Creating the GM-Toyota - Term Paper Example

? Antitrust Case Study al Affiliation) As the 1980s began, General Motors could see its automotive future dimming. Twice in 7 years, politics in the Middle East had pushed oil prices up and hurt American car sales. On the other hand, Japan was meeting the demand for small automobiles, and its imports’ share of American car sales rose from 18% in 1978 to 28% in 1980. In October 1981, General Motors started a “beat Toyota” campaign, with the ultimate aim of repositioning itself as the number 1 automobile manufacturer in the world and edging out Toyota imports in the US market. 6 months later, in an interesting turn of events, GM decided to “join Toyota” by creating a joint venture with the Japanese carmaker in order to manufacture small cars for the US market. The agreement was signed on 17th February 1983 by the chairmen of Toyota and GM, and triggered one of the biggest and most controversial antitrust investigations in recent history. The vital question was whether it was plausible that the joint venture would actually lead to an increase in domestic small cars that were manufactured more efficiently, with good insights that GM and other firms could use in their plants, or whether it could lead to the regulation of pricing and other conduct between GM and Toyota and merely supplant less-anticompetitive options that GM could have employed in order to realize its objectives. The examination of these question shed light on a number of issues: the changes in behavior that could crop up from the joint venture, the scale of the efficiencies resulting from the venture, economic impacts of the joint venture, and the options available to GM. Some new tools were developed in order to evaluate and examine the joint venture, but they did not result in an agreement with regard to its consequences. Key words Antitrust, GM, Toyota, joint venture, small cars Analysis Most proposed joint ventures, acquisitions, and mergers above a particular size require that, under the stipulations of the Hart-Scott-Rodino premerger notification act of 1976, the Department of Justice and the FTC (Federal transition Commission) be notified. This process provides both agencies with time to investigate a proposed arrangement before it is consummated. In this case, the FTC was mandated to carry out the investigation. In April 1983, Toyota and GM filed initial information and responded to calls for additional information during the summer (White, 1991). The investigation was referred to as one of the most intensive and extensive antitrust examinations ever conducted. The final judgment was delivered by five FTC commissioners, and was founded on different memoranda from a consulting economist, the Bureau of Competition (the legal personnel), and the Bureau of Economics. The two bureaus recommended that the joint venture be approved, but the consultant’s report recommended that it should be contested. In December 1983, and based on these analyses, the FTC commissioners voted 3-2 provisionally to allow the joint venture to be effected, subject to a few minor revisions. Final approval was confirmed by the same margin (3-2) in April of 1984. The fact that there were no court proceedings means that Toyota and GM did not formally account for their positions. In addition to this, there was no direct merging of the issues between the critics and proponents of the joint venture, and not even a public disclosure of evidential paperwork (Cole & Andrea, 1987). The only thing that existed was a set of documents amounting to 1364 pages that the FTC released in January of 1984. Cooperative Behavior and Market Definition This is the first issue in the analysis of the joint venture, and involves the possibility of cooperative behavior in the appropriate market. This called for a determination of the geographic market and appropriate product and then an evaluation of the likelihood that the companies in that market might cooperate in a way that would hurt market efficiency and consumers. Clearly, if the appropriate market were competitive, or even sufficiently challenging in which to maintain cooperation, then the venture, despite what it did or was, would have no negative impacts. As a matter of fact, a meaningful analytical question was whether a full merger between Toyota and GM would be contestable (Cole & Andrea, 1987). If not, then clearly a joint venture, which is a lesser merger of operations, would be right. The dilemma surrounding cooperative abilities may look easier to solve. After all, even considering imports, total American car sales were very concentrated. In 1982 for example, the leading 4 companies accounted for 76% of total sales. GM’s (historical) leadership role was never in question, but imports signified an important competitive threat. However, that reality might just raise concern over a General Motors-Toyota plan, since the joint venture might result in a moderation of the leading importer’s competitive behavior (The Federal Trade Commission, 1983). This modest picture was subjected to careful scrutiny by all parties. First, with regards to definition of the product market, the logical starting point for evaluation was subcompact vehicles (The Federal Trade Commission, 1983). Based on the Merger Guidelines of the Justice Department, the essential question was, supposing the prices of subcompact cars were raised, would consumers migrate in sufficient numbers to other types of cars (or motorcycles, trucks, public transit, etc), so that the price increase would be defeated? Those alternatives to which clients would switch in adequate numbers would have to be part of the appropriate product market, since an increase in prices could not be sustained if they did not cooperate. Effects of a Joint Venture The next step was an assessment of the competitive impacts of a joint venture, especially the impacts of this particular joint venture. A leading legal mind defined a joint venture as a consolidation of operations between two or more different companies, in which the following conditions exist: 1. The joint enterprise is controlled jointly by the parent companies which are not under associated control; 2. Each parent company contributes substantially to the enterprise; 3. The enterprise is a business entity that exists separately from its parent companies; and 4. The joint venture results in important new capabilities with regards to new technology, entry into new markets, a new product, or new productive capability. The interesting part is that the author, in the process of advising Ford in the same case, stated that the GM-Toyota plan was not even a joint venture since there was no clear evidence of a new entry, capacity, product, or technology as a result. The legal staff at FTC agreed that, if the question was looked at based on the definition and legal precedents, it was a very close one. It however correctly pointed out that regardless of