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4 PROBLEM SYKES IS AND RECOMMENDATIONS PROBLEM SCATHES IS What is Happening to Me UPS. Machine roof Industry? The U.S. machine tool industry, once the most productive and technologically advanced in the world, has lost a substantial proportion of its domestic market to foreign impor ts . U. S. . machine tool builder s are under consider- able pressure from Japanese machine tool products, which some consider to have incorporated superior technology. At a time when a severe recession has eroded and sometimes erased prof it margins, rapidly changing manufactur ing technology has created new urgency for plant moderniza- tion and investment in R&~ in the machine tool industry itself. In addition, many customers of U.S. and foreign machine tool builders believe that the Japanese have invested more than the United States has in developing an effective world marketing and servicing network. Compounding the situation faced by the traditional U.S. machine tool industry is this Committee' ~ ob~erva- t ion that the very business of selling stand-alone tools that cut, form, and shape mater ial in product ion processe s has changed radically. An discussed in Chapter 2, manufactur ing process improvement needs today are being met by a group of suppliers of computer and systems technologies in addition to the builders of the machine tools themselves. Because the technology is changing so rapidly and customer needs are increasingly difficult to meet, the problems faced by traditional U.S. machine tool builders are exacerbated. For instance, order-backlog management will not substitute for strengthening efforts to identify and meet customer needs. 84

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85 Even the more traditional economic forces in this industry are unlikely to reverse the situation. His- torically machine tool orders lag the business cycle, but because market penetration by foreign competition seems to be here to stay, the competitive climate faced by U.S. machine tool builders is unlikely to improve even if the current business recovery should prove to be a sustained one. How Did the Industry Get This Way? In every advanced industrial country, there are now intense pressure. to take a global view of sources of materials, production facilities, and particularly markets, in order to compete successfully. This global- ~zation of business has already taken place in such teas to industries as computers, telecommunications, steel, and -immure ial aircraft. ..~..~._~ The machine tool industry also appears to be subject to these same forces, which are fed by the more rapid diffusion of technology, changing economies of scale induced by new automated production techniques, lowering of transport and communications costs, and a narrowing of income differences between the United States and other industrialized competitors. The U.S. machine tool industry is being forced to adjust to these far-reaching developments because its traditional practices are ill-suited to the present day. Unlike their Japanese competitors, most U.S. machine tool builders have managed business cycle swings by accumu- lating backlogs rather than expanding capacity and marketing. Although the machine tool industry'. prof Stability had been healthy from 1974-1981, its capital investment for modernization has been relatively low. It is lowing market share to an industry in a country, Japan, that has lower wage and compensation levels, lower interest races, and a form of government- industry cooperation that is geared to an ~export~or- per ish" economy. The users of machine tools have also influenced the status of the U.S. machine tool industry today. In some machine tool categories, penetration of the U.S. market by foreign firms has been possible because foreign machine tool builders gained important experience with very sophisticated domestic users. With the possible exception of some manufacturers in the U.S. aerospace, farm equipment, and off-road-vehicle industries; there

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86 are no U.S. manufacturers with installed processes of the technolog ical soph istication that can be found in West Germany and Japan. The largest U.S. market for machine tools, U. S. automobile manufacturers, has not until recently been a strong articulator of demand for high levels of manufacturing technology. Although the above paragraphs describe traditional U.S. machine tool builders in general, leaders within that industry have acted and are acting to meet new market realities. This report has shown that the response to new competitive conditions has been widespread and varied. Cos~-cutting ( including relocation of manufac- turing facilities overseas), mergers, joint ventures, diversification into new technologies, more R&D spending, and even a basic reorientation of business strategy have been documented. In addition, as this report describes in Chapter 2, the structure of the machine tool industry is changing signif icantly. The industry is being augmented by an increasing number of. U.S. manufacturers offer ing products that are becoming an integral par t of new manufacturing process technologies. What are O0D' s Interests Regarding the O.S. Machine Tool Industry? This report has identified three levels of DOD interest and concern with regard to the machine tool industry: 1. Access to State~of-the-Art Technology. 'the O01) is answerable both to its mission of national security, and to interested parties such as the U. S. Congress, for maximizing the reliability, effectiveness, and economy of i ts equipment and mater tel. This requires machine tools and systems of the broadest, latest, and highest capability. 2. Cost-Effective, Expandable Production. The same considerations also require that costed festive production be readily expandable and sustainable during per iods of potential ~upply-line disruption. 3 . Health of the Economy . Because inures tment in mor e ef f icient production--including defense production--is more likely to take place dur ing per iods of high levels of economic activity, the DOD is concerned about the health of the economy and of the manufactur ing sector .

