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APPENDICES 99

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. APPENDIX A HIGHLIGHTS OF PHASE I STUDY Defense Needs and the Machine Tool Industry In a national security emergency, the availability of production capacity to meet ~surge. or remobilizations requirements is critical; machine tools are an important component of that capacity. Several recent reviews have examined the Defense Department' s machine tool reserve and found much of it to be obsolete. Similarly, they have considered the domestic machine tool industry's ability to expand capacity and output rapidly and judged it to be inadequate. I n view of the long lead times character istic of machine tool design, production, and delivery, a large increase in output would require a substantial investment and take several years to achieve. At a time of f inancial constraints on present weapons systems procurement programs, investment in creating and maintaining extr a machine tool capacity to meet emergencies is highly unlikely. Therefore, it is particularly important that the Department of Defense carry out mobilization planning in consultation with machine tool manufacturers and users. Such planning should concentrate on maintaining existing machines in operation by ensuring the supply of spare parts, identifying critical equipment and its sources, and providing for the conversion of civilian machine tool production capacity to military applications. The issue of self-suff iciency versus reliance on foreign sources should also be confronted. Because of its important bear ing on productivity, production rates, and cost containment, modernization of the WD and contractor~owned machine tool inventory is a critical element of the defense industr ial base revitaL- ization strategy called for by the Defense Science Board, 101

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.# 102 the House Armed Services Committee, and others. Such a program would take several years to accompl ish . Our ing that period, presumably, the objective would not be to substitute 1970s state-of-the-art machine tools for outdated equipment but progressively to advance and incorporate in defense production new manufacturing technologies. From the point of view of defense needs as well as the competitiveness of the U.S. industry, there- fore, two types of DOD polic ies assume ma jor importance-- procurement policies and programs of technology develop- ment, innovation, and diffusion. Previous reports on the defense industrial base have expressed various concerns about DOD procurement practices particularly relevant to the machine tool industry's response to the need for modernization. First, the pol icy of cost-plus reimbursement is said to discourage contractors ' investment in more efficient plant and equipment. Second, Cost Accounting Standard (CAS) 409, Sequin ing depreciation of contractors ' tangible assets to be based on the ir h istor ical or economical useful 1 Ives, may prevent full cost recovery in an inflationary period and thus impede replacement of outdated assets winch efficient equipment. At the least, CAM 409 imposes a substantial recordkeeping burden on contractors; however, the recent elimination of the Cost Accounting Standards Board leaves no current mechanism for its revision. Third, vat ious restr ictions limit the use of multiyear contracting, which is widely believed to offer maximum economies and encourage participation in defense procurement, not least by producers in industr ies that, like the machine tool. industry, are character ized by sharp fluctuations in civilian demand. WD men u f actur ing technology program have been criticized, not as impediments to innovation, but as inadequate and, in some circumstances, ineffective. The success of the Air E'orce in developing and promoting the use of numerically controlled (NC) machine tools in the l950s has not been repeated. Independent research and development ( JR&D) funds are rarely available to second- and third-tier contractors. The Manufacturing Technology program has been funded at levels far below those recom- mended by the Defense Science Board, among others. Generally, manufactur ing technology development and innovation must compete for a share of the procurement budget where the acquisition of finished products has far h igher pr for i ty.

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103 The Manufactur ing Technology program sponsor s gener ic technology ~ n hopes that it will be widely transferred. The Technology Modernization program provides funding to address specific problems in per tickler plants. The panel-drilling robot at General Dynamics in Ft. Worth, where the Technology Modernization investment is expected to have a five-to-one payback, is often pointed to as an example of the program's success. It is a successful example of stimulating the application rather than the development of technology , however, because most of the technology applied by General Dynamics under the program was already available. The Domestic Machine Tool Industry The Phase I committee was constituted to identify the issues that must be raised in a more comprehensive study of the industry's potential contribution to the needs of the U.S. Departmemt of Defense, and to plan such a study in outline. In carrying out this charge, however, the committee has made a set of tentative judgments, on the basis of its members' reading and discussion and their experience in management, business analysis, military procurement, and the machine toot industry. Capital Investment Inadequate access to capital is commonly raised as the machine toot industry' s fundamental problem. The extreme cyclicality of the domestic market is surely a factor in the tendency of investors to view U. S . machine tool com- panies as r isky places to hazard capital. Some sources cite the additional problem of overconservative manage- ments reluctant to make needed investments In either plant or product development. It is also likely that the many small businesses in the machine tool industry have been hurt by high interest rates over the past few years. This committee f inds much of this descr iption plaus- ible. A domestic f inane ial environment more favorable to capital investment would presumably raise sales of machine tools and other forming equipment. But should the dom- estic industry be unable to compete In technology, marketing, and service, such an environment might only increase the market for foreign manufacturers. Effective

