Japan

Fujifilm's views on Kodak's procedure under the section 301 petition

INITIAL RESPONSE TO KODAK'S NOV.6 SUBMISSION

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In its ongoing trade war against Fujifilm, Kodak yesterday released another weighty document that supposedly substantiates its Section 301 allegations of a closed Japanese market for color film and paper. Once again, there is far less to Kodak's case than meets the eye.

Fujifilm is planning to issue shortly a comprehensive response to Kodak's new "facts." This response will show that these "facts" consist of the same old concoction of misstatements, distortions, and irrelevancies that Kodak has relied on throughout this investigation.

In the meantime, it is important to focus on what is missing from Kodak's new document. Sherlock Holmes once solved a case by noticing the dog that didn't bark. In similar fashion, the truth in this case is shown by what Kodak isn't saying.

On July 31, 1995, Fujifilm submitted to USTR and released to the public its comprehensive and devastating answer to Kodak's factual allegations: a 585-page report entitled "Rewriting History: Kodak's Revisionist Account of the Japanese Consumer Photographic Market." The next week, on August 8, Fujifilm followed up with a 121-page legal analysis that exploded Kodak's legal arguments. Now, with its new release, Kodak purports to rebut "Rewriting History" and Fujifilm's legal analysis. Yet Kodak's submission fails to rebut many key factual and analytical points raised by Fujifilm.

The omissions in Kodak's submission are striking:

  • Kodak does not deny that it can and does sell directly to large retailers, or that it can and does reach small retailers through secondary dealers and its own photofinishing labs. Kodak provides no evidence of retailers that want to carry Kodak but cannot obtain it.
  • Kodak does not deny that the development of single-brand relationships between wholesalers and manufacturers was not specific to Fujifilm, but was a general trend that included Kodak and Konica as well as camera manufacturers. The only difference between Fujifilm and the others is that the others bought their distributors, while Fujifilm continued to rely on independent wholesalers.
  • Kodak does not deny that its market share grew markedly in the early 1980s when the price gap between Kodak and Fujifilm widened. This episode demonstrates that, contrary to Kodak's repeated assertions, competing on price is an effective strategy in Japan.
  • Kodak has dropped its argument that Fujifilm's relationships with photofinishers in Japan create an anticompetitive "captive market" for color paper. Kodak does not deny that forward integration into photofinishing is a normal business practice around the world.
  • Kodak has no answer to Fujifilm's devastating critique of its econometric analysis. Kodak purported to provide econometric evidence that the Japanese market is closed; Fujifilm demonstrated that Kodak's analysis was rife with embarrassing calculational and methodological blunders.
  • Kodak does not deny that on two separate occasions, scrutiny by the Japan Fair Trade Commission led Fujifilm to change its business practices relating to the distribution of color film. This record of scrutiny by the JFTC belies any claim that the JFTC has acquiesced in Fujifilm's allegedly anticompetitive practices.
  • Kodak does not deny that it spent billions of dollars in failed diversifications and repeated restructurings over the past decade, or that it has followed an excessively generous dividend policy for the past 20 years. These two facts, not a closed Japanese market, explain the difference between Kodak's and Fujifilm's cash surplus positions.
  • Kodak does not deny that between 1971 and 1986 it failed to invest in its own distribution arm for the Japanese market, despite the fact that it was legally allowed to do so. This 15-year delay was crucial in allowing Fujifilm to grow unopposed into a formidable competitor with a firmly entrenched leading position in the Japanese market.
  • Kodak does not deny that its advertising effort in Japan has been insufficient, or that it has committed serious cultural blunders. These missteps have doomed Kodak's efforts to offset Fujifilm's built-in home team advantage.
  • Kodak does not deny that it was two years late in introducing the two fastest growing color film products of the past decade: single-use cameras and high resolution ISO 400 film. These two products together account for roughly 60 percent of the Japanese color film market today, yet for both products Kodak ceded the marketplace to Fujifilm for two years before offering a competing product.
  • Kodak does not deny that it engages in aggressively exclusionary practices in the United States. Specifically, it pays retailers as much as seven figures to keep Fuji brand film off the shelf. In addition, it offers retailers rebates conditioned on buying only Kodak. The Section 301 statute expressly requires USTR to examine conditions in the U.S. market when evaluating whether foreign barriers exist.