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87 The Committee found that these D00 concerns and interests will be best satisf fed when three conditions are being met: 1. The most appropr late, up-to-date production technology is being widely used in the domestic industr ial base, in both pr ime and second-tier contractor s; 2. The use of new technology extends beyond the defense sector, at least to those parts of the civilian sector that might be expected to be diverted to supporting military production during wartime: and 3. The strategic industr ies that face rapid technological change are also keeping up with the state of the art and maintaining a sound f inancial position. while several prime defense contractors are working with leading edge manufacturing technologies, the Committee is concerned that advanced manufactur ing technology is not as widely applied in this country as in Japan and Western Europe. While some of the world' s best production technology can be purchased in thin country, and while delivery time. of U. S . machine tools have become more competitive recently, many domestic machine tool users believe that Amer ican machine tool f irms are not satisfying demands with regard to pr ice and reliability as well as some Japanese suppliers. What are DOD's Policy Options, Levers, and Constraints? Although DOD cannot alone galvanize the machine tool industry, the Committee is impressed with the influence that ache DOD can have in advancing the development and application of state-of-the-art production technology. Although the s ize of the direct DOD demand for machine tools is small in volume relative to machine tool sales nationwide, the DOD-induced demand for machine tools in large, and the range of DOI, equipment and materiel needs is so wide as to require virtually every form of manufac- ture in use in the country. Therefore, DOD can, through procurement specifications, affect the standards of product ion that are used . In short, COIN is at least partially in a position to ensure that its own interests and concerns vis-~-vin the machine tool industry can be satisf ied. It is perhaps the only federal agency so well positioned. .

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88 The Committee believes that technological leadership, involving not only the ability to perform state-of-the-art scientific research but also the ability to apply and i ncorporate it economically into co~unercial products and processes, will determine the competitive success of the domestic machine tool industry in the global marketplace and will, therefore, be cr itical to its continuing health . As noted above, this leadership is a function of both the builders and users of machine tools. DOD can do much to stimulate and encourage U.S. builders toward decisive technological Leadership in key aspects of manufacturing sciences. The policy tools available to government range from grants and subsidies, to regulations directly affecting an industry, to other policies designed to provide the conditions that encourage certain desired activities In the case of the Department of Defense, the most direct influence that can be brought to bear upon the machine tool industry is through procurement. Additionally, DOD can subs tantially inf luence the lonq-term health of th e industry by supporting industry-wide ef forts to f ill two of its pr ime needs: better research in manufactur ing technology, and a knowledgeable customer for the resulting process technology. In considering the range of possible actions, the Committee emphasizes that the current situation in not sub ject to a "quick fix. ~ On the contrary, the only valid solution is one that prepares an already diverse industry for a climate of cs:,ntinuing rapid technological advance and strong foreign competition in domestic and world markets well into the future. Additionally, the f inancial condition of Many machine tool builders militates in favor of a mix of measures having immediate as well as long-term i~npac~c. Anything short of a comprehensive package, the Committee believes, could prevent the U.S. machine tool industry from continuing its adjustment to new competitive conditions and strengthen the case for emergency measures in the future. REC=MENDAT IONS The following recommendations numbered in order of priority fall into categories of action open to the three key participants: DOD; parties outside DOI)'s direct jurisdiction but within its power to influence , such prime contractors and other government agencies; and machine tool builders. as U.S .

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89 Recommendations for DOD 1 . Modernize the Defense Industr ial Base There is considerable evidence that contracts for advanced weapons systems are often undertaken today using manufacturing technology that is 20 to 30 years old. As a result ~ not only do these weapons systems have costs that Could be avoided' but the country loses opportunities to pioneer in new Production technoloov having ;` 1 Arm" potential impact on the economy. To a disturbing extent, the Committee believes, the technology lag in defense contracting reflects short- comings in the contracting process itself. As explained in Chapter 3, there are too few incentives built into the process to encourage widespread modernization in defense- r elated product ion . One hopeful sign is that DOD has in place programs that could, if given suff icient pr for ity within the Depar tment, make substantial progr ens . The new Industrial Modernization Incentives Program ( hMIP), and 000 ' s ManTech and TechMod ( including the Army ' s IPI) programs have the potential of speeding the implemen- tation of new manufactur ing technology. Action: DOD should display a greater commitment to the aims of its manufacturing productivity incentives programs. The IMIP (as the successor to the TechMod and IPI programs) and ManTech programs should receive increased and stable funding. _ ,~ , _ . ., ~ ~ ~ 2. Stress Productivity Improvement Incentives The OOD recognizes the value of plant-wide technology improvement through its TechMod Program. Applications of TechMod funds, however, are both extremely limited and conf ined generally to pr ime defense contractors, linked as they are to specif to weapons programs. The expansion of the TechMod concept, and the inclusion of the machine tool builders themselves as potential recipients for program funds, would be an efficient way of supporting the viability of the domestic industry through R&D. Action: DOD should create productivity improvement incentives within the machine tool industry in the form of a TechMod program for machine tool builders that well to the defense industry and to the DOD i tseLf .

