A SUMMARY OF BASIC MARKETPLACE ISSUES RELATED TO H.R. 71 SUBMITTED BY THE AMERICAN FINANCE CONFERENCE, INC., JULY 1961 Basic to an understanding of the marketplace issues related to H.R. 71, two central facts should be recognized as to the supposed need for financing and insurance subsidiaries owned by automobile manufacturers: (1) No automobile manufacturer, including General Motors, has needed sales finance or insurance subsidiaries because the free marketplace has failed. (2) No automobile manufacturer other than General Motors has needed finance or insurance subsidiaries except to offset exclusive auto-merchandising advantages held by GM through creation of artificial markets and restraint of trade. The basic issue is which kind of market shall prevail in the automobile industry and in auto financing and insurance-a free market or an artificial market. Free and fair competition, it is generally agreed, is the public's best assurance of the greatest value and lowest prices. All who hold this to be true will want to consider fully whether H.R. 71 is needed to help secure free and fair competition in the automobile industry and in the sales finance and insurance industries. Different kinds of competition can be expected from basically different kinds of sales finance and insurance companies. Both proponents and opponents of auto factory subsidiaries agree that they differ from independent companies that offer similar services. Factory subsidiaries have a different function and they behave differently. What is the true nature of these differences? How do these differences bear upon the public interest in a free marketplace? Spokesmen for the two dominant factories-the only ones (by no coincidence) that have finance and insurance subsidiaries-explain that the prime mission of such subsidiaries is to sell more cars. They say that their method is simply to provide good low-cost service. Sometimes the expression "lowest possible cost” is used. But are these characterizations as lofty and innocent, or as true, as they sound? Or do the words mask a strangling of competition in the name of competition? Is the catch-phrase of low prices invoked to cover the power and practice of high prices? It is a core tradition and belief in America that under the free-enterprise system supply and demand for a product or a service will push and pull and set a price that is fair to both users and suppliers. Corallary to this is the fundamental belief that the free marketplace better serves the public interest than a supplier-controlled market with artificial pricing. In the exceptional cases. where an artificial market is sanctioned, the public interest is protected by public controls over the suppliers. ARTIFICIAL MARKETS An artificial market exists in the sale of General Motors cars and distorts the entire auto market. This artificial market in autos is largely the product of artificial factory-spawned markets in the installment sales financing and insuring of GM cars. In the automobile industry factory financing and factory insurance services have been forged into lethal weapons that can subdue and destroy manufac turers who do not have them. General Motors Corp., which sells up to half of all American cars made, has invented most of these weapons. And in no arenas of competition has it demonstrated greater inventiveness and efficiency. From 1938 to 1959 GM was the exclusive holder of such weapons, mainly because its two next largest competitors were restrained by a "disarmament pact" (an antitrust consent decree) which they signed with the proviso that GM also would be disarmed. LEAST STRONG ARE UNARMED Ford Motor Co., and only Ford, has rearmed. To others, economic realities pose as effective a restraint today as antitrust legal restraints ever did. The least strong of the manufacturers have to compete unarmed with the kind of weapons that the two dominant manufacturers hold. General Motors and Ford are not in the sales-finance business and the insurance business because of any deficiency in the free marketplace. More than ample funds and services are available and have been, at prices fairly set by the competitive interaction of hosts of suppliers meeting demand. GM and Ford are in sales-finance and insurance simply to bypass a free marketplace that is available equally to all, and to substitute an artificial, privileged marketplace that is available only to those who sell one manufacturer's products. EXCLUSIVE TRADING ADVANTAGES Factory financing and factory insurance exist primarily to provide exclusive trading advantages to one group of dealers. Factory financing and factory insurance are exclusive items for dealers to trade with, or trade away, in order to make the most possible sales for one manufacturer and its dealers. If a factory plan offers the lowest possible rates in installment financing, for example, the lowest rates set by the competitive conditions of the free marketplace in financing serve merely as the point of departure. Undercutting the free market rate conceivably down to no profit, can be justified to an automaker's managers and stockholders if it serves to increase the