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Federal Register / Vol. 43, No. 250 / Wednesday, December 28, 1983 / Proposed Rules

industry price leaders, so that

common to various industries. I fail to competitors are likely to match the see why the Commission was not higher prices. The competitors' price provided with a comparative analysis of hikes in turn are relected in the transfer all practical pricing formulae. price formula--and so the formula

Finally, I should point out that the assures an ascending spiral of lockstep transfer price for is a bit of a red pricing," although without explicit herring, since the agreement between cooperation or collusion. 16

GM and Toyota allows them to It is important to note that infirm price negotiate directly an appropriate selling competition between the Corolla and the price whenever the transfer formula joint venture car can infect the prices on yields a selling price which is at other car models. Car manufacturers significant variance with then current who offer a full line of cars maintain market conditions. The consent price differentials between various agreement would not prevent operation carlines and models. (BC staff memo,

of this proviso. VIII, 12). GM will undoubtedly follow Unfortunately, even if a well-drafted this practice and seek to keep a

consent could cure the transfer price consistent dollar gap between the joint infirmities of this joint venture, I would venture car and the next biggest model, still object to it. That is because I see and between each model further up the the overriding problem as incurable. line. Thus a rise in the price of the joint This joint venture. by its very nature, venture car will force reactive price necessitates coordination of GM and rises all the way up the GM line and. Toyota product marketing and research because of GM's price-leader position,

efforts. The joint venture will produce a the same ripple effect can be expected

car for GM which is manufactured in competitive car lines. Consumers will according to Toyota production still be offered a choice of prices, but the

techniques. The most significant overall level of price competition will be

components of the car, representing well artifically elevated.

over half the value of all its parts and The Bureau of Competition Director

material, will be produced by Toyota. has dismissed the price rises flowing

How could the joint venture not act as a from the transfer formula as too small to

clearinghouse for exchanges between worry about. However, the problem is

customer (GM) and supplier (Toyota) as not so much how much prices rise, but

to what the end product should and the fact that there has been a major

could be? The twelve-year life of the change in car manufacturers' incentives

joint venture covers two complete model to engage in price competition. Because

cycles, and certainly there are a host of there will be several new disincentives

changes in car features from year to to price competition at work in the

year. Improvements in the vehicle's markel, cartel stability will be

designs and technology will be known to encouraged.

the parent companies well in advance of

public announcements or even industry Alternatives to this competitor-based

gossip. Moreover many features on pricing formula apparently were never

small cars are common to large portions explored by the parties. (BC staff memo, of the entire fleet; therefore knowledge VIII, 7). The consent does not cover the

that either parent can produce, say, matter at all. In particular, there has

extended corrosion protection or a been no consideration of an alternative,

significantly lighter engine, gives a suggested by Professor Salop, of a price window onto overall marketing Escalato: provision that is triggered by a strategies, not "just" plans for compact cost index which is not under Toyota's

and subcompact cars. control yet is highly correlated with

It has been argued that GM and
Toyota's costs. Such indexed contracts
have been used for the purpose of major

Toyota are such fierce competitors that
they will

jealously guard all their car components's and are apparently

secrets. This argument ignores the fact

that, even if a major technological "The phrase Jockstep pricing was first used by one of Tojca i counsel when describirs to hus

breakthrough or some other "hush hush" client a probable effect o the transfer price formule.

project were carefully isolated, merely (GM 23245 quoted in Koch nemo, 30).

in the legitimate daily operations of the 1* For a more vigorous analysis of this

joint venture GM and Toyota can glean phenseenon see the commenu of jota kwoka

enough additional hard data to vastly Professor oi Economics. George Washington University. Consellant lo ide FT.C.) and Steven C

improve educated guesses about each Salop (Professor of Economica. Georgetown

other's competitive activities. There University Law Center. Consultaat to the Chrysler does not have to be a complete swap of Corporation)

technical plans for competition to be **For example, Chrysler has furnished us with

dulled. For example, in the course of examples of two such contract which it has with Mitsubis's and Veiswesen both for the supply of

negotiations, Toyota has already Autor otse engines.

supplied GM with certain detailed

product information which otherwise would certainly not be exchanged between these competitors. (BC stafi memo. VIII 17-18; Kwoka. 37–38) It may be too late for GM to match certain technological improvements, but it certainly can adjust its marketing efforts to defuse any Toyota impact. This would leave it free to focus its competitive energies on car companies other than Toyota-a strategic luxury not available to Ford, Honda, Chrysler et al.

