[Senate Hearing 106-458]
[From the U.S. Government Publishing Office]
S. Hrg. 106-458
INTERNATIONAL ANTITRUST
=======================================================================
HEARING
before the
SUBCOMMITTEE ON ANTITRUST,
BUSINESS RIGHTS, AND COMPETITION
of the
COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE
ONE HUNDRED SIXTH CONGRESS
FIRST SESSION
on
ISSUES RELATING TO INTERNATIONAL ANTITRUST COOPERATION AND ENFORCEMENT,
INCLUDING POSITIVE COMITY AGREEMENTS, THE FLAT GLASS INDUSTRY, AND
PROBLEMS WITH THE JAPANESE MARKET
__________
MAY 4, 1999
__________
Serial No. J-106-21
__________
Printed for the use of the Committee on the Judiciary
U.S. GOVERNMENT PRINTING OFFICE
63-623 CC WASHINGTON : 2000
COMMITTEE ON THE JUDICIARY
ORRIN G. HATCH, Utah, Chairman
STROM THURMOND, South Carolina PATRICK J. LEAHY, Vermont
CHARLES E. GRASSLEY, Iowa EDWARD M. KENNEDY, Massachusetts
ARLEN SPECTER, Pennsylvania JOSEPH R. BIDEN, Jr., Delaware
JON KYL, Arizona HERBERT KOHL, Wisconsin
MIKE DeWINE, Ohio DIANNE FEINSTEIN, California
JOHN ASHCROFT, Missouri RUSSELL D. FEINGOLD, Wisconsin
SPENCER ABRAHAM, Michigan ROBERT G. TORRICELLI, New Jersey
JEFF SESSIONS, Alabama CHARLES E. SCHUMER, New York
BOB SMITH, New Hampshire
Manus Cooney, Chief Counsel and Staff Director
Bruce A. Cohen, Minority Chief Counsel
______
Subcommittee on Antitrust, Business Rights, and Competition
MIKE DeWINE, Ohio, Chairman
ORRIN G. HATCH, Utah HERBERT KOHL, Wisconsin
ARLEN SPECTER, Pennsylvania ROBERT G. TORRICELLI, New Jersey
STROM THURMOND, South Carolina PATRICK J. LEAHY, Vermont
Pete Levitas, Chief Counsel and Staff Director
Jon Leibowitz, Minority Chief Counsel and Staff Director
(ii)
C O N T E N T S
----------
STATEMENTS OF COMMITTEE MEMBERS
Page
DeWine, Hon. Mike, U.S. Senator from the State of Ohio........... 1
Kohl, Hon. Herbert, U.S. Senator from the State of Wisconsin..... 3
Leahy, Hon. Patrick J., U.S. Senator from the State of Vermont... 4
Specter, Hon. Arlen, U.S. Senator from the State of Pennsylvania. 16
CHRONOLOGICAL LIST OF WITNESSES
Panel consisting of Joel I. Klein, Assistant Attorney General,
Antitrust Division, U.S. Department of Justice, Washington, DC;
and Robert Pitofsky, chairman, Federal Trade Commission,
Washington, DC................................................. 5
Panel consisting of Peter S. Walters, group vice president,
Guardian Industries Corporation, Auburn Hills, MI; Gorton M.
Evans, president and chief executive officer, Consolidated
Papers, Incorporated, Wisconsin Rapids, WI; and John C.
Reichenbach, director of government affairs, Pittsburgh Plate
and Glass Industries, Washington, DC........................... 25
ALPHABETICAL LIST AND MATERIAL SUBMITTED
Evans, Gorton, M.:
Testimony.................................................... 27
Prepared statement........................................... 29
Klein, Joel I.:
Testimony.................................................... 5
Prepared statement........................................... 7
Pitofsky, Robert:
Testimony.................................................... 11
Prepared statement........................................... 13
Reichenbach, John C.:
Testimony.................................................... 32
Prepared statement........................................... 35
Walters, Peter S.: Testimony..................................... 25
INTERNATIONAL ANTITRUST
----------
TUESDAY, MAY 4, 1999
U.S. Senate,
Subcommittee on Antitrust, Business Rights,
and Competition,
Committee on the Judiciary,
Washington, DC.
The committee met, pursuant to notice, at 10:30 a.m., in
room SD-226, Dirksen Senate Office Building, Hon. Mike DeWine
(chairman of the subcommittee) presiding.
Also present: Senators Kohl and Specter.
OPENING STATEMENT OF HON. MIKE DEWINE, A U.S. SENATOR FROM THE
STATE OF OHIO
Senator DeWine. Good morning. I apologize for starting half
an hour late. As you know, the Senate has been voting on the
Kosovo resolution.
Let me welcome all of you again to the Antitrust, Business
Rights, and Competition Subcommittee. Today's hearing is the
third in a series of our subcommittee's antitrust oversight
hearings. At each of our oversight hearings, we have spent some
time on international antitrust enforcement, and today, we are
actually going to focus on that particular issue, which we
think is a vitally important issue.
Senator Kohl and I have worked closely on this issue with
both of the antitrust enforcement agencies, and we are happy to
have with us back again Joel Klein. Joel, thank you very much
for joining us. Joel Klein, of course, is of the Antitrust
Division, and Robert Pitofsky of the Federal Trade Commission.
We welcome both of you here today.
As noted at last October's hearing on this subject,
international antitrust enforcement is becoming increasingly
important. Expansion of global trade, the increasing impact of
the Internet, and the more rapid cross-border flows of capital
and resources are fundamentally reshaping the way American
companies operate today. More and more business is conducted in
the international marketplace, which means that more and more
often, American companies find themselves involved in legal
controversies in foreign jurisdictions.
Unfortunately, many foreign companies do not have the same
commitment to free and open markets that we in the United
States do. Some of these nations do not have strong antitrust
laws to protect competition, and even among those countries
that do, enforcement is often less vigorous than we would like.
As a result, American businesses are often faced with unfair
anticompetitive actions by foreign competitors in these
overseas markets.
In order to address these concerns, U.S. agencies have
entered into a number of agreements designed to increase
cooperation among international antitrust authorities. As many
of you know from our previous hearings on this issue, this
subcommittee has been troubled by the implementation of these
positive comity agreements. Enforcement by foreign antitrust
authorities has sometimes not met the high standards set by our
own agencies, leaving American businesses to suffer the
consequences of unfair and anticompetitive business practices.
Despite these difficulties, I am happy to report that we
have been seeing improvement in a number of instances. Two of
the witnesses at our last hearing, representatives of Marathon
Oil and representatives of the SABRE Group, have seen
significant progress in the investigation of their respective
complaints. Senator Kohl and I have been working closely with
Mr. Klein, Mr. Pitofsky, and with their colleagues in the
European Commission and both matters are proceeding at a much
better pace. We will continue to monitor and work on these
issues and we anticipate further progress in the months ahead.
While we seem to be making good progress with our
colleagues in Europe, serious problems still remain in Japan.
On our second panel today, we will hear from representatives of
three companies that have been having tremendous difficulty in
the Japanese market. Despite a great deal of work by this
subcommittee and by the American enforcement agencies, we have
seen virtually no progress on this issue. Accordingly, at
today's hearing, we will focus on antitrust problems in the
Japanese market.
Before I turn to Senator Kohl, let me address one
additional point. The Justice Department has been in
discussions with its counterparts in Japan regarding a positive
comity agreement. This agreement, as I understand it, is
similar in substance to some of the earlier antitrust
cooperative agreements we have signed with our colleagues in
the European Community.
On balance, I believe positive comity agreements are
generally a good thing. Based on our experience, it seems that
they help to diffuse some of the tensions that sometimes arise
in the course of antitrust investigations involving companies
from different countries. I think the jury is still out on how
much they help, but they usually seem to provide some benefits.
However, in the case of Japan, I think we must proceed very
cautiously. We have signed a number of agreements in the past
with Japan and have seen these agreements ignored repeatedly
and the interests of American companies violated. Senator Kohl
and I, along with 24 other U.S. Senators, sent a letter last
week to the President making our position clear. In the current
environment, given the continual failure of the Japanese
government to honor past agreements, we do not think it
appropriate to sign a positive comity agreement.
I understand, however, that Mr. Klein will endorse a
different position today, which we certainly respect, and that
the administration is planning to enter into this positive
comity agreement. I believe there were discussions about it
yesterday. I think Mr. Klein and Mr. Pitofsky will have a long,
difficult road to travel in their efforts to gain some
cooperation from the Japanese, and we certainly wish them luck.
Therefore, I do not believe that this is the best way to
proceed. Instead, I think the Justice Department should
strongly consider the extraterritorial enforcement of our
antitrust laws in order to prevent Japanese companies from
violating the rights of American companies.
Let me emphasize again, however, this subcommittee has a
great deal of faith in both of our witnesses today and we will
support their efforts to implement any agreement that is
reached. In the meantime, we will continue with our own efforts
to protect the legitimate business interests of American
companies in Japan.
Let me at this point turn to the ranking minority member of
this subcommittee and someone who I have enjoyed working with
for the last few years, and that is Senator Kohl. Senator Kohl?
STATEMENT OF HON. HERBERT KOHL, A U.S. SENATOR FROM THE STATE
OF WISCONSIN
Senator Kohl. Thank you, Mr. Chairman, not only for holding
this hearing on international antitrust enforcement but for
doing so today, as Prime Minister Obuchi of Japan, a country
whose markets are most decidedly closed, visits the President.
It is a good time to assess competition in the international
marketplace and determine whether our trading partners have a
commitment to free markets. The truth is that we are doing
fine, but our foreign counterparts are not. Let me explain.
First, the good news. Our laws promote competition, our
judicial process is open, and our enforcement authorities, led
by Mr. Pitofsky and Mr. Klein, make sure that the system works
well.
Indeed, after a slow start, it is becoming clear that our
most important positive comity agreement, with the European
Union, is beginning to pay off. Although it has taken some
time, the EU has now acted on the first ever positive comity
request from the SABRE group, and we have also seen some
progress in the European investigation of the Marathon Oil
matter. Just last week, the United States signed a positive
comity agreement with Australia, which will help our two
countries work together on antitrust violations.
But there is also bad news, especially from countries that
have failed to open their markets. For example, after decades
of trying to open the Japanese markets to paper, flat glass,
and rice, and after we have signed several bilateral treaties
to do just this, American companies are still frozen out of the
Japanese market. Although the Japanese say all the right things
and sign all the right agreements, their keiretsu of
manufacturers and distributors has made it impossible for hard-
working companies to bring competitive products to Japan.
Indeed, as Buck Evans of Consolidated Papers will tell us
today, the Japanese work hard at appearing to open their
markets, only in the end to deny foreign companies realistic
chances to sell. After jumping through hoops for 6 months so
his company's product would meet Japan's so-called market
standards, his paper simply languished on the Japanese delivery
docks, and languished, and languished some more, until finally
he decided that breaking open the Japanese markets was not
worth the headache. Keep in mind that American paper products,
like flat glass, are unquestionably the best in the world.
So the lessons of Buck Evans and his colleagues come down
to this: The Japanese markets are about as open and competitive
as ours were 100 years ago, when John D. Rockefeller controlled
the oil and Jay Gould controlled the railroads. Perhaps that is
why the Japanese declined our invitation to testify here today.
But one thing is clear. We need to take more forceful action,
not only with our trade laws, but also with our antitrust
statutes, to go after this protectionist behavior.
In that regard, this may not be the most opportune time to
sign a positive comity agreement with Japan, but if we do, it
needs to be monitored very closely to ensure that the Japanese
adhere to the letter and the spirit of their promises, and we
should not hold our breath.
To be sure, we are not asking for favoritism for American
firms to compete in Japan. All we want is for the Japanese to
follow through with their commitments and open their markets
the way we opened ours and for the President to more
aggressively pursue compliance. Otherwise, I worry that if we
do not see progress on the issue, it will continue to fester in
Congress until it simply explodes, and that would not be good
for either country.
With that, I look forward to hearing what our witnesses
have to say today. I thank you.
Senator DeWine. Senator Kohl, thank you very much.
At this point, I would like to enter the prepared statement
of Senator Leahy into the record.
[The prepared statement of Senator Leahy follows:]
Prepared Statement of Senator Patrick J. Leahy
Chairman DeWine and Senator Kohl, I greatly appreciate you holding
this hearing. I applaud your continued efforts to protect American
consumers and businesses from unfair foreign business practices.
American consumers are often the victims of foreign collusion and
cartels, and American businesses are often unable to play on a level
playing field in foreign markets. Those who export to the United States
and foreign interests that operate here gain the benefit of our
antitrust laws--yet the favor often is not returned.
As the world becomes more interdependent, it becomes more important
for the United States to work to establish an antitrust enforcement
scheme to assure fair and equal treatment of our companies in foreign
countries. The problem of transnational cartels is very real, and it
grossly distorts free trade.
I was pleased to work closely with the Justice Department and the
FTC on the International Antitrust Enforcement Assistance Act of 1994.
I worked with then-Assistant Attorney General Anne Bingaman on that
effort. As an original sponsor and supporter of that act, I am anxious
to hear from the Justice Department and the FTC on how they feel it is
working. International antitrust enforcement assistance agreements can
give U.S. consumers greater protection against foreign monopoly power
and can help promote U.S. commerce overseas.
Vigorous international antitrust enforcement will be helpful to
American businesses wishing to compete in foreign countries. The
comments of the Director of Government Affairs for PPG Industries
highlights the failure of the Japanese to enforce their own antitrust
laws while, at the same time, Japanese glass firms take advantage of
the fair treatment accorded to their companies in the United States.
The costs of international cartels, in terms of business lost for
U.S. firms, is certainly in the billions of dollars. Cartels affecting
lysine, graphite electrodes, citric acid, pharmaceuticals,
transportation, oil, gas and other products or businesses distort world
trade and give non-U.S. companies an unfair advantage. In addition,
anticompetitive policies of other governments unfairly hurt American
producers and manufacturers. For example, Canada subsidizes its sales
of dairy products into the United States yet imposes 300 percent
tariffs on our sales of milk into Canada.
I will be asking Assistant Attorney General Joel Klein and Chairman
Pitofsky for their views on a number of matters to determine how we
together can help alleviate these problems for our consumers,
producers, inventors, investors and manufacturers. We must be
determined and aggressive so that other countries are as fair to our
companies and we are to theirs. This protects American jobs, helps our
balance of trade and provides our consumers with lower prices.
Senator DeWine. Let me turn to our first panel. Again,
these are two veterans of this subcommittee. Robert Pitofsky
was sworn in as Chairman of the Federal Trade Commission in
April 1995. He has testified before this subcommittee on
numerous occasions and we welcome him back.
Joel Klein is the Assistant Attorney General for the
Antitrust Division at the Department of Justice, a post that he
has held since July 1997. He is also a very familiar face at
these hearings. We welcome you back.
Mr. Klein, we will start with you. Any written statement
that you have submitted, any of the witnesses today, will be
made a part of the record and you can proceed as you wish.
PANEL CONSISTING OF JOEL I. KLEIN, ASSISTANT ATTORNEY GENERAL,
ANTITRUST DIVISION, U.S. DEPARTMENT OF JUSTICE, WASHINGTON, DC;
AND ROBERT PITOFSKY, CHAIRMAN, FEDERAL TRADE COMMISSION,
WASHINGTON, DC
STATEMENT OF JOEL I. KLEIN
Mr. Klein. Thank you, Mr. Chairman, Senator Kohl. I
appreciate that. I will be very brief in my comments. It is
delightful to be back here again.
I want to commend the subcommittee for its prescience in
this area. I think not a lot of people have fully appreciated
the significance, and the growing significance, of
international antitrust enforcement. But I think as we move
into the 21st century and the globalized economy, I think what
we are talking about now, what we have been talking about for
the last 2 years, will be absolutely critical and I continue to
welcome the engagement.
As you mentioned, the President and Prime Minister Obuchi
yesterday announced that we will enter a cooperation agreement
with the Japanese, which I think is significant, although I
certainly take the subcommittee's concerns and the other
concerns expressed by the 24 Senators to heart, but I will say
more about why I think this is important.
Beyond that, last week, the Attorney General of the United
States and Chairman Pitofsky executed the first international
antitrust enforcement agreement act treaty, whereby we have now
a very formal, much along the lines of a mutual legal
assistance treaty, with the Australians, again reflecting, I
think, the important significance of antitrust enforcement,
putting it up there in the top echelon of international law
enforcement.
And most exciting, as we have talked about and I am proud
to announce here this morning, the U.S. Department of Justice
an hour ago filed in Philadelphia two criminal cases against
the company, a major German carbon and graphite company called
SGL, the largest company of its sort in the world. The company
plead guilty and is paying a $135 million fine in our graphite
electrodes investigation. That is the single largest fine in
the history of antitrust enforcement.
Second, its chairman and chief executive officer is going
to pay a $10 million fine, and that is the largest individual
fine by several orders of magnitude. Our highest fine up until
now was $350,000, and now we took it to $10 million.
I want to let you know, in that one investigation alone, we
have brought in now close to $300 million in fines, reflecting
money that has been taken out of the U.S. economy, out of hard-
working companies and ultimately consumers, been taken out of
their pockets to go to a group of producers who were unwilling
to live up to the law, and these are all the product of large
international conspiracies. We currently have some 35 grand
juries looking at this area and it is my view that in the next
several years, we are going to crack open some of the most
trenchant and longstanding conspiracies, and I look forward to
working with the committee in making sure that the U.S. economy
is free of this kind of theft from our people.
Beyond that, the chairman mentioned and the ranking member
mentioned the issue of positive comity. I am pleased to say,
while there were some bumps in the road, the SABRE, and maybe I
am mixing my airline and surface transportation metaphors, but
the SABRE matter now seems to be moving toward a, I think,
promising conclusion. The European Commission has issued a
statement of objections with respect to Air France, one of the
people that we were concerned about. In the meantime, SABRE
itself has reached agreements with SAS and with Lufthansa,
which will increase SABRE's access to key information in the
European markets.
I think when the final chapter is written on this, while we
will have all learned some vital lessons, I think the
subcommittee and its initiatives in this area, along with the
work of the Federal Trade Commission, the Department of
Justice, and the DG-IV in Europe, will show that this is a
process that can work. It can work better, it can work more
expeditiously, but I think we will show that it can work.
As I say that, I want to caution all of us that positive
comity is not going to be a panacea for all trade problems.
What we focus on is antitrust access issues, and there are a
lot of other issues out there, but we and our colleagues, I am
sure, at the Federal Trade Commission are willing to do the
hard work to separate out the wheat from the chaff, and when we
find antitrust issues that raise significant barriers to entry
for American countries in foreign markets, you can be assured
we will pursue them vigorously with enthusiasm and with
commitment. But when we do not find the antitrust issues are
the paramount issues, then, of course, there will have to be
other remedies and other agencies involved.
I am sure there will be a great deal of discussion about
this as we go forward, Mr. Chairman, so I thank you.
Senator DeWine. Mr. Klein, thank you very much.
[The prepared statement of Mr. Klein follows:]
Prepared Statement of Joel I. Klein
Good morning, Mr. Chairman and members of the Subcommittee. I am
pleased to be back before you to continue our discussion of antitrust
enforcement in the global economy, and what we are doing to meet the
challenges it presents.
As trade and commerce become increasingly global in scale, vigorous
international antitrust enforcement is key to helping ensure that
American businesses have the opportunity and the incentives to compete
successfully and that American consumers and business purchasers are
protected from anticompetitive conduct. Effective international
antitrust enforcement requires not only that our own enforcers remain
vigilant and active, but also that we are able to obtain assistance,
where needed, from foreign antitrust enforcement authorities.
