the factory at Gloucester, N. J., is the receiving plant for imports of cork used in the manufacture of insulation and industrial products. Indicating that the Commission recognized the possible confusion of allocating the net fixed assets of multiproduct companies to one particular field, the report (p. 11) states: "There are, however, a number of other cases in which this procedure was not applicable and in which the large corporation's net capital assets engaged in 'outside' fields are (1) significant in relation to the size of the corporation. (2) contribute only indirectly to the corporation's position in the industry, and (3) are not convertible to the industry in which the corporation is classified. In such cases, there has been only one alternative, that of excluding the industry from the report." Therefore, according to the standards laid down by the Commission, Armstrong should be excluded from the study because of the manifest injustice of assigning the entire fixed assets of a company of this character to one particular industry. Armstrong's non-linoleum capital assets are more than significant in relation to the size of the company-they are the preponderant part of its size: they do not contribute to the corporation's position in the linoleum industry and they are not convertible to the industry in which the company has been classified by the Commission. In view of these additional data, we are confident that the Commission will want to take appropriate steps to amplify its original report, clarifying the position of the Armstrong Cork Co. in relation to the hard-surface floor covering industry. To that end, we hope that this letter will be helpful, in bringing these further facts to the attention of not only the various committees in Congress that saw the Commission's report, but of the public generally. Respectfully yours, ARMSTRONG CORK CO., H. W. PRENTIS, Jr., President. Analysis of concentration of productive facilities in linoleum industry as reported by Federal Trade Commission for the year ending Dec. 31, 1947 1 Year ending June 30, 1947, excludes Fiberboard Products, Inc. 26 companies, felt base, no linoleum---Paulsboro Manufacturing; Carthage Mills; Delaware Floor Prod ucts; Mannington Mills; Chandler-Palruba; J. C. Dunn; 3 companies, linoleum and felt base-Paratie Cos., Bird & Son, Bonafide; 2 companies, linoleum, felt base and wall covering-Congoleun-Nairn, Sloane Blabon. 311 companies, shown in note 2 plus facilities employed by them for manufacture of asphalt tile, plastic flooring and mastipave; 1 company, asphalt and rubber tile-Hood Rubber; 7 companies, asphalt tileD. E. Kennedy, Flintkote, Thomas Moulding, Mastic Tile, Johns-Manville, Nachmeister, Arrock; 6 companies, rubber tile-American Tile & Rubber, Kleistone, Wright Rubber, Danbury Rubber, Robbins Tire & Rubber, Fremont Rubber; 1 company, sheet rubber flooring-Goodyear Tire & Rubber. Hon. EMANUEL CELLER, FEDERAL TRADE COMMISSION, House of Representatives, Washington, D. C. MY DEAR CONGRESSMAN: This is in reply to the analysis by the Armstrong Cork Co. of the Commission's report, the Concentration of Productive Facilities. The analysis is a valuable contribution to the understanding of the problem of economic concentration in that it not only provides new, additional information, but also high-lights the significance of the type of concentration measure used in the report. It contains two basic arguments: first, that the statistical procedure of classifying all of a corporation's facilities in the industry in which it is principally engaged is not significant, at least for the linoleum, asphalt-felt base, industry; and second, that the different statistical procedure of measuring concentration in terms only of those facilities which are actually devoted to the production of linoleum, asphalt-felt base, would show that Armstrong Cork "owns less than 30 percent of the fixed assets in the linoleum industry," and "stands second to its principal competitor from the standpoint of investment in net fixed assets for the production of linoleum and felt base." Each of these contentions will be discussed below. 1. The significance of measuring concentration in terms of over-all economic strength The statistical procedure followed in the report emphasizes the over-all economic strength or "potential" of the corporations studied. The report focused attention upon the frequently overlooked economic fact-which, it is believed, is beyond question-that a large corporation engaged in a number of different industries has greater economic power in any one of the particular fields in which it is engaged than the amount of resources actually devoted to that one field. The Commission has previously described the advantages which such a corporation possesses in the following terms: "With the economic power which it secures through its operations in many diverse fields, the giant conglomerate corporation may attain an almost impregnable economic position. Threatened with competition in any one of its various activities, it may sell below cost in that field, offsetting its losses through profits made in its other lines-a practice which is frequently explained as one of meeting competition. The conglomerate corporation is thus in a position to strike out with great force against smaller business in a variety of different industries * * * there are few greater dangers to small business than the continued growth of the conglomerate corporation." 