As a final example of why I have trouble accepting this rosy picture of uncompromising competitors who will never be tempted to do each other favors, consider that Toyota has alreody offered, and GM has acted upon, suggestions on retail price differentials for the joint venture car relative to the Corolla. (BC staff memo, VIII, 18-19; Kwoka, 38-39).

I cannot improve upon the BC staffs summary of these instances of the most competitively sensitive information exchange:

The point here is that the Joint venture facilitates discussions about price that GM conceded were forbidden and this is the only example we happen to know about should the joint venture proceed, others may well occur due to the introduction of new models and/or changes in the product itself.... Concern over the occasion and necessity for such information exchanges arises again wben a new joint venture model peeds to be negotiated after several years. (BC staff memo, VIII, 19).

The consent agreement does not cure this problem. It specifically allows the parties to exchange information "necessary to accomplish ... the legitimale purposes or functioning of the Joint Venture." This is a highly significant loophole. What is "necessary" or "legitimate" is determined in the first instance by GM and Toyota. Their threshold sensitivity on these points is demonstrated by the fact that GM's counsel has represented that the information exchanges I just described were not used for any purpose other than determining suitable product options for the joint venture. (BC staff memo, VIII, 17-18). Alleged Procompetitive Benefits

We are assured that the joint venture will produce "efficiencies" which will offset any competitive effects such as ! have described above. In the FTC merger guidelines we defined an efficiency as e cost saving that could not be obtained unilaterally by either company, but instead required a pooling of resources. The efficiencies alleged in

Federal Register / Vol. 48, No. 250 / Wednesday, December 28, 1983 / Proposed Rules

57257

Japan, which account for 40% of the cost advantage. (Kwoka memo, 11). GM concedes that Japanese advantage does not derive from superior products or manufacturing hardware. I must ask therefore, regardless of what value we assign to management skills, whether the fact that they differ justifies this sort of close cooperation between rivals. For example, if Ford had a 30% cost advantage over GM, attributable solely to some Ford management mystique, would the antitrust laws permit GM to learn Ford's special production techniques by jointly producing a Lincoln/Cadillac-type car? I think nol Conclusion

In summary, then, if this joint venture between the world's first and third largest automobile companies does not violate the antitrust laws, what does the Commission think will? This is surely the question that potential joint venture partners will be asking themselves. In this decision, the Commission has swept another set of generally recognized antitrust law principles into the dustbin, using again the incorporeal economic rhetoric that now dominates Commission decision-making. In this case, the decision results in the blessing of a business proposal that is both breathtaking in its audacity and mindnumbing in its implications for future. joint ventures between leading U.S. : firms and major foreign competitors that seek to lend a friendly helping hand.

Perhaps in uneasy recognition of the controversy this antitrust generosity would otherwise ignite. the majority has thrown Br'er Rabbit into the briar patch by penciling in a last minute consent order that the proposed joint venture partners have themselves said merely restates the main features of the private agreement already existing between them. This will fool no one who has even a passing familiarity with the real issues in this antitrust decision. (FR Doc 42-4450 Filed 12-9-43 &45 am

· this matier do not meet even that general description.

Staff of the Bureau of Economics conclude that the joint venture will increase industry output and is therefore procompetitive. Such a conclusion. I note, requires a rejection of GM's own estimates to the contrary. Nonetheless, I am not convinced that staff bas proved this special efficiency, as distinct from private benefits to GM and Toyota. There is no doubt that GM could use a new small car in order to maintain or increase market share in the compact/ subcompact market, as well as to saleguard its large car sales by accrual of CAFE credits."? However, it is highly doubtful that the GM/Toyota venture arrangement represents additional output that would not come into being without the joint venture. The best evidence on this point is GM's own predictions that the sales of the joint venture car will come largely at the expense of other CM and Toyota vehicles. The joint venture car is expected to divert sales especially from GM s Chevette and mid-size "J" car. (BB staff memo, VIIL 3-4; Kwoka memo, 51) Our economics staff finds "somewhat puzzling" that GM assumes no net increase in industry sales as a result of the joint venture, and deals with the puzzle by summarily rejecting GM's estimates and producing its own competitive supply and demand models. (BE staff memo. VIN, 5-14). I am troubled by this willingness to set aside a damaging admission, as well as by several of the assumptions underlying

the BE calculations." Also, regardless of what minimal" output eflects the joint venture may have, those same eflects could be achieved in large part through alternatives. As Professor Kwoka demonstrates, absent the joint venture GM would very likely satisfy its small car needs by a variety of options. including domestic assembly of the "R" car now being produced by GM's Japanese affiliate Isuzu, and improving and retaining the Chevette. (Kwoka memo, 47-55A; Muris memo, 31). Similarly, though with less certainty, we can predict that Toyota would have to pursue U.S. manufacuturing options, absent the joint venture. (Toyota's two? largest Japanese rivals. Honda and Nissan, have already taken that slep.) Naturally these options are more expensive and presumably not as attractive to the companies, but from an overall industry viewpoint they are preferable to simply letting GM acquire 200.000 units of Toyola's production capacity for twelve years.

