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3 THE DEPARTMENT OF DEFENSE, PRIME CONTRACTORS, . AND THE MACHINE TOOL INDUSTRY: _ RELATIONSHIPS THAT AFFECT INDUSTRY STRUCTURE This chapter examines relationships among the Department of Defense, the domestic machine tool industry, and those prime defense contractors that are the major users of machine tools. These relationships include not only such direct mechanisms as contracting procedures, but also the attitudes and perceptions that affect the ability of-one party to work with another. The Committee has found that such attitudes and perceptions ultimately affect industry structure. The circumstances in which conventional machine tool Manufacturers now find themselves, described in the previous chapter, are obviously only partly attributable to characteristics of the defense market. Therefore, the machine tool firms cannot be changed in any major way by DOD actions alone. Indeed, the ma jot forces for changing the industry are not defense~oriented. Nevertheless, the Committee believes that the Defense Department' s direct and indirect influence on the indus~ery can be substantial Although DOD direct purchases of machine tools are small compared with total domestic machine tool produc- tion, DOD' ~ influence on industry behavior manifests itself indirectly, through the requirements placed on pr ime contractors . In fact, the prime contractor rote i n the DOD-contractor-supplier triangle has sometimes been likened to a buffer between the small supplier on the one hand and the government (with its burdensome contracting procedures' on the other. As discussed below, the defense sector remains a significant market for the products and services of machine tool builders. The following pages analyze the ~ ize of the DOD and defense prime contractor market for machine tools and focus on two distinct Defense Department roles in that market : DOD procurement, and DOD support of technology 52

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53 development and appl icat ion . The chapter then consider s the prime contractors' view of the machine tool industry, followed by a review of leg islation af fecting domestic mach ine tool purchases . S IZE OF DOD AND CONTRACTOR MARKETS A__ The Department of Defense is by itself a rather small purchaser of machine tools, accounting for approximately 3. S to 4 percent of domestic orders in 1978, compared to the automotive industry' s 28-30 percent and the civilian aerospace industry's 10-12 percent. An earlier ( 1972) estimate of the proportion of machine tool sales recounted for by defense contracts in total is ?.1 percent, indicating that purchases by pr ivate defense contractors were roughly equal to those made directly by DOD. More recent estimates derived from an input-output analysis by the Commerce Department' s Bureau of Industrial Economics (BIE) confirm this general level of DOD involvement.2 The BIE concluded that in 1982 purchases by the Defense Department and its contractors together accounted for 6.2 percent of domestic metal- cutting machine tool production and 4.8 percent of metal-forming machine tool production. Assuming adoption of the Administratzon's S-year defense plan and realiza- tion of the Council of Economic Advisers' projections for economic growth, the BIE estimates that the comparable figures in 1987 will be 7.5 percent and 6.3 percent, respectively. A s imilar analys is conducted by Data Resources, Inc . (ORIt, for the National Machine Tool Builders' Associa- t fond chaws a much higher proportion of machine tool consumption when all indirect DOD supplier links (i.e., through prime contractor intermediaries) are considered. In Table 12, WD ~direct. purchases include tools for government arsenals, shipyards, and other defense installations. DOD ~indirect. purchases include those by private parties on current account for delivery to defense agencies. Finally, Induced capital. purchase s consist of those by defense contractors, subcontractors, and suppliers. for use in the production of all military weapons and equipment. DRI concludes that Baby conserva- tive estimate, up to 20 percent of the aggregate domestic consumption of machine tools is related to defense needs even in peacetime.. .