1 As an illustration of what it was seeking to measure, the concentration report cited this specific example: "The financial figures for a large corporation may include significant amounts of net capital assets which, although actually engaged in fields other than those encompassed by the definition of the industry, nonetheless contribute significantly and directly to the degree of concentration in the industry in which the corporation is assigned. For example, the net capital assets of the Aluminum Co. of America include the vessels owned by that firm which are used to transport highgrade bauxite ore to the United States. From the strict point of view of the definition of the industry, the vessels should be excluded, since they are outside the field of aluminum manufacturing. But from the point of view of the productive facilities of the Aluminum Co. of America, there are reasons for contending that they should be included, since the ownership of these vessels undoubtedly contributes significantly to the position held by Alcoa in this industry" (pp. 9-10). In much the same way, it was felt that the resources of the Armstrong Cork Co. engaged in such "outside" fields as asphalt tile, insulating materials, cork and rubber products, etc., "contribute significantly to the position" held by Armstrong Cork in the linoleum, asphalt-felt base, industry. Recognizing, however, that it was impossible to qualify the extent of this contribution, the report explicitly stated: "These figures may over state somewhat the degree of concentration in the industry owing to the activities of some of the leaders in 'outside' fields. For example, Armstrong Cork is an important producer of asphalt tile, and since 1938 has manufactured glass containers" (p. 76). According to the figures attached to Armstrong Cork's statement, the amount of its net capital assets engaged in "outside fields," that is, in industries other than the production of linoleum, asphalt-felt base, is greater than the total net capital assets of its four principal competitors combined. Is it to be assumed that the possession of these vast resources engaged in other fields, many of 1 Federal Trade Commission, The Merger Movement: A Summary Report, 1948, p. 59. 2 Industry No. 2274 in the Standard Industrial Classification Manual. which are closely related, does not give Armstrong Cork a decided advantage over its competitors in the linoleum, asphalt-felt-base industry? As additional matters of information, it might be poitned out that two preliminary checks were made before it was decided to include this industry in the report. First, it was determined from reports previously submitted to Government agencies that the leading producers, Armstrong Cork Co., was in point of fact principally engaged in the linoleum industry. According to the 1947 registration statement filed with SEC by Armstrong Cork, "The largest single peacetime activity is the manufacture and sale of floor-covering products." And the corporation report submitted by the company for the last prewar year, 1940, showed that the manufacture of floor coverings accounted for no less than 48,6 percent of its sales. Second, the degree of concentration yielded by the procedure followed in the concentration report was compared with the degree yielded by the different procedure of measuring concentration in terms of the percentage of the industry's output accounted for by the actual output in that industry. According to a report of the National Resources Committee, the Structure of the American Economy, the four largest firms producing linoleum, asphalt-felt base floor covering in 1935 produced 82 percent of the value of product of that industry. In view of the acquisitions and internal expansions by leading companies since that time, this figure did not seem to be too far apart from that of the concentration report, which showed that the four largest corporations engaged in this field owned 93.6 percent of the net capital assets of all corporations whose principal activity was the manufacture of linoleum, asphalt-felt base. In summary, on this first point, the Armstrong Cork Co. contends that its facilities engaged in "outside" fields should not be included in determining the proportion of the linoleum, asphalt-felt base, industry's total facilities held by the company. Where activities in outside fields are so unrelated as to have no significance to the particular field undergoing study, the Commission has refrained from publishing concentration figures. Indeed, in the absence of specific information showing the division of a corporation's net capital assets in different fields, no course is possible other than that of using the undivided figures or of omitting the industry completely. The Commission believes, and still believes, that Armstrong Cork's activities in related fields are sufficiently relevant to its power in the manufacture of linoleum to justify inclusion of the industry in the report. This, however, is a question of judgment; and the Commission welcomes the additional information supplied by Armstrong which shows the relative importance of Armstrong's net capital assets engaged in linoleum production and in other lines of manufacture. 2. The extent of concentration of facilities engaged solely in the production of linoleum, asphalt-felt base The second point made by Armstrong Cork is that if one were to measure the concentration of facilities engaged solely in the production of linoleum, asphalt-felt base, the extent of Armstrong's control would be decidedly less than that shown by the Commission in measuring the total productive facilities of corporations engaged primarily in this line of production. Armstrong asserts that this is true for two reasons: First, that one significant producer of linoleum, asphalt felt base, is omitted from the Commission figures because it is a subsidiary of the Alexander Smith Carpet Co., which is engaged primarily in the carpet and rug industry; and second, that a large proportion of Armstrong's net capital assets is engaged in other lines than the production of linoleum, asphaltfelt base. The Commission is in agreement with Armstrong that wherever facilities for the production of any product are possessed by companies primarily engaged in another industry, the omission of these facilities has the effect of increasing the apparent degree of concentration in the industry. This point was repeatedly made by the Commission in its report, and certain industries were omitted from the report because this effect was thought to be so large as to destroy the significance of the figures. So long as corporate balance sheets do not segregate information as to corporate assets engaged in different industries, it will not be possible, without extensive special inquiry, to prevent statistics pertaining to a particular industry from being affected by this type of omission. Armstrong's second argument, that a large part of its facilities are engaged outside the linoleum industry as narrowly defined, is significant only insofar as there is not a similar spread in the facilities held by other