[Senate Hearing 106-1064]
[From the U.S. Government Publishing Office]
S. Hrg. 106-1064
CHALLENGES CONFRONTING THE MACHINE TOOL INDUSTRY
=======================================================================
HEARING
before the
SUBCOMMITTEE ON MANUFACTURING AND COMPETITIVENESS
OF THE
COMMITTEE ON COMMERCE,
SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE
ONE HUNDRED SIXTH CONGRESS
FIRST SESSION
__________
OCTOBER 28, 1999
__________
Printed for the use of the Committee on Commerce, Science, and
Transportation
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SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
ONE HUNDRED SIXTH CONGRESS
FIRST SESSION
JOHN McCAIN, Arizona, Chairman
TED STEVENS, Alaska ERNEST F. HOLLINGS, South Carolina
CONRAD BURNS, Montana DANIEL K. INOUYE, Hawaii
SLADE GORTON, Washington JOHN D. ROCKEFELLER IV, West Virginia
TRENT LOTT, Mississippi JOHN F. KERRY, Massachusetts
KAY BAILEY HUTCHISON, Texas JOHN B. BREAUX, Louisiana
OLYMPIA J. SNOWE, Maine RICHARD H. BRYAN, Nevada
JOHN ASHCROFT, Missouri BYRON L. DORGAN, North Dakota
BILL FRIST, Tennessee RON WYDEN, Oregon
SPENCER ABRAHAM, Michigan MAX CLELAND, Georgia
SAM BROWNBACK, Kansas
Mark Buse, Staff Director
Martha P. Allbright General Counsel
Ivan A. Schlager, Democratic Chief Counsel and Staff Director
Kevin D. Kayes, Democratic General Counsel
------
SUBCOMMITTEE ON MANUFACTURING AND COMPETITIVENESS
SPENCER ABRAHAM, Michigan, Chairman
OLYMPIA J. SNOWE, Maine BYRON L. DORGAN, North Dakota
JOHN ASHCROFT, Missouri RICHARD H. BRYAN, Nevada
BILL FRIST, Tennessee ERNEST F. HOLLINGS, South Carolina
SAM BROWNBACK, Kansas JOHN D. ROCKEFELLER IV, West Virginia
C O N T E N T S
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Page
Hearing held October 28, 1999.................................... 1
Statement of Senator Abraham..................................... 1
Press release and prepared statement......................... 2
Statement of Senator Ashcroft.................................... 36
Prepared statement........................................... 37
Witnesses
Clevenger, Jeffrey A., president and chief executive officer, SMS
Group, Inc..................................................... 16
Prepared statement........................................... 17
Danjczek, David W., staff vice president, UNOVA, Inc............. 20
Prepared statement........................................... 21
Logan, John F., automation group president, DT Industries, and
Chairman, Association for Manufacturing Technology............. 5
Prepared statement........................................... 7
Summary of the Effect of the Australian Government by Huffman
Corporation................................................ 13
Manzullo, Hon. Donald A., U.S. Representative from Illinois...... 29
Prepared statement........................................... 32
Neal, Hon. Richard E., U.S. Representative from Massachusetts.... 25
Prepared statement........................................... 28
Appendix
Hollings, Hon. Ernest F., U.S. Senator from South Carolina....... 39
CHALLENGES CONFRONTING THE MACHINE TOOL INDUSTRY
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THURSDAY, OCTOBER 28, 1999
U.S. Senate,
Subcommittee on Manufacturing and Competitiveness Committee
on Commerce, Science, and Transportation,
Washington, DC.
The subcommittee met, pursuant to notice, at 2:05 p.m., in
room SR-253, Russell Senate Office Building, Hon. Spencer
Abraham, chairman of the subcommittee, presiding.
Staff members assigned to this hearing: Gregg Willhauck,
Republican legislative assistant to Senator Abraham; and Gregg
Elias, Democratic senior counsel.
OPENING STATEMENT OF HON. SPENCER ABRAHAM,
U.S. SENATOR FROM MICHIGAN
Senator Abraham. We will begin this hearing of our
subcommittee. Today's topic is the challenges which are
confronting the United States machine tool industry. This
industry, of course, for those of us who come from industrial
States is the foundation of the manufacturing sector of our
economy. And so we thought it was very important today to try
to focus a little bit of attention on the issues that are
confronting the industry for reasons I will get into in a few
minutes.
Our first panel, though, I want to get going, because I
know there is going to be a vote here in the House very soon.
We are fortunate to have two members of the House who are going
to be addressing us today. They are the co-chairs of the House
of Representatives Machine Tool Caucus. We already have here
Congressman Don Manzullo, of Illinois. And I believe that
Congressman Richard Neal, of Massachusetts, may be joining us.
We at least expect him to be here.
Normally I would make my opening statement now, but
Congressman Manzullo may need to get back to the House soon. So
what I would like to do is maybe let him comment first, if that
would help, and then I will make my opening statement. And
then, if Congressman Neal is here, we may go to him. There is
the bell.
Mr. Manzullo. Should I go over and vote and come back?
Senator Abraham. You probably need to go now if you are
going to vote.
Mr. Manzullo. Yes. I will vote and then come right back.
Senator Abraham. Why don't you do that, Don.
Mr. Manzullo. Thank you.
Senator Abraham. I will begin with my statement, and we
will see how far we get. We will maybe move to the second panel
and then come back.
Let me begin, then, by commenting a little bit more
specifically. As I said, in my judgment, this industry that we
are focusing on today is the foundation of our Nation's
manufacturing sector. It is very hard to imagine a
manufacturing industry that is not in some way very reliant on
machine tools. Whether that is for the production of some
component or for some essential element of the manufacturing
process itself, machine tools are essential.
Certainly the machine tool industry is a vital component of
the economy of my home State of Michigan, and I know that it is
for Illinois and Massachusetts, as we will hear in a minute,
and for most of the other States, as well. We need a healthy
and thriving machine tool industry in this country if we are
going to produce automobiles and auto parts, planes or ships,
appliances, electronics, construction equipment, and virtually
every other product that we produce. We need it to maintain a
healthy manufacturing sector. We need it to maintain a healthy
economy.
Which brings us to the reason for today's hearing. There
have been a number of reports in recent months that the machine
tool industry was suffering, at a time when most manufacturing
industries are thriving. This is a particular concern, because
many look to the machine tool industry as a barometer of the
health of the manufacturing sector overall. Downturns in the
business cycle of the machine tool industry often precede
downturns in other manufacturing industries and, consequently,
the overall economy.
Any slowdown in the machine tool industry sends troublesome
signals about the health of our economy. This, in my view,
meant that it was crucial for our subcommittee on manufacturing
and competitiveness to look into the causes of this recent
sluggishness, and to try to come up with ideas for improving
the performance of the machine tool industry.
Let me briefly cite some statistics which illustrate the
situation for everybody. I would also like to ask unanimous
consent to include this information in the hearing record. And
since there is no one to object, I will.
[The information referred to follows:]
Senator Spencer Abraham Press Release, Qctober 28, 1999
Abraham Seeks to Boost Midwest Manufacturing Competitiveness
-Senator chairs hearing to examine the challenges confronting the
machine tool industry--the largest sector of the manufacturing
industry-
(WASHINGTON) U.S. Senator Spencer Abraham (R-Michigan) today
convened a hearing of the Commerce Subcommittee on Manufacturing and
Competitiveness to examine the challenges confronting the machine tool
industry--which is currently suffering the most in the Midwest. The
machine tool industry is the foundation of the United States
manufacturing sector. Abraham's statement at today's hearing
follows.xxx
``It is difficult to imagine a manufacturing industry that is not
in some way reliant on machine tools. Whether for the production of
some component or for some essential element of the manufacturing
process itself, machine tools are essential. We often take the goods
produced by and with machine tools for granted But our economy would be
a shambles without them. Certainly, the machine tool industry is a
vital component of the economy of my state of Michigan. Autos and auto
parts, planes, ships, appliances, electronics and even construction
equipment, all would be impossible--or impossibly expensive--without
machine tools.
``We need a healthy and thriving machine tool industry in this
country. We need it to maintain a healthy manufacturing sector. We need
it to maintain a healthy economy.
``Which brings me to the reason for this hearing. There have been a
number of reports in recent months that the machine tool industry was
suffering at a time when most manufacturing industries are still
thriving. This is of particular concern because many look to the
machine tool industry as a barometer of the health of the manufacturing
sector overall. Downturns in the business cycle of the machine tool
industry often precede downturns in other manufacturing industries--and
the overall economy.
``Any slowdown in the machine tool industry sends troublesome
signals about the health of our economy. This, in my view, meant that
is was crucial for the Subcommittee on Manufacturing and
Competitiveness to look into the causes of this recent sluggishness and
try to come up with ideas for improving the performance of the machine
tool industry.
``To begin, let me simply cite some statistics that I would like to
include in the hearing record. These figures come from a report issued
jointly by the Association for Manufacturing Technology and the
American Machine Tool Distributors' Association. That report is dated
September 13, 1999. It is a nationwide survey of machine tool
companies, documenting comparative levels of machine tool consumption
for this year compared to last year. The results, I think are quite
significant and clearly demonstrate why it is important for us to be
here today.
``Specifically, this report noted that in July of this year, U.S.
machine tool consumption totaled an estimated $501 million. That figure
was down roughly 10% from the revised estimate for the previous month,
June, 1999, and down 18% compared to the estimated $608 million total
for July 1998. The year-to-date total of $3.2 billion for 1999 is 35%
lower than for the same period last year.
``Of particular interest is the breakdown of these consumption
figures along regional lines. Of the five geographical regions
surveyed--making up the contiguous 48 states--all showed significant
declines in their 1999 year-to-date figures on consumption when
compared to the identical period last year. The Midwestern region--
comprising Michigan, Ohio, Indiana, Illinois, and Wisconsin--
experienced a drop of 40.7% over the same period in 1998. This figure
is even more daunting when one considers that the Midwestern region
made up 44% of the nationwide consumption volume surveyed. Similarly,
the Central and Western regions both experienced drops of 37% compared
to a year ago. And while the losses in the Southern and Northeast
region were less dramatic--26% and almost 16% respectively--they are
still quite sizable. So there is no region of the country that has been
spared significant decreases in the level of consumption of machine
tool products.
``Finally, while the Midwestern region was the only one of the five
regions to show improved consumption figures between June and July
1999, the figures for the Midwest this July compared to last July were
still down 31%.
``With those disturbing statistics in mind, let me now discuss how
we will proceed today.
``We are fortunate this afternoon to have with us the two Chairmen
of the House of Representative's Machine Tool Caucus, Congressman
Donald Manzullo of Illinois and Congressman Richard Neal of
Massachusetts. Obviously, these two Members are leaders on Capitol Hill
regarding issues affecting the machine tool industry. I would like to
acknowledge and thank them for the interest and dedication they have
shown on these issues. I would also like to thank them for their
willingness to take time out of their busy schedules to come over and
testify at this hearing today.
``For our panel of witnesses, we will hear from three individuals
with impressive backgrounds in the machine tool industry. The first
gentleman, John Logan, will testify on behalf of The Association for
Manufacturing Technology, a major trade association for the machine
tool industry. He currently serves as Chairman of the Board of
Directors for AMT. Mr. Logan will describe for us the national picture
with respect to the machine tool industry, outlining the current state
of the industry and identifying key problems that industry confronts. I
hope he will also indicate to us ideas for solutions to those problems.
I should note that Mr. Logan does indeed have his own machine tool
company as well: DT Industries, of which he is Automation Group
President.
``Our other two witnesses will testify on behalf of the industry in
their capacity as executives with successful machine tool companies.
David Danjczek represents UNOVA Corporation, a top producer of machine
tools and manufacturing systems in the United States. Jeffrey
Clevenger, of Saginaw Michigan, is President and CEO of SMS Group
Incorporated. He will provide us with the perspective of a small
machine tool business. Both these gentlemen will tell us about their
unique experiences with their own companies and identify for us
specific challenges that their companies are facing today.''
Senator Abraham. These figures come from a report issued
jointly by the Association for Manufacturing Technology and the
American Machine Tool Distributors Association. It is a report
which is dated September 13, 1999. In this nationwide survey of
machine tool companies, the report documents comparative levels
of machine tool consumption for this year compared to last
year.
Specifically, this report noted that in July of this year,
United States machine tool consumption totaled an estimated
$501 million. That figure was down roughly 10 percent from the
revised estimate for the previous month, June 1999, and down 18
percent compared to the estimated $608 million total for July
1998. The year-to-date total of $3.2 billion for 1999 is 35
percent lower than for the same period last year.
Of particular interest is the breakdown of this consumption
along regional lines. Of the five geographical regions surveyed
making up the contiguous 48 States, all showed significant
declines in their 1999 year-to-date figures on consumption when
compared to the identical timeframe last year. The Midwestern
region, comprising Michigan, Ohio, Indiana, Wisconsin, and
Illinois, experienced a drop of 40.7 percent over the same
period in 1998; hence, even greater than the national average.
