I’m not updating this blog very often. See instead the link above and also:
Autos and Economics on blogspot and
Japan and Economics on blogspot.
The conspiracy of Japanese wiring and electronics suppliers to put the screws to Toyota and other customers has now led to the largest antitrust action in history. What we know appears stupendous in scope. To date 20 suppliers have paid fines totaling $1.6 billion in the US (an additional $347 million in fines in Europe and Japan brings the total to $1.95 billion). Some 21 executives have pleaded guilty to felony antitrust charges including jail time and financial penalties. Wired participants, secret locations, coded communication and an expanding list of auto parts and firms, spanning 10 or more years and at least 4 continents. Wild!
…once customers have been screwed for a while, it starts to feel normal
Then there’s what we don’t know. To date all of those charged have pleaded guilty. As a result, the Department of Justice (and their counterparts in Japan, the EU, Canada, Mexico, Korea and Australia) have not had to enter detailed charges into the public record. With no trial, no evidence need be made public – and even though every corporate law firm in Detroit is racking up billable hours beyond their wildest imagination, those involved have done a truly impressive job of keeping their mouths shut.
And with cause: private lawsuits in the US can seek treble damages, and at least 45 such have been filed (and for now consolidated in the District Court in Detroit). The fines that firms have willingly paid suggest those fines are well below the maximum – though back of the envelope calculations suggests DOJ used a rule of thumb of 8% of revenue for the early wire harness settlements. These and other firms may however have benefitted from the antitrust Amnesty Plus program, which provides for low or even no fines for those who ‘fess up’ early and help the prosecution. So the amounts could easily hit $5 billion. However, without evidence, such suits will go nowhere, and Federal courts have put a stay on those suits while criminal investigations are ongoing. Attorney General Holder has indicated that the Department of Justice is far from concluding their work; for their part, the Europeans raided six companies this month. But then there are those wiretaps of phones and tapes of meetings: it appears that the DOJ is limiting itself to central players, and going at them with such ironclad cases that they can avoid wasting resources on the morass of a jury trial.
NPR segment …Nine Suppliers Plead Guilty… [mea culpa: they interviewed me]
In some ways, the industry invites conspiracy. The design and engineering process for a new vehicle involves so many components that doing a full start-from-scratch purchase for each part in a vehicle is administratively infeasible; purchasing departments just aren’t large enough. So when a Toyota comes out with the next generation Camry or a Ford the next F-150, they will naturally lean towards the incumbent supplier – they know the engineers, they will have the manufacturing capacity. With suppliers involved in the actual design process, they have to be selected before specifications are firm. Yes, the car companies pursue outside bids to try to keep the process honest, and when there is an entirely new component it’s a fully competitive bid. Likewise firms with new technology can get their foot in the door – and those are exactly the firms I see as a judge of the Automotive News PACE award competition.
With so many vehicles under development – in the US alone carmakers will launch 365 new vehicles between now and 2015 – it’s clear that purchasing departments have fallen down on the job of tracking costs. But these are not the highly engineered items where at present one or two firms control the technology, such as turbos or common rail diesel systems. When I look at a list of the components named in the guilty pleas, they are for the most part not items where new technology is changing the game: starter motors, alternators, seat belts, wire harnesses. While new materials are coming, in the case of harnesses leading to thinner gauges and now even lighter-weight and cost aluminum wires, these products are mature. But this is necessary: you can’t readily fix prices when a good isn’t a commodity. When you know your and your competitors costs are similar, then you can agree on what the price could be and the level at which your conspiracy can fix it.
Part of the reason is again administrative: car companies with few exceptions have no internal manufacturing capability for the items they procure. They thus rely upon comparisons with past prices, adjusted for changes in the price of materials and known or anticipated productivity improvements. Therein lies the opportunity for a cartel: once suppliers have started screwing their customers, the car companies can come to believe that it’s normal. Bids look sensible given past prices. Since harnesses with their miles of wire and hundreds of connectors are one of the most expensive component purchases a car company makes, companies always seek outside bids – but thanks to the conspiracy either find few firms express interest, or come in with ridiculous prices. [For an example see “Ford Alleges…” Automotive News, Aug 5, 2013] This should raise suspicions, but apparently did not set off alarms. While Toyota was firm mentioned in initial guilty pleas, the list of victims now includes most of the industry’s major firms. Toyota’s purchasing department may have been overwhelmed in its go-go years of the noughts (ending with the early retirement of the firm’s top 4 executives), purchasing departments throughout the industry clearly were not up to the task of sniffing out carefully coordinated price fixing.
With wire harnesses, 4 suppliers dominate the Asian market, with Delphi Packard (yes, the name I use is anachronistic) a strong contender elsewhere (and as the one major player not named in this segment, finding that it’s suddenly gaining market share in Nagoya).
So how did the conspiracy arise? In Japan (as elsewhere) suppliers share panels in engineering conferences and industry associations; ironically, as I found in my own PhD research in the mid-1980s, they may even play golf together at events hosted by their customers. Put them together in the ex-pat supplier community in the US and informal interactions become more likely. Or at least that’s my supposition of how things got started, and why it remained undetected in some cases for a full decade.