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54 TABLE 12: Domest ic Consumption of Mach ine Tool s ~ ~ , D 0` ~ _. — _ I 1 c~= _ _ ~ _ C O P~ c ~ cr. _ ~4 _ _ 01 U] - 8 ~ _ 0` - 0 ~ 00 ~ OC _ . - - ._ r. 0\ 0\ 1_ .~4 ~ ~ _ ~ ~ ~ O ~ r~ _ \D 53 . . . . . . . t_ ~ o tD o ~ 1 ~ ~ _ _ ~ ~ ~ ~r O '-o _ ,,~ ~ 'D ~ ~ ~ ~ ~ O · . · . · . . e4 ~ O O O O O :: ;n _ a~ _ ~ ~ _ ,_ D ~ ~ t_ O ~ ~ ~ O . · . · . · . ~ O — O _ — _ ~ 1 t~ ~ ~C D ’I D O ~ ~ O ~ O ~ ~ O O O · ~ · · . · . ~ O O O O O O o O _ u~ ~D D r_ ~ ~ U1 D ~ ~ := ~ O 1^ ~ O ~ ~ ~ O ~ O O O O · . · . . . · . · . · . · . ~ 0 00 0 0 0 0 0 0 0 0 0 0 \0 ~t ~ ~ ~ ~ t~ ~— 0~ `0 ~ ~ ~ /= tC ~ ~ ~ O ~ ~ ~ ~ ~ O ~ O O ~ ~ O O — O O O O · . · . · . · . · . · . · . ~ ~0 oO oO 00 00 OC 00 U~ o ~ ~ CO s ~t ~ N ~ ~ O O O · . · . · . ~ r~ 0 0 0 0 0 ~ ~ ~ U~ - _ ,= ~ ,n ~ ~ ~ ~ 0 `0 ~ O o _ · . ~ . · . ~ ~ ~ 0 00 00 Ol ~ r. r~ ~ ~ ~ ~ O ~ O O — O O C O · · · · . · . ~ oC o O o O oO u' ~ _ `0 O ~ ~ ~ ~ O ~0 0— 00 00 . · . · . · . ~ 00 0 0 ~ O 00 O r" `0 ~ - ~ - ~ ~ ~ ~ ~ - o ~ ~ ~o ~ ~ o o - ~ o o o o o o o c~ - o oo oo oo o o o o o o - ~4 ~ go d~c - ~ 88 s E. o C C C ~ _ ~ o _ ." ~ _ Q E. ~ _ ~ ~ C 41 ~ C — V ~ o U S S S - - ~ o o V o C C _. C °° ~ o V ~ ~ _ Q a. 43~ _ C ~ _ C C O V o ~ Ca) ~ t~ V ~ ~ o~ V — C C 1~ ~l8 _— =,. ~ - 8 8 c c _ _ , ~ s o - ce Oc - 1 ~ ~ u c ~ ~v — ~d 8 C: - - ~; ~ —v 4, L~ U _ ~ ~ C _ — V 1 _ _ ~ ~ e S 0 0 ~ 0 ~ ~ . Z=[ U · ~ C a' -4 oC C) - _ ~ ~Q _ ~ V 40 V _ ~ C ~ == V — C C 8 _ _ 8 gl o ~0 8 ·. U cn

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55 The DRI table also indicates that the defense share of the domestic market has grown as commercial sales have declined and remained depressed, even as the economy emerges from the recession. This increase may be attributed to both production increases entailed in the defense build-up and efforts to modernize DOD production facilities, including munitions arsenals and shipyards. An important caveat is that none of the estimates takes into account the broader range of manufacturing equipment and systems, including related software, that should be considered along with the traditional categories of metal-cutting and metal-forming machine tools in assessing either DOD needs or the competitive status o f the domestic industry. It is reasonable to conclude, however, that the defense sector remains an important market for these products and services and as such represents a far from negligible influence on the development of the domestic machine tool industry broadly defined. DOD PROC0 REM ENT: INCENTIVES AND DISINCENTIVES Department of Defense procurement begins with the preparation of a statement of requirements, usually two to three years in advance of funding and perhaps as long as four to f ive year s before the equipment is installed and operating. The military services are required to search their own inventor ies before dec icing to purcha. e new equipment. On the whole, these inventories contain older, less productive equipment. Therefore , any procur e- ment requirement for state-of-the-art machine tools, whether these tools are intended to be used alone or as part of a flexible manufacturing system, CAD/CAM system, or other automated system, almost invariably leads to new purchases. This is true, for example, of the current arsenal and shipyard modernization programs, which provide for equipment purchases as high as 8200 million per facility over a period of 5 to 10 years. Although these procurements are large compared to past years, they commonly entail the purchase of only one or a few identical machines at a time. Unlike the Army and Navy, the Air Force has a central procurement unit, which facilitates somewhat higher volume purchaser. The Air Force procurement office is said to have a tendency to massage user requirements to produce conformity among users' specifications.

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56 Despite the Defense Department' s interest in promoting production efficiency and the use of state-of-the-art technology, the Committee found that a number of ~ egisla- t ive and procedural requirements act as disincentives to new technology development and application by DOD pr ime contractors. For example, the system of annual congres- sional appropriations creates uncertainty about the f uture defense products market, and heightens the f inancial risk associated with any large investment i n new, DOO-oriented manufacturing process technologies. Further, there is little contractor incentive to lower costs through new more efficient machine tools when contracts are negotiated on a Cost plus" or other similar basis (i.e., where profits are based primarily on costs). MANUFAC=t1~ING TEClINOI=;Y PROG}?1\MS The Department of Defense and the three services have a number of programs designed to promote progress in manufacturing technology. The services' Manufacturing Technology (ManTech) programs concentrate on the validation and application of new process technologies. The Navy' s and Air Force 's Technology Modernization (TechMod) and the Army' ~ Industrial Productivity Improvement (IPI) programs stress cooperative efforts among defense contractors and their suppliers, encourage incentive agreements not necessarily tied to specific weapons program, and aim to highlight counterproductive aspects of DOD' ~ procurement process. The DOD has recently started implementing policies to bring TechMod and IPI under one name, Industrial Modernization Incentives Program ( LISP) . As a new program designation, IMIP is as yet unfunded. The DOD budgets for the ManTech, TechMod, and IPI programs appear in Table 13. A [though separately and vat iously administered by the services, the three ManTech and TechMod ( IPI ) programs have several coon features. ManTech Programs The Manufacturing Technology program, dating from the early 1950s, is designed to promote the development and application in defense production of new manufacturing