This figure is even more daunting when one considers that
the Midwestern region made up 44 percent of the nationwide
consumption volume surveyed. Similarly, the Central and Western
regions both experienced drops of 37 percent compared to a year
ago. And while the South and the Northeast regions were less
dramatic in their reductions, 26 percent and 16 percent
respectively, they are still quite sizable. So there is no
region of the country that has been spared significant
decreased in the level of consumption of machine tool products.
Finally, while the Midwestern region was the only one of
the five regions to show improved consumption figures between
June and July 1999, the figures for the Midwest this July
compared to last were still down 31 percent.
With those troubling statistics in mind, let me now discuss
how we will proceed today. As I said, we have two Members of
Congress who will be part of a panel, though it may now be the
second panel I guess. And, in addition, we will have several
people from the front lines who will be here for a second
panel. That panel of witnesses is made up of individuals, all
with impressive backgrounds, in the machine tool industry.
And so what I think I will do is ask that panel to come
forward at this time and take seats. I will ask our staff if
they would clarify who sits where. We will have you speak in
the order of the name tags here. Then, if it is OK with the
panel, what I thought we would do is, when the members come
back, if they wish to make comments, because of their time
constraints, we will let them do that.
Let me introduce the three individuals here, although the
name tags are now different than the way I have got it written,
but I am going to introduce you in a different order than you
are seated.
First, I want to introduce John Logan, who will testify on
behalf of the Association for Manufacturing Technology, a major
trade association for the machine tool industry. John currently
serves as Chairman of the Board of Directors for AMT. Mr. Logan
will describe for us the national picture with respect to the
machine tool industry, outlining the current state of the
industry and identifying key problems that the industry
confronts. He will also indicate to us ideas for solutions to
these problems. I should note that Mr. Logan indeed has his own
machine tool company as well, which is named DT Industries, of
which he is Automation Group President.
Our other two witnesses will testify on behalf of the
industry in their capacities as executives with successful
machine tool companies. Dave Danjczek represents UNOVA
Corporation, a top producer of machine tools and manufacturing
systems in the United States; and Jeffrey Clevenger, of
Saginaw, Michigan, is President and CEO of SMS Group,
Incorporated. He will provide us with the perspective of the
small machine tool business. Both of these gentleman will tell
us about their unique experiences with their own companies and
identify for us specific challenges that their companies are
facing today.
And I especially of course want to introduce or to welcome
here Mr. Clevenger, who is a friend and constituent and with
whom I am very familiar. We appreciate your being here and
taking the time to come down from Michigan to participate. One
of the few remaining perks, I think, in the Congress is the
chance, from time to time, when you chair a subcommittee or a
committee, to be able to make sure that people who represent
your own constituency and have some of the challenges and
issues confronting them that we are dealing with here in
Washington are given the opportunity to participate. Jeff, I
want to thank you for coming down today.
So, with that said, let us begin with this panel. As I say,
if Congressman Manzullo or Congressman Neal reappear, at an
appropriate point after whoever might be speaking finishes, we
will let them have a chance to speak at that time.
We will begin with you, Mr. Logan. Thanks for being here.
Good to see you again.
STATEMENT OF JOHN F. LOGAN, AUTOMATION GROUP PRESIDENT, DT
INDUSTRIES, AND CHAIRMAN, ASSOCIATION FOR MANUFACTURING
TECHNOLOGY
Mr. Logan. The United States machine tool industry is
critical to both national security and economic prosperity.
With production of over $7 billion, the machine tool industry
is small when compared to other industries, but our industries
products and technology are the essence of the industrial
manufacturing process and the key to a strong defense
industrial base.
With the manufacturing technologies related to machine
tools, the other manufacturing industries would not exist.
There would be no aircraft, ships, tanks, or missiles. There
would be no appliances, automobiles, agricultural machines, or
factory automation without machine tools. In short, life as we
know it today would be impossible without the modern machine
tool industry and the manufacturing technology related to it.
Over the past year, domestic demand for machine tools has
fallen dramatically. The first 6 months of 1999 have seen
machine tool consumption in the United States fall 39 percent
when compared to the same period last year. This dramatic
decline can partly be attributed to a decrease in customer
demand, which in turn can be partly attributed to a collapse in
the Asian export market for many of our industry's customers.
To make matters worse, this reduction in machine tool
demand has been compounded by a sudden change in the marketing
approach and an increase in the market share of the largest
three Asian producers of machine tools; that being Japan, South
Korea, and Taiwan. Asian machine tool builders have increased
their shares of the U.S. market to the point where U.S.
builders have seen our share of our market decline to 40
percent, compared with about 50 percent in the late eighties
and the early to mid-nineties.
As the charts accompanying my written testimony show, some
Asian machine tool builders have cut their prices in some
commodity lines by 30 to 50 percent over the past year. Machine
tool consumption has traditionally been used by economic
forecasters as a leading indicator of the larger economy.
Whether the decline is a harbinger of an overall slowdown from
what has been an amazing record of economic expansion or
whether it is an indication of structural changes in
traditional capital spending patterns, or is a combination of
these factors, the sharp decline in U.S. machine tool
consumption should concern thoughtful policymakers.
Given the importance of the U.S. machine tool industry to
America's national and economic security, the U.S. Government
must adopt policies that assure the continued strength of
America's machine tool industry and which provide a level
playing field for American machine tool builders.
These actions include enactment of an 18-year product
liability statute of repose, vigorous enforcement of U.S. trade
laws, passage of tax laws that encourage U.S. manufacturing and
that are saver/investor friendly, adoption of technology R&D
policies and funding that ensures that U.S. manufacturing
technology is second to none, and application of sensible
export control policy and regulations.
I would like to say a few words about our current export
control policy and what I saw at the China International
Machine Tool Show last week. Several Chinese companies were
showing very sophisticated machinery, machines that U.S.
manufacturers cannot export to China because they are
considered a national security threat in the hands of the
Chinese. Yet there they were, right on the show floor in China.
The Europeans were all over the show, urging the Chinese to
forget about buying American machine tools because of the
difficulty in getting an export license.
I will tell you that the unilateral imposition of export
controls on machines that are readily available elsewhere is
hurting our industry in this critical market, without affecting
one iota access of the Chinese to the manufacturing equipment
they need.
Last, I would like to comment on the WTO ruling that
foreign sales corporation must be repealed by October 2000.
Unless Congress acts, either the Europeans will retaliate
against U.S. exports or U.S. exporters will face a $3 billion
per year tax increase on our exports. The solution is to move
to a territorial, border-adjustable system of taxation, which
would not tax exports at all, but would impose a tax on
imports. This is a system used by all of our major trading
partners. We cannot maintain our leadership as either the
preeminent world power or as the premier world economy with a
second-rate machine tool industry. Please listen carefully to
my colleagues as they present their ideas for meeting the
challenges facing our industry.
Mr. Chairman, one of our member companies that is not
present has asked that a written statement relative to
Australian Government subsidizing of machine tool exports be
submitted for the record.
Senator Abraham. Without objection, it will be submitted.
Again, I am struggling to find out where the objection will
come from, but at least it appears as if it is unanimous. So,
unanimously, it will be included in the record.
[The prepared statement of Mr. Logan and summary of the
Huffman Corp. follow:]
Prepared Statement of John F. Logan, Automation Group President, DT
Industries, and Chairman, Association for Manufacturing Technology
I. INTRODUCTION
My name is John F. Logan. DT Industries (DTI) is a leading global
and the largest North American provider of automated assembly, test,
material handling and packaging systems for a broad range of consumer
and industrial products. DTI consists of two complementary operating
groups--Automation and Packaging. I am President of the Automation
Group. The Groups, and the divisions within them, share design,
engineering and manufacturing resources in pursuit of indispensable
engineered solutions for customers delivering local service within the
context of global teamwork. DTI provides our engineering and
manufacturing expertise to customers involved in electronics,
automotive, pharmaceuticals, consumer products, high technology,
medical devices, cosmetics, hardware, agriculture and heavy trucks.
DTI currently operates 20 manufacturing facilities located in the
United States, the United Kingdom, Canada and Germany. Additionally, we
have an extensive service network established in over 15 countries. We
employ approximately 2,800 people.
I am Chairman of the Board of Directors of AMT--The Association For
Manufacturing Technology--a trade association whose membership
represents over 370 machine tool building firms with locations
throughout the United States, including DT Industries. The majority of
AMT's members are small businesses. According to the U.S. Census of
Manufacturers, 73 percent of the companies in our industry have less
than 50 employees. They build and provide to a wide range of industries
the tools of manufacturing technology including cutting, grinding,
forming and assembly machines, as well as inspection and measuring
machines, and automated manufacturing systems.
II. THE U.S. MACHINE TOOL INDUSTRY IS CRITICAL TO OUR NATIONAL AND
ECONOMIC SECURITY
The United States machine tool industry is critical to both
national security and economic prosperity. With production of over $7
billion, the machine tool industry is small when compared to other
industries. But that industry's products and technology are the essence
of the industrial manufacturing process and the key to a strong defense
industrial base. Without the manufacturing technologies related to
machine tools, the other manufacturing industries would not exist. With
377 members, AMT--the Association for Manufacturing Technology--
represents the U.S. machine tool industry, comprised of companies that
provide manufacturing technology to cut, shape, form, and assemble
metal and other materials and provide software and measuring devices
for those processes.
By definition, machine tools and related manufacturing technology
are the ``tools'' of production. Our nation's ability to compete
globally in electronics, optics, aerospace, and other high technology
arenas and our ability to produce advanced weapons systems for national
defense depend on the availability of state-of-the-art machine tools
and the health of the U.S. industry. Without machine tools and related
manufacturing technology there would be no aircraft, ships, tanks, or
missiles. Nor would there be appliances, automobiles, agricultural
machines, or factory automation without machine tools. In short, life
as we know it today would be impossible without the modern machine tool
industry and the manufacturing technology related to it.
The industry was a serious bottleneck to military production during
World Wars I and II and the Korean War. Even during the Gulf War, the
need for production increases in specific weapons and mobilization
priorities pushed civilian manufacturing projects to the back of the
production queue so that weapons systems and war materiel would be
available in a timely fashion for the conflict with the Iraqis. Indeed,
throughout our history machine tools have been a critical tool for
mobilization and eventual victory over all the enemies we have faced.
That is even more true today given the high-tech nature of America's
weapons systems, than when machine tools were used to make the rifles
and cannons of the Civil War.
Wartime production priorities and mobilization require large
numbers of machine tools be made available on short notice, and that
can only be accomplished with great assurance by a strong and healthy
domestic machine tool industry. While the U.S. Government, using laws
such as the Defense Production Act, can order machine tool production
to be converted from civilian to military priority as soon as the need
arises, the U.S. Government cannot order foreign machine tool makers to
do likewise. It can only make a request, and then hope that our allies
see a particular conflict in the same way that we do. Certainly, there
is no guarantee that our European or Asian allies will see every
conflict from the same perspective as the United States. Moreover,
despite our current overwhelming military dominance, air and shipping
lanes are not as secure in wartime as they are in peacetime. That is
why the U.S. defense industrial base is only considered by the Pentagon
to include the continental United States, plus Mexico and Canada.
Machine tools play an equally important role in peacetime as well.
Machine tools are the heart of our civilian economy and, hence, our
prosperity. Alan Greenspan has testified before Congress to the fact
that U.S. corporate profits and worker wages have risen dramatically
without inflation in recent years in large part because productivity is
once more on the rise. A good part of that productivity can be traced
back to the effective use of more efficient machinery and factory
automation. In essence, Chairman Greenspan was explaining that the
output of the modern U.S. machine tool industry accounts for a good
deal of our recent spurt in productivity and, hence, has played an
important role in our current prosperity.
If we were to lose the domestic core of our machine tool industry,
we would become wholly dependent on our allies and trade competitors
for the industrial production machinery that fuels our productivity and
our keeps our industries on the cutting edge of the latest technology.
Without a domestic base for machine tools, Boeing would be second in
line behind Airbus; and General Motors and Ford would have to wait
behind Toyota before acquiring the latest in production equipment.
Being second to market with innovation is not the way to maintain
industrial leadership. That is not a situation in which we should want
to place our key industrial sectors, which is why a healthy domestic
machine tool industry is so important both for national security and
for continued prosperity. The recent combination of a sharp decrease in
U.S. demand and a huge increase in Asian exports to the U.S.
marketplace has been extremely damaging to the U.S. machine tool
industry.
III. THE MACHINE TOOL INDUSTRY DOWNTURN (1998-1999)
Over the past year, domestic demand for machine tools has fallen
dramatically. The first six months of 1999 have seen machine tool
consumption in the United States fall 39 percent when compared to the
same period last year (see Chart 1). While all but a handful of machine
tool product areas experienced lower order rates in the first half of
1999, some product areas were severely hit (see Chart 2). Machine tool
consumption has traditionally been used by economic forecasters as a
leading indicator of the larger economy. Whether the decline is a
harbinger of an overall slowdown from what has been an amazing record
of economic expansion; or whether it is an indication of structural
changes in traditional capital spending patterns; or is a combination
of these factors; the sharp decline in U.S. machine tool consumption
should concern thoughtful policy makers.
