Learning Center
Plans & pricing Sign in
Sign Out

Friction Materials

VIEWS: 193 PAGES: 22

  • pg 1
									                                       CHAPTER 6
                                   Friction Materials
The products
123. The products with which we are concerned under this heading consist
principally of brake linings and clutch facings. There are many applications for
these and other friction materials in industry, civil engineering, mining, the
railways, shipping and aviation. The main market for friction materials is,
however, the motor industry and it is accordingly to drum brake linings, disc
brake pads and clutch facings for road vehicles, and more particularly cars and
car derivatives,1 that most of the facts and comments reproduced in the present
chapter relate.

Methods of manufacture
124. Brake linings may be of woven or moulded construction. Woven linings
are made from special types of asbestos cloth impregnated with liquid resins,
dried, and thereafter cut to size, baked and shaped, and finally ground and
drilled to finished dimensions. Moulded linings involve essentially a mixture of
fibres, resins and/or rubber and modifying agents, which is compressed into
sheet form, cut, shaped, baked and finished. The details vary, but there are
two basic methods; an older dry mix method and a more modern asbestos
moulded method. Disc brake pads are made from cold-formed compacts of
dry mixtures of asbestos fibres, resins and modifiers, which are placed upon
metal back plates, hot cured under pressure, baked and machined or ground
to finished dimensions.
125. Woven clutch facings are made by impregnating special types of asbestos
cloth with liquid resin, followed by drying, baking and machining and grinding
to size. Yarn wound facings are made by impregnating asbestos yarn or braid
with resins, winding the resulting substance into discs, drying, baking, and
machining and grinding to finished dimensions. Moulded clutch facings are
made in a similar way to disc brake pads (but without the backplate). Moulded
clutch facings are also made from asbestos millboard.
126. The pattern of demand has changed in the years since the war in two
important respects. Before 1945, woven brake linings were almost universally
used in road vehicles; they have since been virtually superseded by moulded
linings and the latter are also increasingly replacing woven linings in general
engineering applications. Since the mid 1950s demand for disc brake pads has
increased at the expense of drum brake linings for motor car use.

  A car derivative is a light van or other comparable vehicle with the same chassis and equipment
as a motor car.
127. New materials based on sintered metals1 are supplementing the scope of
friction materials, which were formerly almost exclusively based on asbestos.
The use of sintered metals within the United Kingdom is, however, at present
limited to brakes and clutches in heavy duty off-road machinery, including
agricultural machinery.
The manufacturers
128. The following table lists the leading manufacturers in the United
Kingdom of friction materials containing asbestos, with particulars of factories
operated and sales in 1971 of reference products to third parties in the
United Kingdom:2
                                                       7977 sales          Factories
                    Name of company                      £'000             operated
       Turner & Newall Limited
         Ferodo Ltd                                       5,435     Chapel-en-le-Frith
         Raybestos-Belaco Ltd (R-B)                       2,721     Wellingborough
       The Cape Asbestos Company Limited
         Small & Parkes Ltd (S & P)                       4,549     Hendham Vale
         Trist, Draper Ltd                                1,900     Bristol
       BBA Group Limited
         Mintex Ltd                                       5,584     Cleckheaton
       Others                                             2,9553    4
           Total                                         23,144

The acquisition of Ferodo and R-B by T & N is referred to in paragraphs 30
and 31; R-B is a fabricator or finisher of friction materials rather than a
manufacturer, obtaining its supplies principally from Ferodo (see paragraph
168). The acquisition of S & P and Trist, Draper by Cape is described in
appendix 4. Mintex represents the original interests of BBA in friction materials
manufacture (see appendix 3); another BBA subsidiary, Railko Ltd, is engaged
in the manufacture of asbestos-based resin-bonded bearing materials, with
annual sales of such products (in 1971) amounting to £420,000. Of the smaller
manufacturers not identified in the table, H. K. Porter Company (Great
Britain) Ltd, a relatively new entrant to the market, is the United Kingdom
subsidiary of an American company; Autela Components Limited became a
subsidiary of Automotive Products Associated Ltd (AP) in 1971.4 In 1971
imports of friction materials totalled £847,000 and exports £7,403,000.
129. The market for automotive friction materials is divided into two sectors,
the original equipment (OE) market and the replacement equipment (RE)
market. The pattern of supply, and to a large extent the pricing system and
  Sintered, that is material coalesced under heat without liquefaction.
  The figures shown do not include sales of lined or relined brake shoes supplied as such, which
are not reference products—but see paragraphs 150 to 153.
  Estimated net sales.
  Before this acquisition Autela was a subsidiary of George Angus & Co Ltd, a manufacturer of
rubber industrial products. In 1968 Angus was acquired by The Dunlop Rubber Co Ltd (now
Dunlop Holdings Ltd).
the prices charged, in both markets are influenced by relationships between the
vehicle manufacturers, the components manufacturers and the friction
materials manufacturers. The pattern originates with the introduction in the
1920s and 1930s of the Lockheed and Girling proprietary braking systems
and the application to British cars of the Borg & Beck (B & B) proprietary
clutch. (Of the companies concerned, Lockheed and B & B are subsidiaries of
AP; Girling is a member of the Joseph Lucas group.) At about the same
time Bendix Limited (now Bendix Westinghouse Ltd, a company controlled by
the Bendix Corporation of America and Westinghouse Brake and Signal Co
Ltd) introduced the first ready-lined brake shoe replacement scheme in the
United Kingdom, for which Ferodo acted as sole distributor.1 Ferodo explains
that in the 1930s vehicle manufacturers relied increasingly upon proprietary
components manufacturers for the supply of brake and clutch mechanisms and
Ferodo itself (as the leading friction materials manufacturer at that time)
collaborated closely with components manufacturers in the design of friction
materials for incorporation in these mechanisms. The supply of clutch
mechanisms for road vehicles by AP and others formed the subject matter of
one of the Commission's earlier reports.2

130. Friction materials manufacturers normally supply to components manu-
facturers, not to vehicle manufacturers; this remains generally true even where
the vehicle manufacturer has his own resources for brake and clutch
manufacture.3 In the OE market friction materials for a particular make and
model of car (or car derivative) form part of the vehicle manufacturer's
specification for the model concerned. Once the supplier or suppliers have been
chosen, their brands normally remain standard for OE purposes as long as the
model continues in production; replacement parts specified are rarely other
than the same make as OE materials. We are told by friction materials
manufacturers that historically the vehicle manufacturer has been quite
prepared to buy friction materials for the OE market from the components
manufacturer as part of a clutch or brake assembly and that the com-
ponents manufacturer regards the vehicle manufacturer's RE business as also
constituting a market which he will satisfy in order to recover his costs. Friction
materials manufacturers say that it has been made clear to them by com-
ponents manufacturers that they should not sell direct to vehicle manufacturers
for either OE or RE purposes. They explain that for their part they must live
with both the vehicle manufacturer and the components manufacturer. One
friction materials manufacturer has, however, indicated that the situation is
changing; different methods of manufacture are likely to develop over the next
two or three years and there will be occasions when vehicle manufacturers will
want to buy direct from friction materials manufacturers.4