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104 management, with the capacity to grasp new technical and market opportunities, is also important. Labor With its highly cyclical market, the machine tool industry in the United States understandably finds it difficult to attract and retain skilled craftsmen in numbers necessary to meet business peaks. As a result, delivery on orders dur ing such periods is slowed, intensifying the effects of the industry's common practice of carrying heavy order backlogs. When demand is high, therefore, many buyers turn to foreign machine tools, which can generally be delivered much more quickly. Capital investment in one solution to this potential shortage. The adoption of new, more efficient manufac- tur ing technology may well diminish the requirement for machinists, tool-and~die makers, and members of other highly sk illed occupat ions. Higher wages would presumably go far toward attracting the necessary per sonnet. One government study in any care disputes the Long-term impact of labor shortage., citing such indicators as average weekly overtime hours, quit rates, and relative wages. Of more long-term significance is the industry' s ability to attract the talented engineers, designers, and managers who will develop and manufacture the next gen- erations of tools. Experts in cutting and forming technology, electronics, computer iced control systems and their software, manufacturing systems design, and market- ing, among other fields, will be needed. Some of there specialists are currently in very heady demand in growth industr ies, and it may not be so easy to attract them to an industry commonly pence ived as heavily cyclical and technologically backward. Again, competitive salaries will have some effect, as will the challenge of working in an industry wi th technolog ical and management challenges before it. Management Some recent studies propose that the machine tool industry's slowness to innovate and lack of aggrensive- ness in marketing may be due largely to the ~fragmented. nature of the industry and the specialized, narrow

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105 Product lines offered by many of the companies. These factors, it i s suggested, militate against adequate innovation and in some ways favor unsophis The Machine Tool Task Force, for investment in t icated management. - "xample, says ~ "Small bus inesses are typically owned and operated by people who were at 1gloally craftsmen and they do not usually employ engineers or other university_ trained people. As a result' they are' with some outstanding exceptions r nonparticipating members of the technology-exchanging community. n Technological change in machine tools and forming technology' the report says r has been prompted over the past 40 years more by user demands (and go~e`=tent-subsidized development) and technical advances in the supplier industries (notably cutting tool manufacturers) than by independent initiatives in the machine tool industry. As an explanation of the industry's performance, such an analysis is inviting. In a f ield whose technological and market horizons are expanding as rapidly as those of the forming industry, it is to be expected that small companies with narrow product lines and experience in producing standard products over long periods of time should miss important opportunities for innovation. However, it should not be forgotten that the industry' sales leaders are fully large enough to afford the technical and management resources necessary to take advantage of new technology and new mar ke ts . Capacity The existence of large order backlogs and long lead times suggests that capacity is insufficient for peak peacetime needs . If the need for mobilization ar ises, the industry in its present condition will not have time to respond. Capacity concerns involve types of machines as well as quantity. During mobilization, the easiest capacity to change to meet defense needs is capacity used for exports. There- fore, a machine tool industry that is competitive in world markets during peacetime should be able to meet mobilization demands. It should also be noted that foreign-owned machine tool plants in this country may be used during wartime to meet U. S. defense needs.

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106 Technology and International Compet ition The U. S. . mach ine tool industry ' s reputation for slowness in applying new technology, and for unreliability in the h igher technology product 1 ines, is no doubt a s ign if icant factor in its market performance against foreign competi- tors. The extent to which this reputation is deserved is unclear, but there is evidence that it influences buyers . The domestic market has a relatively older stock of machine tools and therefore appears rather slow to adopt new process technology, compar ed to those of other indus- trial nations. The U.S. machine tool industry's failure to market its products strongly overseas has thus, probably, cut it off from sources of more sophisticated demand than those available at home. If so, it has correspondingly reduced its incentives to innovate. Nor has the U.S. industry benefited from national research and development organizations, such as those established from the machine tool industries of some other countries Notably Japan, West Germany, and France). Many bel gene that, espec tally in Japan, government guidance has been or itical to the international succes of foreign machine tool industr ins. In addition, the close working relationships between foreign industry and universities are absent in the united States. Role of Prime Contractors Many defense contractors are highly capable of developing their own sophisticated tools. Although individual contractors have often developed sophisticated machines in-house, it has usually been machine tool companies that have built such machines, transforming prototypes into heavy-duty equipment suitable for high-volume production and making more standard models available for purchase. It is this rote of technology transfer among defense contractor. that may be the most important contribution of the domestic machine tool industry--and the one that would be most sorely misted if the domestic industry were to deter iorate further . It would be undesirable, too, to pas. on this role to foreign suppliers, however competi- tive they might be.

