Mich., a circle 600 miles in diameter, 73.6 percent of the number of manufacturers in this industry and 97.7 percent of the employees of the industry are located within that radius.

Senator KING. Which would be the outer rim westward, beyond Chicago, of course?

Mr. CARLTON. Yes; it extends beyond Buffalo, beyond Pittsburgh, beyond Chicago, beyond Milwaukee, north of Lansing, Mich., south of Cincinnati.

The majority of the members of this association, of these 375 members, employ less than 100 employees. We represent employers of as few as five and we represent employers with as many as 10,000 employees.

You would be interested to know that in the election of the board of directors for each $100,000 of sales, or fraction thereof, a member has one vote. Those votes are audited by Ernst & Ernst, and it is interesting that every year since the association was organized, if each member had had just one vote regardless of size, the result of the election would have been exactly the same. I mention that in order to show you that there has been a perfect unanimity of opinion and that no large group of employers, or no large manufacturer or group of manufacturers, is in any way dominating this industry.

The last available sales figures for this association are as of June 30, 1937. The figures reported at that time to this association showed sales of $800,000,000 by the members of this association. I wouldn't have you believe that all manufacturers of automotive parts belong to this association, because there are at least as many more who do not belong to the association as those who belong. Those who do not belong, however, are practically all replacement parts manufacturers who depend for their business upon going through catalogs and determining what parts of the three leading automobiles wear out first, and duplicating those parts and selling them to garages and service stations as replacement parts.

Senator KING. Have you any figures showing the proportion of sales made by this second organization, the proportion of the eight hundred million?

Mr. CARLTON. That eight hundred million are the sales of this particular association, Senator King.

Senator KING. What are the sales of the other organization?

Mr. CARLTON. I can only guess at that. During the N. R. A. days we tried to estimate the sales of the entire industry, and we felt sure that it was a billion dollar industry, and therefore, I believe that it is possible that the sales of those members of the industry who do not belong to this association may total $200,000,000.

Senator KING. Then, of course, with the increase in the use of automobiles, there would be an increase in the demands for parts, and therefore, there would be an increase in the output of the second organization.

Mr. CARLTON. That is right. Of this $800,000,000 of sales, 83.5 percent are original equipment sales, and therefore it can be said that this parts association of which I am president sold last year $650,000,000 worth of parts to the manufacturers of automobiles and trucks.

Mr. DAVIS. Mr. Carlton, do any of those manufacturers of parts of automobiles which you mention in effect compete with the parts manu

factured for or by the automobile manufacturers themselves, members of your association?

Mr. CARLTON. Yes, sir; I think our largest competitor is our own customer. At least our potential competitor is always our own customer. There are some parts of automobiles that are not made at all by the manufacturers of automobiles and trucks. There are other parts that are made, some by one and some by the other.

I know that you will be interested in knowing what parts of automobiles are manufactured by the members of this association.

I am sorry that I have only two copies of this list available and I wouldn't attempt to read into the record a list of these parts, but I would like

Mr. DAVIS (interposing). Mr. Chairman, may we have that inserted in the record without reading?

The CHAIRMAN. Without objection that will be done.

Mr. CARLTON. I was going to offer these as exhibits to be added into the record because the names of over 300 parts of automobiles that are manufactured by the members of this association are on that list. The CHAIRMAN. Looking at the title of this exhibit which you have just handed for inclusion in the record, it reads "Parts of an automobile, excluding the body proper and automotive equipment." Do you care to qualify that title any further? I understand that you were giving us a list of parts which were made by parts manufacturers rather than by automobile manufacturers.

Mr. CARLTON. No. Many of those parts are made by the automobile manufacturer, Senator.

The CHAIRMAN. This, then, is merely a list of the various parts which go into the construction of the automobile.

Mr. CARLTON. But there isn't one part on that list that is not also made by a parts manufacturer. They may make a part of those things themselves, or one manufacturer may make none and the other one may make all, and it is all mixed up in that way.

(The list referred to was marked "Exhibit No. 214," and is included in the appendix on p. 1152.)