In sum, Kodak's 1,100 pages of rebuttal do not rebut very much. The fact that Kodak does not even deny many of Fujifilm's most devastating criticisms highlights the need for USTR to subject all of Kodak's claims to objective, impartial scrutiny. It is now apparent what a mistake it would have been to take Kodak's original claims at face value.

1. Kodak has unimpeded access to retailers

Kodak's central claim in this Section 301 investigation is that Fujifilm's relationships with its four main tokuyakuten -- i.e., the fact that these distributors only carry Fuji brand film -- unfairly hinder Kodak's ability to reach retailers in the Japanese market. According to Kodak, MITI support for and JFTC acquiescence in the relationships between Fujifilm and its tokuyakuten constitute government toleration of anticompetitive activities that is actionable under Section 301.

Kodak's claim -- the core of its entire case -- only makes sense if in fact lack of access to Fujifilm's distributors significantly hinders Kodak's ability to sell film to retailers. If Kodak does not need access to the tokuyakuten to be able to sell to retailers, then Fujifilm's relationships with the tokuyakuten cannot be a market barrier. If there is no market barrier, there is no Section 301 case.

In "Rewriting History" and its legal analysis, Fujifilm demonstrated that Kodak has precisely the same ability to sell to retailers through precisely the same channels as does Fujifilm selling through the tokuyakuten. As shown in Figure 1, both Kodak and Fujifilm/tokuyakuten can and do sell directly to large retailers; both can and do reach retailers through selling to secondary dealers; both can and do sell to retailers through their network of photofinishing labs (#1). Kodak's claimed "distribution bottleneck" is a fraud..

FIGURE 1.

COLOR FILM DISTRIBUTION STRUCTURE IN JAPAN.

First, about half of the tokuyakuten's film sales are directly to large retail accounts. Kodak, likewise, sells directly to large retailers; such direct sales account for roughly 60 percent of its color film shipments. There is no need for a wholesaler intermediary between the manufacturer and large retail accounts. Accordingly, Kodak's lack of a relationship with the tokuyakuten is not an obstacle to selling to large retailers; Kodak can and does sell directly to them through its importer/distributor subsidiary, Kodak Japan.

Next, approximately 35 percent of the tokuyakuten's sales are to secondary dealers, multibrand resellers that specialize in servicing smaller retail outlets often in discrete geographical areas. Kodak also sells to secondary dealers, with such sales constituting about 15 percent of Kodak's total color film shipments. Indeed, virtually all the significant secondary dealers carry Kodak film -- a fact which Kodak does not deny in its rebuttal. These secondary dealers collectively account for around 30 percent of total color film sales in Japan, and Kodak can and does deal with nearly every one of them.

Finally, about 15 percent of the tokuyakuten's sales are to Fujifilm's major photofinishing labs, which also act as resellers of color film. In similar fashion, roughly 25 percent of Kodak's sales are to Kodak's major labs, which likewise resell to retail accounts. Thus, Kodak's network of photofinishing labs gives it yet another channel for reaching the retail store shelf (#2).

Accordingly, even without access to the four tokuyakuten, Kodak sells through exactly the same distribution channels that Fujifilm and the tokuyakuten use. In its rebuttal Kodak denies none of this. Nowhere in its rebuttal does Kodak try to argue that there are retailers in Japan that would like to carry Kodak but cannot obtain it because of a lack of distribution channels. Neither does Kodak argue that anyone is trying to prevent it from upgrading its distribution channels: hiring more salespeople, intensifying its efforts with large retailers, reaching out more to secondary dealers, and acquiring or building more photofinishing labs.

Kodak's implicit admission that it is able to sell to any retailer in Japan that wants to buy its products is devastating to its contention that the tokuyakuten are an "essential facility" for reaching the retailer. Kodak is left with the crackpot theory that some massive conspiracy among nearly 300,000 retailers renders Kodak's sales pitches to them ineffective.

  • (#1) "Rewriting History" at 39.
  • (#2) Fujifilm's August 8, 1995 Comments on Legal Issues at 28-29.

