Foreign Relations of the United States, 1964–1968, Volume VIII, International Monetary and Trade Policy

293. Memorandum From Attorney General Katzenbach to President Johnson¹

Washington, September 23, 1965.

RE

• Economy Cars—Joint Venture

This is in response to your request for my views as to whether the major American automobile manufacturers may enter into a joint enterprise to produce an economy model car.² For the reasons set forth below, I believe that such a joint venture would violate section 7 of the Clayton Act³ and that the enactment of legislation immunizing the venture from section 7 would be undesirable.

I

Section 7 of the Clayton Act prohibits corporations from acquiring the stock or assets of other corporations if the acquisition may have the effect of substantially lessening competition in any line of commerce or may tend to create a monopoly. It is applicable where two or more corporations jointly form a new corporation and acquire stock in it.

I think it clear that under established criteria a joint venture of the type here envisaged would substantially lessen competition within the meaning of section 7.

In 1964, about 22% (or over 1,700,000 cars) of the production of major American automobile manufactures were compacts, the lower priced models of which include the Chevy II and Corvair (GM), Comet and Falcon (Ford), Dart and Valiant (Chrysler), and Rambler American (American). Over 1,380,000 lower-priced compacts were sold in 1964, or about 18% of total passenger car production. Although even lower-priced compacts are larger and more expensive than a Volkswagen-type economy car, for many prospective purchasers they represent an alternative to the economy car. It is clear that sales of economy type cars and sales of compacts, particularly the lower priced models, are sufficiently competitive that the success of one type affects the fortunes of the others.⁴

If American manufacturers enter into a joint venture for the production of an economy class car, they will have to make joint decisions on the price and output of the new car. In making such joint decisions, they necessarily must consider the price and output of the compact lines. The joint decisions on the new car necessarily affect sales of the compact lines, and price and output decisions as to compacts will affect sales of the economy cars. The inevitable consequence of this interrelationship and joint decision-making in the joint venture is that the manufacturers, when competing with one another in the compact line, will be unable to make independent price and output decisions. Competition will thus be adversely affected.

Second, the formation of the joint enterprise would adversely affect competition in the present sale of economy-model cars. General Motors, Chrysler, and Ford presently import into the United States economy class cars—e.g., the Opel, the Simca, and the English Ford—which compete with one another and which would be squarely competitive with the economy car envisaged by the proposal. If, for example, General Motors and Chrysler were to participate in a joint venture to produce an economy car, their joint decisions as to price and output will necessarily substantially affect decisions they are required to make on the volume and price of imports of Opels and Simcas, with a resultant lessening of the independence of that decision-making and a lessening competition.

Third, formation of the joint venture would remove any possibility that the American manufacturers would come to compete with one another in the economy car field. Although the manufacturers claim that they do not intend to produce economy cars independently, the Supreme Court has indicated that it looks to objective economic criteria to determine whether a company is likely to enter a market. Such objective criteria of the likelihood of independent entry receives more credence than corporate disclaimers of intent. Recent antitrust experience bears out the wisdom of this. For example, Bethlehem Steel constructed its own plant in the Midwest after pleading, unsuccessfully, that merger with Youngstown was the only feasible means of entry to the Midwest.

In view of the great resources of the companies involved, their present activity in a closely related market, and probable market growth in demand for second cars, entry by one or more of the American automobile manufacturers in the economy car market is, despite the manufacturers disclaimer, not so improbable as to make a joint venture lawful. Moreover, it should be noted that it has been exceptionally difficult for new companies to enter and remain in the automobile industry. (The case of the Kaiser car is in point.) Any possibility that the economy car market may be entered by another American company, not now a major company in the automobile industry, will disappear in the face of a joint venture of the majors.

Nor do I believe that the joint venture can be justified by showing a business need for it. Business justifications for a joint venture which merit consideration may include the need to pool financial resources of otherwise small companies, the need for complementary technical contributions, or, in exceptional cases, the need for distribution of risks in a highly speculative undertaking such as an exploration venture subject to the vicissitudes of regulation by an unstable foreign government. Clearly the corporations here involved are not faced with inadequate financial resources nor want of technological ability. The companies may claim that they need this joint venture in order to share the risk of failure. But for the purposes of the antitrust laws, the risks here do not differ in kind from those surrounding the creation of any new business enterprise.

II

The basic objection to immunizing legislation is that if there is a market which merits cultivation, American automobile producers are capable of entering it individually. If, in fact, the market does not support their individual entry, the only purpose of the joint venture is to allocate the losses of a losing operation. If losses are so likely, new producers should not enter—through a joint venture or otherwise. If the market can be profitable, and the only deterrent to entry is fear of competition from other entering American producers, our entire antitrust history argues against special legislation to protect against such competition.

In addition, the immunizing legislation cannot eradicate the anticompetitive consequences described above. In an already heavily concentrated industry, the diminution of competition in the sale of compact cars may do economic damage which more than offsets any economic gains created by the joint venture.

Finally, I think that legislation approving such a joint venture will be regarded by other countries as an overt effort on the part of the Government of the United States to limit the success of foreign competition. It will be particularly prominent because it is at the cost of revision of a national antitrust policy which has been peculiarly identified with the United States. It will very likely invite retaliation with more injurious consequences in our economy than any benefits which might accrue from the venture. Of course, the limitation on foreign imports which this venture may impose is not without the immediate domestic cost—i.e., those Americans engaged in the distribution and servicing of foreign imports may experience hardships.

Nicholas deB Katzenbach ⁵

1. Source: Washington National Records Center, RG 40, Secretary of Commerce Files: FRC 71 A 6617, White House, September–October. No classification marking. Katzenbach sent an earlier undated draft of this paper to Secretary of Commerce Connor with the comment, in a transmittal memorandum of September 20, that while he agreed with the conclusions in the paper, he thought it “too lengthy to transmit to the President.” (Ibid.) Handwritten but unsigned instructions, presumably by Connor, on the transmittal memorandum to Connor directed his secretary to call Katzenbach’s office to indicate that “the memo is well done. I see no need to prepare a shortened version for the Pres., but just put the conclusion and a few comments in a transmittal letter.” Another handwritten note, dated September 22, indicates that these instructions were carried out.
2. No formal request by the President on this subject has been found; see Document 291.
3. Chapter 323, approved October 15, 1914; 38 Stat. 730. Section 7 is codified in 15 USC 18.
4. The August 30, 1965, issue of Automotive News, p. 37, in an article captioned “Why No U.S. Answer to VW?” quotes Mr. Roche, president of GM, as saying that the Chevy II is “strongly competitive” with the economy type car; in the same article, a Chrysler official observes that an increase in the economy car market would be “more at the expense of our own present American cars than at the expense of foreign imports… .” [Footnote in the source text.]
5. Printed from a copy that bears this stamped signature.