  T & N believes that Bendix disposed of its interest in proprietary automotive brakes to Girling
after the 1939-45 war.
  Monopolies Commission Report on the Supplv of Clutch Mechanisms for Road Vehicles. (HC 32,
Session 1968-69) HMSO 1968.
  Some loose brake linings are, however, supplied direct, sometimes in large quantities, for use in
the 'service market'.
  We are told that in the RE market a vehicle manufacturer is now buying brake shoes from
sources other than proprietary brake manufacturers and has made arrangements with a friction
materials manufacturer to reline for it, using the same friction material as is used in the
corresponding original equipment.
131. On the RE market, clutch assemblies, relined shoes for drum brakes and
disc brake pads bearing components manufacturers' brand or trade names are
supplied by those manufacturers through their own distribution networks and
are also sold by them for distribution through the parallel networks of vehicle
manufacturers and friction materials manufacturers. As there is now relatively
little relining of clutch plates, clutch replacements are supplied almost entirely
in the form of assemblies produced by clutch manufacturers, and friction
materials manufacturers do not normally participate directly in the market as
producers.1 In the case of drum brakes, the used brake shoe is relined, or the
new brake shoe lined, by the brake manufacturer and supplied by him under
his own brand or trade names and through the same channels as those
described above; such replacement shoes are commonly referred to as the brake
manufacturer's 'genuine' relined shoes.2 In this case a cheaper alternative has,
however, for some years been available in the form of linings, sold in bulk or
boxed in sets of four, supplied by friction materials manufacturers to whole-
salers, garages, fleet operators and others who undertake relining themselves.
More recently friction materials manufacturers have also offered 'approved'
relined shoes under their own brands at prices below those of the 'genuine'
shoes, and the practice of relining by wholesalers and others has declined.

132. Until still more recent times disc brake pads (for which Girling holds
patents and Lockheed registered designs) were supplied by friction materials
manufacturers only to the brake manufacturer, for sale on the RE market
under the latter's brand or trade names. In disc pad manufacture the pad is
fixed by the friction materials manufacturer (as an integral part of production)
to a backing plate provided by the brake manufacturer. Where the friction
materials manufacturer requires the brake manufacturer's replacement disc
brake pads for his own distribution channels, the goods are subsequently
repurchased. In the case of Girling disc brake pads this repurchasing represents
what is basically a paper transaction; Girling supplies the friction materials
manufacturer with proprietary brand boxes and boxing for resale is carried out
in the friction materials manufacturer's factory. In the case of Lockheed a
physical transfer was formerly involved; the disc brake pads were sold and
delivered to Lockheed, inspected by quality control and boxed by the latter,
and resold and delivered to the friction materials manufacturer. Since the end
of 1971, however, Lockheed has followed the same procedure as Girling.

133. We refer to the supply by friction materials manufacturers of their own
relined brake shoes and to recent developments connected with disc brake pads
in paragraphs 143 to 160.

134. Prices for brake linings and clutch facings supplied by friction materials
manufacturers to brake and clutch manufacturers for both OE and RE
applications are negotiated prices which remain effective (subject to adjustment

  Cape points out, however, that S & P does participate directly in the RE market as an assembler
of its Don Flex clutch facings with bought out clutch plates for specialist applications.
  For convenience and in the interests of clarity we refer throughout to shoes supplied on the RE
market as relined shoes, irrespective of whether the brake shoe itself is in fact a re-used or a new
for increased costs or technical variations) as long as materials for the particular
model of car are required. The price for the RE market is the OE price plus
an uplift,1 except in the case of clutch facings supplied to AP and one other
purchaser where a single price is now negotiated for both markets.2 RE prices
to vehicle manufacturers are also negotiated prices.

135. There is now virtually no supply of clutch facings as such by friction
materials manufacturers for resale on the RE market. Brake linings for cars
and car derivatives are sold to wholesalers at recommended trade prices, less
discount, but this trade is also declining, being replaced by brake shoes (see
paragraph 136). Discounts allowed by friction materials manufacturers range
from Tl\ to 50 per cent and the rate applicable in any given case is selected by
the sales manager concerned within this bracket, on the basis of his assessment
of the potential volume of business and with reference to a guide scale issued
by his company. Ferodo also supplies brake linings for cars and car derivatives
to wholesalers in bulk quantities and at special net prices. Brake linings for
commercial vehicles are sold by the company to wholesalers at special net
prices, subject to discount, and to fleet operators at three different price levels
according to the size of the fleet operated.

136. Brake manufacturers' 'genuine' relined drum brake shoes, and disc brake
pads boxed by them or on their behalf, are purchased from them by friction
materials manufacturers and sold at the brake manufacturers' resale prices,
which in turn depend upon the nature and size of the customer. Friction
materials manufacturers' own 'approved' relined brake shoes are sold to
wholesalers, garages, fleet operators and other large users at the friction
materials manufacturers' recommended prices, less appropriate discounts. (See
paragraphs 143 to 153 for relined drum brake shoes and paragraphs 154 to 160
for replacement disc brake pads marketed by friction materials manufacturers.)

137. In the case of friction materials for general engineering applications or
for the railways, prices are negotiated.

138. The description of pricing arrangements given above is based principally
on information given by Ferodo, but the systems operated by the other
leading friction materials manufacturers are generally similar. Ferodo has for
long been regarded as the 'price leader' in the RE market and recommended
trade prices of all manufacturers for comparable linings are in general similar
or identical. There is some variation in the range of discounts offered and
greater variation in the discounts actually applied in particular cases. From the
particulars given it is clear that there is competition (direct or indirect) both
among friction materials manufacturers and between the latter and vehicle and
components manufacturers, and that this competition is centred on obtaining
the business of wholesalers and large users. Ferodo (writing in June 1970)

  In the case of Ferodo, uplift on brake linings and disc brake pads ranges from approximately 50
to 75 per cent (dependent upon customer, type of product and volume of business); on clutch
facings the uplift is 33^ per cent.
  Abandonment of the two-tier price system follows the recommendation of the Commission's
Report on the Supply of Clutch Mechanisms for Road Vehicles, 1968, that AP should negotiate its
purchases of clutch linings at a single price whether they are for use in initial equipment or in
replacement clutches (paragraph 233).
referred to a war of discounts over the previous 10 years. As a result of this,
and of the replacement of woven drum brake linings by cheaper but technically
superior moulded linings, prices realised by friction materials manufacturers for
selected sizes of car and commercial vehicle brake linings sold to brake
manufacturers, wholesalers and public service vehicle operators have, the
company says, fallen by anything from 17 to 24 per cent. Ferodo submits
that for a given size of lining fleet users of moulded linings are in effect
paying no more, and in some cases less, than they were 10 years ago.

Pricing arrangements among friction materials manufacturers1
139. From 1946 to 1956 prices and terms of supply of drum brake linings on
the RE market, and more rarely prices on the OE market, were the subject of
agreement among friction materials manufacturers.2 Following the enactment
of the Restrictive Trade Practices Act 1956 manufacturers continued at first to
agree percentage increases which each would apply to his own list prices and
later (after 1964) to express views on the movement of costs with a view to
subsequent price adjustments. Discussion centred on the supply of linings boxed
in sets of four for cars and car derivatives rather than on bulk supplies. We are
told by T & N that boxed linings now account for only a very small part of
the total RE market in car brake linings.3 After 1956 friction materials
manufacturers also operated a 'challenge procedure' by which from time to time
they disclosed to each other prices offered to a particular customer in the OE
market, the purpose being to provide a check where information on competitive
offers given by a customer was thought to be unreliable. The pricing dis-
cussions ended in 1969 and the challenge procedure fell into disuse at about
the same time. (For further information see appendix 2.)