The second major ? justification for the joint venture translates even less easily into an “efficiency" benefit That is the claim that GM needs to have "hands-on" experience with Japanese management techniques in order to produce a cheaper car. No one denies that the Japanese have a significant cost advantage (approximately $2000) in the production of cars. However, it is not possible to isolate and quantify many of the sources of that advantage, other than differences between labor wages in the automotive industries of the U.S. and

11 The Corporate Average Fuel Economy (CAFE) slatute. part of the Energy Policy and Conservation Act of 1975, sele annually escalating eiciency standardelor the average o! rach domestic car manufacturer', heel The law provides sti! fines for failure to meet the standard CAFE essentially conditions the sale of a larger car on the sale of a small car. Firms need to lower their feet as erage and so continue selling the more profitable large cars.

1. See critique in Koch memo. pp. 38-39, alternate calculations by Professor Kwoka at 31-35, 44-55

"Ironically, BE lavorite justification for the joint venture has been hemstrung by the only provision of the consent which changes the original obligations of the parties. The formerly open-ended production commitment has been capped at 200.000 can

10 GM has characterized the learning experience as the primary goal of the joint venture: BC slall is skeptical as to iu value. (BC staff memo, 11. 31-40. 48-52)

BILLING CODE 6750-01

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The Federal Trade Commission, having reason to believe that General Motors Corporation ("GM" or "General Motors') and Toyota Motor Corporation ('Toyota") intend to acquire shares in a Joint Venture corporation in violation of Section 7 of the Clayton Act, as amended (15 0.s.c. S 18), and Section 5 of the Federal Trade

Commission Act, as amended (15 0.9.c. $ 45), and it appearing

that a proceeding by the Commission in respect thereof would be in the public interest, the Commission hereby issues its Complaint, pursuant to Section 11 of the Clayton Act (15 u.s.c. S 21) and Section 5(b) of the Federal Trade Commission Act (15 0.s.c. S 45(b)), stating its charges as follows:

1. Definition

1. Por the purpose of this Complaint, the following definition shall apply: 'new automobiles' means new passenger automobiles manufactured or sold in the United States or Canada, and includes 11ght trucks and vans.

II. General Motors Corporation

General Motors is a Delaware corporation with

2.

headquarters at 3044 West Grand Boulevard, Detroit, Michigan.

III. Toyota Motor Corporation

3. Toyota is a Japanese corporation with headquarters at i, Toyota Cho, Toyota City, Aichi Prefecture 471, Japan.

rv. Jurisdiction

4. At all times relevant herein, each of the companies named in this complaint has been engaged in or affected commerce as "commerce is defined in Section 1 of the Clayton Act, as

amended (15 0.9.c. S 12), and Section of the Federal Trade

Commission Act, as amended (15 0.5.C. § 44).

V. The proposed Joint Venture

5. Pursuant to an agreement reflected in a Memorandum of Onderstanding (hereinafter "Memorandum") executed by GM and Toyota on February 17, 1983, attached to this Complaint as Exhibit 1, GM and Toyota have agreed to form a Joint Venture corporation (hereinafter “Joint Venture'). GM and Toyota will each acquire one-half of the shares in the Joint

Venture and will each designate one-half of the Board of Directors of the Joint Venture. The Joint Venture vill be nanaged principally by persons designated by Toyota. The Joint Venture will manufacture new automobiles that will be designed by Toyota in consultation with GM and will be sold to GM, and may also manufacture new automobiles that would be sold to Toyota.

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6. The relevant product market is the manufacture or sale of small new automobiles, which includes automobiles commonly referred to as subcompact, compact, and intermediate sized

automobiles.

7. The relevant geographic market is the United States and

Canada.

8. Concentration in the relevant product and geographic

markets is high.

9. Both GM and Toyota are substantial competitors in the relevant product and geographic markets.

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10. The effect of the Joint Venture may be substantially to lessen competition or tend to create a monopoly in the relevant markets in violation of Section 7 of the Clayton Act, as amended (15 0.s.c. S 18), or may be unfair methods of competition in

violation of Section 5 of the Federal Trade Commission Act, as

amended (15 U.S.C. S 45), in the following ways:

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