The U.S. machine tool market is composed of manufactured durables
producers--the largest of which are the auto parts industry, Detroit's
Big Three, the aerospace industry, and the off-road and highway
construction industry. Total capital spending (including machine tools)
for these four sectors fell 21 percent during the first quarter of 1999
relative to the first quarter of 1998, although the spending levels
varied significantly by sector. The auto parts industry's capital
spending climbed 45 percent while capital spending by the aerospace
industry and Big Three both fell by 25 percent. The 39 percent decline
in machine orders cannot be accounted for solely by these significant
capital spending declines among the major customers.
Some Wall Street analysts suggest that some of the difference can
be attributed to a significant change in the mix of capital spending in
1999 relative to the mix over the past three years. In the past three
years, these four sectors spent heavily on new manufacturing
technologies and increases in capacity to meet the growing demand of
the world market. In 1999, capital spending will be focused more
towards software solutions to the Y2K issue and investments in
knowledge and information technologies. The Y2K issue is a short-term
distortion whose impact will dissipate over the next twelve months. The
shift from investments in new capital equipment is a longer-term issue.
Many financial analysts point to lax bank regulation and
extraordinary investment in new capacity during 1994-1997 by Asian
auto, auto parts, and heavy equipment manufacturers as principal causes
for the financial crisis in Korea and other Asian countries. Economists
who follow the situation in Asia suggest that it may take two to five
years to rationalize the over-capacity in various industries throughout
Asia. In the meantime, additional capacity needs of the U.S. auto and
heavy equipment industries will be weighed against the cost of
investing/buying foreign capacity in Asia at fire sale prices. Not only
is the U.S. machine tool market three-fifths of the size that it was at
the end of 1997; but to make matters worse, this already vexing problem
has been compounded by a sudden change in the marketing approach and an
increase in the market share of the three largest Asian producers of
machine tools: Japan, South Korea, and Taiwan. In addition, U.S.
machine tool exports to Asia have collapsed (e.g., machine tool exports
to Korea dropped 69 percent from 1996-1998).
Their approach has utilized a very aggressive--if not predatory--
marketing strategy that has seen, even accounting for currency
fluctuations, Asian prices for some commodity machines cut 50 percent
or more in just one year (see Chart 3). As a result, Asian machine tool
builders have increased their shares of the U.S. market to the point
where U.S. builders have seen their domestic market share decline over
the past year to a level where we now supply about 40 percent of the
U.S. machine tool market, compared with about 50 percent or more a few
years ago (see Chart 4). AMT does not have legal standing to initiate
an antidumping case on behalf of its members.
The import surge from Asia can be explained by the Asian financial
crisis, brought on in part by over-investment in certain key
industries, including machine tools. But whatever the cause, the
response chosen by the Asian machine tool builders to the lack of
demand in the Asian marketplace has been to export their over-capacity
to the United States. One telling example of the shift caused by the
Asian financial crisis is that South Korea, which only exported 15
percent of its machine tool production to the United States in 1995,
exported fully 50 percent of that production to the U.S. in 1998.
Similar, if less dramatic, shifts have occurred in Japan's and Taiwan's
exporting patterns (see Chart 5).
The dramatic decline in U.S. machine tool industry orders over the
first half of 1999 can be attributed to a decline in customer demand
and a significant increase in import competition. Both can be directly
related to the effects of the Asian financial crisis, which has also
had a substantial negative impact on U.S. machine tool exports to Asia.
During the past 13 years, two Presidents have seen fit to negotiate
Voluntary Restraint Arrangements (``VRAs'') with Asian Governments;
because they concluded that the continuation of a healthy U.S. machine
tool industry was critical to national security. Those VRAs lasted
seven years, during which time the industry did exactly what was
required to return to profitability and competitiveness. U.S. machine
tool builders doubled their investment to depreciation ratios. They
dramatically increased expenditures on research and development, and by
the termination of the VRAs in 1993, U.S. machine tool competitiveness
in world markets was measured by the fact that the industry was
actually exporting over 30 percent of its output.
Nonetheless, the recent combination of a sharp decrease in U.S.
demand and a huge increase in Asian exports to the U.S. marketplace has
been extremely damaging to the U.S. machine tool industry.
IV. WHAT SHOULD BE DONE TO HELP THE U.S. MACHINE TOOL INDUSTRY
Given the importance of the U.S. machine tool industry to America's
national and economic security, the U.S. government must adopt policies
that assure the continued strength of America's machine tool industry
and which provide a level playing field for American machine tool
builders. These actions include:
Enactment of an 18-year product liability statute-of-
repose.
Vigorous enforcement of U.S. trade laws--both to
assure that trade is fair and that the national security is
protected.
Passage of tax laws that encourage U.S. manufacturing
and that are saver/investor friendly.
Adoption of technology/R&D policy and funding that
assures that U.S. manufacturing technology is second to none..
Application of sensible export control policy and
regulations.
I would like to say a few words about our current export control
policy. Mr. Danjczek will address the issue in greater detail. However,
I want to describe what I saw at the China International Machine Tool
Show last week. Several Chinese companies were showing fully integrated
5-axis CNC-controlled machines. In addition, several are showing very
high accuracy turning and milling machines with accuracies of +/- 3
microns and one spherical lathe with accuracies of +/- 2 microns. These
are machines that U.S. manufacturers cannot export to China because
they are considered a national security threat in the hands of the
Chinese. Yet, there they were right on the show floor in China. I will
tell you that the unilateral imposition of export controls on machines
that are readily available elsewhere is hurting our industry in this
critical market without affecting one iota access of the Chinese to the
manufacturing equipment they need.
V. FSC REPLACEMENT
Mr. Chairman, my colleagues will be discussing a variety of other
issues which affect U.S. machine tool manufacturers--from product
liability to technology policy to trade policy and export control
reform. I would like to touch on one other issue before I conclude my
remarks--Foreign Sales Corporations. Specifically what does Congress
intend to do in the wake of the World Trade Organization's (WTO)
dispute resolution panel ruling that the Foreign Sales Corporation
(FSC) violates WTO rules and must be repealed by October 2000. FSCs
provide an enhancement to exports by allowing U.S. companies to deduct
14 percent of their export income. These funds are used to make U.S.
exports more competitive in world markets. DT Industries has a FSC, as
do many other AMT members--both large and small.
Unless Congress acts by October of next year, billions of dollars
of U.S. exports will be subject to retaliatory ``compensation'' by the
European Union and others. But simply repealing the FSC would deprive
U.S. companies of a powerful incentive to export and effectively amount
to a $3 billion per year tax increase on U.S. exports. On the other
hand, simply replacing FSC with a slightly different version could be
inconsistent with the WTO decision and could lead to European
retaliation.
The dispute resolution panel has pointed the way towards a logical
solution to FSC replacement. The U.S. currently maintains a system of
worldwide taxation of its businesses. We are the only major industrial
nation that does so. The WTO dispute resolution panel clearly states
that we cannot couple territorial treatment of exports with a system of
taxing the worldwide income of our companies. The solution is to move
to a territorial, border-adjustable system of taxation, which would not
tax exports at all but would impose a tax on imports. This is the
system used by all of our major trading partners.
You may recall that a few years ago, your colleagues, Sens.
Domenici (R-NM) and Nunn (D-GA), introduced a comprehensive tax reform
proposal called the USA Tax. It called for replacing our current tax
system with a cash flow tax that would be both border-adjustable and
territorial and would provide for the expensing of capital purchases.
Cong. English (R-PA) has introduced similar legislation in the House.
AMT supports Cong. English's proposal. Enactment of this approach is a
top legislative priority for AMT.
VI. CONCLUSION
We cannot maintain our leadership as either the pre-eminent world
power or as the premier world economy with a second-rate machine tool
industry. Please listen carefully as my colleagues present their ideas
for meeting the challenges facing our industry.
------
SUMMARY of the Effect of the Australian Government Subsidizing
of Its Machine Tool Industry Over the Decade & How It Has
Affected the Huffman Corporation, a Privately Owned South
Carolina Corporation
The U.S. machine tool manufacturing base is comprised of
many small technically innovative companies, with the average
company being less than 50 people. The focus of U. S. trade law
has been on larger corporations, but increasingly the fountain
of technical innovation is actually in small companies.
Microsoft or Dell is an obvious example of a little company
turning large. But Small Business Administration statistics and
forecasts show that the majority of U.S. economic growth and
job creations are coming from, and will come from the
burgeoning number of small technically advanced manufacturing
companies. Indeed, the merging of larger companies into global
titans is at once able to happen and is caused to happen by
this trend. Large global corporations are becoming design,
assemble and service companies that outsource parts
manufacture. In the latest design of automotive plants, for
example, it is the parts supplier who actually assembles the
car, and not the automotive manufacturer. A good reason for
this outsourcing drive is that smaller companies are early
adopters of technology, whereas larger companies are late
adopters or laggards. Increasing use of smaller suppliers
allows the large companies to enjoy the benefit of the latest
technology, while not having to fund it or absorb mis-starts or
mistakes. This trend is gaining momentum, and changes the very
fabric of how industrial America works. It radically shifts the
importance in the whole of smaller U.S. manufacturing
technology innovators.
Foreign governments seem to have realized this trend and
have acted to incubate their own growth by significantly
tampering with U.S. free trade laws. Their subsidy of whole
manufacturing technology industries to the distinct detriment
of the same capability in the U.S. is alarming and is
accelerating. The U.S. economy and government, glowing from the
effects of the aggregate of these trends, appear to still be
playing yesterday's game. That is, watching the large companies
while foreign governments, more alert due to depressed times,
have been quick to see the change and have acted to take
advantage of it to foster their own technically led economic
revolutions. In the balance of this document, I will outline an
example of what one government has done, and how it has
affected a typical U.S. company.
The Huffman Corporation is an example of one of these
entrepreneurial companies, known for supply of both inventive
and innovative manufacturing technology to the U.S. Fortune 50.
In the past year, the average machine sold increased customer
productivity by 3.5 times. That's 350%. In some cases, gains
were much higher. The U.S. economy's annual productivity gains
are on the order of 3.5%. So Huffman's products increase
productivity 100 times more than average. Products made on the
company's machines touch virtually every American. If you have
driven in a car or flown in an airplane, some of the components
were made on Huffman machines. If you or someone you know have
had a knee or hip replacement, you have been touched by
products made on Huffman machinery. The company's machines have
been exported to 17 other countries.
Founded in the early 60's. Huffman grew and prospered from
inventions and innovations in the development of CNC
Superabrasive Grinding Machining Systems. 20% of its output has
been exported. The company has a reputation for high quality,
precise, reliable and durable machines, besides its technical
leadership. Returns on investment have been, and are extremely
high, the ultimate test of the value of capital investment.
In 1990, machine tools built in Australia began to enter
the U.S. with no prior experience. The product always seemed to
be priced 1000 below Huffman's prices. The Australians then
hired away Huffman's Sales Manager and a key software
development employee. They sold light duty machines, calling
Huffman's overbuilt for the applications, and telling customers
that Huffman had not stayed ahead of the cost curve. With price
as their main advantage, they ate quickly into Huffman's market
leader position. Huffman's sales fell a staggering 45% from
1991 to 1994 before stabilizing. Employment went from a peak of
165 to just below 90, a loss of 75 manufacturing jobs. In the
self-deprecating mood of the times, the company's problems were
written off to poor ``American'' management.
In early 1994, teetering on bankruptcy, new management took
over. Working through the Association for Manufacturing
Technology (AMT), a 1990 Australian Government Bounty Act was
uncovered that gave a 24% subsidy to its machine tool builders
for exports. One specifically targeted Huffman. As it turned
out, Huffman's cost was actually competitive all along, but the
Australian Government had stacked the deck in their industries'
favor. Old familiar story. Investigating further, several other
``helps'' were uncovered, but none as strong as the ``Bounty
Act.'' Earlier the Australian Government created an
``Australian National Control Association'' for the purpose of
providing affordable CNC controls to help incubate a domestic
CNC machine tool industry. Later, to develop specific
automotive parts manufacturing capability, the Australian
government provided ``R&D'' subsidies to their machine tool
builders.
While Huffman had been staggered by the broad market
impact, it was able to stop the free fall because it had
developed a strong base of innovative applications for parts
that required a significant amount of self funded R&D to
create. In one case, Huffman had self-funded over $1,000,000 of
R&D to create an entirely new process for manufacturing power
steering pump spool valves (the one that eliminated the squeak
at turning limits of power steering units). The machine was one
of the first in America to achieve a Six Sigma process
capability--that later became the world standard. In 1994, the
Australians quoted a large requirement in Detroit, and with no
experience promised two times the Huffman productivity. With so
low pricing, we couldn't figure out how they could afford to
fund the research to make this complex system. But then AMT
uncovered the R&D subsidy. The machines they delivered only
achieved half of the Huffman cycle time and failed to meet the
Huffman quality level. Three years later, Huffman got the
business back. But in the meantime, Huffman suffered yet
another devastating loss of millions in business.
Working through AMT, other U.S. member companies affected
by the Australian situation reported other apparently curious
business practices. To design such technically complex and
process critical machinery requires a lot of face to face
technical review time between the buying team and the selling
team, usually at the supplier's factory. Travel to the other
side of the world is exorbitantly expensive, besides time
consuming. Hearsay from customers is that their roundtrip
airfares to Australia at times have been reimbursed. Other
customers report that the Australian machine tool manufacturers
ship to the U.S. by airfreight to avoid the lengthy delay of
ocean freight. Yet the machines weigh several tons. The
standard industrial practice is to ship ocean freight.
