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August 25, 1967. Hon. ABRAHAM RIBICOFF, Committee on Government Operations, U.S. Senate, Washington, D.C.

Dear Senator RIBICOFF: I have your letter of August 16.

Senators Warren Magnuson and Walter Mondale inquired with regard to this general subject several weeks ago.

The pricing of automobiles is an extremely complicated matter taking into account not only all costs, which are almost unallocable, influenced by volumes but in the last analysis controlled by the competitive situation in the market place.

My reply to Senators Magnuson and Mondale is a more explicit review of the above and for that reason I am enclosing copy of a letter sent to them on June 2. All of what was said in that letter outlining the factors which have to be considered, is particularly true in special bid situations such as that outlined in the enclosure of your letter.

Incidentally, in the computa ons which you sent as an enclosure, neither of the second volume procurement in each instance was of Chrysler automobiles. The first volume procurement in 1966 was 2891 (Belvederes) and the first volume procurement of fiscal 1967 of 374 cars included but 202 Chrysler products (again Belvederes).

I am sorry I cannot be more explicit but hope that this will be sufficiently explanatory to give you an appreciation of why it is impossible to be more precise. Sincerely,

V. E. Boyd.


June 2, 1967. Hon. W'ARREN G. MAGNUSON, Hon. W'ALTER F. MONDALE, U.S. Senate, Washington, D.C.

DEAR SENATORS MAGNUSON AND VONDALE: We have received and have reviewed with care your letter of May 29, 1967 and the letter of Administrator Bridwell, which you enclosed with your letter,

As you may know, we have not yet made any decisions regarding our 1968 model car prices. We will make these decisions in the fall, shortly before the introduction of the 1968 cars. Naturally, increased costs will have a tendency to push prices upward, whether such increases result from compliance with the National Traffic and Motor Vehicle Safety Act, compliance with the Clean Air Act, increased costs of labor or materials or any other increase in our cost of doing business. Conversely, any cost savings we may be able to effect in any area of our operations will help reduce this upward price push.

Since pricing of our vehicles combines not only myriad costs, but competitive factors as well, and is almost unbelievably complicated, and since your letter indicates real and deep concern, it is necessary to go into some extensive detail to purposefully acquaint you with the true situation.

When we price our products in the fall of this year, we will take into account a great number of factors. Initially, we will attempt to establish what our total costs will be for the ensuing model year. These costs, in addition to direct labor and material costs, will include estimated costs for administration, research, selling expense, amortization of tools and depreciation of facilities, taxes, and all other factors that are involved in the running of our business. Once having arrived at an estimate of this total cost situation, we will attempt to determine what number of cars we can reasonably expect to sell of each model and body type during the ensuing model year. Following this, we will arrive at initial prices that, based on our selling estimates, will return to use a reasonable profit.

Having arrived at these prices, we will then have to review each such price in line with our appraisal of the competitive conditions present in each segment of the market and our analysis of the saleability at such price of each of our models. As a result of this appraisal, we likely will have to make a number of adjustments, decreasing the price of some models and perhaps increasing the

price of others, still hoping to maintain the estimated reasonable profit we had previously established. Finally, we may have to price all of our products below this level in order to be competitive, based on our appraisal of the overall strength of the market and the product offerings and anticipated prices of our competitors' products.

For the above reasons, it is impossible to attribute any specific price change in a particular model of a car to only one item of increased cost, such as compliance with the provisions of the Safety Act. We have to consider our total costs, our total expected sales, and the prices that we believe the public will pay for our products in a competitive market place. Obviously, our total prices have to cover our total costs and leave room for some profit. Or we will not be able to continue in business. As a result, total increases in costs will normally tend to have an increasing effect on total prices, but prices of particular models can vary upward or downward, depending on market conditions and independent of any particular item of increased cost.

Further, even if we were able to attribute directly to each model a specific price increase based on the increased cost of complying with the Safety Act, we question whether it would be possible to isolate these increased costs with complete precision. It would certainly not present an accurate picture of our costs if we were simply to include the cost of labor and material involved in adding any particular item at the production level. We would have to consider the added cost in engineering and development work, the increased cost of necessary administrative procedures, and many other such added indirect costs. We do not isolate our indirect costs in this manner, rather, we deal with them in an aggregate, based on the overall job that has to be done, one facet of which is compliance with the Safety Act.