sales and profits from selling cars. Likewise, a factory with insurance subsidiaries may choose to sell insurance with or without commissions, or at cost, or below cost-all of which practices are currently followed. Whatever combination of these and other privileged market advantages GM's or Ford's subsidiaries offer their own dealers-to keep or to trade away-they serve to take away sales and profits from dealers who must draw upon the free marketplace for their services rather than having access to a privileged market. The unprivileged manufacturer suffers sales losses, a lesser ability to hold dealers and a lack of income from sideline activities. It is evident that such unequal conditions among manufacturers have no selfcorrectives. The strong get stronger, the weak get weaker. The "seed corn" of "lowest possible prices"-real or illusory-in secondary lines causes the harvest of market dominance which can, and does, set artificially high prices in the primary line-automobiles. ILLUSION AND REALITY IN AUTO PRICES The reality of artificially high prices of autos is sometimes obscured by the fierce competition that is waged among dealers, thousands of whom have been forced out of business. But the dealers' battle is fought on a high platform of noncompetitive factory pricing. General Motors-the largest manufacturer and the only one with long-entrenched finance and insurance companies-sets its prices so as to obtain a consistent target return of 20 percent on investment after taxes for an average 3-day production week, as was brought out in a Senate antitrust inquiry reported in 1958. GM's profits-which have often far exceeded the target-have been described by the Amercian Institute of Management as "phenomenal." Ford competes for volume, but not on a price basis. This was demonstrated in a classic manner, as the record shows, when Ford jacked up its prices on 1957 models a second time so as to match GM's 6-percent increase. Other manufacturers cannot challenge on prices, largely because of inequities that handicap them in building dealer organizations. So handicapped, they cannot increase sales volume and thus create a large enough margin above the breakeven point. So unequally is power distributed in the automobile industry that under present conditions, the two largest manufacturers are not likely to compete with each other on price. They need not-and perhaps they dare not. Price competition could well eliminate competitors and bare the control of the marketplace so clearly that the public's representatives would be moved to take equalizing action far more drastic than H.R. 71. Further expansion of the artificial marketplace of factory financing and factory insurance will doom whatever hopes that unprivileged manufacturers may have and whatever hopes that dealers and the car-buying public may have of real competition in a healthy automobile industry. Continuation of artificial markets can have no other result but to further weaken the free markets on which the unprivileged depend. When the true nature and implications of such catch phrases as "lowest possible prices" are revealed-when such prices are artificial-their glitter turns to tarnish. WHY FORD ENTERED FINANCING AND INSURANCE Ford's explanation of why it founded Ford Motor Credit Co., as restated to the House Antitrust Subcommittee, reveals much, but leaves much to be revealed: ** our interest and our objectives in the field of automobile financing and insurance are very simple: "(1) We want our dealers and car buyers to have available to them financing and insurance at as low a cost as possible. "(2) We do not want to be, and we do not want our dealers to be at a competitive disadvantage with General Motors, whose dealers and customers are serviced by GMAC." The paramount reason, by all signs of the present and the past, is to offset competitive advantage held by General Motors. The low-cost reason has meaning only in the context of a General Motors-type artificial market; its meaning is not what it seems, but the words sound good. The difficulties of translating such catch phrases into meaningful language can be seen in the Ford financing and insurance plans, as unfolded before the House Antitrust Subcommittee: Ford is dedicated to offering its car buyers financing at as low a cost as possible; yet it permits charging them whatever rates they will pay (at least up to $8 per $100 per year on new cars) for financing which costs the dealer a constant submarket rate. Ford is dedicated to offering its car buyers insurance at as low a cost as possible; yet it limits its 20-percent, off-manual insurance rates on physical damage policies to those States where dealer commissions are illegal; if the law does not eliminate dealer commissions from the charge to consumers neither does Ford. Neither of these "low cost" features is unique to Ford, it should be stated. They are patterned exactly after the GM financing and insurance plans, which may or may not result in low financing or insurance costs to consumers, but nearly always provide extra income to the dealer to counter trading losses. After all the dealing, it should be