140. We asked T & N whether price consultations and the exchange of
information on prices between friction materials manufacturers have had the
effect of perpetuating the wide differentials between OE and RE prices. We also
asked the company whether the two-tier price system for brake linings and (so
far as it still exists) for clutch facings is justifiable in terms of differential costs.
T & N replied that the questions raised are not significant in relation to
clutch facings, which are sold almost entirely to the clutch manufacturers and
reach the public incorporated in drive plates, for the pricing of which it is the
clutch manufacturer and competition between distributors that are responsible
and not the friction materials manufacturer. Price discussions on brake linings
were limited in scope and the company does not think they had any effect on
  T & N says that price discussions and arrangements reflected the peculiarly difficult conditions
confronting friction materials manufacturers in the motor industry and were the results not the
causes of those conditions. There have been no similar arrangements in the other substantial sectors
of the friction materials market.
  Prices agreed were related to a volumetric formula devised by Ferodo and adopted by other parties
for calculating RE market prices.
  Ferodo has given the following estimated proportions (by number of pieces) of the company's
production of brake linings for cars and car derivatives for sale in the home market accounted
for by boxed linings in the financial years 1965-66 to 1970-71 :
                                  Year ended 30 September         %
                                            1966                 46-4
                                          1968                 20-0
                                          1969                 19-2
                                          1970                 12-5
                                          1971                  7-8
price differentials between OE and RE prices; neither was the challenge
procedure liable to maintain those differentials. T & N says that whilst there
is a differential between the prices for brake linings paid by the brake
manufacturers and the prices for such linings paid by distributors, it is necessary
in assessing that differential to bear in mind the following factors: the brake
manufacturers buy their linings undrilled and their accounts are much cheaper
to service than the accounts of distributors, both because of the size of their
orders (placed centrally) and because they take delivery in much larger
quantities, drawing on stocks held at the friction materials manufacturers'
factories; on purchases to service their own and the vehicle manufacturers'
replacement sales in the home market, the brake manufacturers pay a surcharge
on their basic OE prices. T & N says that the extent to which the differential
between prices to brake manufacturers and prices to other purchasers is justified
purely in terms of cost should not be under-rated.

141. More generally, T & N submits that the differentials and the two-tier
price system as a whole are of kinds common to the motor industry. If the
public interest is affected by the system, which T & N considers to be by no
means self-evident, any sensible discussion of the possible effects requires proper
consideration to be given to the whole structure of distribution for automotive
components. That structure depends ultimately, the company says, upon the
position of the vehicle manufacturers (and, less importantly, the main com-
ponents manufacturers) as immensely powerful (i) buyers, (ii) suppliers of
automotive parts other than friction materials and (iii) links in the distributive
chain. T & N does not feel it practicable in the context of the present inquiry
to analyse the long-term effects on that structure either of changing the price
system for friction materials alone or of changes in the structure which might
result from changes in the price system. It does, however, draw attention to
two steps which it has taken itself to reduce the existing differentials between
OE and RE prices, namely its bulk linings scheme introduced in 19661 and the
introduction in 1970 of the Ferodo relined shoe; Ferodo claims that the first
has reduced prices to distributors by up to 50 per cent compared with the
prices of the same linings sold boxed, while Ferodo relined shoes are sold at
up to 50 per cent below the prices charged by the brake manufacturers for
their shoes for the same applications. These and corresponding steps taken by
other friction materials manufacturers have reduced, not perpetuated, the
differential between OE and RE prices.

Friction materials manufacturers' relined brake shoes
142. Before 1969 friction materials manufacturers sold loose linings to factors,
who were relining brake shoes and thus offering a cheaper alternative on the
RE market to the components manufacturers' 'genuine' relined shoes. Friction
materials manufacturers were also undertaking relining at their own depots.

143. We are told by Cape that in August 1968 Lockheed and Girling each
expressed dissatisfaction at the share of the market being obtained by its
'genuine' relined shoes. Each, acting separately, called friction materials
manufacturers jointly to meetings, in the course of which it indicated its
  In 1966 Ferodo started to encourage its wholesalers to instal relining facilities and provided them
with relining equipment on extended credit terms and with brake linings in bulk at cheaper prices.
plans for obtaining a larger market share. In the case of Girling these plans
entailed encouraging Girling's own distributors to instal relining plant, coupled
with a system of new buying incentives. Such action would, Cape says, have
seriously affected the friction materials manufacturers' access to a market vital
to the economics of their business. They accordingly discussed among them-
selves counter proposals likely to be acceptable to Lockheed and Girling,
proposals which in effect entailed the marketing by each friction materials
manufacturer of his own relined shoes. In March and April 1969 the friction
materials manufacturers concerned (namely Ferodo, R-B, S & P, Trist, Draper,
Mintex and Brake Linings Limited—a manufacturer not individually named in
paragraph 128) formulated heads of agreement reached in discussions with
AP and Girling. All the friction materials manufacturers were present at
meetings with each of the brake manufacturers, but AP/Lockheed was not
represented at meetings with Girling nor the latter at meetings with AP/
Lockheed; the heads of agreement were sent by each friction materials
manufacturer individually to each brake manufacturer. In a letter to Girling
dated 19 March 1969, Ferodo describes the document as having been prepared
in a form designed to 'cover the points without need for registration' (under
the Restrictive Trade Practices Acts).

