small producer, in that it would put him in a disadvantageous position, vis-a-vis the marketing of his products.

Senator, I have heard you this morning engage in a dialog with the witnesses and describe the options available to the small producer. He could sell the product "as is," he could sell it with a parts warranty, he could sell with an outboarded labor service contract, or he could sell it pursuant to the performance guarantee as comprehended within S. 3074, which, in effect, is an inboarded policy including labor and parts built into the price of the commodity.

Two things are very clear. No. 1, only the large can afford the luxury of S. 3074. The second thing of equal import that must be considered together with that is that the inability to have access to the luxuries of S. 3074 constitutes a marketing disadvantage visited on the small.

That, I think, Senator, is a sufficient summation of the statement, and I have expended to a very slight extent beyond the submitted version. But in substance, that is it, sir.

Thank you very much.

Senator Moss. Thank you, Mr. Rothwell; a very eloquent and interesting statement.

I was glad to have you philosophize a bit about the changed market conditions that have come about in the last two decades, perhaps, the effect of the Supreme Court's holding, and the general climate in which we operate now.

I think those are good contributions to our record, and the committee will be aware of them as we try to find our way through this problem that we have.

I was happy to have you underline that we all recognize there is a problem and we want to address ourselves to it, but do so in a way that will be beneficial and certainly not add to the problem as might possibly be done if we didn't move in the right direction.

I was interested in your opening statement, about our confining this to the thermal, mechanical and electrical. I suppose the only way to explain that is in talking about a performance guarantee, you are talking about things that work or don't work. That is about as simple as you could put it.

So, when you include the door for an illustration, you might have a performance guarantee on the hinges that are the working part, and just a parts warranty on the panel of the door. You warrant what the seller says it is, and it, therefore, will have certain characteristics.

I don't know how else to make the distinction, but that is a good point for us to think about, and it indicates there are a lot of things that we have to delve more deeply into.

I am a little bit disturbed about your position, one, taken by many other witnesses, that this bill is really inimical to the small producer. And I think you have set forth some of the reasons, and they have some validity. I am not sure that they are all valid, and the thing that I would hope that we could do is design it so it certainly wouldn't have any built-in advantage in size to any kind of a producer.

What we are trying to do is encourage one who produces the reliable product to have the advantage of selling the performance guarantee on it, which gives him a marketing advantage; and he is not burdened

with the great expense of replacement and labor and so on; and therefore, we get better products.

We are going to have to examine that very carefully to make sure we haven't handicapped the small producer and the small retailer, and I'm sure all of the committee feels that very strongly.

We are going to be considering this bill for some length of time. We are awaiting the task force report. We are going to read all of this testimony very carefully.

We would like to continue to be in touch with you, and your association to get from you additional comment, to be able to submit written questions to you if they come up in the interim before we have another public hearing, so that we can add to our record.

I surely appreciate your coming here to testify for us this morning, and I will read in detail your statement.

Mr. Sutcliffe, do you have any questions you would like to address to the witnesses now?

Mr. SUTCLIFFE. Yes. A couple of questions.

In your prepared statement you mention a jurist's remarks that it is important to ask the question before you give the answer. In doing so you pose two questions that I think may be instructive for the purpose of this committee.

You say "Why is there such uneven performance on the part of the producer relating to guarantee policy?" Another form of the same question you say is "What has caused the noticeable deterioration in product quality?"

By saying that these are two forms of the same question you suggest that there is an important nexus between performance on guarantee policy and product quality, and this is something that I think the bill recognizes and attempts to deal with. But I would like, if you could, to describe for a moment that nexus between guarantee policies, the performance of them, and product quality, because it is the thrust of S. 3074 to make it absolutely necessary for manufacturers to fulfill promises of performance. Otherwise the economic conditions will be too grave for them, and this is the way in which S. 3074 hopes to stimulate product quality.

Now, given that framework, I think it might be instructive for the committee with your recognition of that nexus to discuss for a moment that point.