With the foregoing as background, we hope that you will more readily understand why we find it impossible to comply with your request for a varying number of reasons, among which are:

(1) We have not yet made any decision regarding our 1968 model car prices.

(2) While overall cost changes do affect overall price levels, the cost change involved in a particular model does not necessarily reflect itself directly in the price of that model.

(3) Market and competitive conditions affect the degree to which changes in overall cost levels will result in changes in overall price levels and, consequently, the two do not necessarily follow in exact order.

(4) Many kinds of costs are not segregated on a model or an item basis. Further, any efforts to isolate such costs would necessarily reveal a great deal about our engineering and development costs, our administrative costs, and our rolume estimates for our various models. Information of this kind is highly confidential and it would be extremely detrimental to our competitive situation if it were to become known to our competitors.

I believe the above also answers the several related questions raised by Administrator Bridwell in his letter. I hope that this information will be of help to you and that you will appreciate why the factors stated above make it impossible for us to give you the precise information you requested. Sincerely yours,




Detroit, September 7, 1967. Hon. ABRAHAM RIBICOFF, U.S. Senate, Washington, D.C.

DEAR SENATOR RIBICOFF: This letter is in reply to your request of August 16 that American Motors furnish you with data concerning that portion of the price increase on 1967 model cars which was attributable to the inclusion of General Services Administration required standards.

Our 1967 vehicle prices were established primarily through evaluation of competitive factors in the marketplace. We believe this is the appropriate and only feasible course of action for the smallest producer in the automobile industry.

From model year 1966 to 1967 our costs on comparable vehicles increased by substantially greater amounts than the average $46 per unit indicated to you in the General Services Administration's computation of average prices paid

for standard four-door sedans. We are, however, unable from our cost data to answer the question you ask on specific costs related to the 17 safety standards individually and in the overall.

The principal difficulty in answering your question lies in segregating the real cost increases for safety standards from the many other causes of cost change from year to year. Our 1967 Rebel and Ambassador cars were all new cars, significantly larger and improved in comparison with 1966 and we have found it impractical to conduct detailed part-by-part evaluations which can conclusively identify that portion of the overall cost changes which may be attributable to the safety standards. To identify the real cost increase attributable to safety only would require us to go back and to conduct a very complex analysis of our product design cost and analyze our engineering and styling budgets in depth to determine additional workload peculiar to the safety program as distinct from our normal engineering and styling, and would require that we evaluate our capital expenditures item-by-item to identify tooling and facilities related to the safety standards which would otherwise not have been included in our programs.

I am sure you will understand that when, in the final analysis, our prices are established primarily by competitive position, we would not find it practical to divert our personnel to the complex study which would be required.

We appreciate your concern about the impact of the safety standards on car prices. American Motors, as a matter of merchandising strategy, has always provided the customer high product value-cars with low prices and extra features. We assure you that we will continue to incorporate desirable safety features in the most economic manner practical, as an integral part of the continuing process of redesign and derelopment of our vehicles. Sincerely,

Roy D. CHAPIN, Jr. Senator RIBICOFF. Our first witness is Senator Walter F. Mondale, who has been one of the foremost and ardent champions in the whole field of automobile and highway safety and we certainly welcome you today, Senator Mondale, as our first witness,

Will you proceed as you will, sir.



Senator MONDALE. Thank you, Mr. Chairman.

I am pleased to appear here today, particularly before a subcommittee under the chairmanship of Senator Ribicoff, for you have played a fundamental and major role in the passage of automobile safety legislation and you are now making another important contribution with your proposal to require disclosure of the cost of complying with motor vehicle safety standards.


As you know, Senator Magnuson and I have been engaged over the past year in an effort to obtain information regarding the cost of complying with the new safety standards, and one of the primary purposes of my testimony today is to brief your subcommittee on our experience in this area and to make available to you pertinent correspondence with automobile manufacturers and certain Government agencies.

The events of the past year clearly demonstrate that legislation such as you are considering here is needed to offset misleading industry claims regarding the cost of complying with Governmennt vehicle safety standards.