144. The understandings set out are similar, if not identical, in all cases.
In each, the friction materials manufacturer will continue to use his best
endeavours to sustain and promote the sale of the brake manufacturers'
'genuine' assemblies; will buy all his requirements of unlined shoes from the
brake manufacturer (subject to provisos on availability, delivery and price);
will contact the brake manufacturer immediately in the event of any approach
by a vehicle manufacturer concerning the supply of brake shoe assemblies;1
and will pay the brake manufacturer 5 per cent of the net invoice value of
all United Kingdom sales of the friction materials manufacturer's relined shoes
(no payment to be made on the latter's sales of the brake manufacturer's
'genuine' relined shoes). The friction materials manufacturer reserves the right
to terminate the arrangement on one months notice should the brake manu-
facturer (i) penalise or discriminate against a distributor for purchasing the
friction materials manufacturer's relined shoes, (ii) enter into any contract or
arrangement for direct sales of his 'genuine' shoe assemblies other than with
vehicle manufacturers or friction materials manufacturers, or (iii) acquire (in the
case of AP) or extend (in the case of Girling) his existing relining facilities. The
arrangements were to have a term of two years, subject to review after the
first year; they would have the overall effect of enabling friction materials
manufacturers to supply their own relined shoes in the RE market (against
payment of royalty), while safeguarding the brake manufacturers' market with
vehicle manufacturers.
  T & N explains that the brake manufacturers were apprehensive that friction materials
manufacturers would approach vehicle manufacturers for their RE, rather than their OE,
business; they were anxious that before friction materials manufacturers became involved in such
discussions, brake manufacturers should have the opportunity of saying why they thought friction
materials manufacturers should not participate in this business. In T & N's view it is unlikely that
friction materials manufacturers would be able to participate directly in the OE market because
vehicle manufacturers order brake assemblies complete with shoes. The undertaking was a quid
pro quo for brake manufacturers not increasing their participation in relined shoes in the RE
   Ferodo has notified one approach by a vehicle manufacturer and would notify any future
145. In July 1969 AP wrote to each friction materials manufacturer recording
that 'no binding agreement' had been reached; on legal advice AP could not
now enter into such an agreement, but it was willing to enter into a com-
mercial arrangement. The terms offered (and accepted) differed in form though
not greatly in content or intention. They comprised an offer by AP to supply
brake shoe blanks at quoted prices and to grant the friction materials
manufacturer the association of AP's registered trade name 'Lockheed' with
his own factory relined shoe when sold to the motor trade, in return for 5
per cent commission on net sales turnover. The friction materials manufacturer
was expected to buy his supplies of unlined shoe blanks from AP, as required,
on competitive price and delivery terms. In his use of the Lockheed name,
the friction materials manufacturer was not to use packaging which could
cause confusion with the 'genuine' shoe; the quality of the friction materials
manufacturer's shoe was not to be lower than that approved by AP from
time to time.1 The arrangements, again initially for two years, were subject to
review at the end of the first year. In practice they ran for the two-year term,
when they lapsed. No new agreement with AP or Lockheed has been negotiated
or offered.
146. Meanwhile, in August 19702 Girling had terminated arrangements under
the 1969 heads of agreement, asking the friction materials manufacturers to
confirm that they no longer regarded themselves as in any way bound either
legally or morally towards their competitors or Girling.
147. In January 1971 Girling again wrote to friction materials manufacturers
confirming terms of agreement reached in discussion for the supply, in the
United Kingdom market, of unlined and relined brake shoes. Under the terms,
Girling would supply and the friction materials manufacturers would buy from
Girling such quantities of unlined and relined Girling-type brake shoes as the
friction materials manufacturers might order; Girling would not sell goods of
the same description to other friction materials manufacturers on more
favourable terms; Girling would not be concerned or interested in the supply
of relined Girling-type brake shoes to persons other than friction materials
manufacturers, except where such relined brake shoes were lined at Girling's
premises or at the premises of concerns where it had installed relining facilities;
provided Girling's prices for unlined shoes were not more than 5 per cent
greater than those quoted by third parties, the friction materials manufacturers
would not sell Girling-type brake shoes relined by themselves which incor-
porated new brake shoes acquired from other sources; the friction materials
manufacturers would pay Girling 5 per cent of the net invoice value of their
total sales of 'approved' relined shoes for vehicles originally fitted with Girling
brakes and would notify Girling of approaches by vehicle manufacturers. The
terms as set out by Girling and summarised above are described as 'a complete
record of the agreement between us on this subject matter'. Ferodo's reply,
submitted to us, said that before discussing the matter further it would need
'to obtain advice from the company's legal advisers as to whether or not such
an agreement . . . is in order'. Writing to Girling in April on the same
subject the Managing Director of Mintex said that he would be unwilling to
  From this, shoes relined and marketed by friction materials manufacturers have been known as
'approved' relined shoes, as distinct from the brake manufacturers' 'genuine' shoes.
  January 1971 in the case of Mintex.
progress the proposed arrangements until Girling agreed that full particulars
could be supplied to the Registrar of Restrictive Trading Agreements.

148. In June 1971 Girling wrote to the friction materials manufacturers
notifying them that it had now registered the arrangements operative from
March 1969 to August 1970 with the Registrar. Mintex1 expressed surprise
that this action should have been taken without prior consultation, particularly
as Mintex 'throughout have been more conscious than others . . . to ensure
that we do not act outside the requirements of the Restrictive Trade Practices
Act. Furthermore, the registration of the agreement which is now terminated
seems to beg the question should we in fact arrive at a new agreement and
register this if appropriate'.2

149. In August Girling wrote to Ferodo notifying the latter of its intention
to lodge the 'agreed draft' terms of January 1971 with the Registrar, on
receipt of Counsel's opinion that 'as presently drafted the agreement is not
registrable', and asking whether Ferodo's solicitors had been able 'to make any
detailed comments'. To this Ferodo replied in September that the company had
'no wish to enter into a registrable or unregistrable agreement pending the
report of the Monopolies Commission', but 'would be happy to reconsider the
matter' thereafter.

150. At the present time there are, formally, no arrangements on relined
brake shoes between individual friction materials manufacturers and either AP
or Girling. BBA (on behalf of Mintex) says that a new arrangement with
Girling is still under consideration but no agreement or arrangement has been
made; there are no current proposals for negotiating an arrangement with
Lockheed or AP. Meanwhile, we note that payment to Girling of a 5 per cent
commission on the net value of sales in the United Kingdom of 'approved'
relined shoes continues.3

151. Commenting on the arrangements described above, T & N says that the
5 per cent royalty (or commission) was the relatively low price paid by its
subsidiaries 'for regaining their freedom to operate, as masters of their own
business, in the replacement market, without prejudicing their position as
suppliers to the brake manufacturers or jeopardising their relations with
automotive wholesalers, whose services Ferodo and R-B share with the brake
manufacturers'.4 By paying the royalty, T & N says, Ferodo and R-B have
been able successfully to enter the RE market for brake shoes (at prices
substantially below those charged by the brake manufacturers, and thus to the
advantage of purchasers) without the brake manufacturers taking counter-

   In the case of Mintex the arrangements were operative until January 1971—see footnote to
paragraph 146.
  The correspondence submitted by friction materials manufacturers is not in all cases complete;
in this account we have drawn on such information as was readily available. It should not
necessarily be assumed that other friction materials manufacturers did not write in similar terms.
  T & N says that its subsidiaries ceased to make corresponding payments to Lockheed because
the latter had reduced its take-off of friction materials from Ferodo for use in replacement
  AP says that when the arrangements were first made, it inspected friction materials manufacturers'
 relining facilities and continued thereafter to vet and approve them technically. The 5 per cent
commission was paid 'for this facility'.
measures which could have resulted in a loss of volume of production to
Ferodo and could thereby have adversely affected the economy of Ferodo's and
R-B's operations. In so far as royalty is still paid, T & N submits that it is a
manifestation of the complex workings of the competitive process in this
152. T & N adds that brake manufacturers have never, either explicitly or
implicitly, indicated that without 5 per cent royalty they would take counter-
measures, but T & N knows their general attitude and the jealousy with which
they regard the replacement market. The company believes brake manufac-
turers would in fact react by taking steps against it in the OE market, where
it is vulnerable in relation to them.
153. Other friction materials manufacturers have expressed similar views. The
scheme is described as a positive de-restriction of the market, enabling friction
materials manufacturers 'at long last' to compete in the RE market with their
own shoes and to carry out as a factory operation what had previously been
done by them as a 'one-off' operation. We are told that the user has now
available to him a cheaper alternative to the 'genuine' shoe and of an
acceptable quality, whereas the standard of such alternative relining had
previously been of very poor quality. The 5 per cent commission is described
as the quid pro quo for entry into the market and as compensation for the
brake manufacturers' corresponding loss of market. The further point is made
that the brake manufacturer must recoup development expenses incurred in
designing and producing the brake and on OE business alone he would never
get his costs back. (For further historical background on the supply of
relined shoes, see also Ferodo's account of the company's loss of market
share in paragraphs 175 to 181.)

