This management transfer argument is to some degree novel in antitrust and demands close scrutiny as a defense to otherwise anticompetitive changes in the industry. In assessing the validity of this particular efficiency claim, I think it is important to stress the differences in management skills among companies are present everywhere, and are not generally accepted as defense is to cooperative action. The competitive process relies instead on firms' individual incentives to imitate and exceed rivals' capabilities so as to spread efficiencies without competitive harm. But I believe where imitation is for some reason impossible or exceedingly slow, the efficiencies in the transfer process may be recognized as a legitimate argument in principle. What is surely required, however, is a careful assessment of the minimum efficiencies truly not achieveable by the disadvantaged party in some other fashion, some other less anticompetitive fashion. In the present context, an important part of my research was to isolate the demonstrable efficiency, against which were not otherwise achievable by General Motors. We have heard much talk of the $2,000 cost differential. For several reasons that number bears little relationship to the efficiency gains attributable to this joint venture. First, approximately 40 percent of the cost differential involves straight wage differences between United States and Japanese industries. Public reports indicate that the Fremont joint venture will pay wages comparable to the rest of U.S. industry, so none of this will be saved. Second, of the remaining 60 percent, only final assembly and some body stamping are encompassed by the joint venture. Projectivity differences involving design, engineering, engine and transmission manufacture, and so forth will not be revealed and cannot be attributed to this joint venture. Third, of the fraction comprising productivity in assembly and stamping, some portions simply cannot be replicated in U.S. practice. Everything from cultural differences to geographic distances in the United States prevent this result. And last, of the remaining fraction that might be transferred here, a substantial amount, in my judgment, is already known to GM and other domestic companies or can be learned in the case of GM from the Japanese affiliate, Isuzu. Not all, but some. I attempted to make an estimate, therefore, of the magnitude that really is attributable to the joint venture. I concluded that these were less than $200 per joint venture car-less by some amount that depended on one's judgment of Isuzu's capabilities to convey the same information to GM. Even with an overly large figure, a generous figure of $200 per joint venture vehicle, the 200,000 unit production there would include no more than $40 million in total efficiencies attributable properly to the joint venture. I find no basis in fact or policy for accepting the far-reaching efficiencies claimed by some, including GM, to flow from this joint venture across all of its plants or across the entire U.S. industry. These maximum efficiency gains of $40 million could be offset by an increase in small car prices by GM and Toyota of merely $23 per car. And if other small car producers follow their price increase, a $9 increase in all small car prices would offset the entire efficiency gains, in my view, properly attributable to this joint ven ture. These price increases, I believe, are easily achievable by GM and Toyota and are sufficient to create net consumer losses from the joint venture. These and other calculations to me demonstrate that the joint venture is on balance plainly anticompetitive. The joint venture is part of a longer term restructuring of the U.S. industry, as many observers have commented. Some of this restructuring seems inevitable as a result of the huge cost and quality advantage now enjoyed by Japanese producers of small cars. Ford and Chrysler are considering more extensive sourcing of components and vehicles, plus domestic assembly operations perhaps with their own Japanese affiliates. The GM/Toyota joint venture may hasten to some degree these other changes. But I do not believe by itself that this joint venture represents a fundamental turning point or cause of these other changes. Rather, my concern is that this joint venture is not the drastic action required by the domestic industry, and GM, in particular, to restore the competitive health of the industry. What is required, in my view, is the resolve to tackle the management inefficiencies and the labor problems that otherwise would always leave our industry uncompetitive. This requires a forthright and fundamental rethinking of wage scales, work rules, product designs, traditional management prerogatives, attitudes towards the work force and relationship with suppliers. I cannot emphasize strongly enough that these issues are all well-known to the domestic industry, and it is within their power to deal with them. If they do so, they can preserve this country's ability to build small and medium sized cars as well as large cars. GM/Toyota joint venture will add little to the industry's