have "occasion to fashion their behavior to take into account the presence of a potential entrant." United States v. Marine Bancorporation, 418 U.S. at 630.
Exhaust systems consist of mufflers and connected piping that serve to dissipate the engine fumes of a vehicle as well as to reduce the noise level arising from its operation. The muffler is a series of tubes housed in a metal unit with adaptations. Pipes leading from the engine to the muffler and tail-pipe complete the system. Although estimates vary depending upon the existing resources of a corporation, the cost of constructing and outfitting a plant to produce a full line of exhaust system parts is substantial. At present, there are five principal manufacturers in the replacement field: Walker, Maremont Corporation (Maremont), Questor Corporation (Questor), Midas International Corporation (Midas), and Arvin Industries, Inc. (Arvin).
Shock absorbers are hydraulic devices which consist of a pump-like mechanism housed within two concentric cylinders. The cylinders are partially filled with a fluid such as oil. The ends of the mechanism are attached to the chassis and to each wheel of the vehicle so as to compress the fluid and to limit or control the automobile's vertical movement. Shock absorbers contribute to the stability, comfort, and roadability of a vehicle.
Steering dampers are a form of shock absorber. These mechanisms, however, are employed to reduce the lateral movement of an automobile's wheels and are utilized on a limited number of vehicles.
Although they are similar in technological design, steering dampers and the more traditional shock absorbers are not interchangeable.
The Geographic and Product Markets
It is uncontroverted that the relevant geographic market is the United States of America. Throughout this area, both shock absorbers and exhaust system parts are sold for installation as original equipment in new vehicles (original equipment market) and for the replacement of worn out or damaged units on existing vehicles (replacement market). The distinction between these two markets has been recognized by the industry and is supported by demonstrated market realities. Further, the replacement market for shock absorbers and exhaust system parts consist of two submarkets: the service market and the independent aftermarket. The former consists of sales made to vehicle producers for service sales to their dealers, while the latter encompasses all other replacement sales except those made to other manufacturers of the same product.
Concentration in the sale of shock absorbers to both the replacement market and the independent aftermarket is high. The four-firm concentration in 1976 sales of shock absorbers was in excess of 83% to both the replacement market and the independent aftermarket. Concentration in the sale of exhaust system parts is equally high. According to respondent Tenneco's (Walker's) own statistics, two firms accounted for approximately 57% of sales to the replacement market in 1975 and four firms were responsible for some 88%. When the top five firms are considered for that year, the approximate share of the market reaches 96%.
Traditionally, both the shock absorber and exhaust system parts businesses have been profitable and stable. The market positions of the top five replacement exhaust system parts producers have not changed significantly for over ten years. The shock absorber replacement market has been likewise traditionally stable. While Monroe has, in the last two years, experienced a decline in profitability, the respondents view the drop as temporary and attributable to a variety of factors, only one of which is the increased competition from its principal competitor, Maremont's Gabriel shock absorber division. In addition, the evidence demonstrates that a large part of the competition experienced in the field is of a nature which is not likely to produce price competition. According to a report prepared by Tenneco in contemplation of the proposed merger, Monroe has been "careless" in its pricing.
Only in the case of the large purchasers is there credible evidence that buyers may exert respectable influence on prices.
Barriers to Entry
Barriers to entry into the replacement shock absorber market and, in particular, into the independent aftermarket are high. Such barriers include a high absolute cost to enter de novo ; the large size required for an efficient plant; and a high degree of product differentiation which is encouraged by heavy advertising and promotional activities.
An analogous situation exists in the replacement exhaust system parts market. Among the more significant barriers are the high cost of de novo entry; the large size of an efficient plant; the importance of extensive economies of scale; and the use of patents to secure cross-licensing agreements.
Finally, despite these high barriers, it appears that because of traditionally high profits and of the expanding nature of the market,
the shock absorber field is becoming more attractive to potential entrants and minor participants. The Court does not find that because significant barriers exist, attempts to penetrate this market will not be made.
