In a rare glimpse inside the secret world of international cartels, a University of Notre Dame economist and two associates have obtained documents showing price-fixing, bid-rigging and elaborate other collusion in the worldwide sale of nearly $2 billion a year in heavy electrical equipment.
The documents are from an organization called the International Electrical Association. Its offices are in Switzerland; its members, as of 1977, were 49 West European and six Japanese manufacturers of gear for generating electric power in both conventional and nuclear plants.
No American firms belong. On the contrary, the documents and an accompanying draft report by the university economist and one U.S. associate indicate the cartel is powerfully squeezing U.S. companies, blocking them out of export markets. The domestic heavy electrical equipment industry is withering, and this is one reason, the two suggest.
The documents also indicate that, at least in years past, the cartel companies have heavily overcharged their weaker customers, sometimes by as much as 60 percent and particularly in less developed countries of the Third World. The report estimates the likely present-day proceeds of this price inflation at $300 million to half a billion dollars a year.
The report also points out that cartel companies are now moving into the U.S. market for the first time and starting to form joint ventures with weakened U.S. competition. "In effect, the United States firms have become distributors for their former overseas rivals," the report says.
The material shows no clear violations of U.S. antitrust laws. But the 300 documents covering 2,000 pages lay bare a fascinating, generally unseen world of detailed compacts and coded communications, secret punctilio and bureaucracy. There is an "Agreement Y," an "Agreement X(W)," a reference in some of the documents to a "Mr. Japan." There is an elaborate nine-page set of "Conciliation Rules" to resolve disputes among members.
There is a pre-bid notification system -- members must notify headquarters in Lausanne in advance of almost all bids they intend to make -- which the report says has "been the backbone of the cartel's operations since 1930." There are also careflly worked out systems, product line by product line, for formulating prices before bidding and allocating sales among members, and procedures in some cases whereby designated winning bidders pay compensation to the "losers."
The Notre Dame economist is Richard S. Newfarmer. His associates are Barbara Epstein, also an economist and now vice president of Horace J. DePodwin Associates Inc., a New York consulting firm, and Kurt R. Mirow, a businessman who says the cartel impeded expansion of an electial equipment company he owns in Brazil.
The documents, which detail activity into 1977, were leaked to them by an unidentified former member of the IEA staff.
They have written about the international electrical equipment industry before: in 1977, the United Nations Conference on Trade and Development published a report on the industry by Epstein and Mirow, and the next year published another by Newfarmer. Epstein and Newfarmer wrote the new report, which is based mainly on the 300 new documents. Newfarmer made the report and documents available last week to The Washington Post.
The Organization for Economic Co-operation and Development in Paris says that, as of 1974, there were more than 500 registered international and national cartels involved in world trade. The best known today is OPEC, the Organization of Petroleum Exporting Countries. The industrialized countries that are its main customers deplore OPEC's effect, and wince at talk that other raw material cartels may form along the OPEC model in the Third World.
Newfarmer and Epstein find irony in this, in light of IEA and other industrial cartels. "Tolerance of clandestine cartels places home governments in an increasingly awkward position when they express opposition to raw materials or other cartels in the Third World," they say.
Efforts last week to reach Derek F. French, IEA's secretary-general, for a response to the Newfarmer-Epstein report were unavailing.
Major U.S. companies claimed to know almost nothing of the cartel and reacted warily to the main recommendation Newfarmer and Epstein make, which is that there be a federal investigation of the cartel's impact on U.S. exports and domestic commerce.
In Fairfield, Conn., a General Electric Co. spokesman said the company "certainly would be interested . . . in any facts that would provide us with a clearer picture of any cartel situation that might exist."
In Pittsburgh, a Westinghouse Electric Corp. official said, "We are not in a position to judge whether the information now available would indicate whether any government inquiry should or should not occur." In a 1971 complaint against dumping of large power transformers, Westinghouse told the U.S. Tariff Commission it was "evident that a price-fixing agreement exists or did exist . . . among the European producers."
In Milwaukee, an Allis Chalmers Manufacturing Co. spokesman said any recommendations would be "premature since we have no knowledge of the IEA or its operations and activities." Allis Chalmers is a 50-50 partner in a domestic joint venture with Siemens of West Germany, a founding member of the cartel.
In Washington, Bernard H. Falk, president of the National Electrical Manufacturers Association, after being given a summary of the docments, told a reporter without commenting specifically on IEA that "Congress should give attention to any unfair, illegal, unethical international trade practices." NEMA's 575 members make all kinds of electrical gear.
The IEA was founded in 1930. Two U.S. firms, International General Electric and Westinghouse Electric International, were among the founders. Of the other founding companies, four were British, two German and one Swiss.
By 1939 the cartel had 39 members. Its activities were interrupted by World War II. After the war, the Federal Trade Commission forced the U.S. members to withdraw, on grounds their participation was a violation of antitrust laws.
In a 1948 report on the cartel the FTC said its purpose was to help member companies "get together for . . . discussing and agreeing upon price quotations and terms."
The most important postwar enlargement of the cartel came in the late 1960s, with the corraling of the renascent Japanese, who posed an increasing competitive threat to the older European members.
"The most critical change in cartel operations in recent years has been the incorporation of the japanese manufacturers," Epstein and Newfarmer say.
They describe the firms as full "participants in IEA's cartel practices."
Yet, the report notes, Japan in 1947 passed a law prohibiting its corporations from entering "into an agreement or international arrangement which contains such matters as constitute unreasonable restraint of trade or unfair business practices."