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S7 TABLE 1 3 DOD Manu f ac tur ing Technology P rogr am Budgets (S million) Request FY 82 FY 83 Army ManTech (Manufactur ing Methods & Technology) Industrial Productivity Improvement Air Force ManTech TechMod N avy ManTech Tedded ( included in ManTec h f unding) EY84 93 $S0a/ lDl 61.8 66.4 34.0 38.0 37.3 49.8 6.0 6.D a/ A House Appropriations subcommittee first rejected the Army's FY 1983 request for ManTech, then added SSO million but under R&D rather than procurement programs. processes previously validated in the laboratory but not yet reduced to economically sound practice. The program concentrates on situations where industry is unable or unwilling to commit private resources, at least on a timely basis, to make technologies available for use in meeting WD requirements. Supported in most cases by procurement funds, ManTech finances little research and development and generally the purchase only of prototype equipment. It alms to define particular technologies to the point at which they are repeatable and reliable, with the expectation that weapons systems manufacturers will then purchase and use them in volume. ManTech projects are non-propr ietary : diffusion is, in fact, encouraged by requirements that

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58 the contractor make a disclosure of technical findings and implementation results as well as license the processes developed on a non-exclusive basis. ManTech pro jects nay be awarded to any qualif fed per- former; equipment vendor ~ are informed of DOD plans and encouraged to bid. In practice, however, all three military services have awarded the overwhelming majority of external ManTech projects to prime defense contractors and independent laborator ies . Approximately 40 percent of the Army's ManTech budget is spent in-house. Very few awards have been made directly to machine tool companies. ManTech funds have gravitated to prime contractors for the following reasons: Increasingly ~ WD policy has placed a premium on the implementation of validated technologies . Evaluation s showing higher technological than implementation success rates have reinforced this policy, as have pressures from Congress and elsewhere. Not only is it the conviction of responsible DOD officials that technology ~pull. efforts are more effective than technology ~push. efforts, but it is also the prevailing opinion within DOD that pr ime contractors are generally disinclined to adopt novel production equipment with which they are not very f amiliar . In these c ircumstances, reliance on pr ime contractors encourages the application of ManTech results, though often by sacrificing widespread diffusion. The original contractor is frequently the only user.4 ~ ManTech pays only part of the costs of developing and demonstrating new technologies, usually excluding th - costs of prior research, development, and capital equips meet. This narrow support is usually attractive only to companies that are accustomed to investing heavily in R&D or are able to bear the pr for capital equipment costs . U c S. machine tool companies in general fit neither of there categories. ~ Prime contractors and laboratories and consulting organizations dependent upon DOD business have invested heavily in an institutional capability to compete success- fully in the defense market. In many cases, this invest- ment includes personnel expert in anticipating ManTech requirements and marketing proposals. For such companies, it is estimated that the cost of developing a proposal for a S300,000 ManTech contract is in the range of S10,000 to SI5.000. For those not accustomed to competing in this market, the cost may be two to four times as great and, therefore, prohibitive.

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s9 ~ The regulatory and other disincentives to machine tool company participation in defense procurement apply wi th equal force to the ManTech progr am. Equipment suppliers can and do participate indirectly in ManTech projects as subcontractors and advisors. For example, a current Department of the Army project to disseminate EMS technology has recently resulted in th e completion of a large study detailing the economic and technological potential of flexible manufactur ing systems. This pro ject, which is des igned to overcome a perceived lack of information among machine tool users about the potential of EMS technology, is being carried out through a consortium that included: Or 1 Ah i - tool builders. ~ _-____ —~~ ~ ~ it ManTecn supports technologies applicable to the production of a mingle weapons system or even component, but program guidelines favor the support of generic technologies that may be used in the manufacture of different types of defense materiel. Such technologies are not limited to metal processing, material handling, composites production, and automation, but encompass a wide range of ob jecti~res including chemical processing, electronics packaging, energy conservation, and safety and health. Table 14 lists the technological areas receiving greatest emphasis in each of the ManTech programs. Thus, the relatively limited funds committed to the Manufacturing Technology programs as shown in the table are spread among a relatively large number of manufacturing technologies. The WD's ManTech programs use conventional procure- men~c terms and procedures. Contracts are usually competitive and negotiated on a fixed price or cost plus basis. In some cases, incentive awards are made for superior performance. The lead times for ManTech projects do not vary significantly from those for ordinary purchases. A decision to pursue a technology may precede a request for proposal (RFP) by as much as three to five years, and a few months to a year may elapse between the advertisement of an REP and the contract award. These long lead times for ManTech contracts seem self-defeating, in view of the program's purpose of promoting advanced technology. Like other parts of the DOD budget , ManTech budgets must be assembled at leas t two years in advance of contract awards. This means that W D substantially lags the private sector in its ability to promote rapidly changing manufacturing technology. .

