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In its continuing smear campaign against Fujifilm, Kodak last week released new "evidence" purporting to show that film prices in Japan are substantially higher than prices in the United States. Kodak argues that this alleged disparity in price levels demonstrates that the Japanese market is closed. According to Kodak, the presence of market barriers allows Fujifilm to charge artificially high prices and thereby convert its home market into a "profit sanctuary."
Old habits die hard, and Kodak's habit of twisting facts in this Section 301 investigation is clearly not yet under control. The fact is that color film prices in Japan and the United States -- at both the wholesale and retail levels -- are actually remarkably similar. Kodak's allegation of a gross disparity between Japanese and U.S. prices cannot withstand serious analysis. Consequently, Kodak's "evidence" of market barriers in Japan is really evidence only of its cynical willingness to play fast and loose with the numbers.
1. Japanese domestic and export prices
In its Figure 1, Kodak compares the average unit value of Japanese domestic shipments with the average unit value of Japanese exports to the United States and other countries. These data appear to show that prices in Japan are 3.1 times higher than export prices to the U.S., and similarly higher than export prices to other countries.
As Kodak surely realizes, these comparisons are inane. The average unit domestic shipment value reflects expenses related to sales and distribution in Japan, while the average unit value for exports to the U.S. market does not reflect sales and distribution expenses incurred in the United States. Kodak's chart compares apples to oranges. Furthermore, the average unit values cited by Kodak for export shipments to various European countries are irrelevant to Fujifilm. Except for small volumes of specialized products, Fujifilm did not export color negative film to Europe in 1994, the year of comparison(*1).
Indeed, a comparison of Kodak's average unit values for domestic shipments and exports to Japan yields an even greater disparity. Kodak's average domestic wholesale value for 35 mm color negative film in 1995 is approximately 8,321 yen per square meter(*2). By comparison, data prepared by the Ministry of Finance show that the value of exports from the U.S. to Japan is approximately 2,025 yen per square meter(*3).
Accordingly, if Kodak's methodology is applied to its own prices, the result is that the average domestic wholesale price in the U.S. is 4.1 times higher than the average unit value of exports to Japan. Thus, the disparity between domestic and export average unit values is not peculiar to Japan; an even greater spread exists for Kodak in the United States. These disparities, however, have no probative value; they are simply artifacts of a flawed methodology(*4).
2. Retail prices
Kodak's submission contains a chart showing retail price data from the first quarter of 1995. According to Kodak's Figure 2, the retail price for 35 mm ISO 100 Fuji brand film (24 exposures) is $5.41 in Japan, as compared to $2.67 in the United States, $3.92 in photo stores in Germany, and $3.38 in German hypermarkets and department stores.
Kodak's price data are unrepresentative; Kodak has simply cherry picked very high prices from Japan and compared them to very low prices in the United States. In reality, as shown below, retail prices in the two markets are similar. Prices in both markets, however, vary greatly depending on the speed and packaging of the product, the brand, the type and size of store, and other factors. Kodak's comparison ignores all these critical factors.
The Japanese price figure is based on a government survey which is conducted over the telephone and therefore does not involve verification of actual prices. Survey results also do not specify the brand of film. Most importantly, the survey covers only camera stores, where film prices are relatively high. The U.S. price figure, by contrast, is based on data from A.C. Nielsen, which only surveys mass merchandisers, supermarkets, and drug stores that tend to price more aggressively. These considerations alone show how skewed Kodak's comparison is.
Furthermore, Kodak appears to be using Fuji brand prices in both Japan and the United States. In other words, Kodak is comparing the prices of the market and price leader in Japan with the prices of imports in the U.S. that are sold at a discount as compared to the market leader, Kodak. In addition, the U.S. price appears to based on Fujifilm's secondary, cheaper brand, which is not even sold in Japan. Finally, Kodak has conveniently chosen a comparison period during which the yen/dollar exchange rate was at a very high level of 90:1. At every turn Kodak has manipulated the data to increase the Japanese price and lower the U.S. price(*5).