2. The development of single-brand distribution was a general industry trend

Kodak argues that the transition of the four tokuyakuten from multibrand wholesalers to dealers of only Fuji brand film was deliberately engineered by Fujifilm and MITI to block Kodak from the Japanese market just as overt trade barriers were being removed. Yet the facts surrounding this transition -- facts which Kodak does not deny -- show that Kodak's conspiracy theory is baseless.

First, the timing of the tokuyakuten's switch from multibrand to single-brand wholesalers is completely inconsistent with Kodak's characterization of the switch as a "liberalization countermeasure." Kodak does not deny that Kashimura and Ohmiya have not carried Kodak film since World War II; furthermore, Kodak does not deny that these two wholesalers became Fuji-only color film distributors in 1963 and 1964, respectively -- long before the Japanese market began to be liberalized. Furthermore, Kodak does not deny that Misuzu dropped all brands of color film besides Fuji in 1968, when the tariff rate was still 40 percent and thus no "liberalization countermeasures" were necessary to hinder Kodak (#3). Thus, Kodak concedes that three of Fujifilm's four major tokuyakuten became single-brand distributors long ago, when the Japanese market was overtly protected. It is impossible to draw a causal connection between these prior events and the subsequent liberalization of the color film market.

Only one of Fujifilm's major distributors, Asanuma, terminated Kodak during the liberalization period. Yet Kodak does not deny that in 1973, shortly before Asanuma's decision to drop the Kodak color film brand in 1975, Asanuma officials visited Kodak in Rochester to seek restoration of direct dealings with Kodak(#4). Kodak refused Asanuma's request, saying that Asanuma could only purchase Kodak through Kodak's then-exclusive importer, Nagase. Since Nagase was also the major distributor of Kodak film in Japan, Asanuma was in effect being required to purchase from its competitor. It is little wonder that Asanuma eventually decided that its relationship with Kodak had no future (#5).

Kodak's conspiracy theory is belied not only by the timing of the tokuyakuten's actions, but also by what other participants in the industry were doing during the same period. Here again, Kodak does not deny the facts that undermine its own argument.

Kodak does not deny that Nagase bought its own tokuyakuten, Kuwada, in 1967, forcing it to drop Fuji brand film and become a single-brand distributor. Likewise, Konica acquired a number of distributors during the 1960s and '70s, building its own internal single-brand distribution network (#6). Thus, Fujifilm's competitors were moving to single-brand distribution at the same time that the tokuyakuten were; the tokuyakuten's moves were part of a general industry trend, not an anti-Kodak plot.

Indeed, not only film manufacturers, but also camera manufacturers were moving toward single-brand distribution at this time. In particular, Canon and Olympus began to develop their own direct distribution systems starting around 1965 (#7). The tokuyakuten thus faced some very stark alternatives: camera manufacturers, their major source of business, were abandoning them, as were other film suppliers. Their decisions to enter into single-brand relationships with Fujifilm were a logical response to the business challenges facing them.

In sum, Kodak does not deny that the entire Japanese photographic industry was trending toward single-brand distribution during the 1960s and '70s. Kodak remains in denial, however, about the clear implication of this fact: the development of Fujifilm's relationships with the tokuyakuten had nothing to do with "privatizing protection.

  • (#3) "Rewriting History" at 66-67.
  • (#4) Kodak's November 6 submission at 121.
  • (#5) "Rewriting History" at 181-182.
  • (#6) "Rewriting History" at 68-71.
  • (#7) "Rewriting History" at 72.

3. Kodak's market share rose sharply when it competed on price

In "Rewriting History" Fujifilm showed that Kodak's market share in Japan rose sharply when it competed aggressively on price, and then subsided after such aggressive pricing stopped. Specifically, in 1980 and 1981, when Fujifilm was raising prices due to the "silver shock", Nagase held the line on prices and thus increased the price gap between the Kodak and Fuji brands. As shown in Figure 2, Kodak's market share rose accordingly, up from under 12 percent in 1978 to 18 percent in 1981 and again in 1983 (#8). Only then did Nagase, after absorbing multiple price increases from Kodak, begin again to raise prices. In 1984 Kodak's market share began its long downward slide (#9).