Mr. CARLTON. In giving these sales figures and talking about this industry I would have you know that rubber and rubber tires are not in this group, they belong to the rubber association. I would also have you know that bodies are not in here, they belong to the automobile manufacturers association.

Senator KING. Some of the parts manufactured by members of your association are likewise made by the automobile companies themselves?

Mr. CARLTON. That is right, very many of them.

I think you would be interested to know that we have recently made a survey to find out how much engineering, experimental work, experimental samples, research and development cost this industry, the members of this association, in the year 1937, and that figure amounted to more than $20,000,000 in the year 1937. The tool and die expense of this industry in the year 1937 amounted to more than $20,000,000. In other words, this industry in research, development, engineering, tools and dies spent more than $40,000,000 in the year

1937.

The pay roll of the industry in 1937 was in excess of $250,000,000. Senator KING. You mean your association?

ROLE OF PATENTS IN IMPROVEMENT OF AUTOMOBILE PARTS

Mr. CARLTON. The members of this association only. It is probable that you are wondering why we spend so much money in experimental and development work. The parts manufacturer selling to the manufacturer of automobiles and trucks is a servant to his customer. The parts manufacturer must live by his wits. He can only be successful in holding his business so long as he can continue to improve his product. He must make his product better constantly, lighter if possible. His customer, the automobile manufacturer, may be able at any one given moment to make the product that he is buying from the parts manufacturer as cheap or as well, but he must be convinced that the parts manufacturer because of his specialization in one product; because of the fact that he has a large volume of business gathered from a large number of manufacturers of automobiles and trucks, because of those things he can make it cheaper and he can afford to specialize, be can afford to do all of this research, all of this experimentation. As long as the parts manufacturer maintains this position of research and experimentation constantly, then he has a successful business. The minute he lets down then he is going to lose his business, because, as I said before, his greatest potential competitor is his own customer.

The parts manufacturer, in my opinion, and I believe it is the unanimous opinion of our industry, could not afford to engage in this very large amount of development and experimental work without the protection afforded by the patent system.

Looking over the large number of parts manufactured by the industry, it is evident that practically all of the companies manufacturing those parts started because of patents. Speculative capital was attracted to these new parts industries when they were new, because investors were convinced that here was something that could be sold. in a large volume to the automotive industry, and that they could secure protection long enough to secure the return of their capital and make a fair profit on it. So in the beginning of practically all of these various parts industries the patent was the nucleus around which they were built.

It is not unusual for a parts company to spend a half-million or even a million dollars, and well over that in many cases, in the development of a single new part or device. The patent affords the parts manufacturer the opportunity to get his initial development and tooling expense back before his competitors start copying his device. The parts manufacturer doesn't ask for a continuous monopoly, because experience has taught him that his industry changes so rapidly and competition is so intense and so fierce in the industry that nothing that he patents today is going to continue in the form in which he patents it, It would be foolish to insure speculative capital, for example, that if he puts his money into this given part in this industry, that for 17 years we are going to continue to make this part in this given form, because we know that we must progress and that competition is going to build something better, and therefore we must build something better or we will have no business in a very few years. All we want is a hesitation period, a head start, as we used to say when we were boys, to give us a chance to get the experimental and developmental money back.

Senator KING. I suppose the mortality in your industry is very great?

Mr. CARLTON. It has been exceedingly great. It has settled down now to a much more stable business than it has been.

A patent granted to a competitor in this industry has proved to be the greatest incentive possible to other competitors. For example, if one of my competitors tomorrow should bring out a wheel which would revolutionize the wheel industry and threaten to put the company with which I am connected out of business, that in itself would be the greatest incentive in the world for us to use every possible means to get around that patent and to devise something quickly to save our very lives and our physical existence, and I am sure we would do it. We have been faced with that situation time after time. We have lived through the days when all wheels were wood, as you remember on your automobiles, where we had investments of several million dollars solely for wood.