In the last few years, we have worked to strengthen the
international enforcement tools at our disposal. With the help of this
Subcommittee, we were able to obtain passage of the International
Antitrust Enforcement Assistance Act of 1994, which enables us to enter
into agreements with our foreign counterparts to share information and
provide assistance on a reciprocal basis. Last week, we signed the
first agreement under the 1994 Act, with Australia, which we hope to be
a model for other such agreements. In March, we signed a more
traditional antitrust cooperation agreement with Israel, along the
lines of our 1991 agreement with the EU and our 1995 agreement with
Canada. These agreements, the 1994 Act itself, and the growing number
of more general mutual legal assistance treaties to which the United
States is a party, combined with the favorable ruling we obtained two
years ago in United States v. Nippon Paper Industries Co. Ltd.,
reaffirming that Congress indeed has given us jurisdiction to prosecute
anticompetitive activities that take place off U.S. soil but that have
significant effects here, give us important building blocks for our
continuing efforts to build an effective international antitrust
enforcement regime and make effective use of it.
We have achieved some remarkable successes recently, including
unprecedented levels of criminal fines.
From a practical standpoint, the increasing globalization of
markets leads to increased complexity in our investigations, making it
more difficult, time-consuming, and costly to pursue an investigation
to its ultimate conclusion. Often, we must have the assistance of
authorities in other countries in order to obtain crucial evidence. It
is therefore particularly important, as Congress recognized in passing
the 1994 Act, and as the Senate affirms on a broader law enforcement
front when it ratifies additions to our growing network of mutual legal
assistance treaties, that we be able to cultivate and maintain
constructive working relationships with our foreign counterparts.
Although the United States can rightly claim a large share of the
credit for the adoption around the world of competition as a foundation
for commercial relationships, each country's antitrust law is
necessarily tailored in part to its own legal system and culture. That
variation in approaches to antitrust enforcement, in a world where
countries zealously protect their sovereignty, creates number of
difficult challenges in building an international antitrust enforcement
regime that works effectively, challenges which have been brought to
the forefront with the increasing globalization of markets.
As you know, in the fall of 1997 the Attorney General and I
established an International Competition Policy Advisory Committee to
look at these challenges with a fresh perspective, giving particular
attention to three key issues. First, how can we build and strengthen a
consensus among competition enforcement authorities around the world
for prosecuting international cartels? Second, at a time when
increasing numbers of mergers involve international transactions that
directly affect competition in more than one country, how can the
various competition enforcement authorities best coordinate their
merger review efforts, while preserving their sovereignty, to achieve
results that are sound and efficient, both for the parties to these
mergers and for consumers in the countries affected by them? And third,
how can we ensure that, as our international trade agreements remove
governmental impediments to free trade, those impediments are not
replaced by anticompetitive schemes on the part of private firms to
impede market access? Getting the right answers to these questions is
essential to the maintenance of free and fair international commerce,
and its attendant benefits for the U.S. economy.
The Advisory Committee continues its work under the leadership of
co-chairs Jim Rill and Paula Stern, former Assistant Attorney General
for Antitrust and former International Trade Commission Chairwoman,
respectively. It has held a number of meetings and hearings, and has
heard from numerous witnesses representing a wide range of viewpoints.
It plans to submit its final report this fall, and I expect it to be of
tremendous value to the Department of Justice and to this Subcommittee
as we continue our efforts to internationalize basic antitrust
principles and make them the foundation for the burgeoning commercial
relationships among nations.
Meanwhile, we are continuing to pursue our enforcement
responsibilities vigorously in the international arena. Let me now say
a few words about the three major facets of our international
enforcement agenda: international cartel enforcement, international
merger enforcement, and positive comity.
international cartel enforcement
Vigorous enforcement against international cartels is a top
priority for us. As a result of our aggressive overall criminal
enforcement efforts against hard-core antitrust violations such as
price-fixing and market allocation, we have set records in the last two
fiscal years in the level of fines collected. In fiscal year 1997,
criminal fines totaling $205 million dollars were secured in cases
brought by the Antitrust Division. This total is five times higher than
during any previous year in the Division's history. We broke that
record in fiscal year 1998, with more than $267 million in fines
secured. Of the roughly $472 million in fines secured in the last two
fiscal years, nearly $440--million--well over 90 percent--were in
connection with the prosecution of international cartel activity, a
graphic illustration of the increasingly international focus of our
criminal enforcement work, and our success in cracking international
cartels.
This focus is well justified. International cartels typically pose
an even greater threat to American businesses and consumers than do
domestic conspiracies, because they tend to be highly sophisticated and
extremely broad in their impact--both in terms of geographic scope and
in the amount of commerce affected by the conspiracy. The massive
international cartels uncovered in citric acid, lysine (an important
livestock and poultry feed additive), sodium gluconate (an industrial
cleaner), and graphite electrodes (used in steel making) are prime
examples. The criminal purpose behind these and other conspiracies
investigated and prosecuted by the Division has been to carve up the
world market by allocating sales volumes among the conspirators and
agreeing on what prices would be charged to customers around the world,
including customers in the United States.
International cartels victimize a broad spectrum of U.S. commerce,
costing American businesses and consumers hundreds of millions of
dollars a year. For example, citric acid, which is used in products
ranging from soft drinks and processed food to detergents,
pharmaceuticals, and cosmetics, is found in virtually every home in the
United States. Sales in the United States during the course of the
citric acid conspiracy were over $1 billion. In each of these cases,
American consumers--and, in cases where the U.S. government is the
victim, American taxpayers--ultimately foot the bill.
The international cartels uncovered by the Division have often been
governed by elaborate agreements among the conspirators to ensure that
each conspirator understood its role in suppressing competition and
increasing prices in the varied markets of the world where the goods
and services were sold. The cartel agreements, which were formed by
high-level executives and carried out through conspiratorial meetings
around the globe, included the following features: agreed-upon prices;
agreed-upon volumes of sales worldwide; agreed-upon prices and volumes
(market share allocation) on a country-by-country basis; exchanges
among the conspirators of all types of otherwise competitively
sensitive information, such as monthly sales figures by geographic
area, prices charged (or bid) to customers in particular geographic
areas, and prices to be charged (or bid) to specific customers; and
sophisticated mechanisms to monitor and police the agreements.
Thus far, while much remains to be done, we have had great success
in prosecuting these international cartels. In the food and feed
additives industry alone, our efforts have resulted in criminal
convictions or plea agreements against 9 companies and 10 individuals
from 6 countries, and nearly $200 million in fines imposed or agreed to
in the past 2 fiscal years--including a $100 million fine imposed on
Archer Daniels Midland Company and a $50 million fine imposed on
Haarmann & Reimer Corporation, the U.S. subsidiary of the German-based
pharmaceutical giant Bayer AG.
In our investigation in the graphite electrodes industry, in
February of 1998 we charged Showa Denko Carbon, a U.S. subsidiary of a
Japanese firm, with participating in an international cartel to fix the
price and allocate market shares worldwide for graphite electrodes used
in electric arc furnaces to melt scrap steel. The company agreed to
plead guilty, cooperate in the Division's ongoing investigation, and
ultimately paid a fine of $32.5 million. In April of 1998, another
participant in that cartel, UCAR International, agreed to plead guilty
and pay a fine of $110 million, the largest fine imposed in antitrust
history. Last Thursday, another participant, the Japanese firm Tokai
Carbon Co., agreed to plead guilty and pay a fine of $6 million. Sales
of graphite electrodes in the United States during the term of the
conspiracy were well over a billion dollars. This investigation is
continuing.
Last fall, we achieved a tremendously important victory in our
battle against international cartels, when the jury returned a verdict
of guilty against three top executives of Archer Daniels Midland for
masterminding their company's participation in the lysine cartel. These
convictions send a strong deterrent message around the world that our
commitment to vigorous enforcement against hard-core cartels includes
prosecuting the top corporate brass in appropriate cases.
Notwithstanding our recent success, I am convinced that these
prosecutions represent just the tip of the iceberg. At present, more
than 30 U.S. antitrust grand juries--approximately one-third of the
Division's criminal investigations--are looking into suspected
international cartel activity. The subjects and targets of these
investigations are located on five continents and in over 20 different
countries. In more than half of the investigations, the volume of
commerce affected over the course of the suspected conspiracy is well
above $100 million; in some of them, the volume of commerce affected is
over $1 billion per year.
The investigation and prosecution of international cartels creates
a number of imposing challenges for the Division. In many cases, key
documents and witnesses are located abroad--out of the reach of U.S.
subpoena power and search and seizure authority. In such cases,
national boundaries may present the biggest hurdle to a successful
prosecution of the cartel. For that reason, we are aggressively
pursuing cooperation agreements with foreign competition authorities to
step up cooperation aimed at hardcore cartels.
To that end, we have been working in the Organization for Economic
Cooperation and Development (OECD) to encourage OECD members toward
more systematic and effective anti-cartel enforcement and international
cooperation. Last spring, the OECD endorsed at the ministerial level
our proposal encouraging member countries to enter into mutual
assistance agreements to permit sharing evidence with foreign antitrust
authorities, to the extent permitted by national laws, and to take
another look at provisions in their laws that stand in the way of these
cooperative efforts.
international merger enforcement
As trade and commerce have become increasingly globalized,
inevitably there have been increasing numbers of mergers that cross
international boundaries and thus are subject to review by more than
one country's antitrust authority. To minimize the burden placed on
merging parties by multi-jurisdictional antitrust review, and to
minimize the conflicts that can result from differing conclusions
regarding a merger, it is important that we establish and cultivate
good relations with foreign enforcers and understand each other's
merger enforcement policies and practices, and coordinate where we can.
Given each jurisdiction's understandable interest in reviewing mergers
that impact its markets, and in applying the substantive and procedural
rules it deems appropriate, navigating these waters is not easy. After
our experience with the Boeing/McDonnell-Douglas merger--where U.S. and
European Commission authorities reached sharply differing conclusions
regarding the merger--we redoubled our efforts to minimize that kind of
conflict, if not eliminate it altogether. I believe that our more
recent experiences with the MCI/WorldCom merger and the Dresser/
Halliburton merger, in which we and the EC shared our independent
analyses of the transaction's as they, evolved, and ultimately reached
essentially the same conclusions, are a good model for how close
consultation in international merger enforcement can and should work.
positive comity
Let me now turn to positive comity. It grows out of a recognition
that, because of legal and practical constraints that may come into
play, effective enforcement in the global economy may require action by
more than one country's antitrust authority.
Under a positive comity agreement, the antitrust authority of one
country makes a preliminary determination that there are reasonable
grounds for an antitrust investigation, typically in a case in which a
corporation based in that country appears to have been denied access to
the markets of another country. It then refers the matter, along with
the preliminary analysis, to the antitrust authority whose home markets
are most directly affected by the matter under investigation. After
consultation with the foreign antitrust authority, and depending on
what conclusions the foreign authority reaches and what action it
takes, the referring antitrust authority can accept the foreign
authority's conclusions, seek to modify them, or pursue its own action.
Such an approach has many helpful aspects. First, competition
authorities have a great stake in taking each other's referrals
seriously, not only in the interest of promoting cooperative relations,
but because their own consumers are affected. Second, such a process
maximizes, the likelihood that the kind of evidence necessary to
properly decide such cases can be obtained, as the antitrust authority
in whose country the conduct takes place generally has greater leverage
to obtain it. Finally, this process can defuse trade tensions by
providing a sensible, systematic approach to fact-gathering, reporting,
and bilateral consultation among competition authorities.
We currently have cooperation agreements in place with the European
Union, with Canada, and most recently with Israel, that have positive
comity provisions, and we expect soon to have one in place with Japan.
And as you know, last June we signed an enhanced agreement with the EU
that provides additional details and outlines a formal protocol for
referrals. We hope to reach agreements with other competition
authorities as well.
As was discussed in the Subcommittee's hearing last fall, we now
have a positive comity request pending with the European Commission
regarding possible anticompetitive conduct by several European airlines
that may be preventing SABRE and other U.S.-based computer reservation
systems from competing effectively in certain European countries. In
January 1997, we requested that the EC investigate the matter, and we
have been in regular contact with the EC to monitor progress. The EC
issued a statement of 11 objections against one of the European
airlines, Air France, in March, which is a preliminary determination
that the airline has anticompetitively discriminated against SABRE.
Under EC procedures, Air France now has an opportunity to respond to
the statement of objections, after which the EC will make a final
decision. Subsequently, SABRE has reached agreements with two other
European airlines, Lufthansa German Airlines and Scandinavian Airlines
System (SAS), that provide for those airlines' enhanced participation
in the SABRE system. We will be continuing to follow the EC's progress
in this matter, and will take a close look at their supporting analysis
for whatever decisions they reach regarding whether to take further
action.
The computer reservation systems referral, our first such referral,
has, I believe, thus far been a successful one, demonstrating that
positive comity can be an important tool in the international antitrust
enforcement arsenal. We have also gained valuable experience that we
can apply in future referrals. This Subcommittee has played an
important and constructive role in this process. Let me now turn to
four steps we plan to take in future referrals, in light of our
experience and the input we have received from this Subcommittee and
elsewhere, to help improve the positive comity process.
First, we agree that it is a useful idea to establish an intended
time frame for completing an investigation that has been referred under
a positive comity agreement. Our 1998 agreement with the EC provides
for a presumptive time frame of six months. Based on our experience, we
can now see that such a time frame will be unrealistic in some if not
most cases. Indeed, many of our own investigations have taken
considerably longer. We believe a better approach is to engage the
foreign antitrust authority to whom we make the referral, after they
have had a chance to familiarize themselves with the matter, but as
soon as practicable, and arrive at an educated estimate. We would do so
in full realization that the course of an antitrust investigation may
take unpredictable turns and encounter unanticipated obstacles; but we
would use the estimate to gauge the progress of the investigation as it
goes forward.
Second, we agree that it is a useful idea to maintain regular
contact with the foreign antitrust authority to which a matter has been
referred under a positive comity agreement. Suggestions have been made
that an update every six weeks, or more frequently in the event of a
major development, and we believe that is a helpful and workable
schedule to adopt.
Third, we agree that it is a useful idea that the complainant be
kept generally apprised of progress in the matter. There are
limitations on what we can reveal to the complainant without
compromising the investigation. We have a obligation not to reveal
information provided to us in confidence by our foreign counterpart.
But I think at a minimum we can convey to the complainant that we have
been in recent contact with the foreign antitrust authority to whom we
referred the matter, and, as appropriate, at times we may be able to
provide more information. The complainant may also want to take
advantage of whatever rights and opportunities it has in the foreign
forum to directly obtain information; in some instances, it may thereby
be able to obtain information directly that we would not be in a
position to furnish, as well as obtain other important procedural
rights.
Fourth, we agree that, having established a time frame for the
investigation under a particular positive comity referral, when that
time frame has run its course it is appropriate to take stock of where
things stand and how we and our foreign counterparts can most
effectively proceed. Of course, we would normally and will continue at
all stages of a positive comity referral to consider these questions
internally and to discuss them with our counterparts abroad. It should
be kept in mind that, while we always reserve the right to initiate or
resume our own investigation, there may well have been limitations on
our own authority or practical ability to pursue the matter that led us
to make the referral in the first place. If it was not feasible for us
to pursue the matter ourselves initially, it may not become any more
feasible later. And there may be very good reasons why an investigation
is taking longer than anticipated. But we would expect to reassess any
referral we make at appropriate junctures, and the running of the
agreed-upon time frame would certainly be one such juncture.
Positive comity is but one tool in our antitrust enforcement
arsenal, a relatively new tool, and one that may not be practical to
employ very frequently. But we believe it can be a useful tool in
appropriate circumstances, and that its successful use is an important
part of our effort to further strengthen international antitrust
enforcement cooperation in general. We are committed to making it work
as effectively as possible, and we appreciate the Subcommittee's
interest and assistance.
conclusion
Opening markets around the world to competition will require a
sustained effort on the part of antitrust enforcement authorities in
many countries. We are committed to that effort, and appreciate the
continued support of this Subcommittee. We look forward to meeting the
ongoing challenge to ensure that businesses can compete without being
subject to anticompetitive behavior and that consumers can benefit from
competition that produces low prices, high quality, and innovative
goods and services.
Senator DeWine. Mr. Pitofsky, thank you for joining us.
STATEMENT OF ROBERT PITOFSKY
Mr. Pitofsky. Thank you, Mr. Chairman, Senator Kohl,
Senator Specter. I am pleased to be here to present testimony
on behalf of the Federal Trade Commission. Let me say how much
I agree with the opening remarks of both of you that given the
increase in international trade, the increase in the number of
transactions that affect consumers and citizens in different
countries, there is no more important area for oversight by
this committee, and I commend the committee for zeroing in on
these questions over the last several years.
You have asked us to focus on positive comity and that is
what I will try to do. It is a fairly new technique in which
occasionally we will refer matters to one of our trading
partners and inquire whether or not an American company injured
by behavior in that foreign company is injured by behavior that
violates the law of the foreign country. And, of course, we
stand ready to do the same.
I do want to emphasize that if we refer something to a
foreign country, that does not mean we wash our hands of
responsibility in this area. On the contrary, we stay in touch,
we follow the matter, and if we are not satisfied with the
investigation by the foreign country, we can go back and
enforce our own law in the area.
I know there is some discomfort about the way positive
comity has worked and I also agree with the earlier comments
that it got off to a shaky start, but I think we are doing a
bit better, certainly in the last 6 months.
Also, perhaps in some quarters, the whole concept was
oversold. International coordination and cooperation is
critical and we have made great progress with respect to
working with our trading partners, exchanging information,
although we recognize the concerns about confidentiality,
discussing theories, applying consistent approaches to remedy.
Positive comity is really a very small element. It is a
useful one, but a small and modest element that you use in
unusual cases to try to protect American firms doing business
abroad or foreign firms doing business in the United States. It
is hardly a common resort.
We have referred two matters informally. One is to the
Italian government. We got a very good result. One is to the
European Community in the Marathon matter, and it looks like
there is some encouraging movement there. There have been no
matters referred to us and we have not invoked formal positive
comity as yet.
Although it is a modest device, it is still important that
we get it right. The SABRE witnesses who were here last time
made some suggestions about ways in which we could modify our
approaches. I think they put forward useful ideas and I think
we can probably adopt some of those ideas and make things
better.
First, there is a suggestion that we set a time deadline
when we refer a matter to a country with which we have a
positive comity arrangement. I think that is right. I would not
do it at the opening of the referral because neither side knows
very much about the matter. But perhaps 3 months after a
referral, it would be a good idea for us to work out with the
country we refer the matter to some sense of how long it is
going to take to investigate the matter and come to a
conclusion.
The SABRE representatives suggested that the antitrust
enforcement agencies maintain regular contact with the country
to which the matter is referred and also advise the complainant
about the status of the matter. That is what we have done,
actually, in the Marathon matter. I have spoken with senior
representatives in DG-IV and we have kept Marathon advised and
I think it has worked well.
Finally, there is the suggestion that after the positive
comity matter is dealt with entirely, we come back and review
the bidding and see if, at that point, based on additional
facts that we have, we think it is worthwhile to try
extraterritorial enforcement. Now, let me be candid about that.
We would not have referred the matter to another country if we
could have conveniently brought the case ourselves. But,
certainly, we may have learned more and it may be that we are
so dissatisfied that we want to bring an enforcement action and
we would consider doing that after the--in fact, we would do it
after the positive comity period has closed.
Let me just conclude by saying that the committee's
oversight in this matter and the testimony of affected U.S.
corporate officials has offered some very constructive
suggestions, and I believe several of those suggestions can be
implemented. Thank you very much.
[The prepared statement of Mr. Pitofsky follows:]
Prepared Statement of Robert Pitofsky \1\
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\1\ This written statement represents the views of the Federal
Trade Commission. My oral presentation and responses to questions are
my own and do not necessarily reflect the views of the Commission or
any other Commissioner.
---------------------------------------------------------------------------
The Federal Trade Commission appreciates the opportunity to provide
this follow-up report to the Subcommittee on the Commission's
experience with the positive comity process.
The Subcommittee's hearing last October focused attention on the
role that positive comity can play as an antitrust enforcement tool.