The automobile industry opposed the motor vehicles sa fety bill from the outset, and when the bill became law in September of 1966 the industry redirected its attack to the modest initial safety standards proposed by the new National Highway Safety Bureau. The new standards were attacked as being unreasonable, arbitrary and technically unfeasible. At the same time, industry began floating dire predictions that the new safety standards would require price increases of from $100 to $200 per car on the 1968 models.


These forecasts reached their height in May of last year with pronouncements by top officials of U.S. automobile manufacturers that the cost of complying with safety and air pollution requirements would necessitate "substantial" increases in the prices of 1968 vehicles.

These statements were most disturbing because the safety standards being required on 1968 cars were not only quite modest and minimal but many of them were already present on 1967 model cars—and presumably had been paid for by the 1967 price increases.

In addition to this, some of the safety requirements actually reduced costs by eliminating certain items on American automobiles.

In answer to an inquiry, the Federal Highway Administrator, Lowell K. Bridwell, wrote me on May 23, 1967, that“Any substantial price increase based on compliance with the initial Federal Motor Vehicle Safety Standards is not justified.”


It was obvious that the American auto industry was conducting a huge propaganda campaign to discredit the new safety program by making safety the scapegoat for increases in consumer prices of new cars. Thus, on May 29, Senator Magnuson and I wrote to the four major American automobile companies requesting a breakdown of that portion of any price increase attributable to compliance with the initial Federal Motor Vehicle Safety Standards. The responses of the four companies made it quite clear that they had no intention of providing such information. They said they could not furnish such data at that particular time because 1968 model prices had not yet been determined. In addition, they contended it would be virtually impossible to provide it at any time—then or later, after prices had been set, because car prices are not based solely on direct production costs but involve many other--apparently undeterminablefactors such as competition. In other words, whatever the market will bear.

INDUSTRY'S REFUSAL TO DISCUSS PRICE INCREASES UNJUSTIFIED We found it rather strange that the auto industry was incapable of determining the market value of vehicle changes in terms of consumer prices especially in view of the fact that an agency of the Federal Government, the Bureau of Labor Statistics, claims that it can and does make such determinations. The industry's position is also curious in view of the fact that the auto manufacturers provide

the information on which the BLS evaluations are based and constantly use the BLS data to justify their price increases. As the chairman of this subcommittee well knows, each year when the auto industry increases the prices of cars, their main defense in justifying the increase with the American consumer is to cite BLS statistics which show that all or most of the increase is offset by quality improvements in the new cars. Thus it is a major weapon used by the auto manufacturers to justify price increases and becomes more than just a matter of technical curiosity for this subcommittee.

It is inconceivable how BLS which has far less information than the manufacturers, can make market value determinations for the Consumer Price Index when the manufacturers themselves claim they are unable to make this kind of determination. And it hardly seems consistent for the auto companies to contend, on the one hand, that it is impossible to determine the cost to consumers of quality changes such as safety improvements, and, on the other hand, to constantly cite BLS consumer price extrapolations based on industry-selected information as official proof that car prices really have not increased in terms of product quality.


Thus, on July 28, Senator Magnuson and I wrote BLS Commissioner Ross, requesting an evaluation of the company responses and an explanation of how BLS could do what the automobile industry said it was unable to do. Regrettably the Commissioner, in his reply of August 30, chose to ignore these requests and responded only with a brief description of BLS procedures and assurances that BLS could indeed make valid evaluations regarding the market value of vehicle quality changes. The Commissioner also informed us that BLS evaluations were based on information provided by the companies. However, no mention was made of the manufacturers' purported inability to make such evaluations.


Acting on Commissioner Ross' assurances that BLS procedures are sufficiently precise to evaluate the vehicle quality changes, we wrote a second letter on October 2 requesting that BLS make such information available so that the American public might have an accurate picture of the relationship between safety standards and the higher prices consumers would have to pay for 1968 cars.

BLS responded, however, in its letter of October 12, that a detailed breakdown could not be provided without disclosing confidential information supplied by the manufacturer which BLS has pledged not to reveal. We, therefore, in a third letter to BLS, dated October 17, revised our request and asked BLS to provide the evaluations in a manner which would not disclose the specific source of the information. Regrettably BLS, in its reply of November 6, persisted in its claim that anything but the most general estimates would require disclosure of confidential information.

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