*See "Privatizing Protection," Appendix A, Table 2; Exhibit 19, Table 1

FIGURE 2

KODAK MARKET SHARE
FOR FILM IN JAPAN
1971-1983*

In its rebuttal Kodak does not deny that this episode occurred. It does not deny that the price gap between Kodak and Fujifilm widened in the early 1980s, and it does not deny that Kodak achieved its record high market share at the same time. Nevertheless, Kodak continues to assert that price competition in the Japanese market is for one reason or another futile. The uncontroverted facts, however, show otherwise: when Kodak undersold Fujifilm aggressively, it picked up market share by leaps and bounds. The facts show that supply and demand operate as surely in Japan as anywhere else.

  • (#8) "Rewriting History" at 169.
  • (#9) "Rewriting History" at 169-172.

4. Kodak alleges no market barriers in the Japanese color paper market

Kodak originally argued that Fujifilm's equity and contractual relationships with photofinishing labs create an anticompetitive "captive market" for its color paper sales. In "Rewriting History" and its legal analysis, however, Fujifilm showed that vertical integration by color paper manufacturers into photofinishing is a normal accepted business practice worldwide. In Japan, Kodak has had a photofinishing presence since 1952; in the United States, Kodak and its subsidiary Qualex dominate wholesale photofinishing (#10).

In its rebuttal, Kodak does not even attempt to respond to Fujifilm. There is no discussion whatsoever of market barriers in the Japanese color paper market. Accordingly, Kodak's "captive market" argument must now be declared missing in action.

  • (#10) "Rewriting History" at 91-92, 94-96, 241-247.

5. Kodak's econometric "evidence" of Japanese market barriers is garbage in, garbage out

Kodak's original complaint presented econometric analysis purporting to show that the supposed closure of the Japanese distribution system in 1975 (the year of the "Asanuma incident") significantly hindered U.S. exports to Japan. In addition, the analysis concluded that U.S. export prices and the yen-dollar exchange rate had only a marginal effect on U.S. exports -- a conclusion that according to Kodak is consistent with its position that price competition in Japan is suppressed.

In an appendix to its legal analysis, Fujifilm's economic consultants, National Economic Research Associates (NERA), provided a devastating critique of Kodak's econometric study (#11). First, Kodak's results are apparently due to gross calculational errors. Second, the analytical framework of Kodak's study is shot through with fundamental conceptual, analytical, and statistical defects. In short, Kodak's study is a professional embarrassment whose results are completely unreliable. Garbage in, garbage out.

Tellingly, Kodak has said nothing in its rebuttal in defense of its discredited econometric analysis. Kodak thus tacitly admits that its so-called statistical evidence proves nothing. Accordingly, Kodak offers nothing to demonstrate a causal connection between alleged anticompetitive activities and the supposed burden or restriction on U.S. commerce.

  • (#11) Fujifilm's August 8, 1995 Comments on Legal Issues at Appendix.

6. Fujifilm has changed its business practices because of JFTC scrutiny

In "Rewriting History", Fujifilm refuted Kodak's allegations that the JFTC has failed to subject Fujifilm's business practices to scrutiny under the Antimonopoly Act. Specifically, Fujifilm detailed the numerous investigations and studies of Fujifilm and the Japanese photographic industry generally that have been conducted by the JFTC over the past 25 years (#12). Kodak has denied none of this; it simply continues to assert, without any factual support, that the JFTC fails to enforce the Antimonopoly Act and is therefore "part of the problem." In particular, Kodak does not deny that on two separate occasions in the past 15 years, scrutiny by the JFTC led Fujifilm to make significant changes in its business practices relating to the distribution of color film and paper.

First, in 1981 the JFTC conducted an investigation of Fujifilm's distribution system for X-ray film, and ordered Fujifilm to eliminate certain vertical restraints on dealers (e.g., territorial restraints). Although the JFTC investigation focused on X-ray film, Fujifilm realized that some of the issues identified by the JFTC could also apply to Fujifilm's distribution of consumer products. Fujifilm therefore voluntarily undertook a broad-based internal initiative to modify its other contracts -- including those relating to color film -- to remedy any possible problems. In particular, Fujifilm eliminated provisions requiring the tokuyakuten to (1) obtain Fujifilm's consent before handling other brands, and (2) make efforts to maintain orderly prices (#13).