Price data manipulated to make Fujifilm look bad can just as easily be manipulated to put Kodak in a negative light. Figure 1 below does just that.
Comparison of Low Japanese Prices and High U.S. Prices
Figure 1 is based on outside price survey data from September 1995. In both Japan and the United States, Fujifilm retains independent survey firms to gather retail price information on a regular basis. In Japan, one outside firm, Nippon Research, conducts a monthly survey of 32 Tokyo and Osaka retail storefronts. In the United States, another outside firm, Advance Marketing Services, conducts a quarterly survey of several dozen outlets in New York, Los Angeles, Chicago, and Washington, D.C. These firms have been providing survey data to Fujifilm in the ordinary course of business for years -- long before Kodak lodged its Section 301 complaint.
Figure 1 provides selected store-specific price information from the September 1995 Japanese and U.S. surveys. The data are organized by store type and by brand. To illustrate how manipulable the data are, we have included the highest U.S. prices and lowest Japanese prices for each store type/brand combination. Even using Kodak's indefensible Fuji brand to Fuji brand, Japanese camera store to U.S. discounter comparison, the data for ISO 100 3-pack film still show a Japanese price ($6.85) that is lower than the U.S. price ($8.99). When the tables are turned, and Kodak U.S. camera store prices are compared to Kodak Japanese discounter prices, the U.S. price ($13.81) is exactly twice as high as the Japanese price ($6.90). The data for ISO 400 film are even more damaging to Kodak's position.
To make a valid comparison of price levels in the two countries, it is necessary to compare similar store type to similar store type, and leading brand to leading brand(*6). Figure 2 provides such a comparison for both September 1994 and September 1995(*7).. Comparisons are made for four different film products (ISO 100 single pack and 3-pack, ISO 400 single pack and 3-pack) and three different store types (camera store, discounter, supermarket)(*8).
Comparison of Average Prices:
Fuji Brand in Japan vs. Kodak Brand in the U.S.
The data presented here are far more comprehensive, reliable, and representative than the figures cited by Kodak(*9). In the Japanese market, Kodak provides telephone survey data on ISO 100 single pack film -- a film speed/packaging combination that covers about 34 percent of the market(10). By contrast, the Nippon Research data presented here cover ISO 100 and 400, single pack and multipack -- a film speed/packaging combination that covers 95 percent of the market(*11).
In the United States, Kodak provides Nielsen survey data on Fuji brand ISO 100 single pack film -- less than 3 percent of the total market(*12). The Advance Marketing Services data cover Kodak brand ISO 100 and 400 -- a brand/film speed combination that covers 30 percent of the market(*13).
Thus, the independent survey data provided here are far more comprehensive and representative than the figures cited by Kodak. Because of that, they allow methodologically valid comparisons, matching leading brand to leading brand, store type to store type, film speed to film speed, and packaging to packaging.
These data show what Fujifilm has been saying all along: price levels in the two markets are remarkably similar(*14). Sometimes the average U.S. price is higher, sometimes the average Japanese price is higher. Specifically, for the 12 store type/product combinations in September 1994, the U.S. price is higher in seven instances; in September 1995 the U.S. price is higher eight out of 12 times. What is clear, though, is that Kodak's contention that Japanese prices are dramatically higher than U.S. prices is utterly baseless(*15).
3. Price differentials over time
Kodak provides a chart which purports to show that during the period August 1994 and May 1995, there was no overlap between the Japanese price range and the U.S. price range. Kodak uses this chart to argue that the Japanese price level has been persistently inflated over time.
Once again, though, Kodak's chart tells more about its creator's lack of scruples than it does about market realities. Kodak again uses the government telephone survey of camera stores. Thus, Kodak again compares Japanese camera store prices to U.S. discounter prices, and apparently compares Fuji brand in Japan to Fuji brand in the United States.
