« PreviousContinue »
to make an independent analysis and judgment of the economic consequences of a proposed standard. The bill before the subcommittee addresses itself to the question of what the manufacturer says the price is of a standard already promụlgated and in effect.
Senator Hansen. Thank you, Mr. Bridwell.
STATEMENT OF RALPH NADER, AUTHOR OF "UNSAFE AT ANY
Senator RIBICOFF. You may proceed, Mr. Nader.
Mr. Nader. Thank you, Mr. Chairman, distinguished members of the Senate Subcommittee on Executive Reorganization, I am grateful for the opportunity to present some views on S. 2865 and the objectives it seeks. It is particularly fitting that your subcommittee, which first launched the Senate hearings on auto safety, is continuing its initiative in areas that will assist the executive branch in carrying out the mandate to advance automotive safety.
PURPOSE OF S. 2865
The purpose of S. 2865 was summarized in a statement by Senator Ribicoff on January 24, 1968 in the course of filing the subcommittee's traffic safety report:
The Subcommittee asked the four major domestic manufacturers to supply roluntarily the price of the safety equipment on cars sold to the General Services Administration in fiscal 1967. They replied that they could not do so. Accordingly, the report recommends the enactment of legislation requiring that bidders specify the price of individual safety standards on vehicles sold to FSA. The Government has a right to know how much it is paying for safety and this information will assist the public in determining whether the prices charged for safety features are fair and reasonable.
Before commenting on the mechanism developed by S. 2865 to achieve these objectives, and other possible alternative mechanisms that may be considered, it is useful to discuss briefly some of the broader aspects of this important quest.
GOVERNMENT'S ROLE IN VEHICLE SAFETY STRESSED In 1966 the Congress rendered a unanimous judgment that the Federal Government, representing the public interest-I emphasize that, Mr. Chairman, because I am having increasing difficulty in differentiating between Government spokesmen and industry spokesmen on the subject of vehicle safety—that the Federal Government representing the public interest, should have a strong role in establishing minimum safety standards for automobiles. The Government was also authorized to generate forces in the marketplace and in nonindustry centers of research and development that would lead to faster development and adoption of automotive engineering safety innovation with an adequate reliability over time. Obviously, such a powerful public safety mandate cannot operate in a wasteland of information about costs and prices.
Immediately upon the law's enactment, automobile cost-price data were clothed with a profound public interest of saving life and limb. Any rational or humane excursis into this matter would so conclude. The bedrock, however, is more intimately constructed. For through the efforts of auto industry representatives, the necessity to consider cost as an element in the reasonableness and practicality of any safety standard was impressed again and again on Members of Congress. Auto industry spokesmen even wanted it explicitly written into the bill. In early Vay 1966, the Automobile Manufacturers Association submitted proposed amendments to the auto safety legislation. One of these amendments listed criteria for standard-setting by the Government. Clause (3) was offered as follows:
The standard, the means of complying with the standard, and the methods of testing for compliance, should embody feasible devices and techniques that are available or can be made available in a reasonable time and at costs commensurate with the benefit to be achieved.
Congress did not accept this provision in the legislation, but the committee reports recognized cost as an element in deciding the scope and timing of safety standards. The report of the Senate Commerce Committee declared:
The general counsel of the Commerce Department stated in a letter to the Committee: "The tests of reasonableness of cost, feasibility and adequate leadtime should be included among those factors which the Secretary could consider in making his total judgment." The Committee intends that safety shall be the overriding consideration in the issuance of standards under this bill. The Committee recognizes, as the Commerce Department letter indicates, that the Secretary will necessarily consider reasonablenes of cost *
COST DATA RELATES TO SETTING OF STANDARDS
It is elementary that the Government cannot consider cost in setting standards without being given, or being able to obtain cost data. Here it is necessary to distinguish clearly between levels of cost and final retail or wholesale price. To confuse cost with price would permit the manufacturers to thwart the adoption of a standard in proportion to their ability to magnify the markup for a particular safety feature. Moreover, price without cost data has little meaning if verifiability and corporate intentions count for anything. But the auto industry seeks to deny the Department of Transportation and inquiring Senators not only cost data but also most kinds of price data broken down by standard. The fact that cost data disclosure has not been an issue in the 1968 and proposed 1969 standards reflects a hopefully temporary phenomenon of the Department issuing standards that for the most part ratify existing, oftentimes long-existing, levels of performance by the industry.