The testimony offered at that hearing also, however, illustrated that
positive comity, like other enforcement tools, is not a panacea. For
positive comity to be an effective means of redressing harm from
foreign anticompetitive practices, antitrust enforcement authorities
must agree to help each other by taking on, and giving due priority to,
cases that involve anticompetitive conduct in their own territory that
inflicts harm in other countries. Even where such agreement and
commitment exist--as manifested in the bilateral agreements into which
the United States has entered with the European Community,\2\
Canada,\3\ and Israel \4\--we can never be certain that the antitrust
authority that investigates and prosecutes the case will be successful.
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\2\ Agreement between the Government of the United States of
America and the European Communities regarding the application of their
competition laws, Sept. 23, 1991, reprinted in 4 Trade Reg. Rpt. (CCH)
para. 13,504, and OJ L 95/45 (27 Apr. 1995), corrected at OJ L 131/38
(15 June 1995) (hereafter ``1991 Agreement''); Agreement between the
Government of the United States of America and the European Communities
regarding the application of positive comity principles in the
enforcement of their competition laws, June 4, 1998, reprinted in 4
Trade Reg. Rpt. (CCH) para. 13,504A; OJ L 173/26 (18 June 1998)
(hereafter `` 1998 Agreement'').
\3\ Agreement between the Government of the United States of
America and the Government of Canada Regarding the Application of Their
Competition and Deceptive Marketing Practices Laws, Aug. 3, 1995,
reprinted in 4 Trade Reg. Rpt. (CCH) para. 13,503.
\4\ Agreement between the Government of the United States of
America and the Government of the State Of Israel Regarding the
Application of Their Competition Laws, Mar. 15, 1999, reprinted in 76
ATRR 279 (N4ar. 18, 1999).
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Although positive comity may be a valuable tool, it is important to
recognize that it is a small piece in a developing mosaic that reflects
broad cooperation in antitrust enforcement among the United States and
its major trading partners.\5\ Much of the Commission's testimony for
this Subcommittee's hearing last October was devoted to describing our
enforcement efforts that have involved cooperation with foreign
antitrust enforcement authorities. That work has continued in the
intervening months, as was demonstrated by the settlements we reached
in cooperation with the European Commission (EC) in the 4BB/Elsag
Bailey and Zeneca/Astra merger cases. Thus, evaluating positive comity
in isolation may miss important developments in the forest by
concentrating on this individual tree. For example, only a small
fraction of the cases that come before us lend themselves to referral
under positive comity. In the seven months since this Subcommittee's
last hearing, the FTC has not referred or received a referral of a
``formal'' positive comity case, nor have we been involved in any new
matters that could be classified as informal positive comity.
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\5\ See, e.g., Approaches to Promoting Cooperation and
Communication among Members, Including in the Field of Technical
Cooperation, Submission of the U.S. Government to the World Trade
Organization, April 1999, WT/WGTCP/W/116.
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While there are few instances where formal or even informal
positive comity comes into play, positive comity could be a device for
assuring availability of relief and recognizing legitimate business
concerns--without unduly contributing to international friction. In
other words, positive comity could be a constructive, albeit rarely
used, device.
The Subcommittee's hearings in October 1998 focused on possible
ways of improving the positive comity arrangements. We believe there is
room for improvement and, in this regard, we believe the testimony
presented by SABRE \6\ at the October 1998 hearings was particularly
helpful. The FTC, along with the Antitrust Division, has been
evaluating in recent months how to make the positive comity process
work as efficiently and effectively as possible. We believe we can
implement some of the suggestions offered at the October hearing.
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\6\ The SABRE Group, Inc., of Fort Worth, Texas, markets
computerized reservation system (CRS) services and offered testimony
before the Subcommittee's October hearing concerning its complaint
against operators of CRS systems in Europe, which the Department of
Justice formally referred to the EC under the positive comity article
of the 1991 Agreement.
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A few additional comments about positive comity, particularly as to
case selection and procedure, maybe useful. First, positive comity is
still a relatively new experience for the U.S. agencies. There has been
only one formal referral to the EC, and none to the U.S., in the eight
years since the 1991 Agreement was signed. Thus, with respect to formal
referrals, the Commission would be hesitant to burden the process with
rules and obligations that might make it less likely that the process
would be used in the future. On an informal basis, we have discussed a
small number of matters with our foreign counterparts, including the
Parma ham matter that was mentioned in our testimony last October.\7\
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\7\ As mentioned in the Commission's testimony of last October, the
FTC informally encouraged the Italian Competition Authority (AGCM) to
end a production quota agreement by a consortium of ham producers that
exported to the United States, harming U.S. consumers with
supracompetitive prices. The FTC held up its investigation while the
AGCM conducted its investigation, which resulted in a finding that the
consortium's production quota violated Italian law and an order under
which the consortium agreed to end the quota.
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Second, and speaking for the moment just about our Agreements with
the EC, while we might ask the EC to agree to certain conditions in its
review in response to a positive comity request, whether the EC's
Competition Directorate, DG-IV, agrees to those conditions is within
its discretion. Only in cases within the scope of the deferral
provisions of Article IV of the 1998 Agreement \8\ would DG-IV be
obligated to fulfill certain conditions, and even these can be waived
by agreement of the parties as appropriate. In other positive comity
cases--i.e., in those outside the scope of the deferral presumption and
in so-called informal positive comity cases-DG-IV (like the FTC or DOJ
if the U.S. were the Requested Party) would not have any obligation to
agree to conditions on accepting the referral, and might well be
reluctant to handle such a case in away that significantly differed
from its procedures in comparable cases outside the positive comity
ambit. Moreover, many--perhaps most--cases to which the deferral
presumption applies will be cases that the U.S. agencies could not or
would not bring themselves. In some cases, we may lack the necessary
subject matter or personal jurisdiction to prosecute the case and
impose a remedy. For example, anticompetitive conduct affecting a U.S.
firm located in and doing business in a foreign country--exporting from
Norway to Turkey, for example--would not be reachable under U.S. law.
Even if we could arguably assert jurisdiction, it maybe so difficult to
collect evidence and/or impose an effective remedy that we would not as
a matter of prosecutorial discretion, choose to allocate scarce
resources to the matter. In such cases, there is no credible
probability that we would bring our own case. This is the situation we
would face not only in relation to the EC, but also in relation to
other jurisdictions to which the U.S. agencies might seek to refer a
matter under the positive comity provisions of either a bilateral
agreement (Canada and Israel) or the OECD Recommendation.\9\
Nonetheless, the U.S. agencies would still, in appropriate cases, ask
DG-IV and other authorities to whom we might refer a matter under
positive comity to agree to apply the procedures described below.
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\8\ Under these provisions, the Requesting Party (that is, the
competition authority making a positive comity request) will normally
defer or suspend its own enforcement activities in favor of enforcement
action by the Requested Party (that is, the competition authority
receiving and acting on the request) where the anticompetitive
activities at issue occur principally in the Requested Party's
territory and the Requested Party agrees to certain conditions. In
summary, these conditions include: (A) The adverse effects on the
Requesting Party's interests can be and are likely to be fully and
adequately investigated and remedied pursuant to the Requested Party's
laws, procedures, and available remedies; and (B) the competition
authorities of the Requested Party agree to (1) devote adequate
resources to the case, (2) use their best efforts to pursue all
reasonably available sources of information, (3) inform the competition
authorities of the Requesting Party, on request or at reasonable
intervals, of the status of their enforcement activities and
intentions, and (4) use their best efforts to complete their
investigation and to obtain a remedy or initiate proceedings within six
months of the Requesting Party's deferral or suspension of enforcement,
or such other time as agreed to by the competition authorities of the
Parties.
\9\ The 1995 Recommendation of the OECD Council Concerning Co-
operation between Member Countries on Anticompetitive Practices
Affecting International Trade, OECD Doc. C(95)130/FINAL (1995),
available at .
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With the above caveats, the Commission believes we can improve the
positive comity process in certain cases under our Agreements with the
EC. First SABRE has suggested that once the EC accepts a positive
comity referral, the U.S. antitrust agencies should agree with the EC
upon a time frame within which we anticipate that the investigation,
including issuing any relief, would be concluded. The Commission agrees
that this is a useful idea. In fact Article IV.2.(c)(v) of our 1998
Agreement with the EC provides for such an understanding in cases
falling under the deferral provisions of that Agreement. In retrospect,
the six-month time frame in the agreement was probably too ambitious--
the Commission does not complete most of its domestic investigations
within that period, and positive comity cases maybe more complex than
our typical domestic investigation. However, the Commission is prepared
to discuss with DG-IV an appropriate time frame in which DG-IV expects
to complete its process.
Of course, predicting how long an investigation will take is
inherently uncertain. For example, critical evidence maybe more
difficult to obtain than anticipated--or may not exist at all--and the
target of the investigation may raise plausible defenses which must be
investigated. The Commission, therefore, believes that it would be more
productive to choose a target date once DG-IV has had a chance to start
its procedure. Accordingly, we would expect to agree on a target date
approximately three months after a positive comity referral takes
place.
The Commission also has considered possible options if the
anticipated completion date for the investigation arrives without final
resolution. As a practical matter, there maybe little or nothing the
FTC could do because of the jurisdictional and evidentiary obstacles
mentioned earlier. However the FTC regularly re-evaluates its
investigations to determine whether we are proceeding on the right
course. Such re-evaluations typically occur at certain investigational
points, such as completion of depositions, when we assess the strength
of the evidence supporting our theory of violation. The same would be
true in a positive comity referral. Thus, during the course of an
investigation pursuant to a positive comity referral, we may ask
whether the referral is proceeding as expected, and even whether we
should consider terminating the referral and initiating our own case,
as provided for by the 1998 Agreement. The passing of the anticipated
action date is the type of event that would normally cause us to focus
on the referral and to consider what response, if any, would be
warranted at that point. The action the FTC decides to take would
depend on many factors, such as the reason the investigation has taken
longer than expected, the time frame in which DG-IV expects to act, and
our satisfaction with how the investigation is being conducted. Our
range of options at that point would include, among other things:
taking no action; having an in-depth discussion with DG-IV staff,
setting a new deadline; and initiating our own case.
Another productive suggestion made by SABRE at the October hearing
was that the U.S. antitrust enforcement agencies maintain regular
contact with DG-IV once DG-IV begins its investigation of a matter
referred under the positive comity agreement. This is contemplated in
Article IV.2.(c) (iii) and (iv) of the 1998 Agreement, which pertains
to cases meeting the deferral presumption criteria. The Commission
believes it would be useful to have someone from the FTC's staff in
contact with an appropriate member of the DG-IV staff whenever there is
a significant development in the investigation, but in any event at
least once every six weeks. Sometimes, as a result of our meetings with
U.S. complainants, those complainants continue their own efforts
through their counsel, without asking our help. Sometimes the U.S.
agencies make an informal inquiry of the reviewing authority about the
status of the matter on behalf of a complainant, much as the FTC has
done with respect to Marathon Oil Company's complaint that remains
under EC investigation.\10\ The Commission believes that regular
communications will affirm our commitment to these provisions of the
agreement and make it easier for both sides to fulfill their respective
commitments.
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\10\ Since last October's hearing, Commission staff has been in
regular contact with DG-IV on the Marathon matter, and has kept the
Subcommittee staff apprised of developments in this matter as
appropriate.
---------------------------------------------------------------------------
SABRE also suggested that the referring U.S. agency maintain
regular contact with the U.S. complainant on developments in the DG-IV
investigation. While this is a good suggestion, some caution is
appropriate. Some of the information we learn from DG-IV is
confidential, and the U.S. agency would be prohibited from disclosing
it to the U.S. complainant. For example, it may involve nonpublic (but
not confidential commercial) information concerning a third party, or
it may concern DG-IV's internal nonpublic processes. The Commission
does not routinely provide status reports on its investigations to
domestic complainants concerning investigations of U.S. firms, and
there does not appear to be any reason to provide complainants in
positive comity matters with any greater rights. Nonetheless, the
Commission is willing to inform the complainant that we intend to be in
regular contact with DG-IV about the matter, and that the complainant
is free to contact us for whatever information we are able to
provide.\11\ Again,we have generally followed that procedure in the
Marathon matter.
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\11\ As indicated in our follow-up responses to the questions posed
by Chairman DeWine and Senator Kohl, some of SABRE's suggestions, while
well intentioned, cannot be implemented in the current legal
environment--specifically, SABRE's recommendations that the U.S.
antitrust agencies develop and share confidential evidence with other
antitrust agencies, and that each party to a cooperation agreement
enlist and use the active assistance of professional staff supplied by
the other party to overcome resource limitations.
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In conclusion, the Commission appreciates the Subcommittee's
continuing interest which we share, in making the positive comity
process work as effectively as possible. The Commission believes that
the practices described in this statement can help improve the positive
comity process. We understand and appreciate the concerns that the
Subcommittee and witnesses before the Subcommittee have raised, and we
will continue to work with you to make the process as effective as
possible.
Senator DeWine. Thank you both very much.
Senator Specter, any opening comments?
STATEMENT OF HON. ARLEN SPECTER, A U.S. SENATOR FROM THE STATE
OF PENNSYLVANIA
Senator Specter. Thank you, Mr. Chairman.
The issue of antitrust enforcement becomes more important
each day as we see more mergers of major companies which limit
consumers' alternatives as to where they are going to be able
to look for competition.
The bank mergers have had a very profound effect on the
country as a whole. Last year, the acquisition by First Union
of a major Philadelphia bank has resulted in precisely the dire
consequences which many of us predicted, but that went ahead.
We are now looking at a very complex acquisition issue
involving Media One where there is a weighing of the size of
the prospective acquiror, and this is something which is a
matter of enormous importance.
I have been deeply involved in the issue of the antitrust
exemption enjoyed by football on revenue sharing and the
antitrust exemption that baseball has in a blanket manner. And
it has been a profound issue for Pennsylvania, which is now
looking at four new stadiums. It is a little hard for me to
understand why the taxpayers of Pennsylvania ought to be called
upon to put up public money when the NFL has a $17 billion
multiyear television contract which they enjoy by virtue of the
antitrust exemption which they have.
The school systems in Pennsylvania are in dire shape.
Housing in Pennsylvania is in dire shape. And we are putting up
a lot of public money.
There is a war in New England at the moment, maybe recently
ended, between Boston and Hartford on the Patriots, Hartford
being called upon to pay $375 million for a stadium. And one of
the questions which I am going to ask both of you gentlemen to
take a look at would be: What would be the ramifications if we
legislated away the judicial doctrine of an exemption for
baseball from the antitrust laws? Where would we go? How far
would the impact be?
I am going to introduce legislation which would condition
the continuation of the baseball antitrust law and the limited
antitrust exemption which football has on their paying, in
effect, half of the stadium construction costs. But the more I
deal with baseball and the more I deal with football, with the
executives, the less inclined I am to see them have any
exemptions at all. They move teams around at will. They steal
the Browns from Cleveland to Baltimore with extortion, a
tremendous cost to Baltimore and Maryland, and baseball players
move from one team to another for $91 million on a 10-year
contract. Just a total blatant disregard of the public
interest.
And when it comes to a request to have them make some
contribution to stadium construction, which they ought to be
bearing all of, they throw up their hands in horror and fight
in a way which is really unbecoming.
So I like what you two men are doing. I have had occasion
to sit down with both of you and talk to you about the work of
your departments. This subcommittee wants to help you. We want
to help you on funding. We want to help you do the very, very
important job which you have.
Thank you, Mr. Chairman.
Senator DeWine. Well, Senator Specter, thank you for your
comments. We are kind of flexible around here, and in the
interest of continuity, why don't you take your time right now
and just follow up with the questions? That way we can continue
on, if you want to do that.
Senator Specter. Thank you.
Senator DeWine. We can stay on football and baseball. We
will get to flat glass later.
Senator Specter. Thank you very much, Mr. Chairman. Well,
there are quite a few issues.
I am fascinated by the antitrust case which Mr. Klein
mentioned in Philadelphia about carbon and graphite. I want to
know a lot more about that. I have a lot of questions about
Media One, a lot of questions about banking. But in the limited
time each of us has because of the time constraints, let me
follow what the chairman has suggested.
This may be something which will have to be studied, Mr.
Klein, but baseball has the antitrust exemption because Justice
Oliver Wendell Holmes, I think it was 1922, said it was a
sport. And Justice Blackmun had a long opinion in the 1970's
saying it was not a sport but we are not going to change the
matter, it is up to the Congress.
Well, the buck starts right here. This is where we start
the change in the Antitrust Subcommittee.
Is there any doubt, Mr. Klein, that baseball is a business,
a big business, and not a sport?
Mr. Klein. I do not want to say it is one or the other. It
is certainly a very big business. It is a sport. It is many
things. But there is no question that baseball is a big
business, Senator.
Senator Specter. Well, is there any reason why baseball
should not be subject to the U.S. antitrust laws except for the
historical Supreme Court decisions?
Mr. Klein. I think in your opening comments, Senator
Specter, you put your finger right on the issue, which is this
is a matter that should be studied, and you are entitled to
very, I think, thoughtful, careful engagement from us on this.
In part, I think there are several issues. One, you need to
think about where you are in the course of the particular
development of baseball as a business in terms of its reliance
on the antitrust exemption, what implications it would have if
you were to consider changing that in any way.
But I can assure you, Senator Specter, that we would
welcome the opportunity to work with you and your staff on the
issues that you have raised in your opening comments.
Senator Specter. Would the issue naturally come to the
Department of Justice as opposed to the FTC, Chairman Pitofsky?
Mr. Pitofsky. I think it probably would. We have not really
had much experience in recent years with the application of the
antitrust laws to professional sports, but I think it probably
would go to the Department of Justice.
Let me say, to break it down a bit, the original decision
which said that baseball was not interstate commerce is
indefensible today, absolutely indefensible. Much of the--and I
share your premise. I am very skeptical of antitrust exemptions
generally, and I am very skeptical of this one.
On the other hand, it has now become a very complicated
question because much of what was accomplished under the
umbrella of the antitrust exemption has now moved over to
collective bargaining. And, therefore, one has to see fairly
carefully exactly what it is that these teams, these
enterprises are doing, that they could not do if the antitrust
laws applied.
But I have to say, to give them an across-the-board
exemption with no limitations at all seems to me something that
certainly deserves additional study, and I am skeptical about
it.
Senator Specter. Well, I would like to see the experts
apply that study, and I am well aware of the collective
bargaining issue and the labor issues which overlap. And the
matter goes much beyond stadium construction. The matter
involves the issues of revenue sharing for baseball and salary
caps. But I think there is no doubt that as far as Major League
Baseball and the NFL are concerned, it is the public be damned.
Let the record show an affirmative nod by Mr. Klein. He can
always negate my representation of his adoptive admission here.
[Laughter.]
Adoptive admissions are gone in criminal law now, but they
are not in Senate hearings, Mr. Klein.
Senator DeWine. Be very careful, Mr. Klein, what you do
with Senator Specter. [Laughter.]
Mr. Klein. This crick in my neck is going to cost me
dearly.
Senator DeWine. That is right. [Laughter.]
It is like at an auction. Never raise your hand.
Senator Specter. If you have a doctor's note, I will
expunge the record.
But we have seen the Dodgers move in 1958 from Brooklyn.
Los Angeles should have had a team, but they did not have to
have Brooklyn's team. Indianapolis should have had a team, but
they did not have to have Baltimore's team. That just sets up
three-ring larceny if it goes to Cleveland. And you have small-
market teams like Pittsburgh and Seattle in very terrible
shape, and you have Mr. Murdoch buying the Dodgers for an
astronomical price. At least we thought it was an astronomical
price until the Redskins were sold recently. And Mr. Murdoch
has his satellite and seeks to have the satellite operate in a
way which is at variance with the FCC laws. And you have the
super stations, and you have a tremendous amount of
paraphernalia sold.
I have had conversations with Commissioner Selig over the
years and many of the Major League Baseball owners about trying
to bring some rationality. They have a gigantic goose that lays
a gigantic golden egg. But they are pressing the outer limits,
refusing to have revenue sharing in baseball, refusing to have
salary caps, and it puts tremendous pressure on a team like
Pittsburgh.