All of these practices violate WTO rules, we are told.
Through AMT work with various U.S. Government agencies, by the
end of 1997 the Australian Government agreed to end the larger
documented subsidies. By then, interestingly many of the
lightweight Australian machines that had entered the U.S. were
experiencing severe reliability problems. In some cases, a
machine expected to last 12 years or more was failing to
perform to its depreciation life of 7 years. Others limped on
greatly reduced cycle times and poor uptime. The situation
became so bad that the Australians were forced to design a much
larger, more robust machine, which was introduced in late 1998.
But this machine was 30% more expensive.
In the interim from the first appearance of the subsidized
Australians, until their subsidies ended in late '97. Huffman
Corporation reduced its cost by 35%, while retaining its
premier quality, reliability and precision, and increasing its
productive rates. In 1998, without the subsidies, Australian
exports to the U.S. dropped by 35% to below the 1996 level. In
that same period, Huffman's sales grew by 25%, after 8 years
finally competing on a true cost and quality basis.
In 1998 and into 1999, a recession began in the machine
tool industry worldwide. In the U.S., business dropped by 40%
industry wide, with equal to or worse drops seen in Asia and
Europe. In the U.S., the grinding market (Huffman and
Australia's principal market) dropped 60%. In spite of this,
Huffman's sales continued into the first and second quarter of
1999 above its 1998 level. Then suddenly in the third quarter,
customers began reporting being able to purchase Australian
machines at huge mark downs, some as much as 35%. In their
September '99 quarter, Huffman's bookings and shipments dropped
in spite of having no effect of the overall Industry recession
to date.
Again checking with the AMT, it was discovered the
Australians had instituted yet another subsidy scheme called
the ``Automotive Industry Export Facilitation Scheme.''
Basically the ``scheme'' allowed for 100% subsidy of machine
tools value added and exported. This clearly accounted for the
sudden drop in the selling price for the much larger, more
expensive Australian machine design. Clearly the earlier
subsidies had fostered a false competition, and now the
situation was so bad they had to extend a 100% value added
subsidy for exported machines. No manufacturer in any free
economy can compete against a government subsidizing
competition by 100%. Huffman had hired back 20 of the 75
workers laid off in the early 90's and with the growth, had
planned to hire another 20. Instead Huffman laid off 20.
Huffman has worked with NCMS and developed two types of
machinery vital to reducing the cost of airframe, air engine
and industrial gas turbine components. Huffman has also
developed machinery that increases the quality and productivity
of carbide cutting tools used to increase the productivity of
making aircraft airframes and engines. Huffman also provides a
critical machine that results in a 5X productivity gain in the
production of automotive gears. Advances in the medical
orthopedic industry were mentioned above. In spite of Huffman
machines being of higher quality and better productivity, the
capital goods buyers naturally gravitate to a substantially
lower price. In some cases, like in the Industrial Gas Turbine
power generation industry. Huffman has developed what so far is
the only way to manufacture the latest generation coming to
market. Without volume generated from past developments, we are
unable to self-fund new developments. The difficulty with the
small companies developing critical technologies to support the
big global corporations is that if they are targeted by foreign
countries as vital technologies, and then face 100% subsidized
competition, their critical manufacturing technology will be
cut off as the knowledge base is dispersed when people are
scattered to find other employment. Unison, another American
company hit by the Australian subsidies, went bankrupt. They
were eventually able to reorganize but lost all their people in
the meantime. 95% of their intellectual property evaporated,
causing massive destruction from the lack of support of their
thousands of installed machines and still born customer
specific development projects.
On a free trade basis. Unison was competitive. Huffman is
extremely competitive, not just in the U.S. but when exporting
products to 17 countries. A small private company, however, is
not capable of competing with a government subsidized industry
that totally supports R&D and reimburses freight and travel
expense. We certainly can't compete with a 100% valued added
subsidy. The lost volume takes away R&D money used to fund
Laser and Waterjet manufacturing in the Gas Turbine Industry
that raises productivity by 5-700 percent, greatly reducing the
cost in those industries.
Huffman is in favor of free trade and seeks no advantage
from the U.S. Government. Instead, we would like to see
cooperation between our government and our industry, which will
address free trade as diligently as the Australians bias trade
in their favor. The issue here is that if we as a country
continue to allow violations to our free trade policies, we
will be destroyed as surely as we would be if we allowed
similar transgressions from a military standpoint. To deal with
the slow response, more and more U.S. companies are moving
production offshore to countries with favorable manufacturing
policies. When large innovative manufacturing companies, like
Chrysler, merge with Daimler and choose to become a German
company due to non-competitive U.S. Government trade and tax
policy, we are beyond the point when we can afford to take a
passive view of the economic war we are fighting, and the
flagrant violations. What a national embarrassment. When the
U.S. makes a transgression, other national governments are only
too quick to post retaliatory duties. After ten years of
flagrant abuse from the Australians, isn't it time to do
something?
Senator Abraham. We thank you very much.
I know Congressman Neal is here, but we will go to you, Mr.
Clevenger.
STATEMENT OF JEFFREY A. CLEVENGER, PRESIDENT AND CHIEF
EXECUTIVE OFFICER, SMS GROUP, INC.
Mr. Clevenger. Today I want to address just two areas where
Congress can help our industry compete in the emerging global
market: First, the enactment of an 18-year statute of repose
for work place products; and, second, the continuation and
supporting of research and development programs such as
Commerce's Advanced Technology Program and the R&D tax credit.
My written testimony describes the many reasons for the
abundance of older machines in use in plants and on shop floors
today. This old and often modified equipment causes a threat to
my company and to my industry because of the very costly
litigation. My written statement documents our product
liability history.
We are a 20-year-old company. Of the 23 product liability
suits we have defended during that time, not one involved a
machine manufactured by SMS Group. They were built years ago by
a company we acquired. We do not service, provide technical
assistance or spare parts for these machines. In every one of
the 23 cases, the machine had been through at least two owners,
had been altered or modified, and in every case the machine
involved was 18 years or older.
These 23 cases have cost my company in excess of $6.5
million, most of it in very wasteful transaction costs. That is
$6.5 million that could have been reinvested to develop state-
of-the-art products which will enhance us to survive in a
global marketplace. SMS is now able to carry product liability
insurance, but a large judgment against us could put us out of
business quickly. It has happened to many companies in this
industry.
Our foreign competitors do not bear these long-tail costs
or risks because they have a 10-year statute of repose in their
home markets, and their entrance into our market has been in
relatively recent years.
H.R. 2005 was recently approved by the House Judiciary
Committee, and may be on the floor as easily as next week. The
bill provides a Federal 18-year statute of repose for equipment
used in the work place. Under this proposal, no injured worker
would go completely uncompensated. What the bill would do is
improve the competitiveness of my company and the industry by
driving down litigation costs.
Enactment of H.R. 2005 would eliminate 42 percent of my
industry's product liability lawsuits. Please, we need you to
adopt the 18-year statute of repose for capital goods in the
work place.
While the current product liability system imposes
financial hardship on my company and the industry, Commerce's
ATP program does exactly the opposite for research and
development. Very few companies in my industry have the
capability and the resources to advance state-of-the-art, and
then only with substantial risk. Without ATP program
advancements in manufacturing in our industry, these projects
will not be taken on as frequently. By forging a partnership,
however, with government, industry, and academia, the ATP
enhances and encourages advancements for all.
SMS has been a very successful recipient of numerous ATP
awards. My written statement details some of the ATP projects
that we have successfully completed. I urge you to continue
supporting this program.
Last, I would strongly urge the Senate to take action
before the end of this session to extend R&D tax credits. The
tax credit is another inexpensive way for Congress to encourage
the R&D efforts of American businesses. Please do not go home
without extending that for us.
Thank you.
[The prepared statement of Mr. Clevenger follows:]
Prepared Statement of Jeffrey A. Clevenger, President and Chief
Executive Officer, SMS Group, Inc.
I. INTRODUCTION
My name is Jeffrey A. Clevenger. I am President & C.E.O. of SMS
Group Incorporated located in Saginaw, Michigan. SMS Group employs
roughly 100 workers. The bulk of our product line is devoted to
vertical and inverted spindle lathes at an annual sales volume of about
$20 million. I am Chairman of the Government Relations Committee of
AMT, the trade association that John Logan chairs.
Today, I would like to focus my remarks on two areas in which
Congress can facilitate enhanced competitiveness in the global
marketplace for American manufacturers. One is to address the liability
exposure resulting from the abundance of overage durable equipment used
in workplaces today. The other is a continued commitment to government-
sponsored R&D funding such as that provided by the Commerce
Department's Advanced Technology Program (ATP).
II. THE NEED FOR A FEDERAL STATUTE-OF-REPOSE FOR WORKPLACE DURABLE
GOODS
According to American Machinist magazine, in 1996 (the last year
for which data is available), over 60% of machine tools used in U.S.
metalworking industries were over 10 years old. When a factory decides
to invest in new capital equipment, the old machinery is not thrown in
the trash heap. Instead, companies, who lack the resources for new
machines, purchase these overage machines, often altering them to fit
their needs. This process is repeated, as newer machines are acquired
and older ones resold. As a result of base closures over the past few
years, the Defense Department has resold over 15,000 overage machine
tools since 1994. They are now being used in job shops across America.
Most of the machines are of World War II or Korean War vintage. The
result of all of these factors is a big overhang of overage machine
tools in the U.S. market. This exposes the manufacturers of the old
equipment to costly litigation. In addition, it exposes companies that,
like SMS, sprung out of corporate divestiture and later discovered they
had assumed the historical liability for the equipment built by the
dissolved company. Machines they never even manufactured.
Under product liability law today, in many states, potential
liability for my industry's products is endless--literally ``forever.''
Many of these machines--built before the creation of OSHA, before Neil
Armstrong walked on the moon, before the Beatles came to America--are
still in use today. Although these machines were built decades ago to
safety standards of their day and although they are likely to have
passed through several owners--each of whom are likely to have made
their own modifications to accommodate their needs--they are still the
subject of almost half of our industry's lawsuits. SMS Group has been
in business for about 20 years. Of all the product liability suits we
have defended during that time, not one involved a machine made by SMS.
All 23 cases involved equipment manufactured by the company whose
assets were purchased to form SMS more than two decades ago. SMS does
not even manufacture the same types of machines named in the suits. We
provide no service for them, no specs, and no spare parts. Yet
defending them in court has cost us in excess of $6.5 million. In every
case, the machine in question had passed through at least two owners
(and in some cases, four or five). And in every case, the machine had
been modified (sometimes contrary to government safety standards). Very
often, every safety door and guard had been removed prior to the
injury. All 23 machines involved were over 18 years old.
Of that $6.5 million spent to defend these cases, only $2.5 million
went to claimants, and of that, at least one-third went to plaintiffs'
lawyers and some went as subrogation to claimant's employers or their
insurance companies, even in instances where there was substantial
employer fault. Some of these cases are eventually dismissed. Still
others are withdrawn by plaintiffs who did not count on companies like
us fighting back. Yet, we still spent $4 million defending ourselves in
litigation over machines that we didn't make, and in most cases, has
lost complete track of. These figures exclude the many extra man-hours
put in by me and my employees working on these cases. Just tracking a
serial number for one of these machines is a lesson in diligence and
patience because most, if not all, of the companies originally
associated with this equipment have since gone out of business.
SMS is lucky. We are able to carry product liability insurance
coverage--$1 million worth of it at an annual premium of $100,000. When
it came time to renew our policy this year, we wrote to several
insurance companies with letters looking for additional coverage. We
did not receive one quote. I believe the reason our carrier continues
our present coverage is because of the aggressive manner in which we
tackle these cases. However, should a case ever reach trial and the
jury find for the claimant, a large judgment would force us to close
our doors. The $7.5 million verdict in 1996 involving a machine built
in 1948 against Mattison Technologies, a 100-year old Rockford,
Illinois machine tool builder, led to the company's bankruptcy.
In contrast to the significant long-tail exposure of U.S. builders,
the incursion by foreign machine tool builders into the U.S. market is
fairly recent (within the past 20 years). American companies that have
been in business for many years must factor into their prices the risk
of litigation involving thousands of overage machines. Our Japanese and
European competitors don't have those risks and those costs. Their
liability exposure is relatively small (both Europe and Japan have 10-
year statutes-of-repose). Enactment of a federal statute-of-repose for
workplace durable goods would therefore level the playing field for
U.S. manufacturers and achieve the uniformity and certainty necessary
to produce the state-of-the-art products for which we are noted.
III. H.R. 2005
Over the years, we have testified before this and other
Congressional committees in support of numerous product liability
bills. Because those bills were broad in scope, some of their
provisions drew controversy that could not be overcome during their
consideration by the Senate and/or the White House. H.R. 2005, recently
approved by the House Judiciary Committee, deals only with the issue of
overage workplace products. It provides for a federal 18-year statute-
of-repose for equipment used in the workplace. It does not contain
controversial provisions on other product liability issues that have
held up passage in past years. The bill is identical to the statute-of-
repose provisions contained in product liability legislation agreed
upon for consideration in the last Congress, after extensive
negotiations between the White House and a bipartisan group of
Congressional leaders.