INDUSTRY'S ARGUMENTS AGAINST COST DISCLOSURE In the industry's firm resistance ot being hoisted by its own petard, two arguments are advanced as justification for nondisclosure. First, it is claimed that such cost-price data are confidential, or additively, a trade secret. This should not be a slogan to be intoned but a proposition to be examined. Confidential to whom? Competitors? Such a reply must certainly go down as one of the biggest jokes in Detroit, where, as one industry executive put it, "there are few secrets." I
am impressed whenever an industry spokesman says "trade secret” without his teeth crackling. Knowledge of each other's costs may not transcend the third decimal point, but the precision remains impressive. Auto companies watch each other with more than an external scrutiny. The chrome curtain around cost data embraces the industry, rather than separates companies within the industry. The curtain is really erected toward the public and its Government whenever such secrecy is deemed desirable. Auto companies make some selected fig. ures available to the Bureau of Labor Statistics because they want the imprimatur of BLS on product quality increases and price stability. Safety apparently is not a sufficient reason.
a Furthermore, there is an inconsistency in an absolute confidentiality plea. American Motors President W. V. Luneburg wrote to Senators Mondale and Magnuson on June 21, 1967 that AMC:
Has always considered its product cost data to be confidential and has not furnished this information to any outside parties for any purpose.
Where this leaves BLS's assertion is somewhat unclear. More clear, though, was the voluntary submission by AMC 10 years ago to the Senate Antitrust Subcommittee of figures of their costs of materials and components—the only auto producer to do so. Other domestic companies pleaded that such disclosure would place them at a serious competitive disadvantage. Again, it is stated as an article of faith without a rational exposition.
INDUSTRY CLAIMS DIFFICULTY OF COST BREAKDOWN
The second argument advanced might be called the argument of "unfathomable complexity." That is, costs cannot be broken down by component or safety feature, so shifting are the variables in the accounting melange. (As far as price is concerned, Mr. Roche of GM conceded that optional equipment can be priced individually.) Of course, the perfect cost breakdown has not yet appeared any more than has the perfect automobile. Yet, the automakers are decidedly not stopping building automobiles. It is certain that the Government will understand that imperfect cost breakdowns, with declared assumptions at each increment, can still be very enlightening. Certainly, after reading the following authoritative statements, one can only be impressed by the degree of precision attained years ago before many new refinements were adopted in a computer age. Buick's Edward Ragsdale wrote in the early sixties:
Cost estimates are given the closest possible scrutiny, and they frequently are calculated to the fourth and fifth decimal place.
In a little known address (titled the Internal Financial Reporting of General Motors) before an audience of accountants in Washington, D.C., 15 years ago, R. C. Mark, recently GM's comptroller, said:
Cost is in complete detail for each product line and so developed that we can easily convert for any change in the economic cost level. * *
You see illustrated something I said earliercontinued Mr. Markthat we build our budget from the bottom. We have a unit cost estimate for each part we make-and these estimates form the basis for our budget project. *
NADER CITES SIX REASONS FOR NONDISCLOSURE
The real reasons for the industry's determination not to divulge publicly discrete cost-price data can be summarized as follows:
(1) Annual price increases vaguely attributed to safety features, but actually including other costs such as styling changes, can be ascribed to Government regulations, thus relieving the companies of the responsibility for inflationary increases. The excuse of Government mandated safety is a handy one to take to private conferences with members of the Council of Economic Advisers just before a price hike.
(2) Inflating prices allegedly for safety features, without disclosing cost, can place the Department of Transportation on the defensive in the timing and scope of a particular standard.
(3) Revealing how little many safety features cost, as compared with their consumer price, tends to focus attention on other costs that might be included under safety's safe umbrella. This could lead more quickly to data revealing how resources are allocated between what the American Banker once called "frills, furbelows, and seeming necessities,” and engineering safety protection.