So what happens? The legislature recently authorized a lot
of public money for the Pittsburgh stadium, and I support that.
With a gun at my head, a person will do most anything or a city
will and a State will with a gun at their head.
And then you have football with the antitrust exemption
which gives them an extraordinarily lucrative position, $17.6
billion. In discussions with Commissioner Tagliabue, help build
these stadiums. No, we cannot afford it.
Well, if they cannot afford it, who can afford it? And if
it is all heading for chaos, let the chaos be on the terms that
every other business functions in America.
Commissioner Pitofsky puts his finger on it. Ludicrous to
say they are not in interstate commerce, shorthand for big
business in interstate commerce.
Do I have to do anything in a formal way to ask you to
study this, Mr. Klein and Chairman Pitofsky, to give us an
answer?
Mr. Klein. I view these proceedings as sufficiently formal.
Senator Specter. OK; I would like to know just what would
happen if we just took it all away, no antitrust exemptions at
all, not conditioned on building stadiums. If they do not want
to build stadiums, we have to have a blood war, let us forget
that one. Let us just take it all away. If we are going to go
to war, let us make it unconditional surrender.
Thank you, Mr. Chairman.
Senator DeWine. Senator, thank you very much.
Mr. Klein, I was a little surprised in reading your
prepared remarks to see that the issue of flat glass was not
dealt with. While the flat glass market is certainly not the
only issue that we have with Japan and trade competition, it, I
believe, is symbolic of what is wrong in that relationship. We
examined this issue last fall at our last hearing, at which Mr.
Walters from Guardian testified.
Let me ask you your views on the state of competition in
the Japanese flat glass market. Let me just say that I hope you
share my view that signing an agreement with the Japanese on
positive comity is not meant to signify that we are not going
to aggressively address this problem in regard to flat glass.
Mr. Klein. Sure. Mr. Chairman, let me make two points in
response. As you may know, several months ago, several people
from the flat glass industry came to the Department for the
first time and requested that we look at this issue in terms of
the possibility of pursuing some form of referral to the Japan
Fair Trade Commission. Up until then, I think the issues had
largely been dealt with on a trade basis.
We have fully engaged that process. We are in the course of
studying the information that has been submitted. We have
notified the Japanese, who are now doing a survey, that we
expect to fully review the survey results and what action they
take in response and that we will certainly continue to do our
work and our analysis.
One of the benefits, I believe, of this agreement is if,
and I underscore ``if'', Mr. Chairman, we come to the
conclusion that there is a basis for a positive comity referral
with respect to glass or any other product, we will then have a
vehicle in which to make the referral. So I see that as a key
benefit of the process and we will continue to do our work in
that regard.
I would also note, as I think you did in the beginning
during your comments, that having an agreement and making a
referral are only the beginnings of the process. You need to
see the analysis that the Japan Fair Trade Commission would
undertake. You need to see the decision they would make, the
support for that decision. I think you know that from our part,
we engage this with seriousness and purpose, and when we think
there is a basis for referral, we will follow up.
Senator DeWine. I appreciate your comments very much. As
you know, and you and I have discussed this before, flat glass
is a great concern of mine. It affects our State, affects our
country, and I think we just have a long, long way to go and it
is a real sore point with this Senator. I am not going to let
go of it.
Let me ask you another question. In your testimony, you
discussed a number of specific changes that you think may be
worth making in order to improve the positive comity process.
Do you envision implementing these changes as part of the
actual positive comity agreements or merely as internal
procedural changes at the Justice Department? Let me also ask
you whether you have discussed these changes with your
counterparts in the European Commission.
Mr. Klein. At this point, I would prefer, and I think the
sensible way to go, since we have only had one experience,
essentially, SABRE, and I remember the old line, one swallow
does not a summer make, I think to try to really redo the
agreement or amend the agreement would be premature. So I think
the proposals, which, again, Chairman Pitofsky commented on in
his remarks and I have some comments on them in my written
remarks, I think we will seek to internalize those as working
procedures under the agreement with the Europeans.
In a general sense, not the specifics, but in a general
sense about timeframes and about contact with the parties, we
have, indeed, discussed that with our counterparts in the
European Commission and DG-IV.
Senator DeWine. Senator Kohl.
Senator Kohl. Thank you, Mr. Chairman.
Later today, we will hear from Buck Evans, president and
CEO of Consolidated Papers, of how the American paper industry
has had more than its fair share of problems with the Japanese.
According to Mr. Evans, the Japanese market is not open for
paper products, just as it is not open for flat glass.
As I understand it, Mr. Klein, your policy permits you to
go after antitrust violations abroad that harm American
exports. So, Mr. Klein, will you tell us what you can do to
help Consolidated Papers and other American companies and what
should they do with the Justice Department to help move the
process along and break open this very closed market?
Mr. Klein. I think, first of all, what they should do, and
I have actually talked to various representatives of the paper
industry and made clear in my remarks that if they believe that
the basis for their market access issue is an antitrust
violation, or as they call it in Japan, an antimonopoly
violation, we would be happy to meet with them and to consider
whether we would make a referral, previously, before the
agreement, in some informal manner, or now, once the agreement
is executed, pursuant to it.
What we have told them, Senator Kohl, is that just as in
the United States we have companies come to us in the United
States and say, I am having problems in this market because
there is some collusive arrangement or there is a monopolistic
practice and so forth, we need the support, the back-up, the
evidence, the economic theories, and the hard work, because
otherwise, obviously, we would lose our moorings. We have said
this to various people with respect to access to foreign
markets and we are prepared to engage, when the evidence is
there in a prima facie way and make the appropriate referral.
The second issue which both you and the chairman have
raised is an important issue and I want to be very candid with
the subcommittee. We have the power under U.S. law to be able
to bring on our own a market access case where we think it is a
violation of U.S. law.
The real problem with that approach, and I know this from
firsthand experience, is we do not have access to evidence in
the foreign markets. So in order to bring a case in U.S. court,
you need to both have the evidence and have a remedial plan
that could exercise control within the foreign market, and the
way sovereign power is now constructed in the United States, I
think we would be unrealistic to think that we would
frequently--I would not say never, and we have looked at
several of these matters--frequently bring this kind of action
in the United States.
One of the reasons why I have been a big proponent of
positive comity, even though it is flawed and it is limited in
its implementation sometimes, is because the alternative may be
nothing because we do not have subpoena power, we do not have
access to the documents, and foreign countries will not
voluntarily produce that to us because they view that as within
their own domain.
So I think we ought to continue to work to develop the
positive comity option, reserve, and there may be cases in the
future where we get the evidence, but we have had offshore
meetings with people in affected industries who would not come
to the United States but would talk to us outside their country
of origin about these matters in efforts to tease out the
relevant evidence to be able to launch an appropriate case. To
date, we have not been able to put together that sort of
evidence, and that is why we continue to hold out the hope that
positive comity will be a meaningful avenue.
I view it as a positive step, but by no means the last
step, simply the first step in Japan's evolution and maturity
in terms of commitment to antitrust enforcement that they are
willing to do something that up until now they were never
willing to do. While antitrust agreements were quite common
throughout the rest of the world over the past decade, Japan
had never entered any one of them. The fact that they chose to
do so with us, I want to look at the glass now being half full.
Whether it gets full or not will certainly matter.
Senator Kohl. Mr. Pitofsky, what would you say to Mr. Evans
from Consolidated Papers?
Mr. Pitofsky. A very similar answer, Senator. I believe
there are circumstances involving Japan and other countries in
which they do not have the same commitment that we do to open
markets and American firms are being injured unfairly. The
question is what to do about it.
My own experience is the same as Joel Klein's. Getting the
witnesses, getting the evidence is extremely difficult, if not
impossible, and, therefore, relying in the first instance on
positive comity, asking the foreign country to help us out, is
the right way to go.
Senator Kohl. Mr. Klein, Mr. Pitofsky, you have worked hard
on creating a positive comity agreement with Japan and I
commend your efforts, although I am not entirely optimistic, as
none of us are, that the agreement will be a success. Why do
you think that the Japanese will honor this agreement any more
than they have the two flat glass agreements or the 1992 paper
agreement, for that matter? We would like to be optimistic, but
past Japanese behavior leaves people doubtful. So would you be
willing to talk to the folks at the paper industry and at
Consolidated, in particular, to see whether you can help?
Mr. Klein. Certainly, we would welcome them, if they would
like to come in and talk to us and present their concerns.
Again, I want to make it a fruitful engagement, so I would
certainly urge them to engage antitrust counsel so that they
understand the parameters in which we operate, because I think
this is a new avenue for a lot of companies to explore relief.
So consistent with, I think, the limited portfolio we carry,
which is antitrust enforcement, I certainly would welcome
meeting with those representatives, Senator Kohl.
As for the Japanese, let me say this. I do not know what
history will show. I think they made a classic mistake for
which they are paying by not committing themselves to
deregulation, competition policy, and open access to their
markets. I think America's greatest strength in the 21st
century is we got there early, we got there with enthusiasm. It
has cost us in terms of certain domestic industry, but our
market is strong, our companies are strong because they
competed domestically and we are ready for the world stage. I
think it has been a great benefit for us and a mistake for
other countries.
I think if you look at what Tom Friedman says in his recent
book on globalization and you look at what Michael Porter says
on the competitive advantage of nations, you understand that
antitrust enforcement has been one of the geniuses of the
American economy, and other countries are going to come to
agree with that. I think we ought to at least suspend judgment.
Perhaps optimism is more than history justifies, but we ought
to suspend judgment because this is the first agreement that
the Japan Fair Trade Commission has ever entered into. This is
not an MITI agreement. This has been a Fair Trade Commission
agreement and I would like to at least give them the
opportunity when we find an appropriate case to refer to see
what their response is.
Senator Kohl. OK; Mr. Pitofsky, would you like to make a
comment?
Mr. Pitofsky. I would like to assure the committee that we
are not going to be naive about this. We recognize that the
agreement is meaningless unless there is some enthusiasm and
there is some commitment to enforce these provisions. Each of
you have suggested that we keep an eye on what happens and that
we study the results of this agreement.
I would like to be optimistic, as well. I think there is an
important change going on in Japan in their attitudes toward
foreign investment and international trade. But we will keep an
eye on whether these agreements are, in fact, supported by the
Japanese government.
Senator Kohl. Thank you. Thank you, Mr. Chairman.
Senator DeWine. Senator Kohl, thank you very much.
Let me take a moment to welcome our students who are in the
back and in the audience from the Close Up Program, a program
that all the Senators are familiar with. We have the
opportunity to see students, I think I do, about once a week
from Close Up, so we welcome you here. This is a subcommittee
hearing of the Judiciary Committee, the Antitrust Subcommittee.
We are looking at antitrust issues and competition issues.
Chairman Pitofsky, Marathon Oil has a major stake in the
Norwegian offshore gas fields and is shipping gas to Europe.
Marathon alleges that anticompetitive behavior by Ruhrgas and
other European gas concerns has cost the company over $500
million in losses. Marathon testified last fall with regard to
its current complaint before the European Commission concerning
Ruhrgas. Will you please provide the status of that
investigation. When can we expect to see a conclusion of this
case and the decision on whether a statement of objection will
be filed? Are there any specific lessons that you think can be
learned from the Marathon case?
Mr. Pitofsky. Yes. Since our last hearing, we have been in
touch with people in Europe on a regular basis. I have myself
spoken to the Director General of DG-IV about the Marathon
matter. They have done several things. They staffed up the
group that was working on this matter. It was rather
understaffed, I believe, the last time we met. There has been
some progress. I believe that Marathon agrees that the matter
is now moving. I think it has been slow. I think it has been--
--
Senator DeWine. You think it has been slow? Did you say
slow? I am sorry.
Mr. Pitofsky. Yes, I think so. It is a complicated
antitrust case, but I would have hoped it would move along more
quickly. But I think it has now achieved some momentum. I think
Marathon would agree with that. I cannot predict. I do believe
that there will be action and movement in this matter in the
near future. I cannot predict how long it will take.
Let me just remind you, this is a matter in which we are
talking about sales from Norway into Europe. We could not reach
that transaction under any interpretation of American antitrust
law. Therefore, we must depend on the Europeans. I am
encouraged that there is movement in recent months.
Senator DeWine. Both of you have indicated in testimony
today and testimony in the past your belief that positive
comity is a useful tool but will not be the only means to
resolve international antitrust disputes. As the U.S. economy
becomes more intertwined with the economies of other countries,
we are sure to see more and more cases that require
international cooperation.
I agree that positive comity is not likely to provide a
complete solution to these problems, but if not positive
comity, how are we going to solve these problems? What else can
we do?
Mr. Klein. I would say, first of all, the fact that these
economies are becoming intertwined makes the need for
cooperation greater. And paradoxically, Mr. Chairman, in our
cartel work, for example, the one I announced today, two of
those companies involved in that were Japanese companies that
we prosecuted with this cartel, and in numerous other cases, we
have included Japanese companies. It is interesting. In those
cases, we get terrific cooperation from the Japanese. We get
good cooperation in Europe because these are worldwide
conspiracies.
As the economy becomes more global, I think you will find
more effective cooperation. Indeed, the need to penetrate
domestic markets is going to change somewhat because they are
going to be globalized markets and that is going to
increasingly happen as we move toward e-commerce and people
able to hit a button here in the United States and buy a
product anywhere in the world, and that is going to be equally
true in other parts of the world.
So I think that what we are doing now is setting the
groundwork for effective interconnected antitrust cooperation,
and I am actually modestly optimistic about where we are going
in that respect.
Mr. Pitofsky. Let me support the first point you made, Mr.
Chairman. The Federal Trade Commission 20 years ago, maybe once
a year, twice a year, would encounter a merger that had cross-
border implications. Today, 50 percent of the mergers that we
take a careful look at, I mean, that we go beyond the initial
investigation, involve more than one jurisdiction and some of
them involve eight or ten.
The real story, it is partly the bilateral agreements that
we have worked out with some of our trading partners with the
Department of Justice taking a lead in an excellent way, and I
think they are important because they point the way. The real
story is day in, day out, people on the phone, working together
as we have very successfully with trading partners in many
parts of the world, particularly with DG-IV, particularly with
Europe. We have had tremendous success in coordinating our
theories, coordinating our remedies, exchanging information,
and so forth. That is the way the future is going to have to
work out.
Senator DeWine. Senator Kohl.
Senator Kohl. I have no further questions. Thank you, Mr.
Chairman.
Senator DeWine. We thank you both very much. Again, you
have been generous, as always, with your time. We look forward
to continuing to work with both of you. Thank you.
Mr. Klein. Thank you, Mr. Chairman.
Mr. Pitofsky. Thank you.
Senator DeWine. Let me invite our second panel now to come
up and I will begin to introduce you as you head up. Peter S.
Walters assumed his current duties as Group Vice President for
Guardian Industries in June 1989. Mr. Walters testified before
this subcommittee in October on the question of international
antitrust enforcement and we welcome him back.
Gorton ``Buck'' Evans joined Consolidated Papers in 1973,
became President and Chief Executive Officer in 1997. We
welcome him before the subcommittee today.
John S. Reichenbach joined PPG Industries in 1958 and was
named Director of Industry Business Analysis and Trade Policy
for PPG's Glass Group in 1989. He currently serves as Director
of Government Affairs for PPG.
We thank all of you very much, again, for your patience. We
apologize for the late start. We will turn first to Mr.
Walters. We do have written statements that will become part of
the record. We would ask you to proceed as you wish. We have
allotted basically 5 minutes for your opening statement, and if
you could try to keep it within that, we would appreciate it
and we will have plenty of time for questions.
Mr. Walters.
PANEL CONSISTING OF PETER S. WALTERS, GROUP VICE PRESIDENT,
GUARDIAN INDUSTRIES CORPORATION, AUBURN HILLS, MI; GORTON M.
EVANS, PRESIDENT AND CHIEF EXECUTIVE OFFICER, CONSOLIDATED
PAPERS, INCORPORATED, WISCONSIN RAPIDS, WI; AND JOHN C.
REICHENBACH, DIRECTOR OF GOVERNMENT AFFAIRS, PITTSBURGH PLATE
AND GLASS INDUSTRIES, WASHINGTON, DC
STATEMENT OF PETER S. WALTERS
Mr. Walters. Thank you very much, Mr. Chairman. As you
mentioned, my name is Peter Walters. I am Group Vice President
of Guardian Industries Corporation, of Auburn Hills, MI, and my
responsibilities include overseeing the company's international
business efforts.
Last October, I described my company's efforts to establish
a meaningful foothold in Japan's flat glass market. Our lack of
success and the similar failures of PPG and other non-Japanese-
affiliated companies are due to a closed distribution system. A
cartel of three Japanese flat glass producers has blocked
competition from other non-Japanese firms for decades. Members
of the cartel have acquired direct equity interest in important
distributors or used highly effective coercive tactics to
prevent otherwise independent distributors from switching to
flat glass produced by foreign firms. The situation is
described in detail in a paper prepared by PPG and Guardian
that is being submitted along with PPG's testimony today.
I can report little progress over the last 7 months. Sales
volumes at Guardian Japan have been flat, despite new sales
initiatives in our part. To deal with the temporary economic
downturn in Japan, the three companies have tightened their
grip over distributors and resorted to, among other things,
selective predatory price cuts to fend off competition from
non-Japanese firms. The Japanese companies are betting that
they can drive foreign suppliers from the market and recoup
lost profits after we leave.
We have recently learned that the Japanese cartel assigns
aggressive sales quotas to distributors. They must meet these
quotas before they are free to purchase foreign glass. A
distributor who fails to meet his quota faces financial
retaliation that can ruin his business if, for example, he
needs a credit reference from his main supplier or if he
depends on rebates for returning the steel racks used to ship
his glass.
I mentioned last October that the Japan Fair Trade
Commission had agreed to do a survey of the flat glass
industry. Such a survey, if it were rigorous, transparent, or
reliable, would identify and confirm the anticompetitive
practices described to this subcommittee. While the survey
results have not yet been released, we expect them any day now.
We are skeptical that they will be valid or even fair.
Discussions between the United States and Japanese
governments since last October have not narrowed the perception
gap much, if at all. My biggest concern is the Japanese
government, and specifically MITI, simply is not taking this
issue seriously. From the outset, MITI's approach to
implementing the flat glass agreement has been to emphasize
form over substance. They created a series of arguments
intended to show that the market is open and they repeat the
arguments despite these fallacies.
Senators DeWine and Kohl, you received a letter from the
Japanese embassy containing many of these arguments in late
March. The complete, unabridged version is contained in a paper
presented by MITI during a government-to-government meeting in
Washington in early April. Let me give you just a sample of
MITI's specious arguments.
They argue that the share of the foreign glass in the
Japanese market has doubled since 1994 to more than 14 percent.
The fact is that nearly the entire increase is accounted for by
imports from Japanese affiliates located abroad, and much is
automotive glass that does not move through the distribution
system.
MITI argues that the market is open because the share of
foreign-made flat glass is more than twice that in the United
States. Our previous point applies here, that the pattern of
Japanese imports is dominated by shipments between Japanese-
owned affiliates, nor has direct investment been an option in
Japan, as is here in the States.
Another MITI argument is that the market is open because,
steadily, more distributors handle imported flat glass, up from
about 14 percent in 1994 to more than 37 percent in 1997. The
problem here is tokenism. Virtually all distributors who handle
foreign glass let it account for no more than 5 percent of
their turnover.
A final example, and to me the most objectionable one, is
MITI's assertion that U.S. firms do not work hard enough or
understand the Japanese market. They cite figures that Japanese
manufacturers have 30 times more sales people and 10 times more
processing facilities. We have put more effort into penetrating
the Japanese market than any other market in the world, with
meager results. But we will keep at it. We will maintain and
expand our efforts because the Japanese market is too important
to ignore.
Mr. Chairman, this leads to the question of whether there
is any prospect for success through the use of competition
authorities. Last fall, I testified in support of proposed
legislation to strengthen U.S. antitrust authorities to deal
with foreign anticompetitive conduct. In particular, we
supported a bill introduced by Senator Abraham to codify
footnote 62 of the current antitrust guidelines for
international operations. We urge that similar legislation be
introduced in this Congress and enacted now.