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60 TABLE 1 4 DOD ManTech Progr~s--Technological Thrust Areas Arm Metals ( including powder metallurgy) Electron ice Optics Chemical processing Pollution control Testing Energy conservation Safety and health Materials handSinq Packaging Automation Nonmetals ( including caspo ites ) Air Force Machining P~der metallurgy Colitis production Electronics packaging E lexibl. au~ted batch ~nufactur ins Critical arteriole SCAM arch itecture/appI icat ion s Repair op rations Electronic poor device r Never Aircraf t and related systems Air f rem amiably automation Materials technology for propulsion Av ion ice, the and eveluat ion Ships, shipbuilding and related ·yste - : Shiptuildinq automation Large combat cysts structures (.. gun Mounts) Hu 11 Outf ittinq arid furnishing Cooputer-aided ships engineer ing Mechanical ~ubeyst~ Elects ica1 subsystem Auxiliary subsystem Shipyard servicers Source Department of Defen" Electronic components s Microwave devices =51e Electro opt ice/ f ibex optics Solid mote technology Pr iAt" circuit technology Materials Log~t~ce Parts~on~d~d technology RaD2 Flexible ~nufactur ing system Welding technology

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61 Any effort to increase the direct participation of equipment vendors in ManTech programs must take into account not only the peculiarities of these programs, described above, but also the level and uncertainty of current ManTech funding. In particular, the stability and continued growth of the ManTech program appears in jeopardy as a result of an unexpected congressional action with respect to the Army FY 1983 appropriation. On the initiative of a House Appropriations subcommittee, Congress reduced the Army's request by 60 percent and converted the remaining 850 million from procurement to R&D funds. This action reduces the Army's flexibility in obligating the remaining funds, jeopardizes ongoing projects, and threatens to transfer the program to an administrative environment less sensitive to the requir e- ments of applying and diffusing new technology. TechMod Programs The Technology Modernization program and its Army version, the Industrial Productivity Improvement (IPI ~ program, originated with the F-16 aircraft program in the late 1970~. It is weapons-system-based and plant-based rather than project-based and technology-specific. TechMod/IPI funds the validation of advanced manufacturing technologies in return for a contractor's commitment to make ~ignif icant capital investments in modernization of equipment producing a particular weapons system in a particular facility. Although its purpose is ordinarily to r educe costs, i t may also, be used to incr ease surge capac ity or improve product quality and performance . A TechMod/IPI project may be initiated either by DOD acquisitions personnel or by a contractor. A typical TechMod contract incorporates three phases, which may be negotiated separately. In the f irst phase, DOD supper ts a top~down, wall-to-wall analysis of the contractor ' s production facility. In the second phase, DOD supports the advanced development of identif fed technologies and the design of plant improvements. Finally, the contractor undertakes to purchase and install the new equipment. Although it originated independently, TechMod can be and has been viewed a. a means of ensuring the implemen- tation of ManTech project results or of promoting other advances in the state of the art. Frequently, however, TechMod results in the adoption of off-the-shelf though technolog ically advanced equipment. There is a danger

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62 that ManTech opportunities are identif fed too late in th e procurement cycle to incorporate them in ongoing weapons prog r ems or ar e j udged to be too long-term and to entai 1 too high a r isk to justify immediate adoption. TechMod contracts are exclusively with weapons system p reducers, although in the F-16 program and other cases , ~ _ ~ _ ~ ~ . . . . . cney nave Been extended through aar~-m~nt'; horn no; m" contractor and subcontractor to secc)nd-ti~r Moon ~ ~ ~—~ —7 ~ ~ manufacturers ~ ~ ~~ a. ~ a,. out of the realization that subcontracted component systems often represent more than half of the cost of a weapons system and out of concern that second- and third-tier suppliers are frequently fragmented, have poorer access to capital markets. and thwart her greater difficulty than primes or major subcontractors in obtaining capital for investment in modern plant and equipment. TechMod and IPI offer incentives that are not typical of conventional procurement contracts. For example, to protect the contractor in the event a weapons system contract is unilaterally terminated or stretched out because of insufficient funding, DOD may agree to pay the undepreciated value of the equipment purchases by the contractor. Secondly, DOI) may agree to a formula for shar ing with Me contractor the savings resulting from productivity gains. In these cases, the contract stipulates investment commitments for each f iscal year o f the contract and targets (though does not guarantee) return on that investment for the contractor . Finally, TechMod contracts frequently use the more conventional device of incentive awards for contractor performance. The general aim of these and other measures utilized under Me aegis of TechMod/IPI is to provide incentives for contractor investments through greatly increased returns on investments and by indemnification of invest- ments in the event of cancellation of the procurement programs for which ache investments are made. Government and industry contract specialists have faced several problems that have precluded greater use of these concepts. Where there is more than one product and more than one government buying office with work in a facility, it is difficult to determine which office or which contract should be the vehicle for the special investment agreement. In addition, it is difficult to measure actual savings resulting from new equipment or facilities and to divide the savings between the govern- ment and she manufacturer. Also, the government has had ~ ~ ~ ~ _ DOD Dolicv enOc~ur~a - 5 oh i at: ~n~r~mi ~ i no

