When the automobile industry churns approximately 75% of the components in their products in 5 years, how can that not be a Sherman §1 violation?

The automobile industry is in violation of §1 of the Sherman Act as argued in detail below. The automobile industry is also in violation of §5 of the FTCA. The violation of §5 of the FTCA is described in a previous article presented on this board. The violation described herein is in the nature of conscious parallelism with plus factors.


Conscious parallelism is not a per se violation of the Sherman Act. Conscious parallelism can be a defense to alleged price fixing or market allocation in that it can explain what appears to be circumstantial evidence of anti-competitive behavior. However, a Sherman Act violation can be established by presenting evidence of conscious parallelism along with the existence of one or more plus factors.

Plus factors are evidence that a prohibited agreement has been reached. Plus factors are economic actions and outcomes by oligopolistic firms above and beyond parallel conduct that are largely inconsistent with unilateral conduct but largely consistent with coordinated action. Plus factors are used to specify imitative activity in terms other than price – anything that tends to exclude independent action. Some plus factors are given below with examples of how they manifest themselves in the automobile industry.

Plus factors
can include:
  1. Actions contrary to each defendant's economic self-interest unless pursued as part of a collective plan.
  2. The absence of a plausible, legitimate business rationale for conduct or the presentation of contrived rationales for certain conduct.
  3. Phenomena that can be explained rationally only as the result of concerted action.
  4. Industry characteristics (product homogeneity, frequent transactions, readily observed price adjustments, high entry barriers, and high concentration) that are conducive to successful coordination.


Through a time intensive investigation with the aid of industry databases, extensive research has been conducted into the manufacture of automobiles at the component level – at the module level if manufacturers chose to manufacture in this way. Most of the research was conducted on Ford vehicles, but some research delved into General Motors vehicles to confirm expectations that the studied manufacturing procedure is industry wide.

At the level of individual parts there is a surprisingly frequent replacement of existing proprietary, non-interchangeable designs of automobile components with new, proprietary, non-interchangeable designs which produce no discernible benefit to consumers but which do produce, instead, much more expensive vehicles carrying an unnecessarily high cost and potential for severe injury and possible death to drivers and passengers from a manufacturing or design error stemming from the high rate of Parts Churn. “Parts Churn” can be defined as a process wherein a part is designed, tested, manufacturing tooling produced, manufactured, and used for 1 to 8 years before being replaced by a functionally identical but non-interchangeable part which is designed, tested, manufacturing tooling produced, manufactured, and replaces the previous part offering no advantage to the consumer over the previous part but does present an enhanced risk of possible injury and expense to the consumer due to an increased risk of random design or manufacturing error.

The primary vehicle for illustrating violation of §1 of the Sherman Act will be the horn although any component could serve. Below are two tables showing data from all the components studied. The churn rate is remarkably high with the shortest being 2.2 years for Ford Seat Back Covers and the longest being 4.9 years for Ford Door Latches and Ford Wiper Motors. Almost all component had at least one version which was used only one year. Ford has recalled over 2 million vehicles for faulty door latches. Injuries have been reported as having been caused by defective door latches.


Below is a summary of all data analyzed from Ford and General Motors:


Ford Part
Spanning Years
2007 - 2016
Number
of Units
Average
Years in
Use
Fewest
Years in
Use
Highes
Price
Lowest
Price
% Used
4 Years
or Less
Vehicle Type
Horn
31
4.8
1
$60.16
$29.02
47.1%
Cars Only
Alternator
53
3.1
1
$522.00
$162.96
62.3%
Cars Only
Door Latches
136
4.9
1
$353.57
$38.77
35.6%
All Vehicles
Cruise Switch
68
3.3
1
$139.24
$14.39
73.9%
Cars Only
Fuel Pump
65
3.1
1
$485.38
$39.88
64.6%
Cars Only
Fuel Tank
42
3.2
1
$1,967.22
$243.67
76.2%
Cars Only
Ignition Switch
39
4.3
1
$263.25
$16.86
75.0%
All Veh. 1990 - 2016
Seat Back Cover
613
2.2
1
$2,039.18
$114.41
81.2%
Cars Only
Seat Belt Assembly
208
2.6
1
$441.82
$29.37
82.2%
Cars Only
Steering Wheel
260
2.7
1
$730.56
$52.71
81.5%
Cars Only
Wiper Motor
33
4.9
1
$137.33
$33.80
27.3%
Cars Only
Airbag Inflator Mod.
210
3.2
1
68.6%
Cars Only


General Motors Part
Spanning Years
2007 - 2016
Numberof Units
Average
Years in
Use
Fewest
Years in
Use
Highest
Price
Lowest
Price
% Used
4 Years
or Less
Vehicle Type
Horn
44
4.1
1
$79.33
$10.43
55.6%
Cars Only
Alternator
66
4.1
1
$542.69
$138.26
62.7%
Cars Only
Cruise Switch
106
3.6
1
$93.85
$14.16
65.1%
Cars Only


The most surprising fact revealed by the data and the most significant in regard to §1 of the Sherman Act is the component churn rate indicate by the Average Years in Use for each component and the extreme amount of redundancy. It is difficult to conceive of any justification on any basis for the number of different units and for such high churn rates, and certainly no technical nor performance justification. On an engineering basis, Parts Churn greatly lowers reliability. Standardization is the basis of all modern, efficient manufacturing intended to serve the general market customer.

