Federal Trade Commission Received Documents Jan. 16, 1995 P894219 B18354900026 February 5, 1996 VIA OVERNIGHT DELIVERY Office of the Secretary Federal Trade Commission Room 159 Sixth and Pennsylvania Avenue, N.W. Washington, D.C. 20580 Re: "Made in USA Policy Comment", Federal Trade Commission File No. P894219 Dear Secretary: Toyota Motor Sales, U.S.A., Inc. ("Toyota") appreciates the opportunity to respond to the Request for Public Comment noted above (the "Request") from the Federal Trade Commission (the "FTC" or "Commission"). The detailed discussion and questions posed by the Request recognize the current complexity of evaluating "Made in USA" claims. Toyota believes this is especially true of the automotive industry. Toyota is a wholly-owned subsidiary of Toyota Motor Corporation, a Japanese corporation. Toyota markets Toyota and Lexus brand vehicles in forty-nine states.{1} Over one-half of the Toyota brand vehicles sold in the United States in 1995 were built here, by either Toyota Motor Manufacturing, U.S.A., Inc. in Georgetown, Kentucky, or New United Motor Manufacturing, Inc. ("NUMMI") in Fremont, California. NUMMI is a joint venture between Toyota Motor Corporation and General Motors Corporation. NUMMI builds Toyota Corollas and Tacomas and Geo Prizms. NUMMI is but one of many examples of the alliances between "foreign" and "domestic" automotive companies. In November 1995 Toyota announced that it was building a new assembly plant in Indiana with capacity to manufacture 100,000 T-100 trucks annually beginning in the Fall of 1998. Toyota will spend $700 million to build the plant, which will employ approximately 1,300 workers and bring Toyota's direct U.S. employment to over 20,000. This will raise Toyota's total investment in the U.S. to $5.8 billion and its total annual U.S. production capacity to at least 1 million vehicles.{2} Over 500 U.S. suppliers currently sell in excess of $5.6 billion worth of parts and materials to Toyota annually; over the last five years Toyota has purchased more than $20 billion in U.S. parts and materials. Toyota affiliates also manufacture some of the parts assembled into its U.S.-built vehicles, including many of the engines. Toyota filed comments with respect to the Proposed Consent Order in the Matter of Hyde Athletic Industries, Inc. ("Hyde"), 59 FR 48892, which are incorporated herein by reference. Toyota is also a member of the Association of International Automobile Manufacturers, Inc. ("AIAM") which has also filed comments in response to the Request. The Commission's Two Principal Questions. In the Request, the Commission asks two principal questions. First, should the FTC alter its legal standard regarding the use of unqualified "Made in USA" claims? Toyota submits that, with respect to the automotive industry, the answer is yes.{3} The FTC should adopt its traditional, reasonable basis standard. Second, how should domestic content be measured under any future standard? Toyota again submits that, for at least the automotive industry, the FTC should apply the reasonable basis standard rather than a prescribed formula. The bases for Toyota's conclusions are discussed below. Consumers Do Not Always See The Implied Claim That "All or Virtually All" Of The Parts Are Of U.S. Origin When An Unqualified "Made In USA" Claim Is Made. The Commission's own consumer testing supports the conclusion that consumers do not always see the "all or virtually all" implied claim, depending upon the specifics of the advertisement. The Commission studied "Made in USA" claims in print advertising disseminated by Smith Corona (for typewriters) and Huffy (for bicycles) (the "FTC Study"). The results of the FTC Study are dated February 1991. Among other things, the FTC Study compared the responses of consumers who were asked generally what percentage of parts are of U.S. origin when they see a "Made in USA" claim for a product with the responses of consumers who viewed a Smith Corona or Huffy ad each of which included a "Made in USA" claim. The FTC Study found that a significantly smaller percentage of respondents who viewed either the Smith Corona or Huffy ad saw the "all or virtually all" implied claim than those who were asked the question generally. (FTC Study, page 38.) Explaining their reaction to the Smith Corona ad, consumers applied their understanding of the electronics industry. They mentioned "most electronic parts [are] made abroad", they "doubt[ed] all parts [were] made here", it was "only assembled in USA", "parts [are] made abroad", "rubber/metal parts are imported", and "this kind of product not usually made here". (FTC Study, pages 38-39.) The difference between the responses to the Smith Corona and Huffy ads compared with the general responses shows that many consumers understood enough to evaluate each Made in USA claim in the context of the applicable industry. For the past several years the publicity surrounding the globalization of the economy has been enormous. American consumers were subject to two high profile political debates on the global marketplace: the North American Free Trade Agreement ("NAFTA") and the General Agreement on Tariffs and Trade. (Indeed, NAFTA was a major issue during the 1992 Presidential election.) The Commission itself recognizes that this restructuring has occurred and may require a change in its enforcement policies. See, Hearings on FTC Policy in Relation to the Changing Nature of Competition, Notice of Public Hearing and Opportunity for Comment, 60 Federal Register 37449, July 20, 1995. It is hard to conceive of an industry that has received as much attention to its international character as the auto industry. On seemingly a daily basis news reports abound on efforts by international automakers, including those headquartered in Detroit, to enter or expand in one market or another, often through local production. Japanese and European automakers have opened new manufacturing facilities across the U.S., with each new opening generating significant media coverage. Just last week television and newspapers reported that Volvo is "weighing plans to build cars and sport utility vehicles in North America". Volvo was reportedly "talking with several other automakers about a possible North American joint-venture operation". (Wall Street Journal, January 10, 1996){4} In addition to the enormous attention given new plant openings, a great deal of publicity has also focused on the value of U.S. parts purchased by Japanese auto companies for use in their assembly plants in the U.S. and abroad. For example, one of the issues in the highly publicized dispute that led to the U.S. - Japan Auto Agreement in June 1995 was the procurement of U.S. auto parts by Japanese automakers. The clear message from the U.S. government throughout this debate was that Japanese automakers were not purchasing sufficient quantities of U.S. parts. Because of this constant publicity, consumers understand that different industries and different companies have internationalized to differing degrees. The FTC Study shows that they apply what they know to the "Made in America" claim in the context of a particular ad. The ad gives consumers important clues: the product, the brand and the overall context of the claim. Since consumers take these things into account, the FTC should as well.