The substantial cost of the hidden headlamp fad, first designed for the Cougar's eyes, and added costs for mechanical failures or recalls of this basically frivolous style (some 82,000 Cougars were recalled last spring for this defect), might be usefully deployed when auto companies complain about the costs of head supports, interior padding, and safer door locks and hinges. A question might be raised about the corporate policy that offers expensive style changes as "standard” and puts forth safety features (relating to tires, suspension, brakes, et cetera) as extra-cost options.
NONDISCLOSURE OF COSTS IS A SHIELD
(4) Nondisclosure of cost data is a major shield preventing public knowledge of the detailed manner in which General Motors dominates the domestic industry (outlined in the Kefauver Administered Price hearings a decade ago); and generally I might say reaffirmed by the present chairman, Senator Hart, in a recent letter to me that he made public.
This vast market power relates not just to pricing but to restraining innovation and the entire spectrum of antitrust issues characteristic of a highly concentrated oligopoly. Antitrust is very much related to automobile safety, as the Department of Justice is persuaded in its current allegation of collusive restraint of development and marketing of auto exhaust control systems by the domestic auto companies.
(5) Cost data disclosure could throw light on the extent to which inflated pricing of safety features is being used to make the motorist
1 From the Senate Subcommittee on Antitrust and Monopoly report (Nov. 1, 1958) on Administered Prices--Automobiles : "An excellent illustration of this point was provided by Dr. Theodore Yntema, in his statement to the subcommittee. Using the 1955 Ford line as an example, Dr. Yntema testified that 72 percent of the special tooling cost was spent for body and front-end components which are most susceptible to style obsolescence. Another 12 percent was spent for chassis tooling and the remaining 16 percent for engine tooling. Three years later changing styles had made all of the 1955 body, front end and chassis tools worthless. Only a fraction of the engine tooling, amounting to 3.5 percent of the total 1955 special tool cost, was still in use on the 1958 models” (p. 123).
pay for the costs of recall campaigns or highly preferential promotional schemes designed to please influential people.
Regarding the latter schemes, at the very time Ford Motor Co. was raising prices both overtly and covertly (by dropping certain items as standard equipment—including safety padding on the “A” pillars—without lowering base prices), Ford continues to offer its little known “X-plan” for certain categories of influential people. The X-plan not only gives such people a 25-percent reduction from dealer líst, but X-plan cars get special treatment on the assembly line, with much more attention to quality control and checkout than the everyday car buyer receives. The fact that X-plan cars demonstrate better quality control and checkout should be of interest to Government safety officials. Other auto companies have similar plans to give a few favored people more safety than the many, and at a lower price, no less.
(6) The public relations embarrassment of having to disclose huge markups (such as the shoulder harness markup) is an additional factor inhibiting auto companies from disclosure. It is one effect to have known that GM's profit on investment after taxes has been about double the average for all of U.S. manufacturing since 1947. It is quite another impact to breakdown markups of such down to earth components as tires and sparkplugs.
I believe the above six points contain attitudes which are fundamentally inimical to the expeditious performance of the Government safety mission. Overcoming such conditions through cost disclosures, among other changes, not only enhances the Government's proper initiatives but permits consumers to have the kind of information that might contribute to a healthy, critical feedback on undesirable company practices.
WAYS TO ACHIEVE DISCLOSURE There are a number of avenues for achieving cost disclosure. S. 2865 utilizes the Government vehicle procurement leverage to induce some degree of disclosure. One problem with this approach is the ease with which auto companies can simply refuse to bid—as the larger companies in effect did during the past year. In addition, the costs to GSA, being essentially at wholesale there is a statutory limit of $1,500 per vehicle-would require conversion and further extrapolation for vehicles not purchased by that agency. GSA is not likely to undertake even part of this task with much enthusiasm, judging by its refusal over the years to disclose, for the consumer's benefit, quality comparisons of the many products which it tests, pursuant to its mass purchases.
The Bureau of Labor Statistics approach is less viable. It is difficult enough to have BLS equip itself with the technical advice and information to uncover deteriorations in vehicles as it is swamped with little documented claims of improvement by its partisan industry informants. It is even more difficult apparently to have BLS reveal at least the features which it credits and discounts without attributing