understanding of these issues. But it does in my view raise serious competitive dangers. Past experience teaches us that reduced competition is not the way to foster attention to quality, costs and prices and ultimately not the way to promote domestic production and employment. TESTIMONY OF JOHN E. KWOKA, JR. ASSOCIATE PROFESSOR OF ECONOMICS Mr. Chairman and Members of the Subcommittee: I am pleased to have the opportunity today to discuss with you the General Motors-Toyota joint venture and its implications for the changing automobile market. Permit me first to identify myself. My name is John Kwoka. I am Associate Professor of Economics at George Washington University. I have previously taught economics at Northwestern University, the University of North Carolina at Chapel Hill, and the University of Pennsylvania. I have also spent five years at the Federal Trade Commission, half of that time as chief economist on automobile industry matters. There I supervised the economic analysis on the omnibus auto industry investigation, Ford's partial acquisition of Toyo Kogyo, Renault's partial acquisition of American Motors, the FTC's comments on Chrysler's loan guarantee request, on-going review of the competitive impact of regulation, and the initial stages of the FTC's comments before the International Trade Commission in the Section 201 (import restraint) petition in 1980. Since leaving the FTC in 1980, I have continued to do research, writing, and publishing on automobile industry matters, as well as the economics of industrial organization, antitrust, and regulation generally. In September, 1982, I was hired by the Federal Trade Commission as a consultant on the General Motors-Toyota joint venture, which at that time was moving towards finalization. Over the next several months, I sought to assist identifying key issues, developing document the staff in a variety of ways requests, and so forth. issues and the documentary evidence, a project which culminated in my final report, dated October 3, 1983. As you know, I concluded that the proposed joint venture between GM and Toyota represents a substantial threat to competition in the market for small automobiles, not outweighed by the modest efficiency benefits By last summer, I also undertook my own analysis of the truly attributable to it. I therefore recommended Commission action against the joint venture. I would like to recount to you my basic concerns with this joint venture. I must apologize, however, for being somewhat circumspect in my comments. I have been advised by the General Counsel of the FTC that my original oath - not to disclose confidential information which I have learned in the course of this investigation essentially limits my public comments to the expurgated versions of my memo, and other staff analyses, released by the FTC on January 24, 1984. While this constraint prevents me from citing most of the factual evidence I found decisive, all of my basic contentions are now on the public record. I shall also offer some (unconstrained) observations on the implications of this joint venture for the evolving auto industry, and some thoughts on public policy towards this key sector. The GM-Toyota Joint Venture The General Motors-Toyota joint venture arises in the context of a concentrated U.S. automobile industry, only recently jarred from complacency by foreign competition. Japanese firms, particularly, have demonstrated an ability to produce large numbers of high quality, inexpensive cars, and the traditional U.S. companies have not succeeded in their efforts to do so. But over the past three years, that competitive stimulus has been blunted by import restraints, as new entry and expansion have been prevented. Restraints have now been extended until 1985, and many including myself are not convinced that we shall see an open U.S. market next year or any time soon. The effect of import restraints has been to return the U.S. market to the hands of the traditional U.S. firms, together with a small domestic presence by Volkswagen and Honda. Not surprisingly, price competition in small cars has moderated. In this market, GM is the largest seller, followed by Ford, Chrysler, and Toyota in that order. This joint venture is therefore between leading direct competitors in a concentrated market. Although that by itself need not render the joint venture automatically illegal, it most certainly is a cause for grave concern. The joint venture does have legitimate business purposes to both parties. Toyota stands to earn some profits and is responding to protectionist sentiment in the U.S., all at modest investment. To GM, this serves two purposes. The joint venture vehicle will meet the company's needs for a new small car, needs not currently met by its aging Chevette line nor by the modest number of imports Because of the huge cost disadvantage it is permitted under the Japanese quota. relative to the Japanese, GM cannot build a new, entirely domestic small car on a profitable basis. Secondly, the joint venture is said to offer GM insight into the Japanese management and production methods which lie at the heart of their |