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73 Development (IR&D) allocations on their government contracts, which as a practical matter are unavailable to most machine tool builders. Prime contractors interviewed for this report stated that although U.S. machine tool builders have kept abreast of technological developments in some areas, they fall short in others. According to these respondents, U.S. machine tool firms are behind the state of the art in applying flexible manufacturing systems and in some applications of computer technology. This perception is disputed by leading U.S . Chine tool f Irma, which claim that U. S . EMS technology is at least equivalent to Japanese technology. Their position has some support i n the 1 i terature, including a r ecent survey of relative technological positions by Japan's Ministry of International Trade and Industry (MITI).1O To the extent that the prime contractors' judgment is true beyond the survey sample, however, it is especially ominous, inasmuch as the areas they cite--MS technology and some applications of computer technology--are where some of the most significant gains are being made in manufacturing technology. If this judgment is not accurate presently, it could become accurate soon, because the Japanese government is spending at least 360 million to improve commercial EMS technology.ll Three national research institutes and 20 companies are participating in this program. 12 There does appear, at any rate, to be a perception among machine tool users that the U.S. products are generally inferior, whether or not the perception is warranted. The Committee did not identify the extent to which this perception is the result of marketing vat technological factors. The Committee believes it is important, however, to compare these perceptions with the observation that foreign manufacturers that use machine tools, especially the Japanese, appear to have made significant investments in modern machine tool technology before their U.S. counterparts did. The reasons for this advantage could include such diverse factors as more enlightened labor- management relations in Japan, built-in disincentives to manufacturing efficiency in the Onited States because of ~cost-plus. provisions in DOD contracts, and the relative effects of U.S. vs. Japanese incentives for capital investment. It is commonly agreed, however, that the Japanese suppliers brought to the U.S. market in the mid

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74 to late 1970s more exper fence in some sophisticated categor ies of machine tools than U. S. . tool builders. With regard to flexible manufacturing systems, for example, observers point out that Japanese machine tool builders had a head start in commercialization, because U.S. machine tool users--in contrast to Japanese users--were slow to pick up on the concept. This observation accords with the Committee's experience that, in making machine tool purchases, U.S. firms have until recently had a tendency to "replace" rather than ~upgrade. ~ The decision to purchase has often involved low-level or uninformed decision-making (e. g., by foremen or purchasing off icers) . This has colored the perception prime contractors have had regarding the responsiveness and reliability of U.S. vs. foreign suppliers of machine tool s. Experience With Foreign Suppliers A [though some prime contractors strongly prefer to buy from U. S. . suppliers, all interviewed respondents stated that they made substantial machine tool purchases from foreign companies. The most commonly cited disadvantages ascribed to U.S. suppliers were these: Deliverv times . As this resort exami n^a ~ mash i n ~ . tool imports have tended to climb during those years when U.S. suppliers were accumulating large backlogs. In the case of the latest surge in imports, which took place during 1976-80, U.S. buyers found that the overseas supplier could deliver an order several months before its U.S. competitor. · Responsiveness to user requirements. Most machine ~ _ . _ tool users that responded to the Com~nittee's surveys believed that foreign manufacturers were more responsive to user requirements, especially where state~of-the-art advances were involved. Some named specif ic instances where U.S. suppliers had turned down opportunities to bid on pro jects incorporating new technology; these bids had subsequently been picked up by foreign firm. In one instance an aerospace firm decided on specifications for a large, multiple~spindle profiler with automatic ~cool~changing and pre-setting capability. It received seven bids, only one U.S. firm was among the bidders. The U.S. machine tool industry has kind of left us, ~ the