Tenneco's Interest in Shock Absorbers as a Compatible Product Line for Exhaust System Parts
Tenneco has, over the last ten years, exhibited significant interest in the shock absorber field on at least three different occasions. As early as 1967, Tenneco, through Walker, entered into discussions with Armstrong Equipment Ltd. (Armstrong) concerning entry into the U.S. replacement shock absorber market. As discussions progressed, Armstrong, a large British corporation, proposed to supply through a subsidiary shock absorbers to Walker for sale in the United States.
Armstrong declined to permit Walker to market all of its line, however, because it felt it could "build . . . the U.S. market into a reasonably substantial one and . . . [Armstrong] wanted the shock absorber base to work from."
In 1973, Walker considered acquiring Tropic Industries, a company that produced the "Loadamatic self adjusting shock absorber." Although Walker subsequently declined to pursue the negotiations for business purposes, the prospective merger was initially viewed in a favorable light. In addition, in May, 1974, Walker expressed an interest in Triple S Industries (Triple S), an assembler of steering dampers.
In particular, interest was focused upon Triple S's Terramatic shock absorber which, at that time, Walker believed might be a substantial innovation.
Motivated in part by this innovation, Walker acquired the assets of Triple S in 1974. Finally, in early 1976, Walker negotiated for the acquisition of De Carbon Shock Absorber Company (De Carbon), one of the major shock absorber manufacturers in France. Tenneco's interest in the shock absorber industry remains strong.
The reason for Tenneco's sustained interest lies in the fact that in certain areas shock absorbers and exhaust system parts are reasonably compatible. This point has been repeatedly noted by Tenneco in its inter-office memoranda and communications. This compatibility arises from commonalities in marketing channels and methods as well as from certain similarities in manufacturing methods. Walker and Monroe share many of the same customers and prospective customers, and Walker has been contemplating the creation of a single distribution system for both shock absorbers and exhaust system parts. In addition, both businesses use the pipe or tube mill as a principal production unit and employ drawing, swedging, welding, and stamping operations in the manufacturing process.
This is not to say, however, that the two products do not have significant dissimilarities. Advertising, for instance, appears to be much more important in the shock absorber business because of the need to draw the customers' attention to both the product and the need for replacement. This point has effects on marketing approaches. For example, two of respondents' competitors, Maremont and Questor, have not been able to utilize a combined sales force despite the fact that both make shock absorbers and exhaust system parts. Finally, it appears that Walker possesses only some of the expertise needed to manufacture shock absorbers, and the evidence is virtually undisputed that Walker's manufacturing facilities, as presently constituted, could not be used for the production of shock absorbers.
Likely Potential Entrants into Shock Absorber and Exhaust System Parts Manufacturing
Because of the nature of shock absorbers and exhaust system parts, Tenneco's large size, plentiful resources, and demonstrated interest in shock absorber manufacturers, Tenneco must be considered a likely entrant into the field. The Court cannot find, however, (1) that Tenneco is likely to enter the shock absorber field by either toehold acquisition or internal expansion, or (2) that only a few likely entrants exist.
A toehold may be defined as (1) a small, available corporation
with (2) the relevant technical expertise
(3) which is not dominant or otherwise significant in the American or foreign market
and which (4) has a reasonable likelihood of serving as a viable market entry vehicle.
Armstrong and De Carbon are large corporations which have substantial market positions in their respective home markets, and Triple S's Terramatic does not appear to be a likely base for substantial growth. In addition, shock absorbers and exhaust systems are not so compatible that a corporation may easily move from one to the other.
Finally, respondents have argued that there are numerous equally likely potential entrants,
namely, (1) the automobile and truck manufacturers; (2) the foreign shock absorber manufacturers; and (3) other auto parts producers. While the deposition testimony indicates that many of the proposed rivals are, in fact, already in the market on a limited scale and/or, like Tenneco, possess only some of the abilities necessary for entry, the Court is not convinced that only a few probable entrants exist.