Disc brake pads
154. Patents are held by Girling, and registered designs by Lockheed, in
relation to disc brake pads (see paragraph 132).1 The brake manufacturers
supply friction materials manufacturers with metal back plates made to their
designs and friction materials manufacturers then make brake pads incorpora-
ting these back plates. The subsequent distribution of disc brake pads on the
RE market in the United Kingdom is described in paragraph 132. Girling
and Lockheed claim to be entitled to restrain friction materials manufacturers
from selling disc brake pads to third parties in the home market unless they
go through the procedure there described, or from manufacturing or selling
similar brake pads. We are told that friction materials manufacturers have
been inhibited less by the fear of legal action for infringement than by the
consideration that if they entered the market with their own replacement disc
pads they might offend their major customers.
155. Until very recently none of the three leading friction materials manu-
facturers had been able to break this deadlock; each offered its wholesale
outlets only replacement disc brake pads made by and bearing the trade names
of the proprietary brake manufacturers. We are told by Cape, however, that for
  We are told by BBA that the original manufacturer of disc brakes was Dunlop, which held a
number of patents. One of these later passed to Girling.
the past 18 months or more there has been a notable increase in imports of
disc brake pads, chiefly from Canada and Denmark, and that pads are being
offered from 'non-approved' sources. The market as a whole is now said to be
in a state of flux.1

156. In April 1972 BBA's subsidiary Mintex started offering 'genuine' pads
at wholesale prices 10 to 25 per cent, according to size of purchase, below
those previously ruling. At about the same time Girling announced comparable
price reductions on 'genuine' pads supplied by the company itself.2 Writing
earlier Mintex told us that it would have welcomed freedom in the replacement
disc brake pad market, but did not regard itself as free to manufacture and
sell direct for RE purposes. The restriction was one which in the past it had
'striven to terminate' by negotiation with Lockheed and Girling, but without
success as far as the United Kingdom market was concerned. In announcing
recent price reductions Mintex has indicated that it will continue to market only
Lockheed and Girling 'genuine' products.

157. On 1 May 1972 Ferodo announced the introduction of an independent
Ferodo range of disc brake pads. T & N explains that this development was
the fruit of negotiations between the company and Girling and Lockheed from
July 1971 onwards. The company had reached agreement with Girling that
the boxes would bear the Ferodo trade mark only; they would be marked
'replacement pads for Girling disc brakes'. Ferodo would pay Girling a rebate
of 17 per cent on its RE sales of Ferodo pads for Girling brakes in the United
Kingdom and of 7 per cent on sales outside the United Kingdom. Under the
arrangements Ferodo agrees that it will not supply disc brake pads for Girling
brakes to vehicle manufacturers for either OE or RE purposes, except after
prior consultation with Girling. Girling will supply plates and ancillary metal
parts; Ferodo will normally buy such plates and parts from Girling subject to
satisfactory delivery and competitive prices. Meanwhile Ferodo had reached
agreement with Lockheed that, with effect from 1 April 1972, it would pay
Lockheed a 5 per cent 'service rebate' on sales in the United Kingdom and for
export of Ferodo pads for Lockheed brakes. Improved buying terms for
'genuine' disc brake pads were agreed with both Lockheed and Girling.

158. Cape's subsidiaries S & P and Trist, Draper have also made their own
arrangements. S & P has recently agreed with Girling that it will introduce a
range with a joint 'Don/Girling image'3 and bearing the names of both com-
panies on the box. For this range S & P has negotiated improved buying
terms with Girling.4 S & P will offer two ranges to wholesalers, the 'genuine'
Girling disc brake pad and that bearing the Don/Girling image. S & P has
arranged with Lockheed that the latter will supply S & P with backing plates
on agreed terms, and S & P will use these plates to sell on the RE market
a new range under the registered trade name 'Don OE', in addition to the

  A letter from Ferodo to Girling dated 25 October 1971 indicates that similar developments
occurred in the RE market for relined drum brake shoes. Ferodo intimated that it had 'no intention
of allowing the same situation in the disc brake pad assembly field1.
  T & N has suggested that Girling and Mintex were reacting to Ferodo's pending announcement
of the Ferodo disc pad (see paragraph 157).
  Don is the principal trade name of S & P.
  The reference is in effect to buying-back terms, see paragraph 132.
'genuine' Lockheed range. Trist, Draper will continue to offer only Lockheed
and Girling 'genuine' disc pads. It has, however, negotiated improved buying
terms for the Girling range and it has eliminated the buying-back procedure for
Lockheed pads in favour of an arrangement whereby it buys the backing plate
and subsequently pays Lockheed a 5 per cent commission on the invoiced value
of'genuine' disc pads sold for Lockheed applications.

159. Brake Linings has entered into arrangements for Lockheed 'genuine'
boxed pads which are generally similar to those between AP/Lockheed and
Trist, Draper described above. Brake Linings explains that while these arrange-
ments will allow it a certain degree of flexibility to meet the competitive
situation created by the leading friction materials manufacturers' 'approved'
products by offering marginally lower prices for 'genuine' pads, they will not
necessarily result in significantly lower prices over a long period. Brake Linings
has not so far succeeded in making corresponding arrangements with Girling.

160. Commenting on these recent developments, AP says that it is 'unhappy'
with the continuing surcharge arrangements with Ferodo and S & P and 'will
continue to press for their elimination'. To that extent AP regards the agree-
ments 'as in a state of re-negotiation'.

Views of components manufacturers and other users of automotive
friction materials
161. The account of prices, distribution and related matters and the informa-
tion on pricing arrangements and on the supply of relined brake shoes and disc
brake pads given in the preceding paragraphs are based almost entirely on the
submissions of friction materials manufacturers; it has not seemed to us
appropriate in the context of this inquiry to refer the matters concerned to
vehicle or components manufacturers for detailed corroboration of or comment
on the facts. Both classes have, however, been approached as users of friction
materials, as have certain wholesale distributors of motor components and
certain public service vehicle and other fleet operators. Replies received indicate
that prices as a whole are regarded as competitive, but that quality may be
considered of equal, or greater, importance; (references to sharp price increases
for materials containing asbestos are usually attributed to world shortage of
asbestos spinning fibres and yarn in the period before March 1970). AP
comments that it has 'had grounds from time to time for suspecting that
direct export sales are, to some extent, subsidized by home sales', but adds that
'this practice is not uncommon in other areas and cannot necessarily be said to
be against the national interest'.

162. All the main suppliers are generally considered by the customers con-
cerned to offer more or less uniform quality and most customers regard all of
them as equally satisfactory on quality grounds. AP says that it has collaborated
with suppliers in an attempt to establish consistency of product, but that
'there is certainly more work to be done in this area'. The company adds
that many friction materials are used close to their critical temperatures and
quite small changes in composition can thus be very important. There is
understandably some difference in technical resources according to the size of
the company, but the large suppliers in our experience do not differ from
one another in this respect.' On the other hand the company goes through
'cycles in which one particular supplier may offer a material which is more
suitable for certain new applications than the others, but where this occurs the
balance seems to re-establish itself within a period of two or three years'.

163. There are references in the replies of customers to problems related to
availability or to delays in delivery. AP, for instance, says that the short time
between a decision by a vehicle manufacturer to use a particular product and
the start of production sometimes 'gives rise to difficulty in initial supply, but
generally the competition between friction materials suppliers is such that they
find ways and means of getting over this difficulty. They are, of course, as
much subject to labour disputes and labour shortages as other types of
manufacturers', and AP goes through periods where the supply position gives
it 'considerable concern'. (T & N accepts the comment and says that it also
finds the cyclical nature of demand in the industry a problem.) Two other
users (a manufacturer of earth moving equipment and a manufacturer of die
castings) refer to delays or extended deliveries, which they tend to attribute to
difficulties in obtaining raw materials. In one of the two cases the reference is
apparently to textile-based linings and T & N comments that 1968 to 1970 was
a period of heavy world demand for asbestos textiles (see also paragraph 167).