companies. If, for example, 50 percent of the assets of each company were devoted to the producion of linoleum and 50 percent to the production of other products, Armstrong's proportion of the total would be the same whether one measured total productive issets or productive assets devoted to linoleum alone. The primary basis for Armstrong's estimate that it holds only 28.7 percent of he total net capital assets engaged in the production of linoleum, asphalt-felt ase, is an estimate that other companies in the field use, as compared with Armtrong, relatively small amounts of their productive facilities for the production of other products. Armstrong believes, in other words, that it is relatively far more diversified than its competitors. The Commission has had access to Armstrong's detailed estimates for each ompetitor included in Armstrong's aggregate estimate for other companies. The Commission has checked these detailed estimates by direct inquiries to the companies in question as to the amount of their net capital assets represented n 1947 by facilities engaged in the production of linoleum, asphalt-felt base. Relies were received from three of the four producers next in importance to Armstrong and from some of the smaller companies. On the basis of these replies he Commission has prepared its own estimates. Where no reply was received he Armstrong estimate has been used. Omitting the figure for the subsidiary of Alexander Smith Carpet Co. which as already been discussed, Armstrong's estimate for other companies is $29,04,000. The Commission's revised estimate, prepared as indicated above, is $18,$6,000. In other words, Armstrong Cork, without exception, has definitely verestimated the amount of its competitors' assets engaged in this field, the verestimates ranging from 33 to 52 percent. From the figures as thus revised, it is possible to prepare an estimate of the conentration of contral over net capital assets engaged in the production of linoleum, asphalt-felt base, and held by companies primarily engaged in that type of proluction. Total assets thus engaged are estimated by the Commission to be $32,725,000. This figure is based upon Armstrong's statement as to its own assets and as to the assets of companies which did not reply to the Commission nquiry and upon direct reports from other companies. Of this total, Armstrong held 42.3 percent in 1947. This is believed to be a minimum estimate. Inasmuch as in all cases where a check has been possible Armstrong's estimates for their competitors have been excessive, acceptance of Armstrong's figures as to other competitors probably results in an overstatement of the amount of net capital assets in competitors' hands, and use of these figures to determine Armstrong's proportion of the total probably understates Armstrong's relative importance. The figure 57.9 percent presented as Armstrong's percentage of control in the Commission's concentration report and stated to be possibly an overstatement because of Armstrong's outside activities, can now be compared with other figures. As published in the report, the figure represents Armstrong's proportion of the total net capital assets of all corporations engaged primarily in the production of linoleum, asphalt-felt base. A minimum estimate of Armstrong's proportion of the net capital assets devoted to the production of linoleum, asphaltfelt base, by corporations engaged primarily in that production is 42.3 percent. Armstrong's lower estimate of 28.7 percent is due primarily to an underestimate of the diversification of its competitors, which led Armstrong to set the figure for them too high by $10,418,000. A second basis for this lower estimate is Armstrong's inclusion in the total for the industry of a substantial sum for a subsidiary of Alexander Smith Carpet Co., the Sloane-Blabon Co. The inclusion of this subsidiary would provide an estimate of concentration of control over all facilities engaged in the production of linoleum, asphalt-felt base, even though such facilities are held outside the industry, as the industry is defined. Although the inclusion in one industry of the facilities actually owned by a company primarily engaged in another would represent a rather unusual departure from ordinary statistical procedures, it is at least interesting to note that, even including these facilities of the SloaneBlabon Co.. as estimated by Armstrong Cork, Armstrong's percentage of the total facilities becomes 36.6 instead of 28.7, as estimated by Armstrong. In summary, it is recognized that although this minimum estimate of 42.3 percent is above the Armstrong Cork estimate of 28.7 percent, it is also well below the figure of 57.9 percent presented in the concentration report. However, the report's figure of 57.9 is based on a different type of measurement--the measurement of what the report describes as "the total economic strength or productive potential of all corporations whose principal activity lies in that industry" (p. 12). But even disregarding the facilities engaged in outside fields and limiting the analysis to the second point emphasized by Armstrong Cork, namely, the concentration of those facilities which are employed only in the linoleum, asphaltfelt base, industry, it is to be concluded that (a) Armstrong Cork holds nearly as much facilities as all the other companies put together; (b) Its statement nowithstanding that it "probably stands second to its prin cipal competitor from the standpoint of investments in net fixed assets for the production of linoleum and felt base,” Armstrong Cork is the largest producer in that specific field; and (c) The production of linoleum, asphalt-felt base, is one of the most highly concentrated industries in this country. Of all the assets engaged in this field owned by companies primarily engaged therein, not less than 84.3 percent are owned by the three largest companies; and of all the assets engaged in this field owned by all companies, including subsidiaries of companies primarily engaged in other industries, not less than 77 percent are owned by the three largest companies. By direction of the Commission. LOWELL B. MASON, Acting Chairman' 1 The Armstrong Cork Co.'s reply to this letter of the Federal Trade Commission | appears in the appendix, infra, p. 665. |