the status of the arrangement, the real issue was still the effect (if any) of the arrangement on competition. Although this venture involved the reopening of a production plant, that does not make the capacity a net plus against the appropriate alternative. For instance, the joint venture may have replaced autonomous expansion by either Toyota or its American partner. In that case, it would be suspect competitively (Copper & Washington, 1983). It is important to note the likelihood of other competitive bottlenecks before analyzing this question. These include the likelihood of behavioral changes triggered by the joint venture. The joint venture may somehow result in more cooperation between the parent companies and/or in the industry in entirety. If more cooperation is sufficient in scale and magnitude, it may check the structural incentives necessary for larger output common in joint ventures that signify new capacity, hence spiking a net anticompetitive impact (Cole & Andrea, 1987). The anticompetitive impact may be much greater if the aforementioned behavioral changes happen in joint ventures that replace existing firms. A joint venture can lead to more coordination and cooperation between parent companies and in the industry generally in a number of ways. It can improve communication between the parent companies and hence facilitate cooperation that was initially absent or weaker. The venture can also offer better ways of implementing discipline between the parent companies since each of them has now made a commitment that makes it vulnerable to retaliation by other parties (Weiss, 1987). Apart from this, the joint venture, by partially consolidating and expanding the parent companies’ market presence, may allow them to implement better discipline among the other companies in the market. Economic analysis therefore helped to pinpoint the fundamental questions involved in the Toyota-GM joint venture: a) did it act as a replacement for other expansion arrangements by either company? and b) did it improve cooperation within the industry? GM’s Alternatives to the Venture The major alternatives explored by GM were the S-car, domestic assembly in conjunction with Isuzu, imports from Suzuki, and imports from Isuzu. GM was also making plans for importing subcompact cars from Japan and reselling them through its network of dealers. An obvious source was considered to be Isuzu. Another alternative involved assembling the R-car domestically. It must be said that this was the best and most obvious alternative and definitely something that GM viewed as a contingency plan. In conclusion, the GM-Toyota arrangement was anticompetitive since GM had a readily available alternative/contingency plan that was also competitively feasible. A cover memo from the Bureau of Communication’s director argued that GM had a business need to acquire at least 200,000 additional subcompact cars, despite its approximation of needs was somehow inflated and even if it could domestically assemble R-cars in a profitable way ((The Federal Trade Commission, 1983). The memo’s effect was that the joint venture and the R-car assembly were not contingency plans but vital components of General Motors’ small-car plan. This became the dominant view by the FTC commissioners and a vital basis for the eventual resolution of the investigation. Behavioral Effects of the Venture The joint venture required a transfer price mechanism/formula. This mechanism would have serious competitive ramifications that had to be considered. These ramifications included a reduction in the anxiety and fear among the top small-car firms that others may not abide by their price increase (Batarse, 1989). Apart from the transfer pricing formula, enhance cooperation came with the likelihood of direct exchange of information between Toyota and GM. Two companies that were initially arms-length rivals would now closely engage in matters concerning a major common good. Although the joint venture was restricted to production, opportunities would be plenty for likely overflow into competitively weighty topics like research and development (R&D), future product arrangements, and retail pricing. Efficiencies of the Joint Venture Since there were possible risks to competition, efficiency had to be evaluated. The only question was whether they were smaller or larger than any cost savings correctly attributed to this venture (Begin, 1984). Most normal efficiency reasons did not apply to this particular joint venture. No one had thought that scale economies might be better achieved, since both firms were well above the least efficient scale for automobile plants. In addition to this, there was no new product being developed through the pooling of resources, since this avenue was clearly a smaller version of an already existing model. The essence of the argument about efficiency was that Toyota had perfected the process of making cars, that GM had to learn that process so as to acquire competitiveness, and that the joint venture was perfectly suited to achieving that objective. The Outcome The five commissioners ruled (3-2) in favor of the joint venture. The three commissioners viewed the venture as fundamentally precompetitive. They stated that it would possibly increase the quantity of small cars and also produce cars in less costly way (Begin, 1984). The validity of these arguments depended on the viability and nature of GM’s alternative arrangements. However, these key issues were never discussed in their statements and therefore the basis for the conclusion remains clouded. They also stated that the venture would allow GM to learn Japanese management and production techniques and that GM would try to enforce these lower-cost mechanisms at its other factories. The majority also asserted that Toyota was a much superior source of this knowledge compared to other likely Japanese partners. References Batarse, M. C. (1989). An analysis of an American-Japanese joint venture breaking new ground in industrial relations, managerial, and production systems in a reopened GM plant: the case of New United Motor Manufacturing, Inc. London: Penguin. Begin, B. (1984). The GM-Toyota joint venture: legal cooperation or illegal combination in the world automobile industry. New York: Wiley-Blackwell Publications. Cole, D. E., & Andrea, D. J. (1987). NUMMI: the GM-Toyota joint venture in learning. London: Penguin. Copper, J. F., & Washington, D. (1983). The GM - Toyota joint venture. Washington, D.C.: Heritage Foundation. The Federal Trade Commission. (1983). General Motors/Toyota joint venture. Washington: The Commission. Weiss, S. E. (1987). Creating the GM-Toyota joint venture: a case in complex negotiation. New York, N.Y.: New York University, Graduate School of Business Administration, The Center for Japan-U.S. Business and Economic Studies. White, L. (1991). The US automobile industry since 1945. Cambridge, Mass.: Harvard University Press. Read More