Second, the JFTC conducted two general studies in the late 1980s: one from 1987 to 1988 pertaining to oligopolistic industries, and one from 1988 to 1989 regarding distribution systems. In response to JFTC requests for information, Fujifilm provided detailed information regarding its various rebate programs and pricing policies. Although the JFTC found no violations of the Antimonopoly Act, it did identify certain points of discussion. Accordingly, Fujifilm voluntarily changed some of its business practices. To reduce even further the mild progressivity of its rebate structure, it modified some of its rebate programs and eliminated others. In addition, Fujifilm clarified its policy regarding manufacturer's suggested prices to clarify the freedom of downstream customers to set their own resale prices (#14).

Kodak does not deny any of this history of JFTC scrutiny. This history, though, belies Kodak's unfounded claims that the JFTC has been failing to enforce the Antimonopoly Act with respect to Fujifilm. The actual record of JFTC's enforcement activities in the photographic industry shows that there has been no government toleration of anticompetitive activities.

  • (#12) "Rewriting History" at 135-145.
  • (#13) "Rewriting History" at 140-141. The tokuyakuten were in fact handling other brands already. For example, each of the tokuyakuten was carrying other brands of cameras besides the Fuji brand. Nevertheless, Fujifilm promptly changed these contract provisions to avoid any possible concerns under the Antimonopoly Act. Fujifilm made clear to each tokuyakuten that it was under no restriction against carrying competing brands.
  • (#14) "Rewriting History at 142-143.

7. Kodak squandered its own cash surplus

Kodak cited as "evidence" of market barriers in Japan the fact that Fujifilm has amassed a large cash surplus. In "Rewriting History", however, Fujifilm demonstrated that Kodak could have attained an equivalent surplus had it not wasted its high operating profits on diversifications, extraordinary charges, and excessive dividends. Specifically, Fujifilm pointed out that:

  • In 1985 Kodak made a $494 million charge against earnings arising out of its infringement of Polaroid's instant photography patents.
  • In 1986 corporate restructuring led to a charge against earnings of $373 million.
  • In 1988 Kodak acquired Sterling Drug for $5.1 billion.
  • In 1989 corporate restructuring led to an extraordinary charge of $875 million.
  • In 1991 additional restructuring led to extraordinary charges of $1.6 billion.
  • In 1993 Kodak took an after-tax charge of $2.2 billion for accounting purposes.
  • In 1992, 1993, and 1994, Kodak incurred further restructuring costs of $220 million, $538 million, and $340 million, respectively.
  • Over the past 20 years Kodak paid out dividends equal to nearly 80 percent of net earnings, including six years in which dividends exceeded net earnings. This payout ratio was nearly 50 percent higher than the average ratio for other companies included in the Dow Jones Industrials (#15).

Kodak is unable to deny any of this. Kodak has just as much of a "profit sanctuary" in the United States as Fujifilm does in Japan; the only difference is that Kodak has "spent" much more of its profits than has Fujifilm. Kodak's failure to come to grips with the facts presented by Fujifilm on this issue shows that its "evidence" of a closed market in Japan does not wash.

  • (#15) "Rewriting History" at 162-168, 184-185

8. Kodak failed to invest in Japanese distribution or photofinishing for 15 years

In "Rewriting History", Fujifilm showed that Kodak failed to take advantage of the new competitive opportunities that arose as the Japanese market was being liberalized. In 1971, partial capital liberalization allowed Kodak to create joint ventures with 50 percent ownership; in 1976, full liberalization permitted Kodak to open up wholly owned subsidiaries. Yet Kodak invested nothing in creating its own distribution capacity in Japan until entering into a joint venture with Nagase in 1986 -- 15 years after such a move was allowed. And it was not until 1987 that Kodak made any investment in photofinishing capacity (#16).

Kodak does not deny that this 15-year delay happened (#17). Instead, its strategy is to play down the importance of the delay. But such a position is clearly untenable: when Kodak was freed to enter the market, Fujifilm was one-tenth Kodak's size and behind Kodak technologically; by the time Kodak began to invest seriously in Japan, Fujifilm had grown to one-third Kodak's size and was its technological equal, if not its superior. While Kodak tarried, Fujifilm had grown into a formidable competitor worldwide and an entrenched incumbent in Japan.