Under this proposal, no injured worker would go uncompensated. H.R.
2005 would only deal with claims involving injuries allegedly caused by
workplace durable goods for which the plaintiff has received or is
eligible to receive worker compensation. For that specific category of
cases, the provision would create a uniform, national statute-of-
repose, preempting any state statutes-of-repose that apply to those
claims. Otherwise, state law would continue to apply. Thus, state
statutes-of-repose that may cover consumer goods and other non-durable
goods would not be affected.
The period within which claimants could bring a lawsuit would be
extended to 18 years in the 12 states that have enacted time limits
(all of them shorter than 18 years); but our members are willing to
accept that extension in order to achieve the certainty a national
period of repose would provide.
An additional eight states have enacted statutes-of-repose based on
the ``useful safe life'' of the product. This approach has proven to be
ineffective; because the ``useful safe life'' of each product must be
litigated in every case, and substantial transaction costs must still
be incurred. Enactment of a federal 18-year statute-of-repose for
workplace products would improve the competitiveness of U.S. workplace
equipment manufacturers by driving down their litigation costs and
cutting down on meritless lawsuits. Passage of similar legislation
relating to private aircraft has revitalized the domestic aircraft
industry.
SMS Group sees no end to our potential liability for the machines
that are the subject of all of our company's lawsuits--machines that
SMS did not even build. As long as the equipment is still on factory
floors, we can be sued. Any one of those lawsuits could put us out of
business. Please adopt an 18-year statute-of-repose for capital goods
used in the workplace.
IV. THE ADVANCED TECHNOLOGY PROGRAM
I would like to take a moment to touch on another issue that
affects the competitiveness of the machine tool industry and that is
government-funded research and development. House and Senate conferees
have provided $211 million (5% more than last year) for the Commerce
Department's Advanced Technology Program (ATP). The ATP facilitates
cooperative research by private industry and academia to accelerate the
development of high-risk technologies that promise significant
commercial payoffs and widespread benefits for the economy. ATP
projects are private industry driven. Universities and non-profit
independent research organizations play an important role in ATP
projects. More than 100 different universities (including the
University of Michigan) are involved in more than 180 ATP projects. SMS
has been a very successful recipient of ATP awards. Four out of five
SMS proposals have received ATP grants.
Using one as an example, in 1991, SMS, working with the Engineering
School of the University of Michigan, collaborated to obtain a $1.7
million grant ``Advanced Compensation Techniques for Enhancing Machine
Tool Accuracy.'' Because of this ATP grant, we were able to combine the
development by the University of Michigan of computer mathematical
modeling with SMS' real-time measuring of heat build-up in various
parts of cutting-type machine tool.
The problem this R&D project solved is that, as machinery is used
on the factory floor, it ``heats up;'' thus changing the parts it is
producing. As a result of what we learned from this project, the parts
produced at the end of a day (when the machine is ``hot'') are exactly
the same as the parts produced when the machine starts up in the
morning.
We placed seven sensors in the machine. These sensors feed the
temperature data into a computer processor, then developed software and
modeling tells the computer to automatically make adjustments to
compensate for temperature changes. Temperature changes that occur
during the day cause the machine to lose accuracy due to ``thermal
growth.'' The new system improves accuracy (often in the tenths of a
thousandth of an inch) without manual intervention, yielding higher
quality and productivity with less operator intervention.
Our ``commercialization effort'' now has many machines in the field
successfully working with an expected forecast of up to 50 percent of
all new machines of this type built with the ``Accu-System'' feature.
In 1998, we partnered with the University of Michigan again to take
this technology to a broader application of machine tools through a
National Science Foundation (NSF) grant entitled ``Robust Error
Compensation Methods for Machine Tools.''
In summary, very few companies have the capability and resources to
advance the ``state-of-the-art'' without substantial risk. As a result,
further advancements in manufacturing will have to be done
collaboratively and with reduced risk. By forging a unique partnership
between government, industry, and academia, the ATP enhances and
encourages both. I urge you to continue supporting this program.
V. CONCLUSION
Mr. Chairman, I want to thank you and the Committee for inviting me
to appear with two of my colleagues to speak on behalf of our industry
about some of the issues that affect us as we prepare to do business in
the new millennium. I touched on two areas where Congress can help.
By enacting an 18-year statute-of-repose, such as H.R. 2005,
Congress would be declaring that endless litigation involving overage
workplace equipment in the U.S. marketplace is a serious problem facing
American producers who are, after all, the foundation of our industrial
economy; and that the interstate commerce clause impels a federal
solution. It is a problem not faced by our Asian and European
competitors in their own markets nor, because of the longtail of
exposure, in ours. The current system has cost jobs, money, and time.
The principal beneficiaries have been lawyers on both sides of the
counsel table. Advances in high-tech products are slowed as a result.
Resources that could have gone toward the development of new technology
and higher productivity for America have been expended on wasteful
transaction costs with a relatively small percentage of total
litigation dollars going to injured workers.
H.R. 2005 does not contain controversial provisions on other
product liability issues that have held up passage of reform in past
years. In fact, the bill is identical to the statute-of-repose
provisions contained in product liability legislation agreed upon for
consideration in the last Congress, after extensive negotiations
between the White House and a bipartisan group of Congressional
leaders. I urge you to enact H.R. 2005 as quickly as possible.
And by continuing to fund government-sponsored R&D programs, such
as Commerce's ATP, Congress would be supporting a working partnership
between the government, American industry and universities that will
develop the technologies that will lead to the state-of-the-art
products for which we are known throughout the world--a partnership
that would not come together without the program.
Lastly, I would strongly urge the Senate to take action before the
end of the session to extend the R&D tax credit. The Senate Finance
Committee has approved an 18-month, retroactive extension of the
credit. The tax credit is an inexpensive way for the Congress to
encourage the R&D efforts of American businesses. Please do not go home
without extending it.
Thank you for your attention. I would be pleased to respond to your
questions.
Senator Abraham. Thank you very much.
Mr. Danjczek.
STATEMENT OF DAVID W. DANJCZEK, STAFF VICE PRESIDENT, UNOVA,
INC.
Mr. Danjczek. Thank you very much, Mr. Chairman. I
appreciate the opportunity to appear before you today.
I am Staff Vice President of UNOVA, Inc., which is the
largest producer of machine tools and manufacturing systems in
the United States. Today I would like to focus on the issue of
how our Nation's export controls and its policies affect the
machine tool industry.
The most difficult issues revolves about what to do about
China. China presents a dilemma for U.S. export policy. The
picture is no clearer with our allies. There is no consensus
about how to treat technology transfer to China, and there is
presently no effective multilateral forum in which to address
U.S. Government concerns. The Chinese can readily obtain the
machine tools they desire, and U.S. companies are denied
participation in the business.
The Wassenaar arrangement with our allies leaves licensing
decisions up to individual countries based on a concept called
national discretion. This arrangement provides neither a level
playing field nor clear rules. U.S. licensing policies and
practices have been far more restrictive than those of our
European allies. In some cases, U.S. machine tool manufacturers
have been denied even the opportunity to bid on projects by the
Chinese because of the likely outcome of the U.S. licensing
process.
At least seven different Chinese machine tool manufacturers
were exhibiting sophisticated machine tools this month, which,
if they were of U.S. origin, would have required a U.S. export
license. Under separate cover, I am submitting the data and the
brochures from the recent Chinese show for your records.
[The information referred to was not available at the time
this hearing was sent to press.]
Mr. Danjczek. Our current multilateral export licensing
system is not keeping the Chinese from acquiring highly
sophisticated machine tool technology, since they can either
manufacture such machines themselves or obtain them from the
Europeans. There is a basic, fundamental problem with the
current export regime. It puts U.S. companies on an uneven
playing field with regards to sales to what is likely to be the
fastest growing and largest market for capital goods over the
coming decade. The Chinese have been denied nothing in terms of
high technology, but U.S. firms have lost out in a crucial
market, and U.S. jobs have been lost.
I would like to commend the Banking Committee for
undertaking the critically important task of revising the
Export Administration Act. That bill is a strong beginning
toward new export control legislation. We are pleased that the
legislation acknowledges, for the first time, that foreign
availability can exist within a multilateral control system,
including Wassenaar, not just outside that system.
I am, however, concerned with the length of time proposed
for negotiations to eliminate foreign availability. Eighteen
months is simply too long. We recommend that the time limit be
reduced to 6 months.
We would also recommend that within the next year the
administration make a serious effort to strengthen the overall
Wassenaar arrangement, to include far better rules for
information exchange than exist today. There ought to be a
commitment among regime members to honor one another's denials.
It is imperative that the status of China be clarified under
the regime.
Permit me to digress very briefly on two other issues. The
U.S. machine tool industry is highly successful in world
markets. Our technology is absolutely second to none. We can
compete head to head and win against the best machine tool
companies that Europe and Asia have to offer. However, we
cannot prevail on an uneven playing field. I join my two
colleagues in urging you to pass an 18-year statute of repose
during this Congress.
Second, UNOVA has had a very positive experiences with the
Advanced Technology Program of the Commerce Department. The
vast majority of these funds have gone to the universities,
which were our partners in this program. The ATP program offers
just the right incentive to stimulate cooperative ventures in
the new technologies that are mandatory to keep American
manufacturing ahead of the worldwide competition.
I will go back to the thrust of my testimony. The manner in
which the current multilateral export regime is administered by
the U.S. Government constitutes a major impediment to accessing
key world markets, such as China. We need to create both a
domestic and an international regulatory climate that puts U.S.
companies on an equal footing with our foreign competitors. Our
Nation's economic health and our national security demand no
less.
We urge you to support the Banking Committee's EAA renewal
when it comes to the Senate floor, and to oppose amendments
that will make U.S. export control policy even more unilateral
than it is today.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Danjczek follows:]
Prepared Statement of David W. Danjczek, Staff Vice president,
UNOVA, Inc.
Mr. Chairman, members of the Subcommittee, I appreciate the
opportunity to testify before you today. I am the Staff Vice President
of UNOVA , Inc. UNOVA is the largest producer of machine tools and
manufacturing systems in the United States, with total sales of $2
billion and machine tool sales in excess of $1 billion. Today I appear
before you on behalf of AMT--The Association for Manufacturing
Technology and will focus my testimony on The United States
Government's technology policy and on the issue of how our nation's
export controls affect the machine tool industry, particularly those
controls as they apply to China.
There seems to be widespread agreement regarding United States
export control policies aimed at keeping dangerous technology out of
the hands of the so-called pariahs, or rogue states, and AMT strongly
supports this policy. Nevertheless, the most difficult issues revolve
around what to do about China.
Certainly China presents a dilemma for U.S. export policy. On the
one hand, China is a major trading partner and needs to import capital
goods, including machine tools, to support its commercial economic
development. On the other hand, China is quite clearly viewed by U.S.
export licensing authorities as a potential military threat and
technology transfer risk.
The picture is no clearer with our allies. There is no consensus
within the Western alliance about how to treat technology transfer to
China, and there is presently no effective multilateral forum in which
to address U.S. Government concerns about dual-use exports. This
dilemma has led to the worst of all worlds for both the U.S. Government
and U.S. machine tool companies. The Chinese can readily obtain the
machine tools they desire, and U.S. companies are denied participation
in the business.
UNOVA, particularly our Cincinnati Machine Division, has been a
major exporter to China, and so I would like to add something of our
own experiences as a U.S. Government licensee. In the days of CoCom,
the multilateral organization that coordinated technology transfer
during the Cold War, the licensing process was slow and the outcome was
uncertain. But we were confident that it provided a level playing field
among our potential competitors, with rules that were reasonably clear.
Its successor regime, the Wassenaar Arrangement, which has been in
existence since 1996, leaves licensing decisions and methods up to
individual countries, based on a concept called "national discretion."
This arrangement provides neither a level playing field nor clear
rules, and our experience operating under it suggests that since CoCom
ended, U.S. licensing policies and practices have been far more
restrictive than those of our European allies.
As a result of our trade association--AMT's--role as a machine tool
list technical advisor to the Wassenaar negotiating team, we have
conducted studies of the licensing process and its outcomes among
Wassenaar members. These studies show that the licensing process in the
U.S. is far lengthier and far less certain in outcome than the
equivalent process in European countries and Japan. The length of the
process and the uncertainty of the outcome combine to put U.S.
companies at a tremendous competitive disadvantage in China, even when
we are competing for obviously legitimate commercial projects.
In some cases, U.S machine tool manufacturers, including Cincinnati
Machine, have been denied even the opportunity to bid on projects in
China because of the wariness of the Chinese customer about the likely
outcome of the U.S. licensing process. More recently, Chinese customers
have asked that my company provide a guarantee that an export license
will be obtained as a condition of the order with significant financial
penalties to accrue if the license is denied. Of course, no U.S.
machine tool company could offer such a guarantee.