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75 aerospace company's General Manager for Manufacturing Ooer at ions ~ emar ked . · After-sales service. The majority of interviewees also. faulted follow-on service standards at the U.S. machine tool firms. In some cases, poor follow-on service appeared to result from the "conglomeratization" of the supplier. Respondents who brought up this point surmised that where service had once been provided by distributors, whose prime responsibility lay in sates and service, it was now done directly by the supplier- congLomerate. Follows service thus became a lower corporate pr for ity and suf feted accordingly. · Reliabilitv. The reliability of U.S. machine tools came in for some of the strongest criticism. As the head of manufactur ing research at an aerospace f irm put it, The Japanese are more likely to give you a product that will run the first time: U.S. manufac~curers usually give you a longer lead time, and the reliability of their machines is not the greatest. ~ Another, similarly placed corporate off icer likened the situation to the U. S. auto indus~cry, which he decor ibed as outclassed by foreign products that offer better reliability and are more responsive to consumer demands. The Committee acquired anecdotal but nonetheless persuasive evidence to the effect that prime manufacturers are seeing i:epro~rements in the competitiveness of U. S. machine tool builders. The Petition of the NINA for relief under Section 232 of the Trade Expansion Act also describes in some detail the .self helps steps being taken by the industry. 13 Together, there suggest that U. S. machine tool builders are aware of changes that must be made in orde c to remain competitive. As precarious sections of this report suggest, these changes will be constrained by f inancial considerations, and by the difficulties that U. S. suppliers have had in dealing with the government. The following subchapter descr ibes aspects of U. S. Legislation that have influenced and will continue to i Of luence the purchase of domestically produced machine tools due ing this transitional phase in the industry. -

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76 DOMESTIC LEGISLATION AEFECTING THE PURCHASE OF U. S. PRODUCED MACHINE TOOLS "Buy American and Other Preferences As a general rule, U.S. government policy favors domestic over foreign suppliers. The Buy America Act, for example, r equines that mater tats and supplies purchased directly by the U.S. government be composed substantially of domestic products. The Air Force's Buy united States Here (BUSH) program has established procedures so that U.S. products will receive higher priority in procurement among overseas procurement agencies. The Small Business Act gives certain preferences to metalworking machinery producers having 500 or fewer employees; this covers all but 3 percent of U.S. machine tool firms. Several Executive Orders provide incentives for firms performing contracts and planning new production facilities in labor surplus areas; there areas presently include the home territory of many machine tool companies. Thin report finds no evidence that such incentives have had a measurable effect on U. S. machine tool purchases by defense contractors . The Buy Amer ice AC t does not apply to machines purchased for a contractor's awn use; it does not apply to the Software used to run automated machinery nor does it apply to purchases from NATO countries, Switzerland, Australia, Israel, or Egypt, where the United States has Memoranda of Understanding (MOUs) waiving the Buy America requirements that might otherwise attach to the purchase of machine tools. The Small Business ACt preferences have apparently not served to bring smaller U.S. firms up to the competitive standards of foreign market participants, and at any rate do not reach the firms that account for a very large share of the sales of domestically produced machine tools. The labor surplus area program. do not affect the price competitiveness of the finished product. Moreover, free trade policies embodied in the Trade Agreements Act of 1979, and in a number of reciprocal international agreements (including the MOUs referred to above), encourage foreign firms to seek host government contracts and provide for the waiver of.domestic preferences. Offset agreements with foreign governments also divert purchases, including machine tool purchases, to foreign soil. These agreements are intended to assist in financing foreign military sales, by providing that the

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77 U. S . pr ime contractor purchase cer tain components o ~ assembly equipment from the receiving government as a condition to the contract. A recent Treasury Department report estimates that between 1975 and 1981, 26 of the largest electronics and aerospace f irms provided foreign governments with offsets totaling 89. S billion, in return for S15.2 billion in foreign military sales. 14 Interviews for this report conf irmed these conclusions as to the ineffectiveness of this legislation in encourag- ing domestic machine tool purchases. In virtually every case, Buy America preferences did not, as a practical matter, stand in the way of users that preferred the foreign machine tool over a similar, U.S.-made version . Legislation recently introduced in the House of Representatives (but not enacted) addresses some of th e concerns raised in this report. The bill, PER 2782, would set up a 3-year, $1.8 billion program of modernization and expansion loans for defense-related small and medium businesses. It would also establish training programs throughout the country to help reduce shortages in certain, largely vocational, labor skills. Finally, the b ill would provide for grants to colleges and univer- sities to purchase and install modern scientific and engineering equipment. A committee report accompanying the bill points out that the legislation has as its intent ~ increasing productivity, improving product quality, and lessening import dependence. ~ The legislative history of the bill indicates that it was drafted with the machine tool industry, among others, in mind. Machine Tool Stockpiles Under the Defense Industr ial Reserve Act (Public Law 93-155), the government is authorized to procure and manage a stockpile of weapons parts and also of manu- f actur ing equipment such as machine tools. WD ' s stockpiled machine tool (metal-cutting and -forming) inventory consists of two categories: (1) the General Reserve, which is centrally managed by the Defense Log istics Agency, and ( 2) var. ious idle packages for mobilization, which are managed by each of the three services . ( 1) As of July 1983, the General Reserve had an inventory of 12,286 machine tools, which were valued at