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107 Phase ~ Committee Recommendations f or Fu r the ~ ( Phase I I ) S tudy The most prominent aspects of the machine tool industry, so far as this committee' s charge is concerned, are (a) the rapid expansion of its technological and market hor icons over the past decade or so, and ( b) i ts deter- iorating position in the world market, as measured by market share at home and overseas. In outlining a plan for a more comprehensive study of the industry' s potential contributions to defense needs, the committee has concentrated on these character istics . Such a comprehensive study must begin by setting boundaries on the field of investigation somewhat wider than the machine tool industry's traditional limitation to metal-removing equipment, taking into account new materials and the information technologies of control and systems integration. Then, with such a definition in hand, a further study can assess the health of the industry, and its ability to serve Defense Departmen t needs. The following outline embodies this committees recommendations as to how such a study should proceed. I . Industry Analys is As a first step, the industry and its markets should be identif fed and character iced. A. Def ine the machine tool industry. For purposes of this study, the def inition should be broad enough to include not only firms traditionally considered part of the machine tool industry, but Also manufacturers of manufacturing systems components (machine holding device, cutting foal, gauging and measuring device, controls, and material handling equipment). Include information integration and such competing industrial shaping technologies as near-net-shape forming. Examine the current structure of the machine tool industry, the changes it is undergoing, and its expected evolution over the next 20 years. B. Assess the technological and economic trends to which the industry should respond. Most important among these trends is the integration of fabrication, assembly, material handling and storage, production control, and management information systems. New methods of metal- forming and metal-cutting as alternative shaping

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108 techniques, and importance of new technical disciplines such as computer control, the merger of electronic controls and mechanical processes, chanaina arch Or in production, market trends, joint international ventures and exchanges of information, and f inane ia 1 considerations should all be assessed. C. Group the f irms in the machine tool industry according to categories that will aid an analysis of the industry' responsiveness to military needs. Which sectors are most important to the Department of Defenses In which f irms is research and development being done? Possible cat- egor ies include high-volume suppliers, suppliers of high-technology equipment, suppliers of equipment par- ticularly critical to military needs, and custom integrators of manufacturing systems. · ~ _ - - , ~ . ~ Consider also wr.~cn classes ot tools are important to the Department Defense. Of O. Assess the reasons why some machine tool companies prefer not to seek Defense Department contracts. E. For industry sectors identified as important to the Department of Defense, conduct case studies of their monitoring of the defense environment and their decision- making processes, to test how each type of company is likely to respond to different DOD initiatives or policies . I Io International Competitiveness The past performance of the U. S. machine tool industry suggests that the industry is losing some of its ability to compete. A more comprehensive study should investigate the facts of the case and assess and weigh the various contributing factors that have been proposed. A. Export decline analysis 1. To what extent has recent booming domestic demand favored impor to ? r esponded? 2. Is national export-import policy a significant factor ? 3. Do intr insic cost advantages play important roles in foreign manufacturers ' success? If so, what are these advantages and how important are they? 4. To what extent do labor and management practices contr ibute to the success of foreign manufacturers? How have domestic manufacturers

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109 5. Are claims of superior quality, higher reliability, faster service, and lower prices for foreign goods based on fac t? 6 . Which tool s are the primary imports, and which the primary exports? B . Compar ison wi th key competitors ( e . g ., Japan) f rom user s ' per specs ire: pr ice, qual i ty, del ivery, and r Pliability. ITI . Problem Synthesi s On the teas is of i tems I and I I, identi fy the newly def ined industry ' s fundamental problems ( i f any), descr ibe poten- t ial WED strategies for assisting in correcting these problems, and identify obstacles to putting those s trategies in effect. The following issues may provide lines for th is analyst s: A. The inf luences of government polio ies in the f ields of taxation, antitrust restrictions, manpower training and education, research and development, and restrictions of sales to the Eastern Bloc.. B. Direct funding of research and development relevant to machine tool technology, in both the machine tool industry and universities, by the Department of Defense. C. Alternative Department of Defense procurement strategies 1. Is it possible, and under what circumstances would it be desirable, for the Defense Department to modernize the government-owned portion of the defense industrial base on a continuing and sustained basis? 2. Can and should procurement regulations be changed to foster the installation of capital equipment of defense contractors? 3. Should research and development funding be augmented? If so, how should funds be allocated between product and process development? How should they be allocated between universities and industry? 4. Would formation of a joint Defense Department- machine tool industry committee be an effective group to develop plans for surge and mobilization?

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110 IV. Recommendations The recommendations will follow from the analysis in part III of this Phase II study, as described above. Likely categor ies for recommendations include the following: A. Business Strategies B. Procurement Strategies C. Technolog ical Strategies 1. Product research and development 2 0 Process resear<:h and developmen t .