The view of these Chinese companies is well justified. Statistics
indicate that the United States Government is far more likely to
disapprove machine tool licenses for China than any of our European
allies. While a mere handful of U.S. machine tool licenses have been
approved over the past five years (a total of 25 licenses, or an
average of five licenses per year during the period from 1992 through
1997), trade statistics indicate that our European allies have, during
that period, shipped a substantial volume of highly sophisticated
machine tools to Chinese end-users.
This is reflected in the average unit prices of machine tools
exported from Europe to China, which are up to five times the average
unit price of machine tools exported from the U.S. to China. Since the
technical sophistication, accuracy, and productivity of a machine tool
is directly proportional to its selling price, this indicates that the
Europeans are shipping to China precisely those machine tools that are
likely to be subject to export controls. Trade figures further indicate
that by freely selling the same sophisticated machine tools to the
Chinese which would be most likely unavailable from United States
manufacturers, German, and other European providers, are also garnering
sales in the non-controlled machine tool categories, putting U.S.
manufacturers at a further disadvantage. Germany alone now has twice
the market share of machine tool sales to China as does the United
States. This is in marked contrast to the situation in South Korea
where favorable export policies by the U.S. Government have led to a 20
percent market share by U.S. companies, twice the market share that we
have in China. Of course, exports to Korea have deteriorated sharply
due to the Asian financial crisis.
In the past three years, representatives of my company have visited
many of the Chinese companies involved in the manufacture of components
for commercial aircraft. We were astounded at the number of state-of-
the-art European machine tools (all of which required export licenses)
that had been delivered into those companies since 1994. Just last
week, as John Logan has noted in his testimony, those same European
manufacturers were exhibiting their five-axis machines at the China
International Machine Tool (``CIMT'') show, in Beijing, and assuring
their Chinese customers that there would be no problem obtaining an
export license from their Governments. Even more significantly, at
least seven different Chinese machine tool builders were exhibiting
sophisticated machine tools at the show, machines that would require an
export license if sold by a U.S. manufacturer as a consequence of
features on the Chinese machines such as five axes and very high levels
of precision. One Chinese-made spherical lathe had a stated accuracy
down to +/- .2 microns, as good as any machine made in the United
States, Europe, or Japan. Under a separate cover, I am submitting data
and brochures from the CIMT for the record.
Our current multilateral export licensing system certainly isn't
keeping the Chinese from acquiring highly sophisticated machine tool
technology, since they can readily obtain it from the Europeans or, as
the CIMT demonstrated, even manufacture such machines themselves.
By far the most frustrating aspect of this situation is that many
of the commercial aircraft factories in China contain joint ventures
and co-production arrangements with American aircraft companies. Some
of our industry's most valued domestic customers are moving production
work from the U.S. to China to satisfy offset requirements related to
Chinese aircraft purchases. Offsets are the practice by which China (or
any other buyer of defense products or machinery) demands that a
certain percentage of large capital goods sales to their country be
built in their country, or that a comparable amount of business be
directed to China as an offset'' for the large capital goods contracts
that China signs.
China already accounts for seven percent of Boeing Company's sales.
Boeing projects that China will become the largest aircraft market
outside of the U.S. and could, within seven years, account for nearly
25 percent of Boeing's total business. Thus, there is every reason to
believe that production of commercial aircraft parts in Chinese
factories will continue to grow in tandem with the Chinese demand for
commercial aircraft.
The Chinese factories producing parts for American aircraft are
often supervised or monitored on site by American managers, yet current
U.S. Government export control policy virtually assures that the
machine tools used in those factories will be of European, not
American, origin. I am at a loss to understand how this policy enhances
our national security.
In sum, as my industry has testified previously, there is a
fundamental problem with the current export regime. Not only does it
lack discipline internationally with regard to a country about which
the United States Government has indicated technology transfer
concerns; it also puts U.S. companies on an uneven playing field with
regard to sales to what is likely to be the fastest growing and largest
market for capital goods over the coming decade. Repeatedly over the
past five years, the United States Government has taken a negative
approach toward machine tool sales to China while our allies have not.
The result has been that the Chinese have been denied nothing in terms
of high technology, but U.S. firms have lost out in a crucial market.
This serves neither our commercial nor our strategic interests and
needs to be addressed in whatever legislation that is produced during
the 106th Congress.
With this as background, I would now like to comment on specific
provisions in the Export Administration Act which has just been
reported to the Senate by Chairman Phil Gramm's Banking Committee.
First, I would like to commend the Banking Committee for
undertaking the critically important task of revising the Export
Administration Act (``EAA''). As everyone is aware, the EAA was last
amended in 1988, a year before the collapse of the Soviet Union, and
the authority of the Act lapsed almost five years ago. Certainly, there
is ample justification to draft and adopt a new EAA to guide export
controls in the 21st Century. The Banking Committee bill is a strong
beginning toward new export control legislation. AMT would like to
comment on a few areas where we feel the bill deals with issues
important to the machine tool industry.
In earlier testimony, AMT strongly recommended that any export
control legislation have a very strong provision defining "foreign
availability" in order to reflect the reality in which U.S. companies
compete today. Current law defines "foreign availability" as any item
that can be supplied from outside the multilateral export control
system in sufficient quantity and comparable quality so as to make the
existing export controls on any particular item ineffective in
achieving the objective of the controls.
Today, however, we operate in a context of weak to non-existent
multilateral controls and, as I have pointed out, a multilateral system
that allows any member country to use its own "national discretion" to
decide whether or not, or how rigorously, to license a product. We
agree with the Banking Committee that the new EAA should not be allowed
to perpetuate the fiction that the current multilateral export control
system functions effectively to deny technology to targets of the
multilateral regime, particularly China, which has, at best, an
ambiguous status in relation to the Wassenaar Arrangement's list of
restricted technologies.
We are pleased that the legislation acknowledges that ``foreign
availability'' can exist within a multilateral control system, not just
outside that system. We strongly support language in the bill that
explicitly acknowledges that ``foreign availability'' can come from
U.S. allies and fellow participants in multilateral export control
regimes, such as Wassenaar. The Banking Committee bill mandates that
the Secretary of Commerce shall determine that an item has foreign
availability status if the item ``is available to controlled countries
from sources outside the United States, including countries that
participate with the United States in multilateral export control
regimes.'' This provision should create a more reasonable ``foreign
availability'' definition, one that reflects the new reality, where
``foreign availability'' of a controlled product is most likely to come
from a U.S. ally rather than a company outside the multilateral control
regime.
Nevertheless, we are concerned with the length of time proposed for
negotiations to eliminate "foreign availability." In an age when the
product cycle for some high technology products is scarcely two years,
eighteen months is simply too long a time limit for such negotiations.
Either the country in question is willing to stop selling the
particular product or technology to the target country, or it is not.
For many U.S. companies, a year and one-half would give foreign
competitors too great a head start in developing a new market. Thus, in
practice, the liberal time limit in the proposed legislation could
fatally undermine the stated purpose of the foreign availability
provision, which would be to give U.S. companies a fair opportunity to
compete for business in products already available to the target
country. AMT recommends that the time limit be reduced to six months,
or, at most, nine months to ensure a better balance between adequate
time for negotiations and competitive consequences to U.S. companies.
Finally, we would recommend that, within the next year or so, the
Administration go back to the negotiating table and make a serious
effort to strengthen the overall Wassenaar Arrangement. As I have
noted, and as the Cox Committee points out, Wassenaar provides weak
guidance and almost no discipline upon its members. It is almost worse
than having no multilateral regime at all, because it gives the
appearance of restricting technology transfer, while leaving all the
key judgments up to Wassenaar's constituent members.
Revisions of the Wassenaar charter ought to include far better
rules for information exchange than exist today. Under current rules,
there is not even a ``no undercut'' pledge, under which each member
state promises not to grant licenses to companies in target countries
which have been previously denied licenses by another member of the
multilateral regime. At the very least, the U.S. Government ought to be
informed beforehand of the intent of other members to grant such
licenses, and, at best, there ought to be a commitment among regime
members to honor one another's denials.
It is imperative that the status of China be clarified for regime
members. If China is not a target of Wassenaar, what is it? Are there
any limits on what technology Wassenaar members, at their own
discretion, can export to China? These are the sorts of questions that
need to be addressed. They are left ambiguous in the current
multilateral arrangement.
The U.S. machine tool industry is highly successful in world
markets. Its technology is second to none, and its companies can
compete head-to-head and win against the best machine tool companies
that Europe and Asia have to offer. But those companies cannot prevail
on an uneven playing field. I join my colleagues in urging you to pass
an eighteen-year statute of repose during the 106th Congress. I
strongly believe that such a law would be a beginning point in the
battle to level the playing field with our foreign competitors. I would
also like to say a word about the Advanced Technology Program (``ATP'')
of the Commerce Department. UNOVA has had a very positive experience
with the ATP program. Although the vast majority of the funds have gone
to the universities that were our partners in this program, we found
that the ATP program offers just the right incentive to stimulate
cooperative ventures in the new technologies that are necessary to keep
American manufacturing ahead of the worldwide competition.
But let me return to the thrust of my testimony. As I have argued,
the manner in which the current multilateral export regime is
administered by the U.S. Government constitutes a major impediment to
accessing key world markets, such as China. I have attempted to detail
some of those problems here today. There is some reason for optimism.
In particular, we are encouraged by the legislation that has just been
reported by the Banking Committee, and it is our hope that an
appropriately amended Export Administration bill will become law. We
need to create both a domestic and an international regulatory climate
that puts U.S. companies on equal footing with their foreign
competitors. Our nation's economic health and national security demand
no less.
We urge you to support the Banking Committee's EAA renewal when it
comes to the Senate floor and to oppose amendments that would make U.S.
export control policy even more unilateral than it is today.
Senator Abraham. Thank you very much, Mr. Danjczek.
What I am going to do is ask this panel if you would not
mind taking seats in the first row for a brief period of time,
and we will hear from our congressional panel. And then we will
ask our business panel to return so that we might engage in
some questioning with them.
Let me again welcome Congressman Don Manzullo, and now
Congressman Richard Neal, from Massachusetts. They are the co-
chairs of the Machine Tool Caucus of the House of
Representatives. And we appreciate very much your efforts on
behalf of this industry. And as you can tell, there is some
interest over here as well on some of the issues that you both
have worked on in the Caucus.
I just wanted to add, we normally, as everybody knows,
would have had the congressional panel first. So I suspect some
of the issues we have just heard about are going to be part of
the comments that you are making in terms of some of the
legislative efforts that you have engaged in. And we apologize
for the re-sequencing here, but hopefully it will not lose the
purpose of trying to draw together both the -- in fact, it may
be in some ways, hearing some of the problems first and then
hearing about some of the ideas that are being debated for
solutions is in some ways more effective.
So we will begin with Congressman Neal. Thank you for being
here today.
STATEMENT OF HON. RICHARD E. NEAL,
U.S. REPRESENTATIVE FROM MASSACHUSETTS
Mr. Neal. Thank you, Mr. Chairman. And I want to thank
members of the subcommittee who have taken an ardent interest
in this critical issue.
I appreciate the opportunity to testify today on a subject
of great concern to me, the status of the United States machine
tool industry. I am especially pleased to appear here with my
fellow co-chair of the House Machine Tool Caucus,
Representative Don Manzullo, one of the most ardent champions
of the industry in the House.
As we are all aware, our Nation is going through an
unprecedented economic boom. Much of that boom can be
attributed to a revolution that has taken place in
productivity. In the past 5 years, productivity grew at double
the pace of the previous 25 years. This, in part, explains why
the economy grew at 4 percent last year, while the core
inflation rate dropped by a half a percentage point, and the
employment rate remained stable.
But what explains this remarkable productivity increase?
Well, in part, it is obviously a result of productivity
gains of the information age, the computer, and the Internet.
But dramatically better machine tools and industrial automation
deserve a significant part of the credit, as well. This is why
I would argue that machine tools are vital underpinnings of our
economy and our continued prosperity.
It is the health of this critical industry that we are
concerned about today. The industry witnesses certainly will,
and have, provided details on the health of the industry
itself, which we know is not good. And they will make
suggestions about how to improve that health. You will hear
about the recent downturn in both U.S. and foreign demand and
how the Asian financial crisis has reached across the Pacific
to affect the profitability of the U.S. industry.
In 1998, we saw a dramatic 39 percent drop in U.S. machine
tool consumption. At the same time, demand for machine tools
everywhere in Asia, with the exception of China, went down to
almost nothing. In response, much as they did with steel, the
major Asian producers--Japan, Taiwan and Korea--redirected
their machine tool sales efforts to the United States.
Literally, the Asian machine tool producers exported their
unemployment to our shores by conducting fire sales on machine
tools, cutting their prices 30, 40 and even 50 percent in order
to unload their inventory in the U.S. marketplace.
Fortunately, there are trade remedies under U.S. law to
deal with such practices when U.S. companies are injured by
unfair foreign competition. The continued availability of those
trade remedies--anti-dumping and countervailing duty rules--is
one of the reasons why I will be attending the WTO ministerial
in Seattle as a member of the Ways and Means Committee Trade
Subcommittee next month.
As the press has reported, developing nations, along with
Japan, are trying to undermine our trade laws by placing
revisions to the international guidelines concerning these
trade remedies on the agenda for the next trade round,
beginning in Seattle at the end of November. If the U.S.