Friction materials for other than automotive applications
164. In the preceding paragraphs we have been concerned mainly with the
market for friction materials used in cars and car derivatives. Ferodo is not a
party to any arrangements relating to non-automotive applications.

Market shares
165. In 1971 T & N's share of friction materials supplied in the United
Kingdom (after taking account of imports) was about 34 per cent. Its share in
1968 was rather higher; and our information suggests that in 1955 the company
had at least half the market and that its share was still higher before the war,
amounting at one time to almost the whole of the market. The competitors
whose market shares have increased at T & N's expense are principally Cape
and BBA.

Turner & Newall Limited
166. Of T & N's two subsidiaries concerned with the manufacture or supply
of friction materials in the United Kingdom, Ferodo makes a wide range of
friction materials of all types both for the motor industry and for other
applications, including railway brake blocks. Within the T & N group, the
company obtains asbestos fibres from Turners Asbestos Fibres Ltd (TAF),
asbestos yarn and fabric from Turner Brothers Asbestos Co Ltd (TBA) and
asbestos millboard and paper for clutch facings from TAG Construction
Materials Ltd (TAG).

167. At various times between 1965 and 1969 TBA found difficulty in meeting
Ferodo's yarn and textiles requirements, particularly its requirements for brake
band lining. Supplies of friction materials to R-B were in turn affected and
there are indications that contracts were lost or placed in jeopardy. We are told
by T & N that this situation arose not through lack of co-ordination of the
production of TBA with the requirements of Ferodo, but because there was at
that time a world shortage of spinning fibres. It is pointed out to us that as
woven linings now represent a relatively small part of total production, only a
small part of Ferodo's total business was affected.

168. Ferodo's production policy is to have sufficient plant and labour available
to meet sales forecasts, and to produce at minimum cost consistent with
maintenance of satisfactory quality and service. In 1968-69 friction materials
accounted for approximately 93 per cent by weight of Ferodo's production
capacity. Of the company's total output of friction materials, some 25 per cent
by value was supplied to R-B and some 27 per cent for export.1 R-B has the
same call on the manufacturing resources of Ferodo as Ferodo itself. R-B does
not manufacture, although it carries out certain finishing processes. Its principal
business has been to distribute in the United Kingdom and most other countries
of the world outside the Americas products bearing the Raybestos brand name
and supplied to the company for the most part by Ferodo, but also to some
extent by Raybestos-Manhattan Inc (R-M). About two-thirds of R-B's home
market sales are concerned with brake linings and clutch facings for the
motor industry.

169. In the motor industry market, Ferodo seeks to obtain the highest possible
share of the OE business since replacements specified tend to be the same make
as OE and OE prices, although low, contribute to overheads; furthermore, the
volume of OE business enables Ferodo to manufacture in bulk. Arrangements
formerly existed between Ferodo and R-B whereby the two companies agreed
not to compete for the business of certain manufacturers of vehicles, com-
ponents and engineering equipment. The arrangements ended in 1971 when
R-B became a wholly-owned subsidiary of T & N (paragraph 173). In the RE
market, Ferodo seeks to distribute its products nationally through selected
wholesalers and in some instances direct to large fleet operators. The company
also supplies replacement goods to components manufacturers. It is prepared
to sell direct to garages, but does not seek to do so. R-B's position, and its
relation to Ferodo, are at present under review. The company says that before
the war it covered the country by means of agency arrangements with a few
wholesalers, each with his own territory and dealing in no other friction
materials but Raybestos. Since the war the company has sought continually to
increase the number of its outlets. Competition has, R-B says, made exclusive
dealing impossible. In comparison with Ferodo, R-B's distribution network is
weighted towards local independent wholesalers much more than towards
national wholesalers.

170. Ferodo and R-B each has its own sales organisation and distribution
network. The full range of friction materials available to the Ferodo sales force
is, we are told, available to the R-B sales force. The products sold by the two
companies for any particular application may be, but are not always, the same.
Certain of R-B's exclusive agency agreements with stockists are still current;
R-B regards them as inoperative, although not formally terminated, and says

  Some 27 per cent and 24 per cent respectively in the case of friction materials of types within
the scope of the present inquiry.
that where stockists have purchased from other suppliers, as is now common
practice, the exclusive dealing provisions have not been invoked.1 No new
agreements have been entered into since the coming into force of the Resale
Prices Act 1964.

171. When originally formed R-B was owned partly by Bell's United Asbestos
Co Ltd and partly by R-M. It became part of the T & N group in 1928 (see
paragraph 31), although it was not constituted as a branch of T & N. T & N
held 50-4 per cent and R-M 49-6 per cent of the share capital and R-M had
the right to appoint two directors to the Board. T & N was responsible for
the management of R-B. Relations between R-M and the T & N group were
governed by agreements entered into in 1932 and which provided, inter alia,
for the exchange of technical information.

172. From 1967 onwards the matter of R-B's indebtedness to T & N was the
subject of periodic consideration by the Finance Committee of the T & N Board.
In September that year the failure of R-B to pay management fees and
dividends, 'which in effect constituted an interest-free loan', was discussed.
The matter was again discussed in February 1968 and in November 1968 (when
indebtedness to T & N amounted to some £880,000). In March 1969 the
Committee commented upon the high level of stocks held by R-B, adding that
this was a matter upon which Group Management Services might be able to
advise. In September the Committee referred to the non-payment of the
dividend and management fee by R-B 'despite the fact that on this occasion
the company had anticipated that payment would be possible largely because
of a considerable reduction in stocks'.2 A report on stocks by Group
Management Services was expected within two months, and as a result of a
'substantial reduction', there was a prospect that R-B would be able to pay
both dividend and management fees.3

173. Meanwhile, R-M had suggested either that T & N should acquire R-M's
shareholding in R-B, or that R-M should acquire T & N's shareholding.
Following negotiations, on 1 October 1971 R-B became a wholly-owned
susbsidiary of T & N. T & N says that although the initiative actually came
from R-M, termination of the joint ownership of R-B was 'a mutual thing'
rather than the result of action taken only on the side of R-M. T & N believes
that R-M made the initial approach because it wished to manufacture, or make
licensing arrangements with manufacturers, in certain overseas markets outside
the United Kingdom and to have full freedom to use the Raybestos brand
name. The approach did not, T & N says, reflect dissatisfaction on the part of
R-M with the management or results of R-B. The arrangements were indeed
favourable to R-M, since T & N took the financial burdens on its back; the
  159 such agreements remain on the company's books, accounting for 99 out of R-B's 334 present
stockist outlets.
  The dividend due to R-M was consistently paid.
  The matter of stock holding within the T & N group was under consideration throughout the
years 1965 to 1969. The tendency for the level of stocks to increase was not confined to R-B; there
was room for significant improvement also in the case of Ferodo, TAG and TBA. Engineering
Components Ltd and British Industrial Plastics Ltd (acquired by T & N in 1966 and 1961
respectively) were said to be noticeably more successful in maintaining control over the levels of
finished goods than the other companies mentioned.
company acted as R-B's bankers and as R-B had no cash, any dividend due to
T & N was entered into a book and not paid. On the other hand T & N found
the cash and paid the dividend due to R-M, thus increasing R-B's indebtedness
to T & N. R-M thus enjoyed satisfactory profits, with freedom from financial

174. T & N explains that following this development, it is no longer necessary
for the company to take into account R-M's interest in the operation of the
group's business. Consequently sales responsibilities have been rationalised so
that all major OE business is now the responsibility of Ferodo. In the RE
market, however, two separate brands will continue to be sold by two separate
sales forces. T & N submits that the retention of two brands greatly enhances
the group's competitiveness and points out that the distribution channels for
Ferodo's and R-B's goods are different in character (see paragraph 169). If T & N
concentrated exclusively on the Ferodo brand, with one sales force, the effect,
in T & N's view, would simply be to lose the vast bulk of the R-B replacement
market business and either to damage that company's existing wholesalers or
to drive them into the arms of another friction materials manufacturer.

