International Joint Venture: General Motors and Toyota (1983) - Assignment Example

?International Joint Venture: General Motors and Toyota (1983 Overview The advent of the 1980s saw a general shift in the U.S. automotive arena, with an increased demand for small cars, as compared to larger vehicles. This was largely due to the surge in oil prices owing to the Middle Eastern political scenario. Japan had already been recognized as a leader in the ‘small car manufacturing sector’. General Motors initially sought to compete against the Japanese giant Toyota, but later on decided to enter in to a ‘joint venture’ with Toyota. This agreement between GM and Toyota went on to become one of the most controversial antitrust investigations in recent times (Kwoka J. Jr., Case 2). The main contrasting theories were whether the joint venture would lead to greater efficiency in the production of domestic small cars, or whether it would give rise to co-operative / coordinated pricing between the two parent companies. GM was the largest automobile manufacturer in the U.S. since the 30’s and traditionally promoted the production of large sized cars. In the 70’s, GM was quick to realize that despite smaller per-unit profits, ‘small cars’ accounted for a huge market segment and promised to play a major role in the future. Toyota, on the other hand, established itself as the leading automobile company in Japan and mainly manufactured small cars, focusing heavily on exports. Japanese techniques that were prevalent at Toyota were way superior in terms of efficiency, labor utilization and quality control techniques. Above all, the cost of production was much economized upon, using Japanese production processes. Owing to heavy import taxes for Japanese cars in the U.S., there was a mounting pressure on Japanese automotive companies to set up their units in the U.S. In February 1983, this finally led to an official ‘joint venture’ named New United Motor Manufacturing Inc. (NUMMI) between GM and Toyota. GM contributed $20 million as well as an assembly plant in California, while Toyota imparted their system of production, vehicle design along with an adjacent stamping plant. Senior officials and labor relations were almost totally taken charge of by Toyota. 2. Legal issues Since this joint venture involved two giant parent companies, the Federal Trade Commission (FTC) was designated to conduct an investigation prior to its consummation. The participants in the case were five Federal Trade Commissioners. Their verdict was based on separate inputs from the Bureau of Economics, the Bureau of Competition and a Consulting Economist. There were various issues debated in the FTC with respect to the joint venture of GM and Toyota. The first issue was the likelihood of ‘co-operative behavior’ in the relevant product and geographic market. There was a unanimous agreement in that the ‘Canadian market output’ should be integrated with that of the U.S.’. The European market was considered to be marginally competitive whereas the Japanese market was seen as the greatest competitor. Since 1981, there was in existence, a ‘quota’ system in the form of a Voluntary Restraint Agreement (VRA) which placed a cap on Japanese imports at around 1.68 million cars. 3. Economic Analysis The main question debated was whether this VRA would persist in the light of the joint venture. This was determined by ‘economic analysis’, wherein the pattern of pricing amongst firms with pricing discretion was determined. The magnitude of imports in turn affected the elasticity of demand. The Herfindahl-Hirschman Index (HHI) was calculated and reinforced the concept that ‘a larger import share reduces domestic market power’. The consultant predicted that the concept of ‘quotas’ would continue over the next several years and that there were sufficient grounds for competitive concern. The economic and legal staff of the FTC expressed the long – run possibility of Japanese producers establishing American assembly facilities, though conceding that the import constraint on Japan was a binding factor in the short - run. The magnitude of increase in the HII was determined to be a modest 45 – point increase, due to the joint venture. On the other hand, a consultant of Chrysler considered the control mechanisms exerted by the parent companies as well as the prospect of establishment of a completely new firm with the same production capacity and found that the HII was most likely to increase between 100 – 200 points. Economic studies had shown that there were factors other than concentration that could determine the outcome of the firm’s interaction in the market. The Economic Consultant considered factors such as the number of firms, technological change, heterogeneity of products, instability of demand and cost differences limiting to cooperative behavior in the auto market. As the VRA was strongly in place, the Economic Consultant and FTC Legal Staff concluded that the market needed close monitoring for ‘pricing collusion and product planning’. In contrast, the Economics staff of the FTC was of the view that the import of components and the construction of new plants were a part of the price restraint exercised by the Japanese. The analysts finally agreed in majority that there was good reason for competitive concern in the market due to the VRA. Economic and Legal