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so 3. Simplify Contracting Procedures . There have been numerous instances where f irms, including machine tool f irms, have deliberately avoided opportunities to bid on government contracts or apply for ~~ _.-_ ~~~ai~~_= -~_~U== AL Bile complexities of con- tracting procedures. Such a situation deprives the taxpayer both of greater competition in government contracting and of the savings from r-rl',-~ A..,.__-; r equi remeets . A reasonable goal in dealings with pr ivate f irms should be to take no more time in the contracting process for particular items than the average time taken in regular non-government business. With regard to making contract specif ications more realistic, and improving disclosure, the procedures used for the recent Watervliet Arsenal Ems andr non ~ ~ ~ = rat ~ e me_ ~ ,. _ ~ ~ = ~ _ ~~ c ~ lie_ L a procurement might serve as a model. Action: DOD should consult with the National Machine Tool Builders' Association to establish a program encour- aging individual machine tool f irms to bid directly for government contracts. Such a program might concentrate on contract specifications (e.g., substituting performance or capacity criteria for design specification criteria), disclosure (e.g., making contract review procedures more open), compliance (e.g., supplying consulting services, through the NMT8A, on EEO, set-asides , etc. ), and timing ( e. g ., stipulating deadlines for reviews and automatic approval if no negative f inding is forthcoming by a specif ic date) . 4. Improve InEc~rma~i~n F1 Hem If well informed about available R&D funds, machine tool companies with the necessary resources and deter- mination will welcome the chance to improve their technological capabilities. If better informed about manufacturing technologies of interest to WO, contrac- tots as well as suppliers can respond with more aggressive efforts at plant modernization. These information flows are especially important given the U.S. machine Cool industry' s present relatively fragmented structure. As a rule, only the largest machine tool firms have been able to maintain the close relations with university engineering departments, and separate R&D divisions, which are needed to maintain a technological edge.

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91 Action: Establish, in conjunction with the U. machine tool industry, one or more joint, industry-wide research center s. Equip DOD research centers to make a more aggressive effort to make manufactur ing technology information available directly to potential adopters. Involve potential adopters in the R&D contract award process. To increase awareness of ManTech and TechMod activities among process and equipment suppliers, hold regular briefings for suppliers of equipment to acquaint them wi th the wor ~ ings of ManTech and TechMod . Hold process technology forecasting sess ions with key individual interest groups (EMS suppliers, near net shape suppliers, etc. ) to share with them DOD expert=' assess- ments of related developments tak ing place in pr imes that ar e sponsored by contract R&O money. 5. Require Long-term Production Equipment Maintenance Guarantees ~- In many cases, one cannot think of ~fixing~ a machine in the old sense of the word; ~repair. has today, in many cases, become the installation of a highly complex circuit board or an electric component made solely by a manufac- turer under highly controlled circumstances. Such con- ditions obviously present enormous challenges even for domestic manufacturers in peacetime, but for overseas resources under wartime conditions, such challenger may be beyond the meeting. Action: In defense contracts, require that con- tractors be able to maintain the production equipment for five years even if supply line. are disrupted. Continued production could be guaranteed either by having suff icient par to inventory in the continental Uni ted States or by having the ability to replicate the equipment. 6. Study Effects of Consolidation, Acquisitions, and Joint Ventures The Committee's interest in consolidations, acquisitions, and joint ventures is twofold. First, several countries have adopted policies permitting joint activity that, if engaged in by U. S . companies, would appear contrary to the intent of the U.S. antitrust law=. Such policies place American machine tool manu-