175. Referring to the performance of its two subsidiary companies, T & N
gives the following estimates of the shares of the various sectors of the friction
materials market held by them in 1958 and 1968:

                                                1958                           1968
          Market sector         Ferodo          R-B     Combined Ferodo         R-B    Combined
                                  %              %         %       %            %         %
Automotive brake manufacturers  40/50           10/12     50/62    25             8       33
Automotive clutch manufacturers   20             60        80      25            60       85
Automotive RE market
(brake and clutch)               25/35           11       34/46     20/25        16      36/41
General engineering              30/40            2       32/42      30           2       32
Railways                         55/65            0       55/65      50           0       50

If the company's estimates are accurate, they indicate that T & N's reduced
share of the expanding automotive market in relation to its chief competitors
(which is indicated by our own comments in paragraph 165) is attributable in
large part to Ferodo's loss in the OE brake sector.

176. Ferodo attributes this loss of market to several factors. It says that
between 1958 and 1968 the use of disc brakes grew substantially at the expense
of drum brakes.1 At the beginning of the period there was no 'high' friction
material2 which gave a sufficiently uniform level of response over the whole
range of temperatures experienced in disc brakes. It was necessary therefore to
use a 'medium' friction material,3 in which a reasonably consistent level of
response was attainable despite the high temperatures generated. Such a
material can, however, be used in disc brakes only in conjuction with a servo
mechanism; the extra cost of the servo mechanism was tolerable in high
performance cars but not at the popular end of the market. The advantages of
  In 1958 3 per cent of axles of new British cars were fitted with disc brakes; by 1968 the figure
was 37 per cent.
  That is, a material having a coefficient of friction of about 0-40 to 0-45.
  That is, a material having a coefficient of friction of about 0-33 to 0-35.
disc brakes were in any case, Ferodo says, greatest in high performance cars
and at the end of the 1950s disc brakes (incorporating a medium friction
material and used in conjunction with a servo mechanism) were confined to
such cars. 'As a result of its leading position as a supplier of disc brake pads
for aircraft brakes', Ferodo claims that it was virtually the only British
manufacturer in the late 1950s able to supply suitable materials for disc brake
pads for cars.1
177. At this time all friction materials manufacturers were energetically
seeking a material which could be used satisfactorily without servo assistance.
Ferodo says that one of S & P's existing drum brake materials was found to
have the necessary qualities. S & P was at this time attempting to break into the
OE market, an attempt which 'was in any event welcomed by the brake
manufacturers as introducing a third major competitor', and S & P thus secured
a substantial share of the disc brake market.2 Ferodo had only limited success
with its materials for non-servo disc brakes until the 1960s, by which time the
company was 'able to offer substantially improved products and terms to start
to increase its share of the by then greatly enlarged disc brake market'. The
company claims that its material was 'significantly superior' to those of its
competitors; it formed part of Ferodo's 'Formula Two-Four' range introduced
in 1969 and gained for Ferodo a Queen's Award to Industry for technological
178. Ferodo says S & P also implemented its decision to enter the OE market
by offering an acceptable drum brake lining at low prices. Brake manufacturers
encouraged that development and, despite Ferodo's introduction in the late
1950s of its asbestos moulded range of linings,3 competition from S & P
resulted in a decline in Ferodo's share of the diminishing OE market for drum
brake linings. The company believes that the cost reductions expected to result
from a programme of radical modernisation at the Chapel factory should help
Ferodo to regain its share of the OE drum brake market.4
179. Ferodo further explains that S & P's success in entering the OE market
was reflected in that company's performance in the RE market. At the same
time buying habits in that market were changing as garages increasingly
abandoned the practice of buying boxed axle sets of brake linings and riveting
them to the brake shoes themselves, in favour of buying (either through
wholesalers or through friction materials manufacturers, including Ferodo)

  In this connection, and on the development of disc brake pads as a whole, see also BBA's
statements in appendix 3.
  BBA makes a similar claim on behalf of Mintex.
  Until this time, the materials used were a dry mix of asbestos fibres, resin and modifying agents,
and woven asbestos. The asbestos moulded method involves the making of a damp mixture of
asbestos and other ingredients (see paragraph 124).
  Changes at present being made involve replacing batch production methods which, Ferodo says,
have hitherto been used throughout the friction materials industry, by new continuous production
processes for brake linings, coupled with the application of group technology to the finishing
process. Ferodo adds that for three group technology lines already established manufacturing time
has been reduced from six weeks to four days. The replacement of a batch by a semi-continuous
process facilitates more effective planning. Eventually the operation of the lines will be
computerised and the system applied to all Ferodo's production lines. The process involves a saving
in space and no new factory buildings are planned up to 1974.
   In April 1972 the process gained for Ferodo a second Queen's Award to Industry for
technological innovation.
ready-lined shoes (the 'genuine' assemblies) marketed by brake manufacturers.
The 'genuine' assemblies in turn lost market share to cheaper reconditioned
brake shoes relined by wholesalers themselves or by specialist brake relining
organisations (sometimes using cheaper makes of lining of types not approved
by brake manufacturers). Initially the wholesalers who carried out relining were
the smaller wholesalers; Ferodo's wholesalers were principally the large con-
cerns, so that this latter development led to a diminution of trade by Ferodo's
wholesale outlets and so to a reduction in Ferodo's market share. Ferodo says
that, not wishing to offend its principal customers by setting up in competition
with the 'genuine' shoe, the company refrained from taking counter measures
until 1966; it then started to encourage its wholesalers to instal relining facilities
and provided them with relining equipment on extended credit and with brake
linings in bulk at cheaper prices. Ferodo submits that this delay further
contributed to the company's loss of market. Subsequently the company
introduced its 'approved' relined shoes (see paragraphs 142 to 153) and its
share of the RE market in car linings is, it says, now increasing.

180. Finally, Ferodo says that the successful development in 1956-57 of its
asbestos moulded range of linings gave Ferodo a technical lead in linings for
commercial vehicles which, with a substantial price reduction to the replace-
ment market in 1959 (made possible by the new manufacturing techniques for
such linings), 'helped to support Ferodo's share of the total drum brake market'.