Mr. ROTHWELL. I am extremely flattered and gratified that you read it with that close attention and did recognize the thrust and import of what was being expressed in that part of the statement. You will note that I used that as a rather truncated lead into the discussion, and a very brief discussion it was, of course, of the ecological factors attendant upon the emergence of this problem and the associated problem of quality.

At the superficial level it would be utterly foolish to say that a guarantee has no relevance to product quality because, of course, the higher the quality the less import, the less importance, the less recourse a consumer would have with the guarantee.

It is the opposite of that that becomes dynamic here in the sense that this is why we are here this morning. The product quality has declined.

Mr. Morris Kaplan of the Consumers' Union, certainly a qualified witness from the point of view of the consumer interest, has discussed this in his Wall Street Journal article, and I think in most candid and honorable terms.

So with the decline of product quality has come an increasing level of disappointment to the consumer and increasing flow of claims to the manufacturer at the same time that 1960 merchandising and advertising techniques have increased the consumer's expectations. So, the relationship between quality of product and guarantee at a superficial level at least would seem to be reasonable obviously. However, in my statement I tried to suggest, and really by categories of subject matter, because this would certainly take a rather profound study by some people with the resources and the time to devote to it, and that is what is the relationship between deteriorating product quality and the resulting problem with guarantees?

Mr. SUTCLIFFE. The question then becomes since there is that nexus whether product quality has declined leading to problems with service

Mr. ROTHWELL. That is exactly the point.

Mr. SUTCLIFFE (continued). Or whether service promises can be hedged, therefore, under a competitive situation its thrust is to cause decline in quality.

Mr. ROTHWELL. I think the cause and effect relationship is as you have initially stated it, sir, that the decline in product quality plus the rising level of consumer expectation has led to these growing and burgeoning problems of the guarantee and the repair and so forth.

Mr. SUTCLIFFE. Let us examine that. You say it is the first premise. But if the manufacturer's decision is made in such a way as to factor in the cost of repair through a certain period of time, is it not trueand this is an assumption that this committee has made and that you have not made, and I thing it is an important one to concentrate onis it not true that it is less expensive for a producer of goods to manufacture the product reliability into the product rather than to come along with the curative servicing of that product? In other words, the old adage, "an ounce of prevention is worth a pound of cure." Is that true in the present marketing situation?

Mr. ROTHWELL. No, Mr. Sutcliffe. If that is the thrust and the import of this legislation, for a legislative body to try by a rather Draconian approach of warranty to induce the producer to build back the quality into his product, if I understand and follow you, that summary of your argument chain

Mr. SUTCLIFFE. That is certainly one thrust.

Mr. ROTHWELL. That, I would say, would be foredoomed to failure. The ecological factors that I have identified would still make it imperative for the marketer to sell his product within the framework provided by the business culture and the law.

Mr. SUTCLIFFE. But if the law is changed so that the consumer now identifies which products have the performance insured, are you not in a new frame of reference for the business community?

Mr. ROTHWELL. Mr. Sutcliffe, I am referring to the general trade regulation law, not this measure, that the general laws of trade regulation has mandated that each producer should be a lone wolf.

Mr. SUTCLIFFE. How can you have voluntary action on that basis? Mr. ROTHWELL. That would be a point for your committee report, sir. This mandate or invitation to voluntary industry action flies directly in the teeth of national antitrust policy, and furthermore how is a producer going to make a product to sell in the discount community? The discount community must give the consumer the illusion of a bargain. They must do that.

Mr. SUTCLIFFE. But if the bill restricts that

Mr. ROTHWELL. Hear me out. The producer must make a good product that can move through discount channels giving the consumer the illusion of a bargain and at the same time giving the discounter a profit. Isn't that completely contrary to the ideal of optimum quality? This is the problem that the committee has, sir, not the problem of framing an appropriate measure. The problem of understanding, I think, why it is that we are where we are today. This was the point of my written presentation, the major point.

