. 18.5 . A34 OT-TSC-NHTSA-78-28 HS 803-544 no DOf- TSC- HISTORICAL FINANCIAL DATA NHTSA-j 78-28 DOMESTIC AUTOMOBILE MANUFACTURERS John M . Carrol 1 Richard P. Schneider Arthur D. Little, Inc. Cambridge MA 02142 JANUARY 1979 FINAL REPORT department of transportation MAR ? 7 1979 DOCUMENT IS AVAILABLE TO THE PUBLIC THROUGH THE NATIONAL TECHNICAL INFORMATION SERVICE, SPRINGFIELD, VIRGINIA 22161 library Prepared for U.S, DEPARTMENT OF TRANSPORTATION NATIONAL HIGHWAY TRAFFIC SAFETY ADMINISTRATION Office of Research and Development Washington DC 20590 . NOTICE This document is disseminated under the sponsorship of the Department of Transportation in the interest of information exchange. The United States Govern- ment assumes no liability for its contents or use thereof NOTICE The United States Government does not endorse pro- ducts or manufacturers. Trade or manufacturers' names appear herein solely because they are con- sidered essential to the object of this report. Technical Report Documentation Page 1 . No. — 2. Government Accession No. 3. Recipient's Cotalog No. HS-803-544 4. Till# and Subtitle 5. Report Date V\/ January 1979 HISTORICAL FINANCIAL DATA—DOMESTIC AUTOMOBILE 6. Performing Code MANUFACTURERS Organization 8. Performing Organization Report No. 7. Author's) John M. Carroll, Richard P. Schneider DOT-TSC-NHTSA-78-28 9. Performing Organization Name and Address 10. Work Unit No. (TRAIS) Arthur D. Little, Inc* HS927/R9404 Acorn Park 11. Contract or Grant No. Cambridge MA 02140 DOT-TSC-1047 Tasks 15-17 ; 13. Type of Report and Period Covered 12. Sponsoring Agency Name and Address Transportation U.S. Department of Final Report Traffic Systems Administration National Highway April 1977 - December 1977 Office of Research and Development 14. Sponsoring Agency Code Washington DC 20590 15. Supplementary Note* . S ^epar tment of Transportation t . *Under contract to: '"Research and Special Programs Administration - Trarisportatio n Systems Center, ^Kendall Square, Cambridge MA 02142 16. Abstract A historical financial data base was developed for the four major U.S. auto- mobile manufacturers, focusing on the specific operations associated with production and marketing of automobiles and light trucks. The years subject to analysis were 1967-1976. The principal accounting and reporting policies of each manufacturer were examined. The accounts selected for analysis were 1) property, plant and equipment- annual capital investment; 2) special tools — annual capital investment; 3) mainte- nance, repairs and rearrangements--annual operating cost; 4) research and develop- ment-annual operating expense; 5) depreciation and amortization of assets annual operating cost. Using a process of successive disaggregation, the consolidated corporate financial statements for each manufacturer were analyzed to develop estimates of the specific automobile - and light truck-related amounts. Data and information to assist in the disaggregation process were collected by means of a literature search and discussions with industry analysts. the accou rto future change An examination of the sensitivity of each of of was also performed. department transportation MAR 9. 7 1979 library 17. Key Words 18. Distribution Stotomont fuel Economy, Capital Spending, Tooling Investment, DOCUMENT IS AVAILABLE TO THE PUBLIC Financial Analysis, THROUGH THE NATIONAL TECHNICAL Accounting Policies, Depreciation INFORMATION SERVICE, SPRINGFIELD, VIRGINIA 22161 19. Security Clossif. (of this roport) 20. Security Clos.it (of this page) 21. No. of Pagss 22. Pries Unclassified Unclassified 272 (8-72) Form DOT F 1700.7 Reproduction of complotod page authorized , PREFACE This report, prepared by Arthur D. Little, Inc., for the U.S. Department of Transportation, Transportation Systems Center (DOT-TSC) presents an analysis of historical financial data of the U.S. automobile manufacturers, focusing on the microeconomics of automobile production. Specifically, the microeconomic examination was concerned with develop- ing historical information on the several critical investment and expense items which might face an altered risk environment as a result of regu- lated or legislated product design modifications. Part I of this report presents the results of an analysis of current generic problems and controversies in financial reporting, leading through a progressively more specific analysis to an evaluation of the published financial statements of the automobile manufacturers as to their utility in gaining further insight on this problem. Part II presents the results of financial analysis of the specific accounts deemed appropriate for examination. The analysis was performed for each of the four domestic automobile manufacturers, focusing on the years 1972-1976 but with background information developed and analyzed for the period 1967-1976. The Appendix presents a bibliography of information sources and a discussion of the utility of various sources for the problem at hand. The most current financial report available for this study were those of fiscal year 1976. ! S i * X E s • = E * ? go Ilf .1 : 1 1 1 1 i f i lii II > i ii 3 « lii £ I J ft 3 S -s 11 s,, S 8 R h O O ^ ^ O M © •- o s - SI V)< s 6 ; . S 5 i ill . $ ! * If i I i l i f f ® T » m e» u o K I 5 I if o | | i s * 1 i iSii: ill! III 1t — — _ u o < fc X o o I I 6 e e J V.