Now in the US it may be over a year before any details become public – all criminal cases have been uncontested criminal cases while the private lawsuits are on stay until criminal proceedings are complete. Nothing has come out of Europe, either. Perhaps in Japan FTC officials are equally good at sealing their lips. But journalists should at least be asking questions – including of Toyota and its purchasing department. And they should be praising the FTC for developing the human resources and independence to be able to pursue their end of an international conspiracy to rip off car companies and (ultimately) the tens of millions of individuals who have purchased cars containing those parts.
I have not been posting to this site. Instead please look for new material on the NewJapanForum.wordpress.com (which was set up while the structure of the NBR Japan Forum was in flux) and to JapanAndEconomics.blogspot.com. You can find posts related to the auto industry at my most active (non-course) blog at AutosAndEconomics.blogspot.com. You can also find older material on the web site for my periodic course on Japan at Washington and Lee University, which is at econ272.academic.wlu.edu and includes posts by students.
The BOJ recently released its biannual inflation outlook (経済・物価情勢の展望: ２０１３年４月). The graph at right shows inflation (dark) and hourly wages; while the latter are up slightly, such metrics are volatile and affect inflation with a lag. But wages are central: they are the largest cost for most businesses, and until they rise, well, there won’t (can’t!) be inflation.
Prospects for that however depend on growth, because the baby boomers (団塊世帯) are in no hurry to retire. [The Somushō report noted in Yomiuri (2013.04.27: 働くシニア１１９２万人 ６年連続最多更新) however looks at absolute numbers, not propensity to work – and the absolute numbers reflect the baby boom.]
I’m skeptical that the BOJ can change this. First, growth of the money stock hasn’t been sluggish; if monetary policy is going to do anything, it should have had an impact a decade ago. I mean, if companies don’t want to borrow at 1% pa, would an interest rate of 0.9% make any difference? We’re really looking at marginal changes.
Then there’s excess capacity. Now there’s no direct measure of gaps between actual and potential; they have to rely upon either a model of how inputs are related to output, or to a trend-based projection, both of which have defects (and, of course, they don’t give the same bottom line, else it would be irrelevant to mention. See a BOJ study of the issue.) By the BOJ’s own calculations this gap remains large. Until it’s eliminated, my belief is that wages will not rise enough to force firms to raise prices (and without higher wages, where will demand come from?).
Now if the government were engaged in fiscal stimulus, I’d be less skeptical. To my knowledge, however, Abe has not forsworn the increase in the consumption tax in 2014. WIll the weak yen help? Maybe, but Japan just isn’t that dependent on exports. Meanwhile, Europe threatens to drag down everyone: from a Japanese perspective the drop in incomes in an important export market will more than offset any benefits from a weaker yen.
washington and lee university
Now that passage of Noda’s tax increase appears certain, it’s time to think about the implications. I will post a more complete analysis later at my regular blog site but want to try WordPress for ease of entry (and to see whether it generates more hits!).
First, I’m puzzled that the hike of a cumulative 5 percentage points (from 5% to 10%) is being done in two hikes rather than five or ten (my preference would be a boost of 0.5 pct points every six months). In the days of bar code scanners and computerized cash registers, surely this would not be hard from the retail side. It might also make it easier to extend the hikes, since it’s unrealistic to think that a 10% rate will be enough in the face of an aging population and an already small government — expenditure cuts won’t go far.
Second, there’s the timing. To be honest, we’ll only know after the fact. Ideally, taxes should be increased in a period of robust growth, when otherwise (<i>ceteris paribus</i>) the BOJ might want to raise interest rates to slow things down. I’m sympathetic, however, to passing legislation now. There had been a broad consensus to raise the consumption tax over a decade ago. The timing just never was right — and that’s ignoring politics, which are more favorable than in the US because under Japan’s cabinet system there can be up to four years between elections.
History cemented it in political (and popular) memory. There was a consumption tax increase effective 01 April 1997, just when the Asian financial crisis was about to break — and the increase coincided with the expiration of a temporary tax cut and a stimulus package. The fiscal hit was large, the economy plunged into recession.
Third, there’s the argument that initial hike should be of other taxes, and above all that the government should introduce a tax ID system to stem tax evasion. Now with a long period of low interest rates and low returns on equities, and far fewer mom-and-pop stores and family farms, this will not produce the bonanza it would have a quarter century ago. In other words close loopholes first, raise rates later. That risks another round of “now is not the time” — and rates will have to be raised, and sooner rather than later.
Now I expect higher taxes to slow growth; I’m not convinced by the new macro of DSGE models in which expectations mute fiscal policy. (Not that proponents of such models are consistent in applying them: in the context of such models, if stimulative policy is ineffective in boosting the economy, then so are tax hikes in slowing it. That’s not the message I hear in the U.S., so my conclusion is that it’s ideology hiding behind mathematical formalism.) At some point, however, Japan’s deficits need to not only be trimmed but turned into surpluses. Since its government is already minimalistic, that must entail revenue enhancements.
Let’s cheer Prime Minister Noda’s gutsy leadership, and hope that he prevails.
I may migrate towards WordPress — I’m used to tweaking html code, and don’t (yet) know how to do that here. Until such time all my content resides on blogspot at the following three sites:
Autos and Economics (run jointly with David Ruggles, and the most frequently updated of the 3 sites by a wide measure.)
Anyway, I do feel welcome to WordPress.com!