Even Dr. Albert Sieg, the former president of Kodak Japan and a self-declared Kodak sympathizer in this Section 301 investigation, has admitted that Kodak's failure to capitalize quickly on liberalization was a major reason for its continued poor performance in Japan:
I clearly believe that one of the biggest problems that Kodak has in Japan is that for clearly 10 years of good opportunity, we neglected Japan. . . . And I'm talking about the early '70s to early '80s when it was possible to have a reasonable investment in Japan and control your own destiny. We were a good 10 years too late. . . . Frankly, it wasn't until the late '70s when Fuji had the technological strength to even compete against Kodak. So you know, we did it to ourselves(#18).

  • (#16) "Rewriting History" at 168-182.
  • (#17) Kodak does argue that it had little choice but to "do nothing" until 1976, the year that wholly owned subsidiaries were allowed. Kodak's November 6 submission at 90. But this ignores the fact, admitted by Kodak, that in 1971 50-50 joint ventures were permitted. Kodak finally entered into a 50-50 joint venture with Nagase in 1986 -- 15 years after such an investment was first allowed.
  • (#18) Scott Latham, "Kodak's Self-Inflicted Wound," Wall Street Journal, August 14, 1995.

9. Home team advantage matters, particularly when the visiting team does not adjust to the opponent's home field

In Section IV of "Rewriting History", Fujifilm explained that the difficulties Kodak faces in Japan are due in part to the concept of "home team advantage". As demonstrated by surveys undertaken by both Fujifilm and Kodak, the success of these two companies in their respective home markets is largely a result of consumer preference. Kodak's surveys show that 50 percent of U.S. consumers will buy only Kodak, regardless of price, and that an additional 40 percent prefer Kodak. Likewise, Fuji brand film is consistently ranked by Japanese consumers substantially higher than Kodak on all of the qualitative measures surveyed, with as much as a 5 to 1 advantage in consumer perceptions. Since both companies have under 40 percent of the world market excluding the U.S. and Japan, it follows that a substantial home team advantage must be at work to permit the companies to maintain 70 percent of their respective home markets (#19). Kodak's rebuttal does not deny that consumer loyalties to national brands can make it difficult for foreign brands to compete.

Recognizing the importance of marketing to overcome home team advantage, one would have expected Kodak's marketing efforts to be greater in Japan. Between 1986 and 1989, when Kodak claims to have spent 5.3 billion yen on advertising, Fujifilm spent 10 times (and Konica eight times) that amount (#20). Kodak's response offers no denial of this fact.

Perhaps more important, however, is that Kodak does not deny many of the cultural blunders it has made while playing on Fujifilm's home turf. Specifically, Kodak does not deny that (1) it waited until the mid-1980s to offer film in Japan that was color balanced for Japanese consumer preferences, after Asanuma representatives had encouraged them to do so in the early 1970s (#21); (2) in 1990 it scaled back its R&D facility and laid off technicians that had just been hired; and (3) in 1993 it cancelled job offers to several college graduates (#22). This last gaffe has been called "maybe the worst marketing decision ever made by a foreign company.(#23)" Such blunders only offer to solidify further Japanese consumers' allegiance to Fuji brand film, yet Kodak fails to address these important cultural mistakes.

  • (#19) "Rewriting History" at 154-161.
  • (#20) "Rewriting History" at 195.
  • (#21) "Rewriting History" at 69, note 18.
  • (#22) "Rewriting History" at 196.
  • (#23) Scott Latham, "Kodak's Self-Inflicted Wound," Wall Street Journal, August 14, 1995.

10. Kodak has trailed behind Fujifilm in introducing new products to the Japanese market

Kodak's efforts to overcome Fujifilm's home team advantage have been further plagued by a persistent innovation gap. As detailed in "Rewriting History", Kodak was two years behind Fujifilm in each of the two hottest-selling products of the past decade: single-use cameras and high resolution ISO 400 film, which together now account for roughly 60 percent of color film sales in Japan (#24).