Many of the same factors which lead the Court to conclude that Tenneco is a likely entrant by acquisition into the shock absorber replacement field argue for Monroe's entry into exhaust systems. Since 1972, Monroe has been interested in products with "good potential in the aftermarket which would be fitted into our marketing structure."
In addition, Monroe has attempted to acquire Arvin, the smallest of the five largest replacement exhaust system parts suppliers. As with shock absorbers, however, petitioner has not sufficiently proved its case. Because of Arvin's fifth place rank in and its 8% share of the exhaust system parts market, it is of questionable value as a toehold.
Although no clear judicial guidelines as to size have been formulated, in United States v. Phillips Petroleum Co., 367 F. Supp. at 1258, the court held that a company ranking seventh with a 6-7% share in a concentrated market would not constitute a toehold. In addition, Monroe does not have the financial resources of Tenneco, a factor which, along with other high barriers to entry, would make it particularly difficult for Monroe to enter de novo. Finally, it appears that more than a few likely entrants exist.
CONCLUSIONS OF LAW
1. This Court has jurisdiction over the subject matter pursuant to Section 13(b) of the FTC Act, 15 U.S.C. § 53(b) and 28 U.S.C. §§ 1337 and 1345.
2. Venue is proper pursuant to Section 13(b) of the FTC Act and 28 U.S.C. § 1391(c).
3. Before an injunction can be issued, petitioner must demonstrate a reasonable probability that it will ultimately prevail on the merits. Additionally, since a regulatory statute is involved, the public interest is of heightened significance and must be given careful consideration.
4. The relevant shock absorber and steering damper markets are highly concentrated and suitable, in this respect, for application of the potential competition doctrines.
5. The relevant geographic market is the United States of America.
6. The product markets consist of the manufacture and domestic sale of (1) shock absorbers to the replacement market; (2) shock absorbers to the independent aftermarket; (3) exhaust system parts to the replacement market; and (4) exhaust system parts to the independent aftermarket.
7. Steering dampers and shock absorbers are different products and are not in competition with each other. "The outer boundaries of a product market are determined by the reasonable interchangeability of use or the cross-elasticity of demand between the product itself and substitutes for it." Brown Shoe Co. v. United States, 370 U.S. 294, 325, 8 L. Ed. 2d 510, 82 S. Ct. 1502 (1962). Since steering dampers address horizontal movement on a vehicle while shock absorbers concern vertical motion, the products serve different purposes, and cannot be substituted one for the other.
8. Tenneco, through Walker and Mechanex respectively, merely purchases traditional shock absorbers and steering dampers for resale to a limited number of customers. Tenneco cannot, therefore, be considered to be in competition with the manufacturers of these products.
Actual Potential Competition
9. Petitioner has not sufficiently demonstrated the existence of toeholds which Monroe and Tenneco, through its Walker division, could use to enter successfully the exhaust system parts and shock absorber markets respectively.
10. Petitioner has not sufficiently demonstrated that, from a practical viewpoint, Walker or Monroe would or could successfully enter each other's markets by internal expansion.
11. Petitioner has failed to satisfy the two preconditions of the actual potential competition theory: (1) that, in fact, Walker and Monroe each has available means for entering the other's market other than through the challenged acquisition, and (2) that those means offer a substantial likelihood of eventually producing a deconcentration of the target market or "other significant procompetitive effects." United States v. Marine Bancorporation, 418 U.S. at 633. The evidence is inconclusive as to the first of these two points, and little or no support has been submitted in behalf of the second.
Perceived Potential Competition
12. Petitioner has not met the requirements of the perceived potential competition theory. In light of the fact that Walker and Monroe are not in the same line of commerce, the evidence as to the ability and incentive of either to enter the other's field is inconclusive.
In addition, the evidence is inconclusive as to whether Walker or Monroe is actually perceived by the other's industry as a serious potential entrant or as a major behavioral influence.
13. The Court has weighed the equities, considered the Commission's likelihood of ultimate success, and concludes that it has not shown that the issuance of a preliminary injunction would be in the public interest.