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.. 92 facturers at a competitive disadvantage. The nation and its lawmakers may have to relax their fears of -treater -- and coordination size and concentration of, domestic companies in recognition that many ; - _1 19~ ~ [ ~ ~ _ . ~ among' U.S. products' I 1ndCnine COONS ~ now compete in a world market. Second, the restructuring of the machine tool industry has, in some instances, involved the purchase of firms by holding companies or conglomerates. Such developments could adversely affect investment in U.S. machine tool production facilities and their ability to respond to Defense Department requirements . Action: OOD should commission a study of recent consolidations, acquisitions, and joint ventures within the machine tool industry, with the aim of determining whether (1) such actions strengthen or weaken machine tool production in this country, and (2) foreign firms are taking advantage of the relative freedom afforded by their laws to gain a competitive edge. Where concerns are warranted, DOD should present the information to relevant Executive and Legislative branch agencies. Each of the above recommendations varies considerably in magnitude of effort and resources. The Committee's deliberations , however , were based on the assumption that the opportunities for manufacturing productivity benefits occur each time the DOD procures weapons, equipment, munitions , or spare parts. The WD' s procurement budget for fiscal year 1982 was S64.1 billion. In addition, DOD and the three services administer revolving and management funds , some of which (e.g ., DOD stock funds) carry a large procurement quotient. In f iscal year 1984, outlays from these combined funds will exceed S100 billion. Savings brought about by increases in manufacturing efficiency can have a compound effect, both from the accumulation of productivity gains and the compound savings on interest costs. A one percen'c productivity gain in the DOD's procurement in f iscal year 1984 alone could, i f i t became the base for a new level of productivity, save the Department S2 billion in 1990, with cumulative savings over the seven years 1984-1990 0 f more than S14 billion. While these gross totals depend upon assumptions about interest rates and increases in procurement spending which may or may not come about, it nevertheless gives a rough estimate of the large savings that can result from productivity gains, and gives some measure of the resources that can justifiably be devoted to this effort.

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93 Beyond this general level of effort, the Committee felt that attempting to develop useful measures of costs and benefits related to each recommendation was a task welt beyond their ability and resources because of the huge var iety of technologies and applications involved. Meaningful estimates with acceptable levels of confidence would require large volumes of experience data specific to each application. Even then the benefits of applying improvements in manufacturing technology are often difficult to quantify at early stages of the technology' development. Another important failing of cost-benefit analysis in this context deserves special mention. The Committee believes that where long-term considerations are paramount, reliance on cost-benefit analysis can be self-defeating. For example, the dollar costs and benefits of becoming internationally competitive in machine tool production are difficult to quantify with any degree of certainty; yet such competitiveness is central to many of the concerns of this report. Indeed, the Committee believes that preoccupation with short-term cost-benefit analysis, to the exclusion of important strategic considerations such as the setting of long r ange goals concerning output and market share, has brought many U.S. firms to the point where they have lost substantial ground to foreign competitors. The question to ask is the cost of not staying internationally compet i five. Recommendations for Agencies with Which DOD Has Frequent Contact s The analysis in the body of this report indicates that the U.S. machine tool industry has been harmed as much by domestic economic policies as by the actions of foreign competitors. Changes in the business cycle have had a marked effect on levels of capital investment, R&D, sales, and prof itability possibly more so than in othe industry sectors. Machine tool orders are a ~lagging" economic indicator; and this means that the industry needs a sustained economic recovery in order to regain a solid equilibrium. The Committee believes that a healthy macro-economy that provides continuous growth oared several years could be the most significant single contr ibutor to a healthy domestic machine tool industry.

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94 1. Raise the Profile in the Administration and the Congress of DOD Programs That Promote Advanced .. . ~ Manufacturing Technologies The evident concern in Congress with manufacturing productivity generally does not appear to be matched by efforts to generate appropriations for programs, such as ManTech and TechMod, which would promote manufactur ing technology from a departmental level. The Congress needs to focus attention on programs such as these, which hold some promise for solving in a practical way the problems of manufacturing technology lags in U.S. factories. Action: Congress should appropriate additional funds for ManTech, TechMod, and similar programs as separate line items in the defense appropriations budget. 2. Build a Program to Promote Machine Tool Exports The Committee believes that participation by the U.S. machine tool builders in world markets is essential both for the economic return and to ensure full awareness of foreign technological developments, productivity, and costs. In other words the global machine tool market is a reality in which U.S. firms must participate in order to ensure competitive effectiveness in domestic markets as well as to expand their sales potentials. In addition, U. S. policy makers must recognize the mobility of technology. Restrictions on U.S. exports for some machine tool technology in an effort to prevent i ts use by Eastern Bloc countr ies is apparently not com- pletely effective because of foreign availability. Action: The Department of Commerce should cooperate w i ch the U. S. machine tool industry to mount a machine tool expor t promotion program utiliz ing the resources o f the U. S. foreign-based Consular Corps to identify market opportunities and help U.S. manufacturers gain access to those opportunities. This effort would include estab- lishing market controls, providing assistance in proposal preparation, and, where appropriate, facilitating Overseas Private Entreatment Corporation (OPIC) financing. In addition, the government should reduce barriers to the export of machine tools to Eastern Bloc countries in cases where those counts ies have access to the same tech- nology f rom other sources . U. S . machine tool builder ~ s hould be able to expor t the same types of equ ipment to the Eastern Bloc that other Western counts ies are expor ting to them.