Government were to accept these trade law revisions as a
debatable topic, I believe that the already fragile coalition
that supports free trade in the U.S. Congress would fall apart.
It is that serious.
The situation in which the machine tool industry finds
itself today is a perfect example of why we need strong and
effective trade remedies. Whether the industry decides to
petition for the redress under U.S. trade laws or not, it is
critical that the machine tool industry retain that option.
I am a cosponsor, along with more than 200 of my colleagues
in the House, of the Visclosky resolution, H. Res. 298,
instructing our trade negotiators not to participate in any
negotiations which revision of trade remedies is part of that
negotiating agenda. We cannot afford to make any concessions
regarding these vital protections available under international
agreement, and which are a cornerstone of the open trade policy
of the U.S.
Another issue about which you will be hearing today is that
of our Nation's export control regulations and how they affect
the U.S. machine tool industry. In that regard, I would like to
share with you the experience of one of my constituencies,
Bostomatic, which employs 140 people in Milford, Massachusetts.
Bostomatic has aggressively pursued business in the China
market, which is the fastest growing machine tool market in the
world and one of the few markets where there is not an
artificial barrier to protect the home industry.
Bostomatic makes an excellent five-axis machining center,
which is highly competitive with products made by its 23
competitors who make a similar product for the Chinese market.
However, the Defense Department seems to feel that there is
something unique about the Bostomatic model that causes DOD to
either object or slow down the licenses that are submitted for
sales to China. This is a tremendous handicap for a company
already in a highly competitive market.
Just last week, Defense objected to a license for an
aircraft engine plant, even though the Chinese have made it
clear that they will switch to a Swiss competitor if a license
is not forthcoming from the U.S. shortly. Other potential
Chinese customers have become aware of the delay and do note
this problem when deciding from whom they wish to buy.
This particular situation is especially puzzling because
there are so many competitors ready to step up and take over
the business from Bostomatic. Moreover, none of the European
companies take any more than a few weeks to obtain a license
for machine tools destined for China, while the U.S. process
goes on and on and on for months and months and months.
While I fully and completely support export controls on
critical machinery, I fail to see how our national security is
protected by ensuring that the Swiss or the French or the
Germans get machine tool business in China, in lieu of American
companies like Bostomatic. As both Vice President Gore and
Governor Bush pointed out in separate speeches last week, our
export control system is broken and we need to fix it.
We need to fix it before more of my constituents and your
constituents are put out of work for no good reason, and the
U.S. machine tool industry is put at an overwhelming
disadvantage in the fasting growing market in the world--China.
As you will hear, there are a number of other things that we
could do that would help this vital industry. We certainly need
to renew the research and development tax credit. We in
Congress need to realize how important it is to support
technology research and development funding, which has enormous
payoffs in the competitiveness of U.S. companies at home and in
world markets.
The Advanced Technology Program, ATP, has been underfunded,
in my view. That should be corrected as soon as possible, as
well, although most of the work needs to be done in the House,
rather than in the Senate.
In sum, let me thank you for the opportunity to bring these
matters to your attention. The machine tool industry is a vital
part of our Nation's competitiveness and prosperity. And I
cannot think of a better subject for your subcommittee to
explore.
Thank you very much, Mr. Chairman.
[The prepared statement of Congressman Neal follows:]
Prepared Statement of Hon. Richard E. Neal, U.S. Representative
from Massachusetts
Mr. Chairman, members of the Subcommittee, I appreciate the
opportunity to testify today on a subject of great concern to me, the
status of the United States machine tool industry. I am especially
pleased to appear here with my fellow cochair of the House Machine Tool
Caucus. Rep. Donald Manzullo, one of the most ardent champions of the
industry in the House.
As we are all aware, our nation is going through an unprecedented
economic boom. Much of that boom can be attributed to a revolution that
has taken place in productivity. During the past five years,
productivity grew at double the pace of the previous 25 years. This in
part explains why the economy grew at four percent last year, while the
core inflation rate dropped by half a percentage point and the
employment rate was stable.
What explains this remarkable productivity increase? Well, in part
it is obviously a result of productivity gains of the information age,
the computer and the Internet. But dramatically better machine tools
and industrial automation deserve a significant part of the credit as
well. This is why I would argue that machine tools are a vital
underpinning of our economy and our continued prosperity. It is the
health of this critical industry which we are concerned about today.
The industry witnesses will provide detail on the health of the
U.S. machine tool industry, which is not good, and they will make
suggestions about how to improve that health. You will hear about the
recent downturn in both U.S. and foreign demand and how the Asian
financial crisis has reached across the Pacific to affect the
profitability of the U.S. industry. In 1998, we saw a dramatic 39
percent drop in U.S. machine tool consumption. At the same time, demand
for machine tools everywhere in Asia, with the exception of China, went
down to almost nothing. In response, much as they did with steel, the
major Asian producers--Japan, Taiwan, and Korea--redirected their
machine tool sales efforts to the United States. Literally, the Asian
machine tool producers exported their unemployment to our shores by
conducting fire sales on machine tools, cutting their prices 30, 40,
and even 50 percent in order to unload their inventory in the U.S.
marketplace.
Fortunately, there are trade remedies under U.S. law to deal with
such practices when U.S. companies are injured by unfair foreign
competition. The continued availability of those trade remedies, i.e.
antidumping and countervailing duty rules, is one reason why I will be
attending the WTO Ministerial in Seattle at the end of next month. As
the press has reported, developing nations along with Japan, are trying
to undermine our trade laws by placing revisions to the international
guidelines concerning these trade remedies on the agenda for the next
trade round beginning in Seattle at the end of November. If the U.S.
Government were to accept these trade law revisions as a debatable
topic, I believe that the already fragile coalition that supports free
trade in the U.S. Congress would fall apart. It is that serious.
The situation in which the machine tool industry finds itself today
is a perfect example of why we need strong and effective trade
remedies. Whether the industry decides to petition for redress under
U.S. trade laws, or not, it is critical that the machine tool industry
retain that option. I am a cosponsor, along with more than 200 of my
colleagues, of the Visclosky Resolution (H. Res. 298) instructing our
trade negotiators not to participate in any negotiations in which
revision of trade remedies is part of the negotiating agenda. We cannot
afford to make any concessions regarding these vital protections
available under international agreement, and which are a cornerstone of
the open trade policy of the U.S.
Another issue about which you will be hearing today is that of our
nation's export control regulations and how they affect the U.S.
machine tool industry. In that regard, I would like to share with you
the experience of one of my constituents, Bostomatic, which employs 140
people in Milford, Massachusetts. Bostomatie has aggressively pursued
business in the China market, which is the fastest growing machine tool
market in the world, and one of the few markets in which there are not
artificial barriers to protect the home industry. Bostomatic makes an
excellent five-axis machining center, which is highly competitive with
the products made by its 23 competitors who make a similar product for
the Chinese market. However, the Defense Department seems to feel that
there is something unique about the Bostomatic model that causes DOD to
either object or slow down the licenses that are submitted for sales to
China. That is a tremendous handicap for a company already in a highly
competitive market. Just last week Defense objected to a license for an
aircraft engine plant, even though the Chinese have made it clear that
they will switch to a Swiss competitor if a license is not forthcoming
from the U.S. shortly. Other potential Chinese customers have become
aware of the delay and do note this problem when deciding from whom
they wish to buy. This particular situation is especially puzzling
because there are so many competitors ready to step up and take over
the business from Bostomatic. Moreover, none of the Europeans companies
take any more than a few weeks to obtain a license for machine tools
destined for China, while the U.S. process goes on for months and
months. While I fully and completely support export controls on
critical machinery, I fail to see how our national security is
protected by ensuring that the Swiss, or the French, or the Germans,
get machine tool business in China in lieu of American companies like
Bostomatic. As both Vice President Gore and Governor Bush pointed out
in separate speeches last week, our export control system is broken,
and we need to fix it. We need to fix it before more of my
constituents, and your constituents, are put out of work for no good
reason, and the U.S. machine tool industry is put at an overwhelming
disadvantage in the fastest growing market in the world, China.
As you will hear, there are a number of other things that we could
do to help this vital industry. We need to renew the Research &
Development tax credit. And we in Congress need to realize how
important it is to support technology research and development funding,
which has enormous payoffs in the competitiveness of U.S. companies at
home and in world markets. The Advanced Technology Program (``ATP'')
has been underfunded in my view, and that should be corrected as soon
as possible, although most of the work needs to be done in the House
rather than in the Senate.
In sum, I would like to thank you for the opportunity to bring
these matters to your attention. The machine tool industry is a vital
part of our nation's competitiveness and prosperity, and I cannot think
of a better subject for your Subcommittee to explore. Thank you.
Senator Abraham. Thank you very much, Congressman.
We will now turn to Congressman Manzullo. We appreciate
your having had to go back and forth here. We appreciate that
you came back to participate today and for your leadership on
this issue.
STATEMENT OF HON. DONALD A. MANZULLO,
U.S. REPRESENTATIVE FROM ILLINOIS
Mr. Manzullo. Thank you very much, Senator. I appreciate
the opportunity to speak here.
Mr. Neal and I formed the House Machine Tool Caucus earlier
this year to work together to find bipartisan solutions to the
problems facing the machine tool industry. I represent the
northern tier counties of the State of Illinois, which includes
Rockford, a center of machine tool manufacturing in the United
States. Over the past year, I have heard from my business
leaders back home that they have never had it this bad.
The city of Rockford has less than 150,000 people, but has
over 1,100 machine shops and factories of all sizes. The
situation, they tell me, is even worse than in the recessions
of the early eighties and nineties. In fact, in 1981, Rockford,
Illinois led the Nation in unemployment, with between 25 and 27
percent. We lost 100 factories and over 10,000 highly skilled
jobs.
Some of the old-timers even believe that business prospects
are worse than the Great Depression of the 1930's. So here we
are, from the Rust Belt, if you want to call it that,
testifying before the Senate. People are absolutely jubilant or
ebullient, whatever the word is, over the economy. And yet, we
see a very dark side to the economy that is growing and
growing. And that is why Mr. Neal and I formed this Machine
Tool Caucus and why we appreciate the opportunity to express
our concerns to you, Senator.
Just this past Monday, I met with owners of small machining
shops who are thinking about closing up because, in part,
orders from machine tool companies have dried up. How can this
be, when many say that these are the best of economic times? I
believe that these rosy economic statistics mask an underlying
reality that may erode our manufacturing base and our long-term
competitiveness.
While the machine tool industry is small when compared to
other industries, it forms the base of manufacturing in this
country. In my mind, the health of the machine tool industry is
a harbinger of things to come for the rest of the U.S. economy.
The machine tool industry is usually the first to suffer during
an economic downturn and the last to recover.
We may be seeing the first steps toward an economic
downturn in this country unless we take steps now to improve
the state of the U.S. machine tool industry. Let me give you
some concrete examples from back home.
Beloit Corporation, of Rockton, Illinois, a manufacturer of
large paper-making machines, and Reed-Chatwood, of Rockford, a
textile machinery manufacturer, went bankrupt primarily because
the Asian financial crisis dried up all their export markets.
W.A. Whitney, of Rockford, makes punch plasma machine tools
for farm equipment manufacturers. Because U.S. farmers are
suffering primarily due to a drop-off in U.S. agricultural
exports to Asia, they are not buying new farm equipment. Thus,
farm equipment manufacturers are cutting back on their
suppliers, including their purchases of machine tools from W.A.
Whitney. To further compound the problem, the strong U.S.
dollar has dried up W.A. Whitney's exports to Europe, and made
it very difficult for them to compete domestically against
price-discounted imports.
The Ingersoll Milling Machine Company, of Rockford, is one
of the largest employers of the City, with over 2,000 workers.
Just last week, Ingersoll announced an additional cut of 17
workers, on top of the 60 jobs lost last summer, because of
slow sales.
Our export policy compounds the domestic problems that face
every machine tool builder. Ingersoll finds it very cumbersome
and difficult to export to China. Our Nation's export control
laws have made it next to impossible for Ingersoll to sell a
five-axis machine tool to legitimate civilian end users in
China.
In 1997, only one U.S.-made five-axis machine was sold to
China. Germany has sold China 18. Something is not right.
The Export Administration Reauthorization Act, as reported
by the Senate Banking Committee, goes a long way toward a
sensible export control policy that recognizes post-cold war
realities.
In addition, Ingersoll was caught up in the middle of the
sanctions imposed on India. Just as they were about to close a
deal on selling a $5 million, four-axis machining center to a
state-owned electrical powerplant in India, the U.S. put the
brakes on this and future Ingersoll exports to India as
retaliation for India testing a nuclear device. This is
retaliation? Laying off workers in Rockford, Illinois, to
protest India's new nuclear testing policy?
All India has to do is purchase similar machines from
Europe. It is time for a total reexamination of our unilateral
economic sanctions policies.
Senator, it is very, very disheartening, as Mr. Neal and I
sit by and see the members of our House with the so-called
retaliations, that every time there is a bad actor overseas,
they come up with sanctions and stop us from exporting to these
bad actors, where as the bad actors will simply turn around and
buy the very same machinery from a foreign country. And here we
are back home, with hundreds and hundreds of employees that are
being laid off because of a misguided, misunderstood, so-called
export policy.