We understand that substantive agreement has now been
reached by the Department of Justice on a joint antitrust
cooperation agreement with the Japan Fair Trade Commission. The
positive comity provisions of that agreement could provide the
basis for identifying and addressing anticompetitive business
practices in the flat glass sector. In our view, if the
agreement is signed, it is important for the Department of
Justice to use the joint antitrust cooperation agreement to
make early progress on flat glass.
Japan's willingness and ability to undertake a credible
investigation into the conduct of its own flat glass industry,
in cooperation with DOJ officials, will be the test of whether
Japan is up to the challenge of being an equal partner with the
United States under the joint agreement. If not, we should
pursue the matter through unilateral action on the part of our
own U.S. antitrust authorities.
Thank you very much, Mr. Chairman. I would be delighted to
answer any questions.
Senator DeWine. Mr. Walters, thank you very much.
Mr. Evans.
STATEMENT OF GORTON M. EVANS
Mr. Evans. Thank you, Mr. Chairman, Senator Kohl, for the
opportunity to appear before you this morning. I am Gorton M.
Evans, President and CEO of Consolidated Papers, and with a
name like Gorton, you can see why Senator Kohl refers to me by
my nickname, Buck.
Consolidated, headquartered in Wisconsin Rapids, WI, is
North America's largest producer of coated printing papers. We
are a $2 billion company in a $160 billion industry. I have
samples, thinking that perhaps you were not familiar with
coated printing paper as much as you are flat glass. These are
samples of the products we produce. Sports Illustrated,
Newsweek, Time, and catalogs are produced on our paper.
Consolidated employs 7,200 people in the State of
Wisconsin, and within the State of Wisconsin, there are 52,000
people employed in paper and related industry. The United
States employs about 700,000 people in the paper industry.
The United States is the world's largest producer of paper
and paperboard products. Paper obviously is a big part of our
economy. That is because we are a Nation blessed with trees, a
renewable resource, water, clay, minerals, chemicals, all the
raw materials that are used to make paper, and this is
important to our case because Japan is a very important market
for our industry.
After the United States, Japan is both the world's second
largest producer and consumer of paper products. Yet, the
import penetration into Japan is the smallest of any developed
nation. Why? Because Japan is protecting an industry that
without that protection would be so uncompetitive it would
literally disappear. Japan's papermakers purchase the bulk of
their wood and pulp and raw materials from North American
suppliers. Their energy, chemicals, and raw materials are much
higher cost than those of North American and Scandinavian
competitors.
American paper manufacturers cannot penetrate the Japanese
market because the Japanese have set up a complex, largely
closed distribution system. Interlocking relationships exist
between members of the same keiretsu--manufacturers, agents,
wholesalers, trading companies, printers, publishers, and
users, and even the banks. These relationships result in
exclusionary business practices that block the entry of paper
imports and promote the growth of their industry at our
expense.
I would like to share with you a brief story. It is an
example, first person, of what I am talking about, not too much
unlike what we just heard from the flat glass.
In April 1992, after a year of intense negotiations, the
United States and Japanese Governments signed a 5-year
agreement to increase market access for paper products. The
Japanese government promised to encourage Japanese keiretsus to
increase their use of imported paper products and adopt
nondiscriminatory purchasing practices. Our industry
association, the American Forest and Paper Association,
encouraged its membership to make every effort to begin doing
business again with Japan.
So Consolidated Papers dedicated a number of people. We
contacted Japan Pulp and Paper, an import agent located in Los
Angeles. Our attitude was, we are going to do business, and we
will do it their way. They were happy to represent us. Now I
will shorten this otherwise long story.
After about 6 months of intensive sampling, shared
technical information, redesign, resubmission of packaging,
labeling, and everything you can imagine to meet their market
standards, we got our first order, one roll of paper--that
would be the equivalent of one sheet of glass--to be tested
upon arrival in Japan for market suitability. Senators, paper
is paper and printing is printing. This is not rocket science.
As far as we could tell, the paper arrived in Japan, but we
think it never got off the dock.
Overall, that 1992 agreement has not led to increased
market access for American papermakers. How can I say that? In
1998, imports from all sources worldwide accounted for just 3.9
percent of Japanese consumption. One-point-seven percent came
from the U.S. mills and 1.7 percent, more or less, has been our
share for the past 20 years. In contrast, the U.S. imports 16.3
percent of its total consumption of paper and paperboard
products.
Specifically, in our segment, coated papers, Japan exported
27,000 tons to the United States in 1997, or 300 percent more
than we shipped to them. The Bureau of Census data show that
Japanese producers increased their exports of coated paper to
the United States in 1998 by 74 percent, while our exports to
them actually went down.
How could an uncompetitive industry like Japan's paper
industry grow their manufacturing capacity by over 10 percent
in just 4 years, 4 years of negative GDP, and why is the U.S.
paper industry shrinking within the same timeframe, a time of
robust economic growth? It is simple--protectionism.
Monopolistic practices by countries like Japan allows for
domestic expansion of capacity at home while increasing exports
abroad, especially to the United States.
Senators if you happen to travel to Japan, perhaps you will
come across that roll of paper that we shipped 6 years ago. We
think it is still on the dock.
On behalf of the U.S. paper industry, I would like to thank
the committee for providing the opportunity to highlight our
industry's market access issues in Japan. We believe that
closer United States Government-industry cooperation is needed
to keep pressure on the government of Japan to eliminate
collusive business practices which limit United States access
to the Japanese paper market. I have submitted a more
comprehensive statement which I request be included in the
record. Thank you.
Senator DeWine. It will be made part of the record. Thank
you very much, Mr. Evans.
[The prepared statement of Mr. Evans follows:]
Prepared Statement of Gorton M. Evans
The U.S. is the world's largest producer of pulp, paper and
paperboard with annual sales of more than $160 billion. Until the onset
of the Asian financial crisis in mid-1997, the industry's exports
served as the major engine of growth. In the 1990-1997 period, U.S.
paper and paperboard exports worldwide doubled to 11.9 million metric
tons with a value of $10.2 billion.
Access to the Japanese market is of crucial importance to the U.S.
paper industry. After the U.S., Japan is the world's second largest
producer and consumer of paper and paperboard. Yet, import penetration
in Japan is the smallest in the world. In 1998, imports from all
sources accounted for just 3.9 percent of Japanese paper and paperboard
consumption and imports from the U.S. represented 1.7 percent of
consumption. To put it in perspective, even a 1 percentage point
increase in U.S. market share is worth more than $400 million in
additional U.S. export sales to Japan.
Low import penetration is especially difficult to reconcile with
Japan's lack of comparative advantage in paper manufacturing. Quite to
the contrary, Japan suffers considerable competitive disadvantage in
the form of high wood, energy, chemicals and labor costs which
translate into one of the world's highest production cost structures.
Competition in the Japanese paper market has been suppressed
historically by both governmental and private actions which have made
access to the market for imported products extremely difficult (except
for products that the Japanese paper industry does not produce such as
liquid packaging board.)
The U.S. paper industry believes that an array of anticompetitive
business practices deter paper imports. Some of these barriers are:
A complex and largely closed distribution system,
Interlocking relationships between members of the same
keiretsu, which include manufacturers, agents, wholesalers,
trading companies, printers, publishers or other end users, and
financial institutions. (These relationships result in
exclusionary business practices restricting the entry of new
suppliers, including imports),
Financial ties between manufacturers and distributors,
Preferential bank financing even of uncompetitive companies,
A lack of transparency in corporate purchasing practices,
and
Inadequate enforcement of anti-monopoly laws.
In April 1992, culminating a year of intense negotiations, the U.S.
and Japanese governments signed a five-year agreement on measures to
substantially increase market access for foreign firms exporting paper
products to Japan (Paper Agreement). Without explicitly acknowledging
that obstacles to market access exist, the government of Japan made a
commitment to undertake a major effort to eliminate them.
Under the Paper Agreement, the Japanese government committed to
encourage Japanese distributors, converters, printers and major
corporate users of paper products to: (1) increase their use of
imported paper products; and (2) adopt and implement open and non-
discriminatory purchasing practices. Also, paper and paperboard
producers, distributors, converters and printers were to establish and
implement internal Anti-Monopoly Law (AML) compliance programs.
Concurrent with the Paper Agreement, the Japan Fair Trade
Commission (JFTC) undertook a study of the paper distribution system
from the competition perspective. While the JFTC report, released in
June, 1993, did not identify specific, actionable violations of the
Anti-Monopoly Act, it cited certain aspects of the paper distribution
system which it found to be problematic. These include,
Capital relationships between manufacturers, distributors
and wholesalers that reinforce business ties,
The use of oral agreements to determine the terms of a
transaction,
Traditional after-sales price adjustment.
What has been the effect of the Paper Agreement? We should
acknowledge that the agreement produced a number of positive changes in
business practices. One example is the use of written contracts rather
than unwritten ``understandings'' between manufacturers and their
distributors. Critically, the Agreement provided some legitimacy for
Japanese customers who were inclined to use imported paper but were
concerned about negative repercussions from their primary suppliers,
the Japanese paper manufacturers. (This points to the need for a
government-to-government venue for discussing market access issues and
for ongoing review of progress in opening the Japanese paper market.)
Overall, though, the agreement did not appear to have lead to
increased market access for imported paper. The U.S. government and the
U.S. paper industry concurred in the judgement that the agreement was
not producing the results anticipated.
As reported in the March 1997 National Trade Estimate Report on
Foreign Trade Barriers, ``there has been no meaningful increase in
Japanese imports of paper products.'' This assessment was based on the
lack of any meaningful change in the level of imports in both absolute
terms and as a share of Japanese paper consumption. Moreover, there was
no evidence that the GOJ took steps to implement commitment to work
with other ministries to encourage end users to purchase imported paper
products and to require Japanese companies to develop Anti Monopoly Act
compliance policies. The 1998, and the just issued 1999, National Trade
Estimate Report arrived at the same conclusion.
The full impact of the combined failure to implement the agreement
and refusal to even discuss remedies can best be understood in the
context of concurrent developments in the Japanese paper industry:
Even though Japan is a high-cost producer and
notwithstanding a relatively slow 2 percent rate of domestic
demand growth--Japanese companies initiated projects which
added some 1.7 million metric tons of new paper and paperboard
capacity in the 1997-98 period;
The major players in the industry underwent a
``consolidation'' which substantially strengthened the position
of the leading producers and minimizes direct competition;
Several paper companies obtained special treatment under
Japan's Business Reform Law, which provides, inter alia for
special tax credits and JFTC approval for cooperation with
other companies in the industry in the course of restructuring.
Finally, in April 1997, with this new capacity substantially in
place and Japanese domestic industry control over the market
reinforced, the GOJ refused to renew the government-to-government paper
agreement on the grounds that the paper market was ``open'' (sic) and
that government interference in the marketplace--presumably encouraging
imports and requiring policies for compliance with the Anti-Monopoly
Act--were not consistent with Japanese government policy.
In refusing to extend the 1992 paper market access agreement, the
Japanese government pointed to the almost 50 percent increase in
Japan's imports of printing and writing papers in 1996, primarily from
Finland, as an indication of the openness of the Japanese paper market.
However, results in 1997 confirmed the U.S. judgment that the previous
year's situation reflected short term market conditions. Total paper
and paperboard imports dropped from 1.56 million metric tons in 1996 to
1.32 million metric tons a year later. In the important printing and
writing paper sector, Japanese imports dropped by 38 percent, from
625,933 metric tons to 387,139 metric tons. In 1998, Japanese paper and
paperboard imports fell an additional 11.7 percent.
The issues of compliance with the AML and GOJ toleration of anti-
competitive practices in the paper market closely parallel in structure
and in market effects the pattern in the photographic film, flat glass
and other industry sectors. Specifically:
The JFTC's 1993 paper market survey documented the existence
of ``traditional'' business practices which impede access to
new market entrants,
The JFTC has failed to act on indications of problematic
behavior by Japanese paper companies. Japanese press reports
during the period of the Agreement and since then documented
meetings and discussions among Japanese paper producers
regarding prices and other conditions of the Japanese paper
markets, but there have been no subsequent enforcement action
by the JFTC.
The 1996 merger between New Oji Paper and Honshu Paper companies,
creating the largest paper company in Japan, indicates that the JFTC
will sanction the increased consolidation in the Japanese paper
industry. While the JFTC expressed some concerns about the merged
company's stake in the top two paper distributors, and about the
practice of loaning executives to distributors, no effective action was
taken to initiate the thorough reform of the distribution system
promised in the several announced distribution reform programs.
At the same time, Japanese paper manufacturers, in spite of their
industry's generally high production costs, are expanding exports to
Asia-Pacific markets. Japan's total paper and paperboard exports were
up 35 percent in 1997, with printing and writing papers exports rising
by an extraordinary 52 percent. Paper and paperboard exports advanced
14.8 percent in 1998. It is evident that Japan's long term strategy of
protecting the local paper industry from import competition, has
allowed Japanese paper producers to significantly expand production
capacity of high-value added paper products for both the domestic and
export markets.
The genesis of this strategy can be traced back directly to the
1994 report issued by the ``Study Committee on Basic Issues of the
Japanese Paper and Pulp Industry'' organized by MITI. Among other
things, the report urged the Japanese paper industry to become more
international in outlook and expand into foreign markets for further
growth. It is evident that Japan's long term strategy of protecting the
local paper industry from import competition, has allowed Japanese
paper producers to significantly expand production capacity of high-
value added paper products for both the domestic and export markets.
The Japan model represents an extremely well developed system of
protectionism. Some would say that this is a failed system that has
contributed to Japan's economic malaise. So why does it matter? There
is evidence that other countries have proceeded down the same path.
South Korea, for one, has also built up a large paper industry without
any apparent comparative advantages. China is also a concern. Right
now, our main concern with China are high tariffs and traditional
nontariff barriers. However, as it lowers tariffs and traditional
nontariff barriers once it joins the WTO, we are concerned that China's
non-transparent trade and economic structure would allow it to protect
the domestic paper industry through a combination of administrative
guidance, government-industry ties, toleration of cartels and other
anticompetitive business practices.
recommendations
Our experience with the 1992 U.S.-Japan Paper Market Access
Agreement and the Japanese Government's unwillingness even to discuss
its renewal, illustrates the limitations of trade negotiations as a
tool to open Japanese markets to competition. It seems apparent that
the primary cause of the U.S. industry's inability to obtain reasonable
access to the Japanese market is collusive and exclusionary practices
among the Japanese paper manufacturers and between those manufacturers
and distributors. The Japanese Government has been unwilling to bring
an end to those practices by vigorous enforcement of the Japanese Anti-
Monopoly Law.
Our industry's situation should provide the Committee with support
for Recommendations it could make to antitrust enforcers along the
following lines:
(1) U.S. enforcers should request the JFTC conduct a follow-up to its
1993 Survey of the Paper Industry and Market, in order to
assess compliance by Japanese paper companies with the Anti-
Monopoly Law.
(2) U.S. enforcers should request the Japanese Government's
cooperation with a U.S. investigation of conduct in Japan that
is hindering exports from the United States.
(3) U.S. enforcers should help educate Japanese enforcement
authorities and Japanese companies on the value of
comprehensive anti-monopoly law compliance programs and
encourage their adoption by Japanese companies. If adopted,
such programs could help deter employees from violating
Japanese and/or U.S. law.
(4) U.S. enforcers should work with the U.S. agencies responsible for
compliance with existing trade agreements, to determine whether
conduct that constitutes non-compliance with such agreements
amounts to an antitrust violation.
(5) U.S. antitrust enforcers should consider supporting amendments to
the antitrust laws clarifying their application to conduct
outside the United States which hinders access to foreign
markets.
Thank you.
Senator DeWine. Mr. Reichenbach.
STATEMENT OF JOHN C. REICHENBACH
Mr. Reichenbach. Thank you, Mr. Chairman and Senator Kohl.
My name is John Reichenbach. I am the Director of Government
Affairs for PPG Industries, Incorporated. It is the hope of PPG
that today's hearing will shed light on the manner in which the
antimonopoly law is, or perhaps more accurately, is not,
enforced in Japan.
PPG entered the Japanese flat glass market in 1967 and has
had continuous presence there ever since. Japan has the second
largest glass market in the world. It is, therefore, an
important one from both economic and strategic points of view.
Despite the company's world class technologies and global
success in manufacturing and selling a wide range of glass and
other products, they have encountered severe market entry
barriers in the Japanese flat glass market which for many years
have frustrated the attempts of PPG and other non-Japanese
producers to enter the Japanese market due to fundamental
distortions in Japan's flat glass market.
The Japanese producers of flat glass and downstream
products of flat glass have engaged in a wide range of patently
anticompetitive activities. The evidence available to us
strongly suggests that the Japanese producers originally
established a collusive market allocation arrangement with the
knowledge and acceptance of their government.
For as long as I can remember, the market shares in Japan
of the three Japanese glass producers have remained essentially
the same, as shown in Graph No. 1. These practices have been
and are pervasive and are of a nature that, if undertaken in
the U.S. market, would be subject to intense antitrust
enforcement activities by authorities at the Federal and State
level. By contrast, the Japanese government has not pursued
even the most egregious instances of anticompetitive behavior.
Attached to my testimony, you will find a longer listing of
anticompetitive trade practices in Japan and I would like to
highlight several areas for you.
Japanese flat glass manufacturers have imposed informal
sales quotas on their customers. These quotas operate by
prohibiting Japanese distributors from buying any non-Japanese-
affiliated foreign manufactured glass until a minimum quota
amount of Japanese-produced glass is first purchased. If a
Japanese distributor does not meet the quota for purchases of
glass from his Japanese suppliers before buying glass from
independent foreign producers, the distributor faces any of a
number of pressures, ranging from unfavorable credit reports to
forfeiture of cash deposits made in advance of purchases to
social ostracism.
Japanese glass producers exercise control over the
distributors in many ways. Some are direct, such as the
acquisition of partial ownership or forced consolidation of
distributors. In some cases, Japanese producers require
distributors to open their accounting and purchasing records to
the producers so that the source of purchases is known to the
Japanese producers. In other cases, Japanese producers have
been known to place their personnel on the management staff of
their distributors. In effect, this means that Japanese
producers can monitor and then later pressure distributors to
limit the amount of glass that is purchased from other
suppliers, such as PPG.
One of the strongest proofs of the collusive nature of the
Japanese market came from a Japanese employer of a U.S. glass
producer who stated that in his previous employment, he
personally collected and aggregated the production numbers of
the Japanese producers so that each could regulate their
production according to the agreed upon market shares.
Additional strong evidence of collusion is contained in
recent comments reported in the Japanese press which suggest
that Japanese producers and distributors are engaged in price
signaling, if not outright price fixing. In the April 15, 1999,
issue of the Nippon Keizai Shinbun, an executive of one of the
large exclusive glass distributors signaled that he was going
to accept a manufacturer's proposal for a new pricing structure
for the entire industry and encouraged the rest of the industry
to do so, as well, stating, ``It is a good time for the glass
industry to reconsider the current glass pricing structure when
the whole industry is suffering from excessive competition
among themselves.'' This clear call for price coordination was
designed to allow an increase in prices.
Japanese glass manufacturers also employ a less-than-arm's-
length relationship in their business dealings. These
relationships extend to credit suppliers and advertisers as
well as to their distributors. In one instance, PPG called a
Japanese trade publication to arrange to buy advertising space
for the sale of PPG glass products. Despite having been told
that space was available initially, in a subsequent meeting
with the newspaper to finalize arrangements for the
advertisements, PPG representatives were told that the
newspaper could not offer space to a foreign flat glass
producer. The reason given was that the newspaper would suffer
the loss of all advertising revenues from Japanese producers if
it sold space to a U.S. glass producer.
Distributors have in the past explained to our sales
personnel that if they made large flat glass purchases from
PPG, they could expect higher prices or even a total cutoff
from supply on special glass products which are not made by
independent foreign suppliers and, thus, must be bought from
Japanese makers. These threatened reprisals intimidate
distributors from buying large quantities of foreign glass.