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~8 $334 million. However, the average age of these tools is 29 years, with only 2.1 percent of the metal-forming tools less than 10 years old, and 1.2 percent of the metal-cutting tools less than.10 years old. Longstanding DOD policy has aimed at replacing 5 percent of this inventory each year: but because of the lack of funds, this goal has not been met. In 198L, the Defense Science Board recommended a one-time, 25 percent replacement and a S percent replacement thereafter: this recommendation, however, has not been implemented. (2) The Idle Packages for Mobilization numbered 13,489 machine tools as of July 1983, with an inventory value of S382 million. Similar to the inventory in the General Reserve, however, the average age for the Idle Packages inventory is 28-29 years. The 25,775 DOD-owned machine tools currently in storage is down from an estimated 32,000 tools in 1981. Because of a lack of funds, this significant reduction in inventory has not been matched by an increase in the number of new tools. The Committee believes that the whole concept of long-term stockpiling of machine tools by X D needs to be examined carefully. A recent Army report, for example, asserted that use of the stockpile to provide machine tools for M1/M60 tank production would Cost a great deal of money [in machine tool rehabilitations and would not improve manufacturing methods above those used for the last fifty years..l5 Thus far, the stockpile concept has tended to discourage technological advance while running up substantial carrying charges for the taxpayer. INDUSTRIAL BASE RESPONSIVENESS In its effort to analyze this country's ability to respond ho wartime production requirements,, the DOD regularly publishes mobilization plans for specif ic weapons systems. The two descr ibed here give an indication of the continu- ing need for a responsive machine tool industrial base. In May 1978, the Army published its study of surge and Mobil ization requirements for the M109A2, 155-mm self- propelled howitzer. It found that the cannon and spare tuber for the M109A2 were cr itical pacing items. This problem was highlighted by the lead times for the construction of industr ial plant and equipment; these lead times did not match the accelerated production

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79 requirements of the surge scenarios in the study. The study concluded, The long lead time required by the tooling industry to produce industr ial plant and equipmen t is a critical problem area pointed out by this study and should be of interest to DOD. tt 16 In June 1982, the Army published an industrial preparedness study for the M1/M60 tank systems. Among i ts purposes was ( 1) analyzing current production capabil- ities, (2) identifying critical and pacing purchased items where the vendor could not meet mobilization requirements. and (3) identifying machine tools, production equipment, and tooling required to meet mobilization planning. That study, which cost more than S900,000 to complete, found that the new machine tools and production equipment required for mobilization are long lead items, not avail- able off the shelf. It concluded that To meet mobiliza- tion requirements and update manufacturing methods will require 200 new machine tools and an additional 200 pieces of special equipment with a producible lead time of 18 to 24 months..!] The study doubted thaw the American machine too L industry could accomplish this task in today's industrial environment. - CONCLOSIONS In the course of its interviews and surveys, the Committee was struck by several features of the DOD-prime contractor-supplier relationship that have served as disincentives to modernization in the U.S. machine tool industry. These can be summarized as follows: · Contracting Procedures. The Committee cannot avoid the conclusion that the complexity of the Defense Acquisition Regulations is at least part of the reason why the U. S . machine tool industry has generally avoided direct O0D relationships. 0 Mar ket character istics. The apparent slowness of ~- the machine tool builders' domestic market, which i ncludes pr ime contractors, to adopt modern production technology on a widespread scale has also affected the competitive status of U.S. suppliers. · Prime contractors as buffers between DOD and s Applier s. While pr ime contractors generally shield machine tool companies from having to deal directly with the government, they also strongly f ilter government programs . Machine tool companies interviewed for thi s

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80 report expressed almost no awareness of the TechMod or ManTech programs. While money can be used from these programs to help purchase tools, no machine toot company interviewed knew if it had made sales supported by these programs. The reasons for this relative disadvantage of machine tool builders in the defense contracting business cannot be ascribed to any s ingle feature of procurement practices or industry structure. This report has described how delays, regulatory requirements, and lack of information have served to the disadvantage of the traditional machine tool builder. The Committee notes some instances where progress might be made. Experience. such as the Watervliet project, and the streamlined review procedures at the General Account- ing Of f ice, can contr ibute to revere ing the generally negative perception that machine tool companies have of dealing directly with the government. · Research and development. Copter 2 of th is repot t pointed out the low levels of R&D spending in the U. S. . machine tool industry. This chapter has identif fed four aspects of the DOI)/prime contractor/supplier relation~hin that have helped perpetuate this situation. · Industrial base res:D~n,:iv~n-ac' ,^~ Q'_L._- 1 ;__ An analys is of mach ine tool fig major weapons systems at surge/mobilization levels is clearly beyond the scope of this study. However, the work that has been done confirms tl) that peacetime levels of each ine tool inventor ies are not Of f ic lent alone to meet surge and mobilization needs, (2) that i ~ is unlikely that sufficient congressional appropriations will be passed in the near future to bring the DOD' ~ machine tool inventory up to reasonable standards of either modernity or surge/:nobilization readiness, and (3 ) that current stockpiling practices have resulted in the maintenance of old and at LO nart-lv He equipment. ~ ~.! __ ~ The Cocci ttee points out, however, that the Department of Defense can exert a powerful influence within the machine tool industry by making a market for new tech- nology, as i t did in the case of numer ical controls. This would require changes not only in stockpiling procedures, but also in the patterns of manufacturing R&D and in procurement procedures which sometimes leave the government with expensive, obsolete equipment. The picture of DOD-prime-~upplier relationships that emerges from interviews and the published literature is