Below are two tables showing examples. The first shows the horns used by Ford Motor Company during the years 2007 through 2016 in cars alone - excluding pickup trucks and SUVs. The second provides similar data for General Motors horns during the same time period, again for cars only. This veritable cornucopia of horns will demonstrate, amongst other things, the automobile industry's collective plan that would be fatal to a company if it were undertaken individually. Below the tables are links to the lists of Ford and GM horns.


Ford Horns - cars only 2007 through 2016
Number of Horns
31
Number used 1 year
0
Average Years in Use
4.5
Number used 2 years
3
Fewest years in use
2
Number used 3 years
4
Most years in use
9
Number used 4 years
6
Least Expensive
$12.46
% churned after 1 year
0.0%
Most Expensive
$57.07
% churned after 2 years
13.6%
Fiesta
$17.67
% churned after 3 years
31.8%
% churned after 4 years
59.1%


GM Horns - cars only 2007 through 2016
Number of Horns
60
Number churned in year 1
7
Average Years in Use
3.9
Number churned ln year 2
2
Fewest years in use
1
Number churned in year 3
14
Most years in use
8
Number churned in year 4
4
Least Expensive
$9.44
% churned after 1 year
11.7%
Most Expensive
$79.33
% churned after 2 years
15.0%
% churned after 3 years
38.3%
% churned after 4 years
45.0%


Table of General Motors horns 2007 - 2016:http://bit.ly/2Y6z7Nl
Table of Ford Motor Co. horns 2007 - 2016:http://bit.ly/2ZzaaM5


During the 10 years studied Ford used 3 horns (13.6% of the Ford horns used during the 10-year period studied) for only 2 years or less before changing to a new version. During the 10 years studied GM used 9 horns for only 2 years or less ( 15.0% of the GM horns used during the 10-year period studied) before moving to a new version. There was no case out of all the components studied in which the use of a component was terminated and, then, was used again in later years. A contrary action would not be expected nor practical because tooling for production would have to be stored and kept idle and in good condition for future use. Considering the many hundred of parts that are churned each year, that would be prohibitively expensive. This is what made the churning of Takata airbag inflators so disastrous for the automobile companies and terminally so for Takata. Tooling and manufacturing procedures for thousands of different airbag inflators had to be reproduced and reinstalled for relatively small batches of parts, and then setup again for many succeeding, different small batches of airbag inflators.

Below are the plus factors considered:

1 Actions contrary to each defendant's economic self-interest unless pursued as part of a collective plan.

A. The churning of numerous, proprietary, functionally identical but physically non-interchangeable parts can be of no legitimate benefit to a manufacturing company. There has never been a study nor theory advanced claiming any economic benefit from the enormous production of functionally identical but physically non-interchangeable components. Indeed, all teaching is to the contrary.

Group technology (GT) also facilitates standardization and rationalization (S&R), which helps control part proliferation and eliminates redundant part designs. It is common for a company to have many similar versions of the same part, such as a gear. When the company implements GT, similarities among gears can be identified, and it is possible to create standardized gears that are interchanged in a variety of applications and products. S&R such as this pays big dividends in that it simultaneously creates economies of scale by increasing part volume and economies of scope because the same gear can be used in a variety of applications. Rufe, Philip. Fundamentals of Manufacturing (2nd Edition). Society of Manufacturing Engineers (SME), 2002. Chapter 19: Product Design Tools, Part 4: Product Design, p. 165.

The manufacturing processes of the automobile industry decimates the long established concept of economy of scale and economy of scope. Parts Churn is an extremely harmful process to manufacturing efficiency and economy and, when practiced by the entire industry, violative of Sherman §1.

B. There is no technological nor manufacturing justification for Parts Churn. In the horn example above, it is very difficult to argue for the need for more than one horn. If there were a case where a louder horn were needed, for example, two units operating together or three should be able to fill that need offering the additional benefit of redundancy in case of a horn failure. Even if an argument could be made that some consumers like change just for change alone, there is no justification for such change in every vehicle manufactured.

One economy vehicle should be manufactured without Parts Churn. If a manufacturer were to use proper manufacturing principles, its costs would be dramatically reduced while concomitantly the quality would rise and vehicle recalls could be significantly reduced or eliminated. The consumer could choose. Now, there is no choice.

When Parts Churn is carried on by an entire industry across all product lines, such customer abuse is against the manufacturers’ economic self-interest unless all manufacturers operate in a similar fashion. The practice could not continue unless all manufacturers behaved similarly.

C. The costs incurred in Parts Churn manufacturing are high. As indicated in the quote above, good engineering practice is realized by reducing the part variations to a minimum and perfecting the design and manufacturing process rather than scrapping existing parts and designing new parts to replace the scrapped parts. From this method flows the following benefits:

Reduced engineering expense
Reduced tooling and reduced tooling expense
Reduced costs for testing and evaluation
Fewer defective parts as parts are perfected over time
Less scrappage
Less warranty expense as parts are improved
Reduced inventory and reduced inventory expense
Greater customer satisfaction from lower cost and more reliable products


On the positive side of Parts Churn there is nothing. There is no legitimate benefits from Parts Churn. Nor is there any legitimate benefit, of course, from industry-wide Parts Churn.

D. The harm of Parts Churn mostly falls on the consumer. For the automobile manufacturers, the cost is another cost of doing business. The cost is another piece of the price of the car along with the car’s cost of designing, testing, manufacturing, and etc. As long as all manufacturers use the same Parts Churn model, there is no harm to the manufacturer. Indeed, it benefits the manufacturer because the higher cost of repair parts 5 to 10 years later will convince the owner to abandon the car he has and buy a new car. As long as all manufacturers follow the same Parts Churn model, consumers have no choice.