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as 3. Bring Machine Tool Industry Considerations Into Other Departmental Programs Several federal agencies already have task forces looking at the problems of the U.S. machine toot industry. There is no evidence, however, that existing federal programs for technology development have focused on the economics of the machine tool business itself. Action: The Administration should inventory the arra`y of federal programs that are aimed at the problems of manufacturing productivity, with the goal of gaining better coordination among programs and simplifying the process of obtaining federal assistance. Recommendations for Machine Tool Industry The Committee recommends that the conventional machine tool industry look beyond government trade policy for solutions to its fundamental problems. To be competitive in today's marketplace, now global in nature, machine tool companies will have to modernize their production facilities an well as stay abreast of advanced tech- nologies in their product designs. They should also recognize that American purchasers of machine tools today have begun to consider foreign suppliers very seriously for more reasons than their lower cost. The American machine tool industry should combat the reputation some companies have built for having a reluctance to be responsive to user preference in machine design and systems, a slow delivery record, and insufficient service. The changing technology will place increasing value on ~ full product support orientation as the basis for competition. This support would include customer educa- tion: needs analysis, applications engineering, and simulation; greater efforts at competing on the basis of quality; and more aggressive service support. The industry should realize that many of the problems that beset it are the same as several other U.S. industr ies face. As the industry itself has recognized, many solutions must come largely from the machine tool industry itself; some must be implemented on an individual f irm basis. 1. More aggressive application of advanced equipment and processes in machine tool production. These steps are needed to improve product reliability, to reduce

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96 costs, and perhaps just as important, to gain first-hand familiarity with modern production methods. 2. A more active search for new technology. This would include taking advantage of access to information available from DOD, and making aggressive efforts to work with prime contractors in areas of new technology that they have identified as important as well as keeping up with offshore technological advances. 3. A -treater willingness to invest in lonq-term competitive strategies rather than responding only to short-term economic considerations. The Japanese firms - that are successful in this country have made their mark by responding imaginatively to customer needs with largely standard products. The new competitive realities demand that U.S. firms must do no less. 4. A new acceptance of joint R&D efforts. This would assist in developing a domestic research capability for nurturing advanced production technology in the mid-1980s and beyond a 5. A more extensive information program. The NMTBA should mount a major program to inform machine tool members of the availability of funds and DOD interest in upgrading the machine tool base in the United States. It is particularly appropriate that the U.S. machine tool builders maximize the value of the current period of cooperation within the industry for more acting upon real operational issues (e.g., labor relations, investment, R&D), which lend themselves to joint efforts. The industry should take this opportunity to set for itself challenging objectives whose attainment will achieve the worldwide competitiveness that is necessary. The challenge facing the industry is to persist with such an agenda until its objectives are realized. CONCLUSION The U.S. machine tool industry displays the character- istics of a mature industry facing pressures to undergo fundamental change. The proper response of government to such change is twofold: 1. The government should continue to aid technological progress and the pos itive restructur ing in the industry . This may mean that from time to time the government will have to look into means to overcome the comparative

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97 advantages of foreign producers where attr ibutable to hidden subsidies such as antitrust concessions and low interest rates give the foreign competitor an advantage. 2. The government should seek to work more directly with machine tool builders to clar if y its policy of promoting rationalization and its intention to assist f irms that are willing to adapt to the realities of the marketplace. The realities of the international marketplace, seen from government standpoint, suggest that the U.S. govern- ment cannot wash its hands of the industry's concerns. Indeed, several government agencies, including the Department of Defense, the Department of Commerce, the International Trade Commission, and the Export-Import Bank, have planned initiatives aimed at developing more effective policies for the U.S. machine tool industry. Free market economics, however, assumes that most problems are not amenable to government-imposed solutions Sometimes resolution of the problem depends upon changing the attitude. and practices within industries suddenly faced with rapid change. The surveys conducted for this report turned up such a pattern among both machine tool builders and users. The challenge facing policy-makers today is to identify those measures which demand govern- ment action, and those which are best left to the industry. In terms of this report, the most relevant reason for action is simply one of our own national de tense . 8u t such an effort will also help improve our whole national productivity and cannot be neglected either. The Committee believes that that argument will come to be of far greater importance.to this country than any defense argument. .

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