concerns Another issue was raised from legal and economic standpoints, stating that the GM-Toyota agreement did not even qualify as a ‘joint venture’ as per the definition, since there was no new capacity, technology or product generated. Further on, it was even noted that the joint venture would increase the possibility of ‘behavioral changes’ such as increased cooperation, coordination and communication between the parent companies, which in turn would increase the anti-competitive effect. The Court too, recognized anti-competitive dangers that could potentially fall out of joint ventures such as the GM-Toyota case. In the absence of the joint venture, GM would have sought to produce small cars by itself or would have imported new subcompacts known as the ‘R-car’, in association with Isuzu. Toyota, on the other hand, would have had to establish a facility in the U.S. despite their conservative outlook. The existence of the VRA coupled with the extension of quotas made it more likely for assembly of ‘R-cars’ in the U.S. itself, as an alternative. This was seen by the economic consultant as a substantial competitive risk of the joint venture. The cover memo issued by the Director of the Bureau of Competition implied that the joint venture with Toyota and the R-car were BOTH necessary ingredients of GM’s small car strategy. There was significant investigation on the transfer pricing mechanism leading to ‘lockstep pricing’ for joint venture cars as well as direct information exchange of unnecessary information such as detailed product information, improvements and design characteristics, between GM and Toyota. The Economics staff of the FTC vehemently defended this information exchange, declaring it as ‘necessary’. However, the FTC’s majority position concluded that information exchange was the ‘most troubling feature of the joint venture’. Interestingly, the efficiency estimation of the merger (after all discounts) worked out to be approximately $200 per car; i.e., $40 million annual savings. This was due to the efficient process, just-in-time inventory system and total quality control measures of the Toyota system. 4. The Outcome The final decision before the FTC was whether or not to issue a complaint alleging an antitrust violation against GM and Toyota. The five FTC Commissioners had to base their decision on the inputs from the bureaus and the consultant. The two bureaus were in favor of the joint venture whereas, the Consultant was against it. The joint venture was opposed by two commissioners on the grounds of transfer pricing formula, information exchange and the risks of GM’s alternatives. Three commissioners declared the joint venture as ‘pro-competitive’ as it would increase the number of cheaper, small cars and also saw it as an opportunity for GM to implement lost-cost techniques. In December 1983, the Commissioners of the FTC voted 3-2 in favor of the joint venture. However, the FTC majority did have concerns regarding certain anticompetitive possibilities and information exchange. The final approval was granted in April 1984. The court declared that a ‘simple joint venture’ was preferable. A complaint was required to be filed against the joint venture along with a mutually signed consent order which consisted of two relevant parts: the first limited the joint venture to production and sale to GM of automobiles from one assembly line while the second prohibited the exchange of information on a list of topics judged not central to the operation of the joint venture. This is how the investigational saga concluded. 5. Conclusion I believe the case study thoroughly examines the Anti-trust laws and procedures from the economic and legal standpoints. In my view, some of the assumptions for decision making during the investigation were rather sketchy and uncertain. Assumptions such as the persistence of import laws did not turn out to be true, as per the case. Interestingly, the alternative strategy assumed to be taken up at a later stage by GM, i.e., assembly of the R-car never took place. General Motors and Toyota were giants in the automobile industry in their own right and may have benefitted to a greater extent had the limitations not been placed by the FTC. I believe that the risks and the benefits were rather overstated during the investigation. Also, it is rather surprising that the investigational records were not properly filed and that vital informational was blacked out in the pretext of being ‘confidential’! I also infer from this case that a ‘joint venture’ doesn’t necessarily mean greater success. This is evident in the fact that though the Chevrolet Nova was a well-built, fuel efficient product of the joint venture of GM and Toyota, it did not sell well. There is of course, always scope for improvement in the production process. GM certainly benefitted from the joint venture by adopting Japanese techniques, imbibing cost – saving methods and by improving efficiency and productivity. In conclusion, anti-trust inquiries go a long way in understanding intricacies of business decisions. The true impact of investigational assumptions lies in the hands of the market and legal / economic policies that govern business strategies. Reference: Kwoka J. (Jr.) International Joint Venture: General Motors and Toyota (1983), Case 2: The GM Toyota Joint Venture, Pg. 46-75. Read More