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81 one of a traditional structure that presently does no t serve either the government or the machine tool industry particularly well. Progress in improving these relationships has been slow and isolated, which has contributed to deficiencies in the competitiveness of th domestic industry. NOTES 1. U.S. Department of Commerce. e 2. David Henry, "Defense Spending: A Growth Market for Industry, n in 1983 U.S. Industrial Outlook. 3. In connection with the NMTBA's Petition under the National Security Clause, Section 232 of the Trade Expansion Act of 1962 (19 U.S.C., sec. 1962) for Adjustment of Imports of Machine Tools ("Petitions) 4. See, for example, Committee on Computer-Aided Manufacturing, Force Manufacturing Technology, National Academy Press, 1981. 5. AFSC Headquarters, Payoff 80, p. 25. 6. Testimony of Richard P. Bodine, President, The Bodine Corporation, before the Subcommittee on Economic Stabilization, Committee on Banking, Finance and Urban Affairs, U.S. House of Representatives, May 19, 1981. . 7. Aerospace Industries Association, Meeting Technology and Mannower Needs Through the Industry/lJniversity Interface, 198 3 . 8. Testimony of Richard T. Lindgren' President and Chief Executive Of f icer ~ Cross & Trecker Corporation r before the International Trade Commission' June 28, 1983, p. 2; Testimony of Michael W. Davis, President, White-Sundstrand Machine Tool Company, before the International Trade Commission, June 28, 1983, p.6. 9 . For example, in its May 1983 issue, Amer ican Machinist reported on a fuLl-~cale EMS built by . 1

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82 Cross & Trecicer that became n fully operational ~ i n May] cutting aircraft and missile parts" for Hughes ~-~~ ~ · l Lle CIL ~ Ache r epor ts the t Hughes ' ~ i - ~ - , ’" - ~___.. ~= . . ~ "management mandated that the most modern, stated -the-ar t equipment would be provided ~ and that although Hughes has no 'buy-American' policy, . . . all bidders ~rere U.S. firms" (pp. 109-11~. 10 - The May 1983 issue of Metalworkina F!nai near i nix S. Marketing reports MINI 's conclusions Ah ~ ~ The _ _ _ = . . ~ ~ _ . ~ L~UC~ cecnnOl~y achievement level of Japanese machining centers and the production technology achievement level of Japanese package software are substantially inferior ho those achieved in the United States. Specif ically, MITI concluded that Japan ~ 's machining centers are1 considerably behind the U. S. . . . in spindle speeds, maximum allowable torque, main motor output and cutting efficiency. . . In precis ion machinery technology, . . . Japan is behind the U. S . and West Germany. huh i red ~~ rT ~ : _ =~ Japan is also ues`~u one u.:~. In Design technology, where the U.S. is pouring effort into CAD/CAM. ~ The article suggests that ~ [tl he reason for the large gap [ in machining center technology! is That Japan concentrates on popular general machining centers featuring economy, while the U.S. and West Germany concentrate on special high performance machining centers for aircraft and the like. (pp. 76-83). 1. ,, July 11, 1983, o. 1L~ Encasement or E11 S. Lustgarten, Vice President, Paine Webber Mitchell Hutchins before Subcommittee on Economic Stabilization of House Committee on 8anlcing, Finance and Urban Affairs, July 26, 1983, p. 18. 12. American Metal Market, July 11, 1983, p. 1LA. . 13. ~Petition, n pp. 221-7; Supplement to Petition, August 30, 1983, pp. 25 - 40. 14. Department of the Treasury, Survey of Offset Coproduction Requirements tl983 ) .

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83 15. General Dynamics, land Systems Division, Ml/M60_Tank Svstems Industrialization Preparedness Mobilization Studio, Final Report (June 1982) . Vol I, p. 4. 16 . Ha] U. S. Army Armament Mater iel Readiness Command, I ndustr ial Base Respons iveness S tudy for Howi tzer, Medium, Self-Propelled lS5nun, M109A2 (May, 1978). 11. General Dynamics, op. cit., p. 2.