These producer practices are designed to monitor,
discipline, and ultimately control the distribution channels in
the Japanese flat glass market. These practices run counter to
both U.S. antitrust law and the letter of the Japanese
antimonopoly laws.
A 1993 JFTC study confirmed the firsthand experiences of
PPG by finding that essentially all primary wholesalers are in
actuality the exclusive agents of one of the manufacturers. The
surveys also found that the Japan's flat glass market is
virtually monopolized by the three glass makers and that the
system of sales through exclusive distributors had barred
access by other suppliers.
During its 30-plus years in Japan, PPG has tried every
plausible way to increase its market presence. PPG has hired
Japanese nationals for its sales staff, both as inside and
outside staff. PPG has participated in trade shows and even
formed a Japanese glass marketing joint venture with the
Japanese trading company Itochu. Over the years, we have
established sales offices, fabrication facilities, and cutting
centers in Japan. A 1997 survey by Japan's Ministry of
International Trade and Industry found that Japanese buyers
viewed PPG's products as equal or superior to the quality of
Japanese products.
Initially, because of producer pressure, Japanese
distributors demanded that PPG repackage its glass into
Japanese style containers so that distributors' purchases of
non-Japanese-affiliated glass could be more easily disguised.
For the same reason, PPG also was told to deliver its products
only on Sunday. Additionally, deposits collected by the
Japanese producers from distributors to reserve future glass
purchases have been threatened with confiscation if
distributors continued buying U.S. glass products.
The Japanese government has claimed that the flat glass
agreement has resulted in a larger market presence for foreign
manufacturers. This claim, however, runs contrary to the facts.
As Graph No. 2 shows, the 1998 USTR national trade estimates
report listed the import share of the Japanese market at only
six percent, with only three furnished by independent foreign
producers.
This highlights the stark imbalances in the flat glass
market of Japan versus the United States. Graph 3 will show
that Japanese glass producers and their affiliates in the U.S.
enjoy unfettered access to the U.S. market, holding
approximately a 22 percent U.S. market share through wholly
owned subsidiaries and another 15 percent of the U.S. market
through joint ventures with other foreign producers. By
contrast, U.S. producers are virtually blocked from the
intensely anticompetitive Japanese market.
In addition, the Japanese affiliates based in the United
States and other countries also enjoy unrestricted access to
the Japanese market. For example, 91 percent of the automotive
glass parts shipped to Japan from the United States in 1998
came from wholly owned subsidiaries of Japanese flat glass
producers, as shown in chart 4. Thus, the independent foreign
producer share of 2 to 3 percent has remained relatively
unchanged in the flat glass market of Japan.
With these facts in mind, we hope that the U.S. Congress
and the administration will act to ensure that the Japanese
enforce antitrust laws which they currently have on their
books. We have asked the JFTC to investigate these practices
and take action. We believe that a thorough, unbiased
investigation of the Japanese flat glass market will reveal a
number of anticompetitive practices.
We also recommend that the measure of success in this
undertaking be the accomplishment of defined objectives within
the near term. In order to pursue this type of success, we also
urge that the U.S.-Japan Flat Glass Agreement be strengthened
and renewed before the end of this year.
This concludes my prepared testimony. I will be pleased to
attempt to answer any questions you may have.
Senator DeWine. Thank you very much.
[The prepared statement of Mr. Reichenbach follows:]
Prepared Statement of John C. Reichenbach
introduction
Mr. Chairman and Members of the Subcommittee: My name is John C.
Reichenbach. I am the Director of Government Affairs for PPG
Industries, Inc. (``PPG''). This Subcommittee asked PPG to provide
testimony regarding the Company's experiences with anticompetitive
practices in the Japanese market and the Government of Japan's
responses to such practices. It is the hope of PPG that today's hearing
will shed light on the manner in which the antimonopoly law is--or
perhaps, more accurately, is not--enforced in Japan.
Because my career at PPG has caused me to deal with this problem
extensively, I have been asked to appear here today in order to share
my Company's views. I joined PPG in 1958 and have served in a variety
of positions in the glass business of the Company, including Director
of Industry and Business Analysis, Director of Market Planning, and
Director of Marketing. I became the corporate Director of Government
Affairs for PPG Industries, Inc. in 1994. In these capacities, I have
dealt often with the long-standing problems PPG has encountered in
Japan's flat glass market.
about ppg
PPG was the first commercially successful plate glass manufacturer
in the United States and has been a glass technology leader since 1883.
PPG's glass operations had global sales exceeding $2.5 billion last
year. PPG Industries has 18 glass manufacturing facilities in 14 states
employing nearly 10,000 highly skilled American workers. The Company is
the largest manufacturer of glass for commercial and residential
construction in North America. PPG's glass business units supply
automotive, aircraft and other transportation original equipment and
replacement glass parts, glass for commercial and residential
construction and remodeling, and products for industrial, mirror and
furniture applications. PPG is also a global producer of fiber glass,
coatings and chemicals.
Most glass today is produced by the float process. Molten glass is
poured continuously from the melting furnace into a second furnace
containing a bed of molten tin. The molten glass floats on the tin and
gradually cools until it forms a continuous ribbon. The solid state
form is conveyed into another furnace known as an annealing lehr, where
the controlled cooling process is completed. The continuous glass
ribbon is then cut into the customers' sizes and packaged for shipment.
ppg in japan
PPG's interest in the Japanese market is long standing. Indeed, PPG
entered the Japanese flat glass market in 1967 and has had a continuous
presence ever since. Japan has the second largest glass market in the
world. It is, therefore, an important one from both economic and
strategic points of view.
Despite the Company's world class technologies and global success
in manufacturing and selling a wide range of glass and other products,
we have encountered severe market entry barriers in the Japanese flat-
glass market which for many years have frustrated the attempts of PPG
and other non-Japanese producers to enter the Japanese market. During
the more than thirty years PPG has operated in Japan we have attempted
every plausible method to gain greater access to the flat glass market.
Our efforts, however, have yielded very little success due to
fundamental distortions in Japan's flat glass market.
Broadly speaking, the Japanese producers of flat glass and down-
stream products of flat glass have engaged in a wide range of patently
anticompetitive activities. Moreover, the evidence available to us
strongly suggests that the Japanese producers originally established a
collusive market allocation arrangement with the knowledge and
acceptance of their government. For as long as I can remember, the
market shares in Japan of the three Japanese glass producers have
remained essentially the same.
These practices have been and are pervasive and of a nature that,
if undertaken in the U.S. market, would be subject to intense antitrust
enforcement activity by authorities at the federal and state level. By
contrast, the Japanese Government has not pursued even the most
egregious instances of anticompetitive behavior, thereby attracting
widespread criticism for inadequate enforcement of its antimonopoly
laws.
anticompetitive trade practices
During its more than three decades of operation in Japan, PPG has
observed a litany of anticompetitive practices occurring in the
Japanese flat glass market. Attached to my testimony you will find a
longer listing of some of these practices, but I would like to
highlight several areas for you. (See Attachment 1 for description of
barriers to entry in the Japanese market.)
(1) Restrictive distribution practices
Japanese flat glass manufacturers have imposed informal sales
quotas on their customers. These quotas operate by prohibiting Japanese
distributors from buying any non-Japanese affiliated foreign
manufactured glass until a minimum quota amount of Japanese produced
glass is first purchased. If a Japanese distributor does not meet the
quota for purchases of glass from his Japanese suppliers before buying
glass from independent foreign producers, the distributor faces any of
a number of pressures ranging from unfavorable credit reports, to
forfeiture of cash deposits made in advance of purchases, to social
ostracism.
(2) Oversight of distributors by producers
Japanese glass producers exercise control over the distributors in
many ways. Some are direct, such as the acquisition of partial
ownership or forced consolidation of distributors. In some cases,
Japanese producers require distributors to open their accounting and
purchasing records to the producers, so that the source of purchases is
known to the Japanese producers. In other cases, Japanese producers
have been known to place their personnel on the management staff of
their distributors. In effect, this means that Japanese producers can
monitor and then later pressure distributors to limit the amount of
glass that is purchased from other suppliers, such as PPG.
(3) Evidence of collusion
One of the strongest proofs of the collusive nature of the
Japanese market came from a Japanese employee of a U.S. glass
producer who has stated that he personally collected and
aggregated the production numbers of the Japanese producers so
that each could regulate their production according to the
agreed market share.
Additional strong evidence of collusion is contained in
recent comments reported in the Japanese press which suggest
that Japanese producers and distributors are engaged in price
signaling, if not outright price fixing. In the April 15, 1999
issue of the Nippon Keizai Shimbun, an executive of one of the
large exclusive glass distributors signaled that he was going
to accept a manufacturer's proposal for a new pricing structure
for the entire industry and encouraged the rest of the industry
to do so as well stating, ``It is a good time (for the glass
industry) to reconsider the current glass pricing structure
when the whole industry is suffering from excessive competition
among themselves.'' This clear call for price coordination was
designed to allow an increase in prices. (See a copy of the
article and translation at Attachment 2.)
Japanese glass manufacturers also employ a less than arms-
length relationship in their business dealings. These
relationships extend to credit suppliers and advertisers as
well as their distributors. In one instance, PPG called a
Japanese trade publication to arrange to buy advertising space
for the sale of PPG glass products. Despite having been told
that space was available, in a subsequent meeting with the
newspaper to finalize arrangements for the advertisements, PPG
representatives were told that the newspaper could not offer
space to a foreign flat glass producer. The reason given was
that the newspaper would stiffer the loss of all advertising
revenues from Japanese producers if it sold space to a U.S.
glass producer.
(4) Tie-in sales
Distributors have in the past explained to our sales personnel that
if they made large flat glass purchases from PPG they could expect
higher prices, or even--total cut-off from supply, on special glass
products which are not made by independent foreign suppliers, and thus
must be bought from Japanese makers. These threatened reprisals
intimidate distributors from buying large quantities of foreign glass.
These producer practices are designed to monitor, discipline, and
ultimately control the distribution channels in the Japanese flat glass
market. These practices run counter to both US antitrust law and the
letter of the Japanese antimonopoly law. Yet, in each of these cases no
effective remedial action has been taken.
In a 1993 JFTC study, the government of Japan noted a number of
anticompetitive practices in the flat glass industry, confirming the
first-hand experiences of PPG. This remarkably frank examination of the
Japanese flat glass market provided many insights into the state of the
industry. The survey found that ``each [domestic] manufacturer does not
engage in trying to sell to the distributors of another manufacturer,
nor does it try to induce the distributor of another manufacturer to
become its distributor.'' The survey acknowledged that there is a
vertically integrated structure to the flat glass market, in which
``essentially all primary wholesalers are in actuality the exclusive
agents of one of the manufacturers.''
Further, the JFTC found that there were instances in which makers
or exclusive distributors, had ``either lodged complaints to or
harassed agencies who had sold imports'' and it confirmed that ``there
were instances of [retailers] being pressured by manufacturers or
contract agencies * * * if they expanded purchases of imported products
or initiated new purchases.'' The surveys finally found that ``Japan's
flat glass market [is] virtually monopolized by the three glass makers,
[and that] the system of sales through exclusive distributors ha[d]
barred access by other suppliers.''
The JFTC market survey confirmed the anticompetitive experiences
that PPG had witnessed. During its time in Japan PPG has tried every
plausible way to increase its market presence. PPG has hired Japanese
nationals for its sales staff, both as inside and outside staff. PPG
has participated in trade shows, and even formed a Japanese glass
marketing joint venture with the Japanese trading company, Itochu. Over
the years we have established sales offices, fabrication facilities and
cutting centers in Japan. A 1997 survey by Japan's Ministry of
International Trade and Industry (``MITI'') and Ministry of
Construction (``MOC'') found that Japanese buyers viewed PPG's products
as equal or superior to the quality of Japanese products. Moreover, PPG
cost advantages consistently enabled it to price its glass at 20
percent-30 percent below comparable Japanese products until last year,
but now we are encountering selective predatory pricing by Japanese
producers.
Thus, all of these efforts have been thwarted by a coordinated
scheme to protect market share and preserve a closed market structure
in Japan.
effect of the 1995 us-japanese flat glass agreement
The U.S.-Japan Flat Glass Agreement held out the hope for change,
but after nearly five years of its operation, it has not lived up to
its initial promise. Today, the Japanese flat glass market remains
largely unchanged. The practices which I have cited have not gone away.
Indeed, PPG continues to experience overt and covert anticompetitive
behavior.
Initially, because of producer pressure, Japanese distributors
demanded that PPG repackage it's glass into Japanese style containers
so that distributors' purchases of non-Japanese affiliated glass could
be more easily disguised. For the same reason, PPG also was told to
deliver its products only on Sundays. Additionally, deposits collected
by the Japanese producers from distributors to reserve future glass
purchases have been threatened with confiscation if distributors
continued buying U.S. glass products. These practices, and a laundry
list of others, continue unabated despite the U.S.-Japanese agreement.
In addition, we now see aggressive new predatory pressures in
Japan. Perhaps in desperation over the economic recession in Japan,
during 1998 and 1999 to date the Japanese producers have resorted to
unprecedented, deep, selective price cuts. This practice by the
Japanese producers is a narrowly focused attempt to retain distributors
who had begun to purchase quantities of PPG glass by offsetting PPG's
cost/price advantages.
The Government of Japan has claimed that the flat glass agreement
has resulted in a larger market presence for foreign manufacturers.
This claim, however, runs counter to the facts. Even if one accepts the
market statistics presented by the Government of Japan, they do not
reflect greater foreign producer participation in the Japan market nor
do they support claims that the Japanese glass market is becoming more
open or that anticompetitive practices are abating.
For example, the Government of Japan's simple assertion that 14.7
percent of the Japanese flat glass market in 1997 was supplied by
imports does not tell the whole story. Of that 14.7 percent,
approximately 4 share points were accounted for by PPG sales of
automotive privacy glass to the Japanese flat glass producers. Clearly,
this glass did not go through the traditional distribution channels.
Another 8 share points were attributable to imports from affiliates of
the Japanese flat glass producers in the U.S. and elsewhere. In
addition, much of this glass consisted of fabricated automotive glass
parts which, once again, did not travel through normal flat glass
distribution channels. Thus, the remaining 2 or 3 share points were the
only flat glass imports relevant to a discussion of the anticompetitive
structure of the flat glass market.
This highlights the stark imbalances in the flat glass markets of
Japan versus the United States. Japanese glass producers and their
affiliates in the U.S. enjoy unfettered access to the U.S. market,
holding approximately a 22 percent U.S. market share through wholly
owned subsidiaries and another 15 percent of the U.S. market through
joint ventures with other foreign producers ventures. By contrast, U.S.
producers are virtually blocked from the intensely anticompetitive
Japanese market. In addition, the Japanese affiliates based in the U.S.
and other countries also enjoy unrestricted access to the Japanese
market. For example, 91 percent of the automotive glass shipped to
Japan from the U.S. in 1998 came from wholly owned subsidiaries of
Japanese flat glass producers. It is particularly frustrating that
these imbalances are founded on business practices which would be
vigorously prosecuted by the competition authorities in the U.S.,
Europe, Canada, and elsewhere.
Thus, the independent foreign producer share of 2-3 percent has
remained relatively unchanged in the Japanese flat glass market. Of
equal concern to PPG is the continuing lack of enforcement of Japan's
antimonopoly laws. It is these laws and the practices they are designed
to prevent that hold out the hope of significant change in the Japanese
flat glass market.
conclusion
With these facts in mind we hope that the United States Congress
and the Administration will act to ensure that the Japanese enforce the
antitrust laws which they currently have on the books. We have asked
the JFTC to investigate these practices and take action. We believe
that a thorough, unbiased investigation of the Japanese flat glass
market will reveal a number of anticompetitive practices. Elimination
of these market distortions would substantially open the Japanese flat
glass market to independent foreign manufacturers.
We also recommend that the measure of success in this undertaking
be the accomplishment of defined objectives within the near term. In
order to pursue this type of success we also urge that the U.S.-Japan
Flat Glass Agreement be strengthened and renewed before the end of this
year.
This concludes my prepared testimony. I will be pleased to attempt
to answer any questions you may have.
ATTACHMENT 1
Barriers to Entry in the Japanese Flat Glass Market: Opportunities for
Bilateral Cooperation
statement of the problem
Access to the Japanese flat glass market is controlled by an
entrenched oligopoly of manufacturers that have effectively organized
themselves as a cartel. They have entered into tacit agreements among
themselves to allocate the flat glass market through their control of
the distribution system. The oligopoly was originally organized with
the active support of the Government of Japan. There has been no
successful new entry into the market since the 1960s and market shares
for the incumbent manufacturers have remained essentially constant over
most of that period.
U.S. and European flat glass manufacturers have unsuccessfully
attempted to enter the Japanese flat glass market. For U.S.
manufacturers, efforts to penetrate this market began over 30 years
ago. Since then, U.S. manufacturers have steadily built efficient sales
and service capabilities in Japan in an attempt to reach customers. At
the same time, these U.S. manufacturers have urged the Government of
Japan, including the Ministry of Trade and Industry (MITI) and the
Japan Fair Trade Commission (JFTC), to exercise their authority to
deter market foreclosing, anticompetitive conduct by the Japanese
manufacturers.
Despite their initial promise, successive trade agreements between
the United States and Japanese Governments to open the Japanese flat
glass market have not been successful. Japanese undertakings in the
1992 Bush-Miyazawa Action Plan did not succeed in the goal to
``substantially increase market access for competitive foreign firms.''
Indeed, the Japanese Government failed to implement key elements of the
agreement. Likewise, a 5-year bilateral agreement on flat glass signed
in 1995, which was intended to ``deal with structural and sectoral
issues in order substantially to increase access and sales of
competitive foreign goods and services * * *,'' has not been effective
to open the market to competition.
In retrospect, it is not surprising that trade agreements alone
have failed to open the market to competition. The root cause of the
market access problem is collusive and exclusionary conduct among the
Japanese manufacturers and between the manufacturers and distributors
that is most effectively remedied by vigorous enforcement of the U.S.
antitrust laws or the Japanese Antimonopoly Act. To date, neither the
U.S. antitrust authorities nor the JFTC has taken an enforcement action
against Japanese manufacturers and/or distributors. Consequently, the
Japanese flat glass market remains effectively closed to new
competitors.
U.S. and Japanese antitrust authorities have recently announced
negotiations on a bilateral antitrust cooperation agreement in line
with similar agreements that the U.S. maintains with Canada and the
European Commission. While potentially useful, such an agreement would
not likely be accepted by the U.S. business community unless the JFTC
is able to demonstrate that it is a reliable and credible antitrust
enforcement agency on par with the Department of Justice's (DOJ)
Antitrust Division and the Federal Trade Commission. Nothing in the
JFTC's actions to date with respect to its own flat glass industry
suggests that it would meet such high standards. Indeed, the JFTC's
lack of enforcement resolve has enabled an oligopoly of Japanese glass
manufacturers to engage in cartel behavior by controlling the
purchasing decisions of its customers and by blocking new entrants,
including U.S. manufacturers, from gaining a foothold in their market.
barriers to entry impede sales and innovation
The $3 billion per year Japanese flat glass market is the second
largest single market in the world. Nearly the entire market is
supplied by three Japanese producers--Asahi Glass Company, Ltd.
(Asahi), Nippon Sheet Glass (NSG), and Central Glass Company (Central).
Each Japanese glass producer is a member of one of the powerful
keiretsu groups, with Asahi part of the Mitsubishi Group, NSG part of
the Sumitomo Group, and Central part of the Mitsui Group. Since the
late 1960s the three producers have maintained steady market shares in
a 5-3-2 ratio. Asahi has consistently been the largest, with a market
share of around 50 percent. These constant market shares are in stark
contrast to the patterns in the U.S. and Europe, where flat glass
market shares have shifted dramatically since the 1960s and new
entrants have thrived.