Fujifilm introduced the world's first single-use camera in a 110 format in July 1986, and followed with a 35mm version in July 1987. Kodak did not introduce a single-use camera in Japan until August 1988. By that time Fujifilm had already sold roughly 10 million units. Today single-use cameras make up over 15 percent of the Japanese color film market (#25).

In 1989, Fujifilm introduced ISO 400 film with resolution equivalent to that of ISO 100 film. In the first year after its introduction, the new ISO 400 film tripled Fujifilm's sales of high speed film from 10 percent of total sales to 30 percent. By the time that Kodak introduced its own version of this product, ISO 400 film accounted for roughly 40 percent of total color film sales in the Japanese market. As Figure 3 shows, that figure had climbed to 47.5 percent by 1994; meanwhile, Kodak's major product, ISO 100 film, was losing market share throughout this period.

FIGURE 3

MARKET SHARE OF
DIFFERENT FILM SPEEDS IN JAPAN

Kodak cannot and does not attempt to deny these crucial facts (#26). Instead Kodak's rebuttal attempts to downplay the correlation between major product innovations and market share. This cannot be taken seriously. Since the 1980s, when Kodak began to focus on the Japanese market, Kodak has had to play "catch up" with Fujifilm, the entrenched domestic incumbent with strong brand loyalty. It is impossible to catch up, however, when you keep falling behind on major product introductions (#27). A total inability to compete for two years on the two most popular products in the Japanese market doomed Kodak to remain an "also ran" in Japan. Kodak claims that distribution problems explain its low market share; its real problem is that all too often it has had nothing to distribute.

  • (#24) "Rewriting History" at 188-190.
  • (#25) "Rewriting History" at 191.
  • (#26) Kodak's November 6 submission at 96, 98.
  • (#27) In this regard, Kodak does not even try to dispute the economic literature cited by Fujifilm on the subject of the significant competitive advantages of "first mover" status. See "Rewriting History" at 160-161.

11. Kodak engages in aggressively exclusionary practices in the United States

Kodak complains about exclusionary practices in the Japanese market that hinder its sales efforts. Yet as Fujifilm showed in "Rewriting History", Kodak engages in practices in the United States that are far more exclusionary than anything Fujifilm is even accused of doing in Japan (#28). The existence of these exclusionary practices is not denied in Kodak's recent rebuttal.
Kodak claims that the tokuyakuten's exclusive dealing with Fujifilm has made it difficult for Kodak to sell to retailers in Japan. Yet Kodak does not deny that in the United States, exclusive arrangements between Kodak and numerous major retail chains make it impossible for Fujifilm to sell to those retailers. Among the major U.S. retail chains from which Fujifilm has been precluded are Eckerd Drug (1,700 drug store outlets), Publix Supermarkets (470 grocery store outlets), Caldor (174 discount store outlets), and Bradlees (130 discount store outlets).

Kodak claims that Fujifilm's rebates discourage distributors and retailers from carrying Kodak film. Yet Kodak does not deny that in the United States, its VIP rebate program offers a 4 percent rebate if either a specified purchase target is met or the store agrees to carry only Kodak. Not only is Kodak's U.S. rebate rate higher than anything Fujifilm offers in Japan, but the expressly exclusionary terms of Kodak's program are completely without parallel in Fujifilm's rebate programs in Japan.

The facts about Kodak's exclusionary practices are clear and uncontroverted. Accordingly, Fujifilm has stronger grounds to complain about market access in the United States than Kodak does about market access in Japan. And as Kodak implicitly concedes,29 what it does in the U.S. market is directly relevant to this Section 301 investigation: the Section 301 statute requires USTR to investigate "reciprocal opportunities" for foreign firms in the U.S. market when evaluating whether market barriers exist abroad(#30). The statute thus expressly guards against the kind of double standard from which Kodak now seeks to profit.

  • (#28) Kodak's November 6 submission at 157-171 (analyzing conditions in the U.S. market as a benchmark for Japan).
  • (#29) Kodak's November 6 submission at 157-171 (analyzing conditions in the U.S. market as a benchmark for Japan).
  • (#30) Fujifilm's August 8, 1995 Comments on Legal Issues at 24-25.