditions, 7
in which case they can negotiate an alternative
price. Although one can readily understand the rationale for such an
escape-clause, its use makes close analysis of the formula irrelevant.
companies can then discuss prices directly.
GM-Toyota "Memorandum of Understanding," February 17, 1983, Exhibit A. See also "Dissenting Statement of Commissioner Pertschuk," December 22, 1983, p. 5.
'"'Memorandum of Understanding," pp. 5-6.
Fifth and lastly, I have some concerns that this joint venture could weaken
Toyota's incentives to enter the U.S. large car market.
That market is the
traditional source of domination and profitability to the domestic industry, and
to GM in particular.
GM's grip on the large car market has in fact increased
over the past few years, as Ford and Chrysler have been beset by a variety of
The joint venture with Toyota night signal GM's partial withdrawal
from the small car market, to Toyota's advantage, in return for which Toyota
might not pursue large car competition against GM as aggressively.
hasten to add that I have seen no evidence of any such understanding.
business and economc forces for this possibility are in place, and if it should
occur, the adverse effects on the domestic large car competition would be huge.
There is, in short, a large number of distinct competitive dangers in this
Collectively, I believe, they are both real and substantial, and
make output diminution (or perhaps better stated, a smaller output increase,
compared to the alternatives) enormously likely. Both GM and Toyota seek higher
U.S. car prices and this joint venture enhances their means of accomplishing
The structure of incentives, the improved means of coordination,
and the evidence on the record to me prove the likelihood of such consequences,
whether intended or not.
A?ainst these concerns must be weighed potential efficiency gains from the joint venture. Few merzing coupanies fail to make clains of efficiencies.
Conventionally, efficiencies from joint ventures consist of such things as
cost savings from improved realization of scale economies, and new products or
processes developed by pooling financial resources.
The GM-Toyota joint venture