{5} A Standard of "All or Virtually All" U.S. Components Could Preclude the Entire Automotive Industry From Making Unqualified "Made In America" Claims and Preclude Truthful Claims About Automakers' U.S. Operations. It appears that no motor vehicle sold in the U.S. would meet the "all or virtually all" standard. For instance, information submitted to the National Highway Traffic Safety Administration by automakers for purposes of complying with the American Automobile Labeling Act (the "Act") indicates that -- even using the distorted calculation mandated by the Act that treats a part with 70 percent or greater U.S. or Canadian content as 100 percent -- no car or truck offered for sale in the U.S. for the 1996 model year will have 100 percent U.S. and Canadian parts.{6} Assembly operations for the automotive industry require substantial capital investments and create significant, good-paying jobs. This investment and jobs-creation in the U.S. may be material to the purchasing decisions of at least some consumers and their view of what is "Made in America". Yet, to require qualifying language would in all likelihood chill such truthful, material claims. For example, under the "all or virtually all" standard qualifying language would be required were any automaker to run a television spot extolling the virtues of its "American Built" vehicle, with a backdrop of its American assembly line and workers. To the extent consumers believe a "Made in America" claim about an auto only refers to the location of assembly or understand that to be the case because of the context, the qualifying language will be confusing. In that event, companies are much less likely to make the claim -- to the detriment of at least some consumers. The FTC should not preclude automotive companies from making meaningful and truthful claims about their contribution to the U.S. economy. A Standard Which Unnecessarily Requires the Qualifying Language Could Also Place Foreign Brand Names at a Competitive Disadvantage. In the automotive industry, a level playing field requires that "Made in America" claims be judged on the reasonable basis standard. Because, despite the publicity to the contrary, at least some consumers may believe that vehicles made by automakers headquartered in Detroit are "Made in America" and vehicles made by automakers headquartered outside the U.S. are not, it is important for all automakers to be able to get their message out. A prescribed standard, whether it is "all or virtually all" or a lesser percentage, would require all automotive companies manufacturing in the U.S. to qualify their claims with reference to foreign content -- and therefore appear to be competitively neutral. However, in practice it could hurt foreign nameplates more by reinforcing the erroneous perceptions some consumers may already have about the foreign content of their vehicles. It would also be problematic to the extent consumers assume a "domestic" vehicle is "Made in America". Because Detroit based companies could forego the claim altogether and rely on such consumer misunderstandings, they could avoid having to state any such qualifying language. To the extent the qualification is not necessary to prevent any consumer harm, the Commission must guard against the potential anti-competitive effects of its standard. Conclusion Toyota strongly recommends that the FTC apply the reasonable basis standard to "Made in America" claims with respect to automobiles. It will provide automakers the flexibility to compete fairly in the context of an ever-changing global economy. It will also adequately protect consumers since consumers see different implied claims -- or no implied claims -- given the context of the ad, the product and the brand name. The FTC should join consumers in recognizing the global nature of our economy and, like consumers, judge each "Made in America" claim on its own merits. Sincerely, Barbara E. Arnold Managing Counsel Footnotes: {1} In Hawaii, Toyota and Lexus brand vehicles are marketed by an unrelated company. {2} Including Geo Prizm production. {3} Because Toyota's experiences are essentially limited to the automotive industry, it has limited its comments accordingly. Toyota takes no position on what standards should be applied to other industries. {4} The Commission is aware of at least many of the changes occurring in the automotive industry. See, In the Matter of General Motors Corporation, a corporation, and Toyota Motor Corporation, a corporation, Order Granting Petition to Reopen and Set Aside Order, October 29, 1993 (pursuant to which the Consent Order concerning the operation of NUMMI was terminated). {5} The automotive press certainly understands that where a vehicle is "built" reflects the location of the final assembly plant and nothing more. See, e.g., Automobile Magazine, March 1993: "I've previously referred to [the Toyota Camry XLE] as the best car built in the United States. . . . Chrysler's new LH sedans - our 1993 Automobile(s) of the Year - are quite wonderful, but they are built in Canada. . . . However, there is a new car that may be the new wonder of the automotive world. . . . And, it is built in the United States. . . . [It] is a Geo Prizm, but it is also available as a Toyota Corolla." There is no mention of the parts content and no need to. The reader easily understands that the writer is referring to the place of assembly -- an important fact in its own right in the auto industry. {6} The 70% rule applies to parts purchased from non-affiliated suppliers. A different rule applies to parts purchased from affiliated parties. Also under the Act, Canadian parts are lumped together with American parts and assembly labor is ignored. Toyota strongly urges the Commission not to adopt the politically charged, but nearly meaningless, Act as the test for what is "American". To do so would treat all of Canada as the 51st U.S. state and ignore the very assembly process which makes an auto "Made in America".