Partly because of this law, it appears the Japanese firms pay dues to the IEA on a different basis than the European. This "has the merit of establishing that you are not members," Secretary-General French said in a March 1978 letter to the Japanese firms.
Epstein and Newfarmer, however, note wryly that these Japanese non-members contribute one-fourth of IEA's entire budget.
The Japanese companies involved in IEA are Fuji Electric, Mitsubishi Electric, Toshiba Shibaura, Hitachi Limited, Mitsubishi Heavy Industries and Meidensha Electric. They are known inside IEA as the JPA. The JPA periodically designates an executive from one of its companies to speak for all in Lausanne; he becomes "Mr. Japan."
IEA's European members were, as of 1977: 11 Italian firms, including Fiat Termomeccanica e Trubogas; nine British, including General Electric Co. Ltd., which is unrelated to the U.S. GE, and C.A. Parsons Co.; eight French, including compagnie General d'Electricite (Delle-Alsthom); five West German, including AEG-Telefunken, Siemens, and their joint venture, Kraftwerk Union, five Swiss, including Brown Boveri; four Swedish, including ASEA; two each Austrian, Dutch and Norwegian, and one Finnish.
For their estimates of cartel pricing practices, Epstein and Newfarmer rely heavily on IEA records of members' sales of large transformers in the years 1965 through 1967. The records -- the best set the economists have -- list base prices from points of shipment and exclude transportation and insurance costs.
Newfarmer and Epstein then looked at the prices paid, under various bidding conditions, by various countries, none of which is able to manufacture such equipment. They found three patterns.
First, higher prices, on average, were paid by developing than by developed countries. Second, prices were higher when cartel rules required winning bidders to compensate losers than when such rules weren't applied. Third, prices were highest -- and the developing-developed country differential was the greatest -- where only one IEA member bid than where several did.
In this last case, the economists found that developed countries (such as Australia, Greece, Ireland and Israel) paid 114 percent of the base price, on average, while developing countries (including Brazil, India, Indonesia, Mexico, and such OPEC member as Saudi Arabia and Venezuela) paid an average 162 percent.
Newfarmer said that sometimes there was only one bidder, apparently by pre-arrangement within the cartel. The authors also note in their report that the Japanese had not yet been brought into the cartel when this one set of transformer sales was made. After the Japanese joined up, they say, the number of "special arrangements" increased "substantially."
Their estimate of the proceeds from price inflation by the cartel is mainly an extrapolation from the 1965-1967 transformer accounting records at the IEA to allow for all product lines and present-day prices.
Many U.S. industries have lost some ground in world export markets over the last 20 years to resurgent competitors from Western Europe and Japan. In the electrical equipment industry, Newfarmer and Epstein suggest, the U.S. share of exports to countries covered by the cartel has fallen, probably in part because of the IEA's activities.
Here they note two patterns. Some U.S. companies have gone out of business; others have gone into joint ventures with IEA companies. They cite these examples:
In 1959, four American firms produced hydroelectric turbines. Today, there is only one major U.S. producer, Allis Chalmers.
In 1972, the Tariff Commission found that the eight U.S. producers of large power transformers had been injured by dumping, at depressed prices, by European IEA members. These, the commission warned, have the capacity "to threaten the continued existence" of the U.S. large-transformer industry.
A year later, one of the eight firms shut down. In 1976, a second stopped making such gear. Also in 1976, Allis Chalmers announced it was halting production and forming a joint venture with Siemens of West Germany to import transformers.
(The Allis Chalmers spokesman said that Siemens-Allis operates under an agreement providing, "without any limitations," for doing business "anywhere in the world without control by either of the parent companies.")
Westinghouse is the only U.S. firm with its own technology for power circuit breakers. (Its spokesman recalled that "promply" after acquiring a Belgian member of the IEA called ACEC, Westinghouse compelled it to resign from the organization. He declined to explain why.)
GE and Hitachi have formed a joint venture, High Voltage Breakers Inc., under which GE imports Hitachi main parts from Japan for assembly here. (The GE spokesman termed the agreement "very limited, specific, and entered into in the exercse of proper business purposes -- in this case, to obtain the necessary technology that gives us a competitive product which is attractive to U.S. utilities.")
Brown Boveri bought Studebaker-Worthington's gas turbine division in 1977 and has a turbine servicing facility in Richmond.
Siemens-Allis is offering a full line of "engineered electrical equipment," some of it made in the United States and some in West Gemany.
GE and Westinghouse have moved from temporary layoffs in turbine-generator production facilities to actual reductions in employment and manufacturing capacity.
As further indications of new IEA interest in the American market, Newfarmer and Epstein cite Agreement Y and Agreement X(W).
Under Agreement Y, cartel members began in 1974, for the first time, to report to Lausanne the value of orders from American buyers.
"At least on its face this isn't collusive," Newfarmer said in an interview. "But we don't know enough about it. It may indicate an increasing concern in the cartel for the American market."
Agreement X(W) requires cartel members who make water turbines to notify Lausanne whenever they plan to tender a bid to a prospective U.S. buyer.
"This creates the same opportunity for pre-bid price-fixing on orders in the United States as exists for developing countries in all of the product categories," Newfarmer told a reporter.
The report says that "there is no reason to believe that the European and Japanese firms colluding 'in the morning' on sales in the developing countries would be able to resist the temptation to do so 'in the afternoon' on sales in the United States."