noted, dealers' net profits are marginal, while GM's and Ford's are generous. Dealer financing rates of factory subsidiaries get close to the heart of the matter. As one justification for reentering the finance business, Ford has testified that its survey in 1958 found that Ford dealers were at a 50-cent-per-$100 disadvantage as against GM dealers, with their GMAC source. Ford introduced Ford Motor Credit Co. rate charts to prove that it now offers its dealers rates lower than formerly available. Ford's action indicates that it is countering GMAC rates which are below those of independent companies in the free market-but such action by no means answers the objection that "low as possible" rates can be rates unfairly lowered by factory subsidy or other special privileges of an artificial market. Perhaps out of sensitivity to such considerations, GM's chairman, Frederic G. Donner, when questioned at the House hearing on H.R. 71, declined to say that GMAC's dealer discount rate is generally lower than that offered by inde pendents. He preferred to hint that it was only in a positive way-by sug gesting that spinning off GMAC from GM could well result in higher charges for financing and automobiles. RELATION OF DEALER-CONSUMER RATES Yet, Mr. Donner admitted that a low dealer discount rate is not necessarily followed by a low consumer finance rate: "*** I don't think that you can say that the exact cost of the financing charge on an invoice has any relationship to the net cost of that financing to the consumer, because you don't know how much the dealer has traded away in the used car transaction or given implicitly as a discount on the new car." Ford's Dr. Theodore O. Yntema also failed to prove that lower financing rates for consumers result from factory financing. He tried to generate such a belief with spectacular estimates of increased finance and insurance costs if factory subsidiaries were outlawed. He also tried to show, by sample transactions, that car buyers are the principal beneficiaries of Ford's new plans. Yet he canceled the validity of both statements when he conceded that there can be no statistical proof that a low consumer rate necessarily follows a low rate to dealers. A lower finance discount rate to a GM dealer or to a Ford dealer would put him in a position to offer bigger trading allowances or to take a bigger profit, or a combination of both. Ford dealers, when they had no factory financing available, met their privileged GM competitors' net prices in general, Ford's spokesman indicated to the Senate in 1959. Presumably, other dealers do likewise and sacrifice part or all of their profits. The essence of factory financing in conferring the privileges of an artificial market to a favored group is to be seen in a revealing statement which Ford made to the U.S. District Court in 1946, seeking the legal right to reenter financing. It is still apropos today. FACTORY-ADAPTED PLANS The existing dependent finance companies then serving Ford dealers "finance all makes of cars," Ford complained, "and their plans are not particularly adapted to the sale of respondent's products." Its inability to offer "better adapted" plans, while GM has been able to do so, had resulted in a loss of sales, Ford argued. In this statement and in one to the U.S. Supreme Court, Ford sketched various artificial-market advantages which GM then enjoyed exclusively over Ford (and all other manufacturers) through GMAC. Low retail financing rates (which bear the possibility of factory subsidy) and cost-free wholesale credit (which would be clearly a factory subsidy) were among the avenues of special advantage open to GM, Ford explained. Ford cited absorbing the "entire cost" of wholesale credit as something that GM could do. There is no evidence that GMAC's subsidizing of wholesale financing has gone to such an extreme in practice, but it is significant that such a degree of subsidy occurred to a manufacturer trying to meet GM's methods of competition. "The more liberal the wholesale financing of the dealer organization, the larger were the dealers' operations," Ford explained. Ford spoke explicitly of its "serious handicap" in the market for new dealers which underlies a disadvantage in factory sales. Finance charges were not the only weapons then exclusively in GM's arsenal. Ford also cataloged these among GMAC advantages, actual and potential: "More lenient" retail financing terms; "More reasonable" collection practices; "More generous and timely" dealer capital loans than "similar loans made available by other finance companies and banks." (Fuller quotations from the Ford statements are attached hereto in an appendix.) All of the GMAC advantages cited were creations of an artificial, privileged market. None of the features which Ford sought the right to copy reflected any failure or improper function or restraint of trade in the free market. None of the features in Ford's hands would have lessened the even greater competitive handicaps of other manufacturers relying on the services of a free market. THE PAST AND THE PRESENT The present nature of automobile factory financing and its present