~H 6 E E AVAILABLE FACTORS zz ll 1C 01 61 81 L\ 91 SI 91 Cl Cl 1 1 01 6 I L 9 S 9 C Cl 1 | CONVERSION COPY TIT TIT TIT METRIC 1 mch«s BEST u e i Ve'"e'S 5 9 E E E "eEE"e E | • 9 9 1 ! 1 t $ [ | r ** E i f fi- © © 1 9 u *1 ll S s I u if — — — 6 £ 5 © • • • i! im Jil 6 E E • ! u u O ' 5 £ • S K ^ rft <T* (A S CD <0 3 ® ' rf.g000<-.00 ~ a ° " o o n ® •5 III! I - . I| I 3 „?~" « m 9 I a ls*Zei ! iilii Hr- *-I iilill s s ErV !l; ui; Jf"t IV AVAILABLE BEST CQPV best COPY TABLE OF CONTENTS Section Page EXECUTIVE SUMMARY viii PART I. DEVELOPMENT OF ANALYTICAL FRAMEWORK 1 1 . 1 INTRODUCTION 1 1.1.1 Objectives and Background 2 (a) General Objectives 2 (b) Conceptual Origins and Problems of Reporting Practices 3 (c) Corporate Taxation and Reported Earnings (d) Sources of Technical Rulings on Financial Reporting 11 (e) Summary 13 1.1.2 Methodology 14 1.2 REVIEW OF ACCOUNTING POLICIES AND PROCEDURES 15 1.2.1 Public Reporting Policies of Major Manufacturers and Implications on Financial Results 15 (a) Principles of Consolidation 15 (b) Inventory Valuation 16 (c) Depreciation and Amortization 21 (d) Taxes on Income 23 (e) Research and Development Costs 27 (f) Pension Plan Costs 30 (g) Reserves Applicable to Foreign Operations 31 (h) Translation of Foreign Currencies 33 (i) Replacement Cost Accounting 36 (j) Line of Business Reporting 39 1.2.2 Internal and External Reporting 43 (a) The Structure of Cost 43 (b) Profit Centers and Transfer Pricing 49 (c) Relationship to Financial Reporting 50 v TABLE OF CONTENTS (Continued) 1.3 Section Page DEVELOPMENT OF AREAS OF FOCUS 52 1.3.1 Objectives 52 1.3.2 Financial Data Utility Evaluation 53 (a) Income Statement 53 (b) Balance Sheet 58 1.3.3 Summary of Accounts to be Pursued and Their Special Characteristics 59 (a) Income Statement 59 (b) Balance Sheet 60 PART II. HISTORICAL FINANCIAL DATA 61 2 . 1 INTRODUCTION 61 2.1.1 Objectives 64 2.1.2 Methodology 64 2.1.3 Structure of Historical Data Report for Each Company 66 2.2 (a) Size and Scope 66 (b) Annual Investments in Property, Plant and Equipment 67 (c) Annual Investments in Special Tooling 68 (d) Annual Operating Costs for Maintenance, Repairs and Rearrangements 69 (e) Annual Operating Costs for Research and Development 69 (f) Annual Operating Costs for Depreciation and Amortization 70 ALTERNATE APPROACHES 72 2.2.1 Aggregation Analysis 72 2.2.2 Break-Even Analysis 73 2.2.3 Traditional Investment Analysis 74 2.2.4 Disaggregation Analysis 75 vi TABLE OF CONTENTS (Continued) 2.3 Section P a 8 e COMPANY RESULTS 76 2.3.1 American Motors Corporation 76 2.3.2 Chrysler Corporation 99 2.3.3 Ford Motor Company 140 2.3.4 General Motors Corporation 178 2.4 LIMITATIONS OF ANALYSIS 229 2.5 SENSITIVITY OF ACCOUNTS ANALYZED TO POTENTIAL CHANGES 232 2.5.1 Changes in Reporting Procedures and Regulations 232 2.5.2 Areas of Impact 233 Appendix A Bibliography and Discussion of Data Sources A-l Appendix B Report of Inventions B-l LIST OF TABLES Table Page 1-1 COMPARATIVE RETURNS OF TWO HYPOTHETICAL COMPANIES 4 1-2 SOME GENERALLY ACCEPTED METHODS OF HANDLING TRANS- ACTIONS THAT AFFECT COMPANY EARNINGS PER SHARE 7 1-3 CONSOLIDATED INCOME STATEMENTS AND RESULTING EARNINGS PER SHARE BASED ON TWO DIFFERENT BUT ACCEPTED SETS OF ACCOUNTING TECHNIQUES 8 1-4 SUMMARY OF DIFFERENCES BETWEEN EXAMPLE COMPANIES 9 1-5 RELATIVE PORTION OF REVENUE, EARNINGS AND ASSETS OF NONCONSOLIDATED SUBSIDIARIES FOR FISCAL YEAR 1976 17 1-6 EXPENSES INCLUDED, EXCLUDED OR OPTIONAL IN CALCULA- TING FULL ABSORPTION COST 19 vii LIST OF TABLES (Continued) Table Page 1-7 ACTIVITIES TYPICALLY INCLUDED OR EXCLUDED FROM RESEARCH AND DEVELOPMENT COSTS 28 1-8 RATES USED TO TRANSLATE ASSESTS AND LIABILITIES 34 1-9 REPLACEMENT COST INFORMATION (UNAUDITED) — GENERAL MOTORS, FORD, CHRYSLER 40 1- 1-10 MAINTENANCE, REPAIRS AND REARRANGEMENTS 2- AND TOTAL CAPITAL AS PERCENTAGES OF REPORTED EARNINGS 43 1-11 BUDGETED OVERHEAD DISTRIBUTION SHEET USING SEQUENTIAL ALLOCATIONS 48 12 ANALYSIS OF COST OF SALES AND OTHER OPERATING EXPENSES 55 1 REVENUES OF DOMESTIC MANUFACTURE RS- ESTIMATED COMPONENTS 1976 ($ BILLIONS) 62 2-A1. AUTOMOTIVE SALES-AMERICAN MOTORS 1972- 1976 ($ MILLIONS) 77 2-A2 . AMC PLANT LOCATIONS-AUTOMOTIVE 78 2-A3.