The exclusive distribution system for flat glass in the residential
construction market represents the single greatest barrier to market
access. That distribution system consists of three rigid channels, each
controlled by one of the domestic flat glass manufacturers. Secondary
distributors and dealers are, in turn, controlled by the distributors.
As a result, the domestic manufacturers are able to control the market
down to the smallest customer at the retail level.
One consequence of the tightly controlled flat glass market in
Japan is that the use of innovative, high-value-added products such as
insulating glass, tempered and laminated safety glass, and energy-
efficient low emissivity (low-E) glass has lagged behind that of
Western Europe and the United States. The relatively low level of these
value-added fabricated glass products in Japan can be traced directly
to the lack of competition, both among the Japanese flat glass
producers and from foreign suppliers. Even as Japanese manufacturers
have increased production of value-added products in recent years, they
have done so in a highly vertical fashion. In the U.S. and Europe, the
value-added coating and fabrication is primarily done downstream by
independent companies. In Japan, the domestic makers preserved the
value-added processes for themselves to prevent the distributors from
gaining any measure of control over the production process and thereby
asserting even a modicum of independence from the manufacturer with
which they have an exclusive arrangement.
The Japanese flat glass cartel controls the market through a
variety of collusive and exclusionary practices, including refusals to
deal, exclusive distribution arrangements, and economic coercion over
distributors and potential purchasers of foreign glass. While Japanese
glass manufacturers do not always hold controlling ownership interests
in distributors, their control has been achieved by similarly effective
means, including tacit supply contracts, partial ownership, quotas and
targets, financial leverage (such as delayed settlement of accounts),
exchange of personnel, and ultimately by threats of retaliation should
the distributor purchase products from outside the exclusive channel. A
recent example of the leverage that the manufacturers exert over their
distributors comes from salesmen for foreign suppliers who have
reported that Japanese manufacturers have informally assigned quotas to
their distributors. The distributors are permitted to buy imported
glass only after they have satisfied their domestic quota requirements.
foreign flat glass firms have not been able to penetrate the market
No major foreign flat glass company has succeeded in penetrating
the Japanese market. The market's sheer size and the relatively higher
prices historically enjoyed by the domestic manufacturers have made it
a prime target for foreign firms, including the major international
companies (e.g., Pilkington, St. Gobain, PPG, and Guardian) as well as
regional manufacturers from Taiwan and Korea. A 1998 survey by MITI
found that prices for imported flat glass products were 20 percent more
or less expensive than domestic products.
Pilkington (U.K.) has attempted to export high-value-added
architectural glass from its European operations, as well as raw float
glass from its Chinese manufacturing facility in Shanghai. St. Gobain
(France) recently became affiliated with a Korean supplier and for many
years has attempted to sell products from its European operations.
PPG Industries, Inc. (United States) has been one of the most
patient and persistent of the major international firms. They have
maintained sales operations in Japan since 1967, and have a joint
venture with the trading firm Itochu Corporation that was established
primarily to market and distribute its imported flat glass products.
Guardian Industries Corp. (United States) began its Japan efforts
more than a decade ago. It has built up a significant sales and
distribution network in Japan, with sales offices and warehouse/
distribution centers in Tokyo and the Tokai region. It also plans to
add additional warehouse/distribution centers. Guardian also cuts glass
to size at these centers to ensure that it can sell to smaller, more
demanding customers.
The major international glass manufacturing companies have
uniformly experienced failure in entering the Japanese flat glass
market. This failure can be attributed directly to the systematic
efforts of the Japanese flat glass manufacturers to deny entry to new
entrants. All of the potential foreign entrants to the Japanese market
are technologically advanced, have proven marketing skills, aggressive
pricing, and compete effectively with each other and with Japanese
firms (especially the largest, Asahi) in all other world markets.
lack of sales opportunities in japan contrasts with the u.s. and europe
Japan's distribution system for flat glass contrasts sharply with
systems in North America and Europe, where a glass distributor is free
to choose from the products of competing manufacturers and where most
distributors handle products of multiple manufacturers. In these
markets, manufacturers tend to cater to the requirements of the
customer/user, giving rise to manufacturing technologies that allow for
efficiencies unavailable to the Japanese market. In North America and
Europe, product innovation is encouraged and distributors are free to
secure capital and buy supplies from the most competitive sources
available to them.
The United States flat glass market is open for both investments
and imports. Japanese firms participate in the U.S. flat glass industry
and account for about one-fifth of total sales.
* Asahi, Japan's leading producer, purchased a 20-percent share of
AFG Industries, Inc., the third-largest glass maker in the
United States, through its Brussels-based subsidiary Glaverbel
during a management buyout in 1988, and acquired the remainder
of the firm in December 1992. The acquisition expanded Asahi's
North American distribution network and product capabilities,
giving Asahi float lines and fabrication equipment in both the
United States and Canada. The operations of Asahi and AFG are
especially complementary in the United States, linking Asahi's
two automotive-glass plants with a supply of raw flat glass
from AFG's float glass plants. The AFG acquisition gave Asahi
control of approximately 20 percent of the U.S. market.
* NSG, Japan's second-largest producer, bought a 20 percent share of
Libby-Owens-Ford (LOF) in 1989. The balance of LOF is owned by
Pilkington of the United Kingdom. The acquisition gives NSG a
presence in all three North American markets through LOF's U.S.
and Canadian facilities and the NSG-LOF joint venture to
produce automotive glass in Mexico, L-N Safety Glass. Another
NSG-LOF joint venture to produce automotive glass, United L-N
Safety Glass, Inc., began its first full year of operation in
Versailles, Kentucky, in 1988.
* Central Glass, Japan's third-largest producer, initially entered
into a joint venture with Ford to produce automotive glass at a
plant in Tennessee called Carlex. Central has now purchased
Ford's shares and owns 100 percent of the company.
Depending upon economic circumstances, imported flat glass products
tend to account for 10 percent to 50 percent of most of the world's
major markets. The high end of these percentages tends to be in
European economies, where logistics are relatively efficient. Countries
such as England and Italy, with their own domestic glass producers,
still show import shares between 30 percent and 50 percent of the total
market. In Japan, imports come primarily from overseas suppliers that
have affiliations with Japanese manufacturers. According to official
Japanese statistics, aggregate flat glass imports account for
approximately 14 percent of total consumption. However, imports from
non-affiliated foreign suppliers account for only 5 percent to 6
percent of the total market.
Despite its own economic difficulties, Japan seems impervious to
the free market forces that have boosted sales of imported flat glass
products from Asia in both the U.S. and Europe. Preliminary statistics
for late 1997 and 1998 demonstrate that both the United States and
European markets saw significant increases in imports from Southeast
Asian countries due to the economic slow-down in the region and the
devaluation of currencies. Even though the Southeast Asian countries
are much closer to the Japanese market, statistics demonstrate that
there was virtually no increase in imports for these countries into
Japan. This pattern provides additional evidence that domestic
manufacturers exert significant anticompetitive restraints on the
Japanese flat glass market.
a litany of private anticompetitive activities in japan
The current structure of Japan's flat glass market was created in
the 1967-1973 period, as the Japanese Government was encouraging the
domestic industry to adapt to the float glass technology. The system of
three vertically integrated supply networks, one for each manufacturer
and based on keiretsu relationships, was created with the active
support of MITI, according to longtime participants in the flat glass
industry. Japan's flat glass market is held together by a wide range of
coercive forces and unwritten anticompetitive agreements and
understandings, some of which are tacit, but all of which are effective
in deterring successful new entry.
* Restrictive Distribution Practices. Unwritten supply contracts,
sales quotas imposed by the producers, partial ownership of
distributorships by producers, the placement of producers'
personnel in management positions of distributorships, the
practice of producers accompanying distributors on calls to the
latter's customers, and financial levers such as delayed
settlement of accounts, leave wholesalers controlled by and
dependent on producers and make it possible to discipline
distributors who step out of line. The domestic makers'
leverage has been sufficient to give them open access to the
financial records of their affiliated distributors. They have
been able to orchestrate amalgamations when to their advantage.
As a result, over the past two years, Japanese manufacturers
have steadily increased their equity holdings in the larger
distributors, making it even less likely that such distributors
would respond to favorable economic incentives to handle
products sold by new entrants.
* Opportunities for Collusion. An extensive network of industry trade
associations ties distributors and retailers to manufacturers
to allow for collusive marketing efforts. There are informal
associations consisting exclusively of the distributors of a
given manufacturer on a regional and national basis. In the
past, meetings of these associations were attended by
manufacturers' representatives who also attended parties and
social occasions. There also are retailer associations attended
by distributors and manufacturers.
In the current ``soft'' market, the domestic makers are attempting to
retain market share at all costs. Asahi, for example, closely
monitors the sales calls of foreign suppliers and their bids
through a sophisticated e-mail system linking its affiliated
distributors. Then, to prevent any possibility of its
distributors deviating from their exclusive arrangement, Ashai
lowers its prices selectively as much as necessary to prevent
foreign suppliers from winning the bids. While this strategy
clearly has been costly for Asahi--it realized a loss for the
second half of 1998, its debt has been downgraded by Standard
and Poors, and it has begun a major cost-cutting effort--it
persists in using its market power to drive out any threat from
upstart new competitors and will continue to do so until sales
improve and it can reap the financial benefits of its
exclusionary tactics.
* Refusals to Deal. The threat of sanctions for dealing with foreign
manufacturers, although pervasive, is rarely explicit. In the
past, potential customers have told U.S. glass companies that,
despite favorable pricing, they could not purchase U.S. glass.
They explained that purchases from a foreign supplier would
affect their ability to purchase other products, such as
polished wire glass, from Japanese manufacturers. Several end
users of flat glass have told a U.S. producer that, although
that producer could supply 90 percent of their glass needs,
they were afraid that the domestic glass manufacturers would
either cut off their supplies of other products or charge them
unreasonably high prices. In 1995, under the terms of the
bilateral flat glass agreement, Japanese flat glass producers
notified distributors in writing that they are not bound to buy
exclusively from them. As a result, domestic makers have
altered their techniques for preventing distributors from
buying meaningful amounts of imported products. According to
salesmen for U.S. suppliers, domestic makers have imposed
informal quotas on their distributors, allowing imported glass
to be purchased only after the quota has been filled.
* Exclusive Distribution Arrangements in Sash Kits. Japanese flat
glass manufacturers and their distributors control a large
portion of the sash (i.e., window frame) market. They buy sash
kits, cut the glass, assemble finished units, and sell them
directly to buyers in the construction market. This is unlike
the practice in the United States and Europe, where sash makers
are major buyers of glass for assembly of windows sold directly
to the construction industry. U.S. flat glass producers seeking
to establish facilities in Japan to assemble cut glass into
sashes from kits purchased from Japanese sash makers have been
told that they could not purchase sash kits because the
Japanese sash makers were too dependent on sales to the
domestic glass manufacturers and therefore were vulnerable to
retaliation.
Because of the restrictive business practices outlined above, U.S.
flat glass producers and other foreign producers continue to hold an
abnormally low market share. All non-affiliated foreign producers
account for only an estimated 5 percent to 6 percent of Japanese
consumption, and of that total U.S. companies account for barely 2
percent.
Unlike in the United States and Europe, it has not been possible to
enter the Japanese market through foreign equity participation. U.S.
companies have explored the possibility of joint-venturing in Japan
with existing glass manufacturers, distributors, and fabricators.
However, because all of the major distributors and fabricators are
effectively controlled by one of the three Japanese flat glass
companies, no such alternative has existed.
evidence of anticompetitive practices revealed in the jftc survey
Under the January 1992 Bush-Miyazawa Action Plan Agreement on Flat
Glass, the Government of Japan committed that the JFTC would conduct a
survey of competitive conditions in the flat glass market. The JFTC
completed that survey in June 1993. Although the survey did not purport
to be an in-depth study of the Japanese flat glass industry, much less
a credible investigation into actual industry practices, it nonetheless
presented a remarkably detailed picture of the structural and
competitive problems in the market as of 1993, many of which persist
today. For example, the survey:
Confirmed that ``each [domestic] manufacturer does not
engage in trying to sell to the distributors of another
manufacturer, nor does it try to induce the distributor of
another manufacturer to become its distributor;''
Reported on a ``state of monopoly by three makers, pricing
by consensus, and creation of sales networks of distribution by
each maker;''
Acknowledged the vertical organization of the market, and
the long-term market shares in a 5-3-2 ratio for the three
producers;
Reported that prices for imported raw float glass are some
20 to 30 percent lower than domestic glass;
Confirmed that ``almost all distributors are brand name
dealers belonging to one manufacturer;''
Acknowledged that imports are essentially shut out of the
market by conceding the ``meager penetration of imported goods
in the area of construction float glass'' and also by conceding
the ``fact that essentially all primary wholesalers are in
actuality the exclusive agents of one of the manufacturers;''
Reported that ``with Japan's [float] glass market virtually
monopolized by the three [float] glass makers, the system of
sales through exclusive distributors has barred access by other
suppliers'' [and] ``has encouraged coordinated efforts among
the three makers to preserve the monopoly situation;''
Confirmed instances in which manufacturers and exclusive
distributors ``have either lodged complaints to or harassed
agencies who had sold imports;''
Found that ``there were incidences of [retailers] being
pressured by manufacturers or contract agencies'' and reported
that various retailers feared retaliation ``if they expanded
purchases of imported products or initiated new purchases;''
Revealed in great detail the lack of competitive forces in
the market; and
Described how the keiretsu system results in the allocation
of glass for construction jobs.
Notwithstanding the evidence of private anticompetitive restraints
presented to it by importers and the survey findings, the JFTC
concluded that ``the survey revealed no evidence of violation of the
law.'' Instead of using the evidence of collusion, attempts to
monopolize the market, and/or exclusionary conduct as the basis for a
credible investigation into industry practices, the JFTC simply
suggested that the three manufacturers implement ineffective measurers
such as voluntary antitrust compliance programs, curtailing certain
rebates, and informing their distributors that they are ``free'' to buy
imports to address the existing competitive problems. Not surprisingly,
these suggestions were implemented in a cursory and ineffective manner.
recent efforts to remove barriers to entry have failed
In January 1995, after long and complex negotiations, the U.S. and
Japan concluded a bilateral flat glass agreement. The five-year
agreement spelled out the responsibilities for all parties to, create
an open flat glass market. Japanese flat glass manufacturers and
distributors released public statements that the market was open on a
non-discriminatory basis for competition by all suppliers, foreign and
domestic alike. The government of Japan endorsed these statements and
agreed to survey the industry annually to ensure that the goal was
being met. The data required to be collected in the annual survey was
spelled out in great detail in the agreement. The Japanese government
also agreed to strengthen building standards to require greater use of
energy-efficient glass products and safety glass.
Since the flat glass agreement was signed in 1995, there has been
no significant enduring change in the Japanese glass market. There was
a slight increase in imports in the first half of 1995, as distributors
were encouraged to purchase glass from other suppliers and found this
freedom of buying satisfactory. However, by the end of 1995 this
diversification trend was reversed, and for the last three years little
change has been noticed in purchasing patterns within the Japanese
glass economy.
Representatives of the United States Trade Representative (USTR)
have sought additional measures from their MITI counterparts in
attempts to encourage MITI to take the flat glass agreement seriously,
but these efforts have met with no success. President Clinton on two
occasions has raised lack of compliance with the agreement with Prime
Minister Obuchi. No change in the Japanese negotiating posture has been
detected. MITI essentially insists that the market is open, that
compliance with the Agreement has been achieved, and that there is no
need for further discussion.
In 1998, the DOJ encouraged the JFTC to help the Japanese glass
producers institute effective antitrust compliance plans, but MITI
blocked the discussion and suggested that MITI has no authority to
force Japanese firms to improve their compliance plans. The JFTC is in
the process of conducting a second survey of competitive practices in
the Japanese flat glass industry. But unless the survey and the
information-gathering techniques used to compile it are improved
substantially, it is unlikely that the JFTC will gather sufficient
evidence of anticompetitive conduct to overcome its historic inertia
and launch a credible investigation into the competitive conduct of the
entrenched incumbent manufacturers.
barriers to entry susceptible to antimonopoly law enforcement
Japan has an Antimonopoly Law prohibiting monopolies, unreasonable
restraint of trade, unfair trade practices, and restraint of
competition. The wording of the law closely parallels U.S. antitrust
statutes, because U.S. antitrust experts provided extensive advice when
the law was being drafted.
Despite the Antimonopoly Law, the JFTC has pursued very few
enforcement actions. The JFTC has limited resources and has always been
extremely short on personnel, but its ineffectiveness likely reflects
deliberate government policy. As part of its industrial strategy, the
Government of Japan has not only tolerated but actively encouraged the
formation of cartels and other anticompetitive actions by the Japanese
industry. Thus Japanese companies have been permitted to engage in bid-
rigging, restrictive distribution practices, restrictive industry
standards, customer boycotts, and restrictive distribution arrangements
that would violate the antitrust laws of virtually any other
industrialized nation. These anticompetitive practices are pervasive in
the glass sector.
japanese law condemns collusive and exclusionary conduct
The Act Concerning Prohibition of Private Monopoly and Maintenance
of Fair Trade (``Antimonopoly Law'') and related Regulations and
Guidelines prohibit anticompetitive conduct of the type used by the
Japanese manufacturers to restrict imported glass.
1. Section 3 of the Antimonopoly Law states: ``No entrepreneur
shall effect private monopolization or any unreasonable restraint of
trade.'' Section 7 empowers the JFTC, in accordance with certain
procedures, to ``order the entrepreneur concerned * * * to cease and
desist from such acts * * * or to take any other measures necessary to
eliminate such acts in violation of the said provisions.'' Section 45
et. seq. sets forth a wide array of compulsory investigative and
enforcement tools that the JFTC has available with respect to suspected
or established violations.
2. Section 19 of the Antimonopoly Act states: ``No entrepreneur
shall employ unfair trade practices.'' Section 20 empowers the JFTC, in
accordance with certain procedures, to ``order the entrepreneur
concerned to cease and desist from the said act, to delete the clauses
concerned from the contract and to take any other measures necessary to
eliminate the said act.'' Section 45 as above applies.
3. Section 8 of the Antimonopoly Law states: ``No trade association
shall engage in any acts which come under any one of the following
paragraphs: (i) substantially restraining competition in any particular
field''* * * ``(v) causing entrepreneur to employ such acts as
constitute unfair trade practices.'' In the event of a violation, the
JFTC, in accordance with applicable procedures, may order the trade
association ``* * * to cease and desist from such act, to dissolve the
said association, or to take any other measures necessary to eliminate
the said act.'' Section 45 as above applies.
4. Section 2 of the Antimonopoly Act defines ``unreasonable
restraint of trade'' as meaning:
That any entrepreneur, by contract, agreement or any other
concerted actions, irrespective of the names, with other
entrepreneurs, mutually restrict or conduct their business
activities in such manner as to fix, maintain, or increase
prices, or to limit production, technology, products,
facilities, or customers or suppliers; thereby restraining,
contrary to the public interest, substantially competition in
any particular field of trade.
5. The Antimonopoly Act Guidelines Concerning Distribution Systems
and Business Practices (1991) (``Guidelines'') set forth the JFTC's
interpretation of what conduct constitutes an ``unreasonable restraint
of trade.'' Examples include:
Where competitors concertedly refuse to deal with a new
entrant or cause their customers or suppliers not to deal with
a new entrant etc. and if such conduct causes substantial
restraint of competition * * * by making it very difficult for
the refused firm to enter the market. * * * [Guidelines, Part
I-Boycott]
Where firms concertedly engage in such conduct as described
above with their customers. * * * [Guidelines Part I-Boycott]
Where firms concertedly * * * allocate a market to each Firm.
* * *'' [Guidelines, Part I-Customer Allocation]
Special restrictions apply to firms deemed ``influential in a
market.'' Such firms are in the first instance judged by a market share
of not less than 10 percent or by virtue of being within the top three
in the market.