restraints of trade cannot be understood without reference to certain highlights of history. General Motors Acceptance Corp. "stands on its own feet," the chairman of GMAC, Charles G. Stradella, told the House Antitrust Subcommittee, this year. The Chrysler Corp. spokesman-although opposed to H.R. 71, which would bring it competitive relief-thought otherwise: "As a practical matter, it (GMAC) does not stand on its own feet." The record written by GM's wholly owned finance subsidiary shows clearly that GMAC has not stood on its own feet-certainly not since 1925. GMAC has been dedicated to creating artificial secondary markets for the exclusive use of GM dealers and exclusive ultimate benefit of the parent company. FACTORY WILL EXERCISE CONTROL In 1925, a GMAC confidential report stated as a clearcut policy: "The factory hereafter will exercise control of the dealer's time-selling practices in keeping with the credit merchandising principles explained, and prompting the use of plans provided by us, thus assuring a volume which will permit the maintenance of the low financing charge." The factory's exercise of control over dealer's time sales became so flagrantly coercive that GM was indicted in 1938 and convicted under the antitrust laws. Canceling franchise, obstructing normal supplies, and other GM violations of law, which are set down in court records, are summarized in the testimony of Lee Loevinger, antitrust chief of the U.S. Department of Justice, in support of H.R. 71. Any low financing charge supported by a volume built on criminal practices has small claim to sanctity. Nor is the possibility of coercion purged today, simply because GM must be circumspect in observing a number of specific injunctions of an inadequate consent decree. (Inadequacies of the consent decree are described in legal briefs which appear in the record of the 1959 Senate auto financing legislation hearings at pages 695-753.) GM-GMAC RELATIONSHIPS Potent GM-GMAC relationships continue today, capable of exerting undue influence on dealers dependent on factory pleasure for supplies and services. Among GM-GMAC relationships Both corporations and their officers and directors have an intimate, active association in the operation of GMAC. The officers and directors of both corporations jointly determine the terms and conditions on which GMAC finances the wholesale and retail sale of GM cars. Both corporations have the same headquarters office location. Both have parallel organizations and local offices throughout the country. Management of other personnel of both, at their respective headquarters and local offices, are closely associated and act together for the acquisition of the finance business. The impact upon dealers of the GM-GMAC association was described aptly by Ford in its brief to the U.S. Supreme Court in 1946: "It is clear to each General Motors dealer without any joint visit that General Motors wants him to patronize GMAC; that General Motors recommends GMAC." The name itself is a competitive advantage, Ford said. "Even if GMAC were not a wholly owned subsidiary, but it was still known as the General Motors Acceptance Corp., recommendation would be inherent in the name alone." Ford was not accusing its competitor of coercion in these relationships. Even though all suspicion of coercion be waived and GM's past record to the contrary forgotten, Ford's statements point up substantial advantages in acquisition cost which act to the disadvantage of manufacturers who do not control a private artificial market. INHERENT ADVANTAGES The acquisition-cost advantage to a factory-owned finance company is not spelled out in GMAC reports. But the history of the kind of competition which GM spurred reveals inherent factors that still hold today even if outward forms are modified. The marked advantage of even a factory-preferred company was proclaimed by Commercial Credit Co. in a debenture prospectus of 1937: "The services performed by Chrysler Corp. and its subsidiaries are believed to be a valuable advertisement of Commercial Credit Co. and its business, plans and financing facilities, to save the company a substantial sum in promoting and acquiring additional business from delers, and to increase its business and profits." So substantial was this acquisition advantage that even after taking its increased profits, Commercial Credit Co., under the terms of its contract, paid Chrysler $1,339,000 in 1937 alone and $3,820,000 for 1929-37, according to Federal Trade Commission reports. Subsidized, artificial market finance rates were the foundation of the finance company relationship which Chrysler devised to fight on the battlelines drawn by GM. At the outset, Chrysler paid $1,474,000 to CCC for the 2 years 1927 and 1928-the difference between finance charges specified by Chrysler and the charges that otherwise would have been in force. (Source: "Sales Finance Companies and Their Credit Practices," Plummer and Young, National Bureau of Economic Research.) Such payment to a large and mature finance company which had been operating in a competitive market can be called nothing other than outright subsidy. |