Figure 3 below provides graphs of high and low Japanese and U.S. prices at three month intervals from March 1994 through September 1995. These graphs are based on the outside survey data described above for camera stores, discounters, and supermarkets. They compare high and low Fuji brand Japanese prices to high and low Kodak brand U.S. prices for each of the four film types.
Fuji Film High and Low Prices in Japan
vs. Kodak Film High and Low Prices in the U.S.
These graphs demolish Kodak's assertion that there is no overlap between Japanese and U.S. price ranges. Generally speaking, the Japanese price range fits within the larger U.S. price range. In other words, the high U.S. price is generally higher than the high Japanese price, while the low prices are at comparable levels in the two countries.
Please note that Exhibit 4 provides Fuji to Fuji comparisons, and Exhibit 5 provides Kodak to Kodak comparisons. These comparisons show, unsurprisingly, that each brand commands a premium in its home market and sells at a discount abroad -- fully consistent with the well-established concept of "home team advantage."Yet another piece of Kodak "evidence" bites the dust.
4. Consumer price index
Kodak's final offering in its recent submission is an analysis of the consumer price index (CPI) for color film between the third quarter of 1989 and the end of 1994. During this period the index went from 100.9 to 100.5, and never dipped lower than 99.8. Kodak argues that this stability is proof of the lack of price competition in the Japanese market.
This argument is sophomoric. Kodak fails to take account of the fact that the general CPI index increased from 97.5 to 107.1 during the period in question(*16). In other words, while the overall Japanese price level rose around 10 percent, nominal film prices remained stable. Thus, the evidence cited by Kodak shows that real (i.e., inflation-adjusted) color film prices declined over the period. The trend in nominal prices over this time span is irrelevant(*17).
Furthermore, it should be noted that Kodak's selection of its time period was no accident. The color film CPI index in the first quarter of 1989 was up to 106.3; one year earlier the figure was 111.2(*18). Kodak clearly attempted to rig the time series to its advantage. Too bad it forgot about the difference between real and nominal prices.
5. Kodak's theory: as bad as its facts
Kodak's charge that prices in Japan are artificially high is demonstrably false. In contrast to Kodak's selective and mismatched comparisons, the independent survey data shown here demonstrate that price levels in Japan and the United States are similar.
While pointing out Kodak's factual errors, though, it is important not to lose sight of the bigger picture: namely, the fundamental analytical incoherence of Kodak's complaint about high prices in Japan. Kodak's Section 301 case is supposedly about unfair exclusion from the Japanese market -- how then are high prices, assuming they existed, supposed to be hurting Kodak? Artificially high prices in Japan would constitute a competitive opportunity for Kodak, not a market barrier -- provided that Kodak were willing to compete with aggressive, low prices.
Of course, Kodak's policy over the past decade in Japan has been to refuse to compete on price. In 1986, Kodak's then president, Kay Whitmore, was unequivocal on this point:
The President rules out the possibility of the company passing on exchange gains from the yen's appreciation against the U.S. dollar to Japanese consumers, in the form of lower product prices. He said Kodak is not a price leader in Japan and has no intention of lowering its prices to win in competition with its Japanese rivals(*19).
And more recently, in 1993 an unnamed Kodak Japan official made the following candid admission:
If we would sell film at even cheaper prices than the current price, this cheaper film would be reverse exported back to the U.S. or other markets and end up destroying the global price structure of Kodak products(*20).
Kodak's whole argument on relative price levels is thus not only factually disreputable, it does not even make any sense. Inflated prices in Japan, if they existed, would give Kodak a golden chance to pick up market share. Yet it is a chance that Kodak has disdained, by its own repeated admission. And all of this is somehow Fujifilm's fault?
Kodak's combination of bogus facts and non sequitur arguments is nothing short of shameless. Fujifilm will not let Kodak get away with it. We expect that, in the end, neither will USTR.
(Commodity by Country, Unit: 1,000yen)
Photographic Retail Prices by Cities in Jun. 1995
vs. Fuji Film High and Low Prices in the U.S.
vs. Kodak Film High and Low Prices in the U.S.