6. Section 2 of the Antimonopoly Act defines ``unfair trade
practices'' as including ``(iii) unjustly inducing or coercing
customers of a competitor to deal with oneself * * * (v) dealing with
another party by unjust use of one's bargaining position.''
7. The Guidelines provide illustrations of what constitutes an
unfair trade practice, including:
``Where an influential firm in a market engages in transactions
with its trading partners on condition that they do not engage in
transactions with its competitors, or causes them to refuse to deal
with its competitors, and if such conduct may reduce business
opportunities of its competitors and prevent them from easily finding
alternative trading partners. * * *'' [Guidelines, Part I-Dealing on
Exclusive Terms]
``Concerted refusal to deal'' [Guidelines, Part I-Boycott]
``Restriction of sales (or resale) price of distributors by a
manufacturer'' [Guidelines, Part II-Resale Price Maintenance]
``Where an influential firm in a market engages in transactions
with its continuous trading partners on condition that the trading
partners do not engage in transactions with its competitors so long as
the influential firm lowers its price to meet the competitors' price
quotations * * * and if such conduct may reduce business opportunities
of the competitors and prevent them from easily finding alternative
trading partners.'' [Guidelines, Part I-Other Unfair Trade Practices]
8. The Antimonopoly Act, Section 2, defines illegal ``private
monopolization'' as meaning that ``any entrepreneur, individually or by
combination or conspiracy with other entrepreneurs, or by in any other
manner, excludes or controls the business activities of other
entrepreneurs, thereby restraining, contrary to the public interest,
substantially competition in any particular field of trade.''
conduct by japanese firms would violate us antitrust laws
In the past, the Japanese flat glass cartel has divided up the
Japanese market by customer and territory. Some of the anticompetitive
conduct, such as customer and territorial allocation, would constitute
a per se violation of U.S. antitrust law. For example, there is
evidence that the three Japanese manufacturers have engaged in a
combination or conspiracy in restraint of trade by dividing markets and
fixing prices, all activities that would be in violation of Section I
of the Sherman Act. American Tobacco Co. v. United States, 328 U.S. 781
(1946) and Monsanto Co. v. Spray-Rite Service Con., 465 U.S. 752
(1984).
Other conduct involving non-price vertical restraints, such as
exclusive distributorships, would be analyzed under the rule of reason
to determine the effect on competition and, ultimately, consumers.
However, considering the demonstrable anticompetitive effects, such as
inflated market prices and the lack of product innovation, of what in
other circumstances might be deemed benign or procompetitive conduct,
even non-price vertical restraints would not likely survive scrutiny
under the rule of reason.
The exclusive dealing arrangements that each manufacturer maintains
with its own distribution network, especially in light of the enduring
market power of Asahi and the substantial foreclosure created by the
parallel conduct of the others, would constitute an unreasonable
restraint of trade in violation of Section 1 of the Sherman Act and
Section 3 of the Clayton Act. Tampa Electric Co. v. Nashville Coal Co.,
365 U.S. 320, 329 (1961) (in evaluating the competitive effects and
determining the amount of market foreclosure, the Court should consider
the relative strength of the parties, the proportion of commerce
involved and the effects on effective competition).
In light of its market power, Asahi's (and likely Nippon's and
Central's) practice of conditioning the sale of certain desirable or
unique products on the purchase by its agents and customers of other
products could constitute tying arrangements in violation of Section 1
of the Sherman Act and Section 3 of the Clayton Act. Jefferson Parish
Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2 (1984).
The tacit agreements among the Japanese manufacturers and between
each manufacturer and its exclusive distributors to limit dealings with
non-affiliated foreign suppliers could constitute both horizontal and
vertical boycotts in violation of Section I of the Sherman Act.
Business Electronics Corp. v. Sharp Electronics Corp., 485 U.S. 717
(1988); Klor's, Inc. v. Broadway-Hale Stores, 359 U.S. 207 (1959).
Anticompetitive conduct in foreign jurisdictions that affects U.S.
exporters can be challenged under our own antitrust laws. 1995
Department of Justice and Federal Trade Commission Antitrust
Enforcement Guidelines for International Operations (citing the Foreign
Trade Antitrust Improvements Act of 1982, 15 U.S.C. Sec. 6a (1988) and
Sec. 45(a)(3) (1988)). Anticompetitive conduct that violates both U.S.
and foreign antitrust laws would appear to be a particularly good
candidate for U.S. prosecution. A recent appellate court decision
expressly rejected a Japanese defendant's claim that notions of
international comity should prevent the application of U.S. antitrust
laws to extraterritorial conduct that violates both U.S. and Japanese
antitrust laws. U.S. v. Nippon Paper, 109 F.3d 1, 8 (lst Cir. 1997).
conclusion
Based on years of experience, it is clear that the Japanese flat
glass market cannot be opened without the active involvement of the
Government of Japan. The JFTC has gathered significant evidence of
conduct-exclusive dealing, threats and coercion, concerted and
collusive behavior, suppliers' interference in the resale prices of
their distributors, and improper trade association activities-to
warrant the institution of formal proceedings as permitted by the
Antimonopoly Act. Failure to do so constitutes toleration by the
Government of Japan of anticompetitive activities by private Japanese
firms that harm Japanese consumers.
No U.S.-Japan bilateral antitrust cooperation agreement will be
credible or acceptable to the U.S. business and consumer community
until the JFTC demonstrates that it is a credible enforcement
authority. To do so would require decisive action on the JFTC's part.
The Japanese flat glass industry is an excellent candidate for U.S.-
Japanese cooperative enforcement action because the long-standing and
widely recognized nature of the anticompetitive practices that block
market access, inflate prices and stifle innovation adversely affect
both foreign manufacturers and Japanese consumers.
ATTACHMENT 2
Central Glass Requesting for Separate Delivery Charges for Treated
Glass Products, Starting Next Month
(source: the nippon keizai shinbun, 4/15/1999, page 26.)
Central Glass Co., Ltd., ranked third among Japanese glass
producers, decided to start charging delivery charges on top of the
prices of special, treated glass products that include multi-layered
glasses. The company has initiated negotiations with its exclusive
distributors.
The company aims to begin the extra delivery charges this May.
Through this arrangement, the company plans to establish a marketing
system in which it can raise delivery costs when necessary.
Central's new pricing approach appears to reflect glass
manufacturer interests in protecting their own profits by reviewing
current business practices in which raw material (glass) costs are
eating into delivery costs.
Traditionally, flat glass prices were set as ``delivered prices to
users, which include freight costs.'' This pricing practice was
established approximately 25 years ago, and has been employed to the
present. Glass products are typically delivered in a ten-ton truck.
Popular treated glass products, in recent years, come in small lots
with a larger variety than standard sheet glass products. Thus, it is
now becoming increasingly difficult for glass manufacturers to recover
full costs because deliveries of the popular glass products are made in
a smaller four-ton truck.
Ikeda Glass (of Chiyoda, Tokyo), a large exclusive glass
distributor, is going to accept Central's proposal for a new pricing
structure. The company states
It is a good time (for the Japan's glass industry) to
reconsider the current glass pricing structure as the whole
industry is suffering from excessive competitions among
themselves (President, Ikeda Kazuo).
Ikeda Glass plans to develop similar pricing structure, keeping glass
delivery costs and glass prices separate.
If Central's new pricing structure for special, treated glass
products is accepted well by the distributors, then, this pricing
structure may spread to other glass products as well.
Two other large glass manufacturers, Asahi Glass and Nippon Sheet
Glass, are expected to follow Central's new pricing structure.
Multi-layered glass products provide high energy-efficiency and are
expected to grow in use by providing an opportunity for energy
conscience Japanese consumers to save energy. Central Glass appears to
have concluded that the company needs to revise its pricing structure
to recover delivery costs for special, treated glass products as their
sales are expected to grow very rapidly.
[GRAPHIC] [TIFF OMITTED] T3623.001
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Senator DeWine. Senator Kohl.
Senator Kohl. Thank you, Mr. Chairman.
Gentlemen, your statements are very forceful, informative,
and factual, and not very debatable. So I would like to ask
you, if you were today at the meeting with the Prime Minister
who is here meeting with the President, what would you say to
Mr. Obuchi and what would you recommend to the President?
Mr. Evans.
Mr. Evans. Ambassador Barshevsky, the U.S. Trade
Representative, has identified a number of encumbrances, and I
am not an attorney, so as a businessman, I do not use the same
language, but there are a number of barriers that continually
are thrown in this country's face, principally by Japan, the
leader of the pack, if you will.
At the November 1998 APEC ministerial in Kuala Lumpur, the
Japanese government singlehandedly tore it apart. U.S. Trade
Representative Barshevsky and her staff had brought everyone
along on trade issues, world trade issues, to complete the work
in the coming sectorial, I think this November. At the
conclusion, literally at the conclusion of the negotiations,
Japan, in essence, backed out.
Japan is a stumbling block, Senator, to further progress by
refusing to eliminate tariffs on forest products and threatened
to derail agreements that other nations have welcomed and said,
in some cases reluctantly, they could get on board with. But
Japan keeps derailing the process.
Senator Kohl. What would you say to the Prime Minister if
you were at that meeting today and what would you say to the
President?
Mr. Evans. The evidence is clear. Japan is a protectionist
society, but I know it is a cultural thing, so I am frustrated.
I know we cannot go in there and police their culture. We
cannot impose what we would like to see on them. But on the
other hand, if they are going to be part of the global
community, I would say, you had better get on board, because if
you do not, we already see the EU now having been a resister in
the paper industry only a couple of years ago. They are on
board. Consolidated Papers is now exporting paper to, of all
places, Finland. You could not say that 2 years ago. But Japan
is isolating themselves to a point where who would want to do
business with them?
There is a phrase that goes around. It is called ``Japan
fatigue,'' where they wear you down with their Asian patience,
and that is what we were talking about today. We have all made
the effort, made the effort, and made the effort, but they wear
you down, and at some point in time, the people of Japan will
be missing out on better products.
Senator Kohl. Are they their own worst enemy?
Mr. Evans. Pardon me, sir?
Senator Kohl. Are they their own worst enemy?
Mr. Evans. Yes, absolutely.
Senator Kohl. OK; Mr. Walters, what would you say to the
Prime Minister? What would you say to the President?
Mr. Walters. I think it would be the same, actually, and I
will just make two brief points. One is that, unfortunately, it
has been our experience that in a variety of industries, I
think including those of us on the panel today, the Japanese do
not seem to take a U.S. point of view seriously if there is not
some form or threat of retaliation or leverage on our side of
the negotiating table.
So it is hard to imagine today that there is a will to
change without some forceful action on our part, and I think we
should search, actually, for what is in our arsenal, which is
one of the reasons why I have testified twice in front of your
subcommittee.
Second, aside from that, I think all you have to do is look
at Mr. Reichenbach's chart and see that from 1970 to today,
there is not any competition in the Japanese glass market,
forgetting foreign competition. The three producers do not
compete against each other.
I have every confidence that if that market was opened up
for the benefit of their own consumers, Guardian and PPG will
compete. We do not need anybody's help to compete. We do it
everywhere else in the world. We batter each other's brains out
elsewhere in the world. For the good of the Japanese consumer,
they need to open their market and then the chips will fall
where they may and those aggressive, pricey, high-quality, good
delivery companies will do well, and those who are not will not
do so well--for the benefit of their own economy.
Senator Kohl. You are also, of course, suggesting that they
are their own worst enemy?
Mr. Walters. In a sense, that is correct.
Senator Kohl. If you were speaking to the Prime Minister
today, you would, what, make a plea based on that to him to
open up his market?
Mr. Walters. Right, for the good of his own processors, for
the good of his window manufacturers, his mirror manufacturers,
his commercial glass high-rise office building manufacturers.
They all need access to other glass in order to compete
globally.
Senator Kohl. OK; Mr. Reichenbach.
Mr. Reichenbach. Senator Kohl, building on what Mr. Evans
said, I would say to the Prime Minister of Japan that integrity
is not cultural and I would urge him to force through the JFTC
the various industries in his country to live up to the
agreements that his government has signed with the Government
of the United States.
And I would say to the President, please, Mr. President,
force him to do that, if necessary, through the powers that are
already conferred upon the United States Government through the
means of the Department of Justice and their extraterritorial
reach, because integrity, if it cannot be learned, can be
forced, and that is what I would suggest to the President.
Senator Kohl. All right. I thank you. Senator DeWine?
Senator DeWine. Thank you very much, Senator Kohl.
Let me ask all three of you to comment on this. The
Japanese have charged that your companies and your industry in
the United States are flabby and not capable of competing in
Japan. I would like for each one of you to address that.
It has also been alleged that part of the problem is that
your industry and your companies do not have a Japanese sales
force, you do not have sales literature in Japanese, you
basically do not know how to deal with the culture. These are
some of the allegations that are made.
Specifically in regard to flat glass, it has been alleged
it is very costly to ship glass from the United States to
Japan. Would you like to comment on that? Mr. Walters, do you
want to start?
Mr. Walters. Well, firstly----
Senator DeWine. True or not true?
Mr. Walters. Not true. Guardian Industries is a global
manufacturing company and we are quite familiar with competing
against our Japanese competitors elsewhere in the world. They
are noble competitors. And depending upon which continent we
are traveling, Guardian typically has anywhere from 10 to 20
percent market share, bigger here, smaller there, depending
upon where we are, with one exception and that is Japan.
For the life of me, I cannot imagine that there is any
reasonable justification for the fact that Guardian and PPG and
others have anywhere from 10, 25, whatever it is, percent
market share elsewhere in the world and we have less than 1
percent in Japan.
Second, there is a little chicken-and-egg thing in terms of
questions like sales force, which is to say that if you are a
large Japanese glass company in a $5 billion market and you
have 50 percent market share, well, of course you are going to
employ more sales people than a company that has 1 percent
market share. So that is a disingenuous kind of an argument.
Whether or not Guardian has tried hard enough, I think it
is not true. We have no ex pats in Japan. We employ only
Japanese nationals, many people who were previously employed in
the Japanese glass industry. We have set up warehousing, we
have set up distribution, we have set up cutting facilities so
that we can deliver glass to customers and you cannot tell the
difference between the distribution of a Guardian product
versus one of our Japanese competitors.
So as far as I am concerned, there is no effective
difference and that is a lame excuse for why the market, in
fact, is not open.
Senator DeWine. Mr. Evans.
Mr. Evans. Mr. Chairman, I really cannot speak to that
because our company is not large enough and diverse enough
except to say we have made the effort and we were thwarted. But
I can use a different example. Some of the larger companies,
like a Weyerhauser and Westvaco, are selling considerable
paperboard product and/or lumber products in Japan because it
suits the Japanese purpose. But those larger paper companies
also manufacture this type of paper and they are thwarted. They
would like penetration on the total product line.
So I would not be the best candidate to testify as to what
is the problem, except, as we know, it is a protection issue,
and while they need certain products, they welcome those in
from the producer, but while they in their mind do not need
these products, then they are thwarted.
Senator DeWine. Mr. Reichenbach.
Mr. Reichenbach. Mr. Chairman, I think the assertions that
you mentioned on the part of the Japanese are completely
untrue. Since 1967, we have hired all Japanese nationals. All
of our literature, our technical literature, our price lists,
our product literature is all printed in Japanese and always
has been. We have maintained, as Mr. Walters said, cutting
centers, distribution warehouses, and fabrication facilities in
Japan. It is simply patently untrue. We have had typically in
the last 4 to 5 years almost as many salespersons in Japan as
we have in the United States, which is considerably larger
geographically.
And in addition to that, I would like to point out that in
1967, the same year that we attempted to enter the Japanese
glass market, we formed a chemicals manufacturing joint venture
with one of the three Japanese glass producers and that, being
in a different market and being welcome, has done extremely
well and we have had no problems. But in the glass market, it
has been a total case of frustration.
Senator DeWine. What level of penetration would you expect
to see before you would believe that Japan is truly open? You
mentioned, Mr. Walters, that in other countries, you are at 20,
25 percent, is that right?
Mr. Walters. Correct.
Senator DeWine. Is that the figure you would expect in
Japan before you would consider it open, or what would that
figure be?
Mr. Walters. I think our expectations would be less than
that. The first measure of competition in the market,
forgetting foreign producers for a second, would be changes in
market share in Japan. One company attacks another company and
there is a shift in market share. I have a chart that is
attached to my full testimony that shows the difference between
North America, Europe, and Japan over this same period and you
see dynamism. You see companies entering, you see companies
exiting, you see changing market shares in those regions. Only
in Japan do you see this constant line without any competition.
So that would be a measure even among the existing producers.
We would probably, and I say probably, need to obtain 4 to
5 percent market share in Japan through our exporting from the
States and elsewhere, distributing in Japan, before we would
then begin to make significant investments, more than these
smaller $2, $3, $4, $5 million investments, and that is what it
would take us to get to a 10 to 20 percent market share. But we
need to walk before we can run. If we cannot sell anything, we
cannot justify the significance of that investment.
Senator DeWine. Mr. Evans.
Mr. Evans. Our industry, a commodity industry, would be
comfortable with 10 percent.
Senator DeWine. Mr. Reichenbach.
Mr. Reichenbach. I would tend to agree with the progression
that Mr. Walters has indicated, but our ultimate objective and
our ultimate level of satisfaction would probably not be
reached on our part until we had somewhere in the neighborhood
of 15 to 20 percent market share, because that is what we have
done elsewhere in the world.
Senator DeWine. Would each one of you like to recap as far
as what you would expect the Japanese to do to open their
markets?
Mr. Walters. I will briefly respond.
Senator DeWine. Give me two or three top things.
Mr. Walters. In my view, after less time than PPG--Guardian
has been in the Japanese market about 10 years--I have come to
the conclusion that until the ties between the producers and
the distributors are in some fashion broken, there will not be
competition in the market. The ties are too strong. What we are
forced to do is go so deep in the market that we sell glass 2
or 3 tons at a time instead of 2,000 or 3,000 tons at a time,
which is the way a normal market would allow us to sell. So
rather than two or three, Mr. Chairman, that really is what I
view needs to happen in Japan.
Senator DeWine. Mr. Evans.
Mr. Evans. We are looking for honesty and integrity. Come
to the table, be honest, do not be deceitful, have no hidden
agendas. Let us know factually what we have to do to penetrate
the market to better serve that population. We are open. We are
forward. That is the way we deal with them as they come here.
Our distributors, consolidated distributors on the West Coast,
all carry Japanese products. They are welcomed.
Senator DeWine. Mr. Reichenbach?
Mr. Reichenbach. Mr. Chairman, I agree with Mr. Walters.
The control of the distribution system, which three Japanese
producers have, just absolutely has to be broken, and a simple
letter sent once or twice saying, you are now free, Mr.
Distributor, to buy foreign glass, is not going to do the
trick. That has been tried and that is an exercise in futility.
It is the control over the distribution market that has to be
broken, Mr. Chairman.
Senator DeWine. I appreciate the testimony of this panel. I
think it has been very instructive. It has pointed out major
problems that we have with Japan in two very important
industries. Your testimony has been very, very helpful.
These are important issues. They are difficult issues. But
I want to assure everyone concerned that this subcommittee is
going to continue to work on these issues. We want to make sure
that American companies are able to compete fairly in foreign
markets and on the same terms and conditions as other
companies.
We plan to have another hearing on international antitrust
and competition issues. We plan on having that hearing this
fall. We hope to see by that time some substantial progress in
the Japanese market and we will take a look at it again at that
point. This will leave plenty of time for the Japanese to
address the underlying issue, and the underlying issue, let us
make no mistake about it, is their closed markets. We will be
working with Mr. Klein and Mr. Pitofsky to ensure that our
industries are able to compete as effectively in Japan as
Japanese companies are able to compete here. In the meantime,
we will continue to assess whether or not legislative remedies
are appropriate.
Again, we appreciate the panel's testimony very much. Thank
you.
Mr. Walters. Thank you, Mr. Chairman.
Mr. Evans. Thank you.
Mr. Reichenbach. Thank you.
Senator DeWine. The subcommittee is adjourned.
[Whereupon, at 12:02 p.m., the subcommittee was adjourned.]