But I think that an attempt to reverse a process by saying in effect that we are going to up the penalties for inferior guarantee performance so that you must build the quality back into your product, Mr. Producer, well, let me suggest that if an egg rolls off this table and breaks, I don't unbreak it by tossing it in the air. I am sorry for the analogy, but it seems to me this is not a reversible equation. This has happened. These forces-probably we can't change them; we can modify them a little, but we can recognize them, and we can adjust accordingly.

Now, the measure that we have-and I agree wholeheartedly with the witnesses who have stated that it strikes a balance in favor of the inboarded warranty, I agree also that there is a consumer preference in favor of an inboarded warranty, but I suggest that that in itself favors the large, and I am very gratified at the Senators' and your obvious concern at the analysis that if this is going to be the result of the legislation, I think we could all agree that there should be no legislation.

Mr. SUTCLIFFE. Let me go to that point, then. You argue about the market entry barrier to the small manufacturer in the context of a situation that may be created by S. 3074.

Mr. ROTHWELL. Yes, Mr. Sutcliffe.

Mr. SUTCLIFFE. I agree that there are market entry problems, but the market entry problems relate to marketing in the present context, not marketing in a different context. Let me give you an example and see if it makes any sense at all to you. Suppose you have a very small manufacturing concern; suppose he has no service facilities. He can't give a service contract. He can't at the present time, therefore, offer a performance guarantee, but what he can do, I would suggest, and ask you to comment upon, is sell his products to someone who already has those capabilities of servicing, who could stand behind it for those situations where, in fact, the normal expectancy of the product does not take place.

He could do this by showing that person that his particular product will last for the 2-year warranty and have a very, very small percentage of failure rate, whereas other manufacturers of that product, large manufacturers of that product, could not give that same national retailer the guarantee.

Now, that would enable the small manufacturer to have an entry point, and what the bill would have done would have forced quality product development upon the small man who wanted to survive.

If that is at all feasible, then, I don't see how that is terribly detrimental to either the small businessman or the consumer, but perhaps there are errors in the assumptions made developing that.

Mr. ROTHWELL. I think the major point of not disagreeing but of discussion between us, sir, would be that the very marketing control that you are presupposing as the remedy for the small manufacturer is the very thing that is affirmatively illegal under the antitrust laws. Mr. SUTCLIFFE. The marketing control here

Mr. ROTHWELL. May I give you an example from my experience last summer?

Mr. SUTCLIFFE. If you could in that experience bring out for the record why the manufacturer could not be a supplier to a major retailer-distributor of those products in violation of antitrust laws.

Mr. ROTHWELL. I am presently defending against civil antitrust charges in a district court throughout these United States a manufacturer whose products are covered by this legislation, and his policy has been that his product should be sold through franchised dealers only, because they can provide the service; they can provide the advice; they are people that we have examined and are thoroughly responsible and they will be in business tomorrow, and their livelihood depends upon selling his product. This has been their policy.

They are presently engaged in a life or death struggle with their government to sustain this policy.

Now, their product is such that without the control of distribution, the only other rational choice for them is to say you pay your money and you take your chances.

May I give you another example, sir. Last summer I had a maker of a humidifier call me from Texas. It seems that he had sold a small unit, although reasonably expensive, to a family-the retailer had sold it to the family. The family moved to New York, one of these frequent corporate transfers. The unit malfunctioned.

My manufacturer has no service people in New York. He called, on me, and we settled by restoring the purchase price to the consumer and having the man keep the humidifier, because it would be too expensive to ship.

But, Mr. Sutcliffe, you speak of market entry barriers; I also speak in those terms. What I mean by that is if I am making a refrigerator, I want to compete with GE because I want to have marketability in my product. GE gives a performance guarantee. I can't sell my product as long as the salesman says "Why that thing that Rothwell makes has no performance guarantee." Then I am out of business. So it is a matter of survival.

Mr. SUTCLIFFE. What if your price was much lower, then?

Mr. ROTHWELL. The salesman would say: "But it has no performance guarantee, and you know the problems. You have been reading about these Senate committee hearings and Mr. Sutcliffe's public statements about this; haven't you? Where am I as a small manufacturer going to find a ready, willing, and able cadre of service people, even if I have the money to pay them?