Then you remember how we all switched to wire, and we switched to wire along with it. Then you saw the switch to steel and we switched to steel along with it. We obsoleted equipment and equipment and equipment, and we learned to do new things and to do them better, so I say that patents granted to somebody else are the greatest incentive to force the other fellow to do something new himself.

PATENTS INCENTIVE TO PRODUCTION OF NEW INVENTIONS

Mr. CARLTON. Patents, then, as I say, instead of becoming monopolies, become incentives to produce other inventions.

The CHAIRMAN. How many different ways are there of meeting the new competition which arises from such a patent? I am asking you now from your experience.

Mr. CARLTON. Well, I think those ways are endless. They have to be endless or you would give up.

The CHAIRMAN. What has been done. Could you give us one or two examples of just what has been done to meet a particular situation? Mr. CARLTON. Well, a few years ago a new brake drum came on the market. You can remember only a few years ago, if you got seven or eight or ten thousand miles from a set of brake lining, and mentioning brake lining, I should have said that that also is not within this industry. There are a lot of sales; I should have said that the fabric upholstery in your automobile isn't in our sales either. You can remember that if you got 10,000 miles on a set of brake lining without having your brakes relined at a considerable expense, that was something. Then along came cast-iron brake drums, and they were better. Then along came another type of drum.

A few years ago we brought out what we believed to be a real invention in brake drums. We were practically forced to bring that invention out. We had to have something better. We had to have it or we weren't going to hold our business. We were going to lose all of our brake drum business, and that is a terrific lot of business. Of course we had a nice replacement business in brake drums. That replacement business is gone now, because the drums last almost the life of your car. They do, today.

We spent over $2,000,000 in the development and in highly specialized machinery which can't build anything else but this brake drum,

and in a building, the building cost only a little over $300,000 to build that one item.

The CHAIRMAN. That is one method. That method I should describe as the invention of another and better device. Another method would be to purchase an outstanding patent.

Mr. CARLTON. Yes, sir.

The CHAIRMAN. Another method would be to license a new, an improved device.

Mr. CARLTON. Yes, sir.

The CHAIRMAN. You have followed all three of those proceedings, have you?

Mr. CARLTON. We have done all three of those.

Another method is to find a better method of manufacture, so you can manufacture more cheaply than the other fellow.

The CHAIRMAN. Do you have in this industry which you have described, in this association, a cross-licensing system?

Mr. CARLTON. Well, not in the association at all, as an association, because we are competitors in the wheel business; they are in the carburetor business; they are in all these lines of business. There are cross-licenses existing among groups of competitors.

The CHAIRMAN. All right. Now let us take the carburetor manufacturers, for example. Do they cross-license their devices?

Mr. CARLTON. I don't know about that. I know about the wheel business.

The CHAIRMAN. All right, let's ask about the wheel business.
Mr. CARLTON. All right.

The wheel business is an old industry. The company with which I am, and its predecessor company, started in 1903. The Motor Wheel Corporation owns over 500 patents. I asked our competitors how many they owned, and I know that they own well over 500 patents. We never sued anyone, with all the patents that we own, except once. A fellow got a little nasty and we sued him and we settled it out of court and we gave him a license, and they went out of business anyway.

If those people in that wheel industry, with those thousand patents, started suing each other, the management ought to be discharged, because they would ruin themselves financially. You take a thousand patents and start clubbing each other over the heads with them, all the people in the industry would be broke, so common sense dictated just one thing, to stop this monkey business of fighting each other, and I will give you a license and you give me a license, and we will stop any further law suits in this industry.

Those licenses are just simple cross-licenses, nonexclusive licenses, in which we license a competitor, but we retain the patents ourselves and the rights to license anyone else that we please, and he does the same thing.

Mr. PATTERSON. Mr. Carlton, does your association have any kind of an arbitration board where, once you see that some of these companies are about to go to war, you step in and try to help them?

Mr. CARLTON. No, we do not. There are groups within the association that get together and try to do that among themselves, but we have such a varied lot of different kinds of competitors, and they are so very independent, that each fellow wants to be independent and he doesn't want any association or anybody else to tell him anything.