181. To these submissions by Ferodo, T & N adds that the reasons given for
the decline in T & N's market shares demonstrate the highly competitive
nature of the friction materials business, particularly in respect of 'pricing and
of the development of new materials in response to changes in the requirements
of the automotive industry. History shows that no one friction material manu-
facturer has, at every point of time, been able to offer the most acceptable
material to the industry's customers for every type of application and that the
fortunes of the manufacturers may vary according to their respective successes
or failures in developing new products'. T & N submits that 'this is under-
standable in an industry in which empirical methods still play an important
part' and that 'it cannot be doubted that Ferodo attaches the highest importance
to its Research and Development Division and has devoted substantial
resources to its work'. T & N further submits that 'despite the great cost
inflation that has occurred over the past 15 years, Ferodo has been able to
contain increases in prices to its customers by improved methods of production
and marketing . . .'.

Ferodo's overseas licensees
182. The arrangements described below originated in the 1920s, before
Ferodo became a subsidiary of T & N. At that time the company was engaged
in establishing what it describes as- an extensive network of overseas agencies
and was granting licences to companies overseas to use the Ferodo marks and
processes. Among the companies concerned was the Societe Anonyme
Franchise du Ferodo (SAFF), formed in 1923, the only company appointed in
this earlier period which is still an associate of Ferodo at the present time.
183. The Ferodo name is now associated with 10 overseas companies (in
France, Italy, Spain, Belgium, Western Germany, South Africa, Australia,
India and Japan). Seven of the 10 manufacture friction materials; the companies
in Belgium and Germany, with one of the two South African companies, act
as distributors for products bearing the name in their respective home markets.
With the exception of the Japanese company, T & N (directly or through
Ferodo) has a financial interest in all the companies, and in five cases this
interest amounts to control.1 T & N holds 10-10 per cent of the share capital
of SAFF, and T & N and SAFF between them hold half the share capital of
the Spanish and all the share capital of the Italian manufacturing companies.
T & N and SAFF hold 40 per cent of the share capital of the Belgian
distributing company. T & N's shareholding in the Australian company is
40 per cent.

184. The seven manufacturing companies, whether or not they are financially
associated with or controlled by Ferodo, operate under licence from the United
Kingdom company. The terms of the licences vary, but generally speaking they
cover the provision by Ferodo, or the exchange between the parties, of
manufacturing know-how and information on technical developments; the
right (subject to quality safeguards) to use the Ferodo name in connection
with some or all of the licensee's products in certain markets (in appropriate
cases against payment of royalty); agreement by the licensee not to supply in
other specified markets. The overall effect of the last two provisions is, broadly,
to permit licensees to manufacture and supply in their own home markets, but
not in the home markets of other licensees or (with certain exceptions) hi that
of Ferodo. It follows that licensees are not permitted to supply under the Ferodo
name in the United Kingdom2 and the arrangements are relevant to our inquiry
on this account. Ferodo is not necessarily debarred from selling in the licensed
territory, except in France where SAFF is Ferodo's sole official vendor; in Spain
Ferodo sells licensed products direct only to supplement production of the
Spanish company or to meet the expressed preference of a Spanish customer
for imported goods.

185. T & N explains that in the friction materials industry it is difficult to
foresee the commercial importance of any projected innovation; ideas are
difficult to patent and the introduction of new developments by competitors is
difficult to detect. Secrecy of know-how therefore provides a better safeguard
than patents. The company adds that the introduction of a successful innovation
may result in the switch of a large sector of the OE market and, con-
sequentially, of a substantial part of the RE market, to the innovator.

186. T & N says that SAFF and Ferodo have exchanged know-how on a full
and free basis since the early 1920s, as part of their world-wide commercial
'partnership'; this exchange would not be possible if the two companies were
in direct and unregulated competition. SAFF is now the only major independent
outside source of technical information available to Ferodo and access to
SAFF's research is regarded by Ferodo as being of considerable value.
  The two South African companies and the German company are wholly-owned subsidiaries of
T & N; T & N holds 79-92 per cent of the share capital of the Indian company and 90 per cent
of the share capital of the Italian company.
  But see paragraph 187.
Furthermore, the Spanish and Italian companies receive know-how from SAFF
and Ferodo, and T & N is doubtful whether this joint provision of information
could continue without the existence of the Ferodo-SAFF licence; and without
the information, T & N does not see how the Spanish and Italian companies
could continue to operate. T & N says that close connections with SAFF are
also important because of that company's interests in the manufacture of
brakes and clutches (as distinct from friction materials). It stresses the
importance of the part played by licence arrangements in 'forging the world-
wide standing of the Ferodo brand'. Ferodo and SAFF are, we are told,
currently seeking to agree upon common methods of manufacture; exchanges
of costing information, which have taken place for many years, are increasing
in frequency.

187. T & N submits that restrictions imposed under the Ferodo licences on
exports by licensees to the United Kingdom are incidental to the main
objectives of the licences and are in any case limited in their effects. Thus,
SAFF is free to supply, and does supply, friction materials to components
manufacturers in its territory for incorporation in components to be exported
as such, as well as in motor vehicles, to the United Kingdom. SAFF's own
brake and clutch manufacturing divisions are free to export to the United
Kingdom components containing SAFF materials and, 'subject to payment of
a modest royalty to Ferodo, SAFF is free to export friction materials direct
to third parties in the United Kingdom' where such materials are for use as
replacements on vehicles and industrial equipment in which SAFF material was
fitted as original equipment. Furthermore, Ferodo and R-B make direct imports
into the United Kingdom of SAFF brake linings and clutch facings and such
imports can represent an important part of total United Kingdom imports of
these products from France and other European countries. T & N says that sales
by Ferodo and R-B of SAFF material add substantially to competition from
imports as well as increasing in the aggregate SAFF's sales in the United
Kingdom market. In 'pursuance of the partnership' SAFF promotes the sale of
Ferodo material in SAFF territories and this in certain cases gives Ferodo a
footing in markets which the company might otherwise have difficulty in

188. T & N further submits that, assuming the United Kingdom accedes to
the European Economic Community, the question whether, and if so how,
Ferodo's licensing arrangements (insofar as they apply to European producers)
affect trade between the United Kingdom and other member states will come
before the European Commission, to which particulars have already been
notified under Article 85 of the Treaty of Rome. If, contrary to T & N's
submissions to us, any aspects of the arrangements should be held to be against
the British public interest, this could, T & N suggests, arise only by reason of
any effect the arrangements might have upon trade between the United
Kingdom and other member states of the EEC. The company submits that the
European Commission, before which all interested parties could conveniently
appear, is specially entrusted and peculiarly competent to deal with issues
raised by any such effect. The company further submits that, by contrast, the
limited restrictions on importation into the United Kingdom are of minimal,
if any, significance in the context of a discussion of T & N's share of the
United Kingdom friction materials market. In these circumstances, T & N
suggests that the Monopolies Commission may feel that the arrangements can
more conveniently be left to the European Commission.

189. Finally, it seems appropriate here to refer to certain comments by T & N
on the share it expects to have of the enlarged EEC market. T & N calculates
that the total enlarged EEC market for friction materials will be in excess of
£88 million (as compared with a current £68 million). Ferodo's and R-B's
share of the enlarged total will be about 12 per cent. This share, according to
T & N, will be smaller than the BBA group can expect to have. T & N
submits that there is a number of other friction materials manufacturers well
established in the Community; it has supplied a list of those manufacturers,
with its estimates of their turnover figures in friction materials and of their
shares of the existing EEC market. T & N believes that the enlarged EEC •
market will be a highly competitive one. It says that the buyers are large and
well-informed, and transportation costs are not high in relation to the value of
the goods. It concludes that the T & N group 'will be a strong, but far from
dominant, supplier of friction materials in the EEC'.


To top