Rockford used to have Madison Technologies, a manufacturer
of large grinding machines. Shortly after celebrating their
100th birthday, Madison went bankrupt because they could not
pay a $7.5 million product liability verdict on a machine they
had built almost 50 years earlier. In fact, at the time they
filed bankruptcy there was a summons sitting on the desk of the
president on a machine that they had built at the time that the
Czars had ruled Russia.
Other nations place limits on the number of years someone
can file a product liability lawsuit. This helps foreign
machine tool builders reduce the cost of their machines.
Adopting a modest statute of repose for work place durable
goods, such as 18 years as contained in H.R. 2005, in the U.S.
would go a long way toward helping machine tool manufacturers.
In fact, Senator, it is the very same philosophy that Dan
Glickman and others in the House of Representatives and members
of your body set forth when private aviation manufacturing came
to a stop when Cessna no longer manufactured anything other
than commercial aircraft and business jets. Former
Representative Dan Glickman guided legislation through the
House and other members guided it through the Senate. In fact,
I think it passed the House unanimously and the Senate
unanimously, a bill that applied a nationwide statute of repose
on aircraft and aircraft parts.
That brought back the aircraft industry and Cessna. They
built, a plant in Topeka, Kansas for starting all over again in
private aviation that now employs between 2,000 and 3,000
workers. That is the situation where reasonable and practical
product liability reform brought back a sector that we had
completely lost.
Finally, Mr. Chairman, I would be remiss if I did not
mention the regulatory and tax burdens that face the machine
tool industry. Profit margins are so thin, and in some cases
nonexistent, that any increase in cost in these areas could
push the companies into bankruptcies. Several companies--and
these are the little guys, Senator, some with 10-15 employees,
most with under 100 employees--have mentioned to me that their
health and accident insurance premiums went up 30 to 40 percent
this past year.
Other companies described increased inspections by the
Occupational Safety and Health Administration, OSHA, even
though they have never had a worker injured on the job in the
entire history of the company. These inspections always result
in the payment of some fine for an obscure violation to justify
the inspector's visit. This is in spite the rhetoric I keep on
hearing from OSHA in Washington that they no longer issue fines
for paperwork violations and they want to help companies comply
with the law.
That is why I believe we need to pass comprehensive OSHA
reform in order to transform the agency--one that ensures the
safety of the worker, but does not penalize the small
businesses that are trying to improve the worker environment.
Thank you, again, Mr. Chairman, for holding this important
meeting. We need a vibrant machine tool industry in the U.S.
for our national defense and for our future economic well-
being.
[The prepared statement of Congressman Manzullo follows:]
Prepared Statement of Hon. Donald A. Manzullo,
U.S. Representative from Illinois
Thank you Chairman Abraham and Members of the Subcommittee for
allowing both Representative Neal and I to speak to the challenges
confronting the machine tool industry.
We formed the House Machine Tool Caucus earlier this year to work
together to find bipartisan solutions to the problems facing the
machine tool industry. I represent the northern counties of Illinois,
which includes Rockford, a center of machine tool manufacturing in the
United States. For over the past year, I have heard from my business
leaders back home that they have never had it this bad. The situation
is even worse than the recessions of the early 1980's and 1990's. Some
old timers even believe that business prospects are even worse than the
Great Depression of the 1930's. Just this past Monday, I met with the
owners of small machining shops who are thinking about closing up
because, in part, orders from machine tool companies have dried up.
How can this be when many say that these are the best of economic
times? I believe these rosy economic statistics mask an underlying
reality that may erode our manufacturing base and our long-term
competitiveness.
While the machine tool industry is small when compared to other
industries, it forms the base of manufacturing in this country. In my
mind, the health of the machine tool industry is a harbinger of things
to come for the rest of the U.S. economy. The machine tool industry is
usually the first to suffer during an economic downturn and the last to
recover. We may be seeing the first steps towards an economic downturn
in this country unless we take steps now to improve the state of the
U.S. machine tool industry.
Let me give you some concrete examples from back home. Beloit
Corporation of Rockton--a manufacturer of large paper-making machines--
and Reed-Chatwood of Rockford a textile machinery manufacturer--went
bankrupt primarily because the Asian financial crisis dried up all
their export markets.
W.A. Whitney of Rockford makes punch plasma machine tools for farm
equipment manufacturers. Because U.S. farmers are suffering primarily
due to a drop-off in U.S. agricultural exports to Asia, they are not
buying new farm equipment. Thus, farm equipment manufacturers are
cutting back on their suppliers, including their purchases of machine
tools from W.A. Whitney. To further compound their problem, the strong
U.S. dollar has dried up W.A. Whitney's exports to Europe and made it
very difficult for them to compete domestically against price
discounted imports.
The Ingersoll Milling Machine Company of Rockford is one of the
largest employers in the city with 2,000 workers. Just last week,
Ingersoll announced an additional 17 workers, on top of the 60 jobs
lost last summer, were laid off because of slow sales.
Our export policy compounds the domestic problems that faces every
machine tool builder. Ingersoll finds it very cumbersome and difficult
to export to China. Our nation's export control laws has made it next
to impossible for Ingersoll to sell a five axis machine tool to
legitimate civilian end-users in China. In 1997, only one U.S.-made
five axis machine was sold to China. Germany sold them 18. Something is
not right. The Export Administration Reauthorization Act as reported by
the Senate Banking Committee goes along way towards a sensible export
control policy that recognizes post-Cold War realities.
In addition, Ingersoll was caught up in the middle of the sanctions
imposed on India. Just as they were about to close a deal on selling a
$5 million four axis machining center to a state-owned electrical power
plant in India, the U.S. put the brakes on this and future Ingersoll
exports to India as retaliation for India testing a nuclear devise.
This is retaliation? Laying off workers in Rockford to protest India's
new nuclear testing policy? All India has to do is purchase similar
machines from Europe. It's time for a total reexamination of our
unilateral economic sanctions policy.
Rockford used to have Mattison Technologies, a manufacturer of
large grinder machines. Shortly after celebrating its 100th birthday,
Mattison went bankrupt because it couldn't pay a $7.5 million product
liability verdict on a machine they built in 1948. Other nations place
limits on the number of years someone can file a product liability
lawsuit. This helps foreign machine tool builders reduce the cost of
their machines. Adopting a modest statute of repose for workplace
durable goods--such as 18 years as contained in HR 2005--in the United
States would go a long way towards helping machine tool manufacturers.
Finally, Mr. Chairman, I would be remiss if I did not mention the
regulatory and tax burdens that face the machine tool industry. Profit
margins are so thin--in some cases, nonexistent--that any increase in
costs in these areas could push these companies into bankruptcy.
Several companies mentioned to me that their health and accident
insurance premiums went up 30 to 40 percent this past year.
Other companies describe increased inspections by the Occupational
Safety and Health Administration (OSHA) even though they have never had
a worker injured on the job in the entire history of the company. These
inspections always result in the payment of some fine for an obscure
violation to justify the inspector's visit. This is in spite of the
rhetoric I keep hearing from OSHA in Washington that they no longer
issue fines for paperwork violations and they want to help companies
comply with the law. That's why I believe we need to pass comprehensive
OSHA reform in order to transform the agency into one that helps--not
penalizes--these small businesses improve the worker environment.
Thank you, again, Mr. Chairman, for holding this important hearing.
We need a vibrant machine tool industry in the United States for our
national defense and our future economic wellbeing.
Senator Abraham. Congressman, thank you.
I thank you both for coming over here. I know there are
activities still going on, on the House floor, and so we will
let you return to your side of the Hill. But we appreciate your
leadership on these issues as well as the time you have spent
with us today. And we look forward to continuing to work on
these together. Thank you.
Mr. Manzullo. Thank you.
Mr. Neal. Thank you.
Senator Abraham. Now we will ask our first panel to return,
now in the form of being the second panel. We thank you again
for your patience.
I also want to state, on behalf of Senator Dorgan, who you
saw stop by briefly, he had hoped to be able to participate in
full in the hearing today, but has had something come up with
the Democratic leadership that he has to attend to. So he asked
me to please convey his regrets, but also to express his
interest in what we are doing here today and his continuing
involvement with us in that effort.
Let me start with you, Mr. Clevenger. You mentioned that
you had supported broader-based legal reform of product
liability legislation but had--in fact testified in favor of
that in the past, but now have sort of been willing to shift
gears a little bit to support the notions contained in H.R.
2005. Could you give us just a little bit more of a expansion
of why?
Mr. Clevenger. Well, as I think you know, Senator, we have
been at this for a long time, my colleagues and I. I am a
second-timer on the Government Relations Committee, endeavoring
to help the industry. In the analysis of what would do us the
most good, the statute of repose is that. As I stated, 42
percent of our industry lawsuits would be eliminated just by
taking out of context the machines over 18 years.
The other issues were very difficult to get by the Senate,
and even the House, the number of times we have attempted. And
we felt pretty comfortable that this got as far as the White
House last year. By narrowing it to the statute of repose, we
are willing to look at a half a loaf of bread, frankly.
Senator Abraham. I understand.
Mr. Danjczek, let me ask you this. You have talked about
export control policies and concerns about that. In your
judgment, what do you think is the best thing we could do to
strengthen the current export control system?
Mr. Danjczek. I think that we need to have true
multilateral controls. I do not think the unilateral sanctions
have ever achieved their intended goal, if that goal was to
stop someone from gaining certain technology. I also think that
we need to speed up the time period of the licensing process to
that in fact U.S. companies know where they will stand in a
much more expeditious manner, so that our foreign customers
cannot complain that our system is holding us hostage.
Finally, I think that we really also need to have better
certainty in the system. I mean, in the old days there was a
much tighter system, but there was much more certainty to it,
as well. And I think those are the three areas that need
improvements done.
Senator Abraham. Have you felt that our allies have been
cooperating and helping us with our efforts to prevent
sophisticated technology from falling into the hands of
countries----
Mr. Danjczek. By helping making them be stronger
competitors, they have helped us in that way, Senator.
[Laughter.]
But in fact they actually go around to our customers
saying, why would you ever consider buying a U.S. machine tool;
you do not know whether you can get an export license; chances
are you cannot. And so they really have been a great hindrance,
and they take advantage of the U.S. export control system to
their own competitive advantage.
Senator Abraham. If the United States does decide to
license sophisticated machine tools to China or other places,
what kind of protections are there that they would not be
misused?
Mr. Danjczek. Senator, there is no absolute certainty that
they would not be used for an inappropriate purpose. I think I
need to state that right up front. However, the U.S.
Government, in the past, has imposed export restrictions and
conditions on the exports that U.S. companies have been able to
abide by without too much difficulty. Our foreign competitors
have no such restrictions. Even having some small restraints, I
think, helps.
Generally, in the plants in which these machine tools are
used, those plants have U.S. citizen managers and U.S. co-
producers. The U.S. air frame manufacturers, which co-produce
the parts, are physically present, who are able to monitor and
who will be able to report on the event of any diversion or
inappropriate use.
Senator Abraham. Are you familiar with Senator Gramm's
export legislation?
Mr. Danjczek. Yes, sir, I am.
Senator Abraham. What are your thoughts on that?
Mr. Danjczek. I think that it is an outstanding step. I
would love to see it become law--the sooner, the better. I
believe that it does provide some of the necessary conditions.
There are areas, such as in foreign availability research, and
I think 18 months is too long a period of time. It should be 6
months. I think that there should be some requirement for the
administration to negotiate with our allies a stronger
Wassenaar regime.
Senator Abraham. Mr. Logan, would you comment on that at
all?
Mr. Logan. I think Mr. Danjczek has clearly spelled out the
position that the organization has on that.
Senator Abraham. Very well. Earlier this year I sponsored a
symposium here on the Hill, along with NACFAM, which is the
National Coalition for Advanced Manufacturing. I know that each
of you, as well as I think maybe our congressional members,
commented a little bit about some of the advanced technology
programs and so on.
The symposium included almost three dozen companies, most
of which are involved in manufacturing to one extent or
another. Our topic that day was basically ways by which
Congress and the administration can assist businesses in
improving productivity. One came away from these meetings with
the certainty that increasing productivity was the key factor
in terms of increasing American economic growth, because the
size of our work force is really not going to be much of a
positive factor in the future, in terms of overall economic
growth. Growth is more or less a function of both the labor
force and productivity.
So one of the things we were trying to do was to come up
with various ideas and so on which we thought would be useful
actions for us to take potentially here, or actions to avoid
taking, to increase productivity. And so I guess I was
wondering if maybe each of you could comment a little bit on
this in general, and maybe just comment from your own
experiences on the whole question of productivity and its
relationship with all these issues, such as economic growth,
higher salaries and so on. And if you wanted to add to it any
specific recommendations to us that might assist people in the
industries you represent in terms of increasing productivity, I
would be interested in that, as well.
Mr. Danjczek. Senator, I think some basic research--and I
had spoken earlier, and I believe that both Jeff and John had
also spoken on the Advanced Technology Program--companies
themselves will often do applied research and apply their own
money to that to take an existing idea and productionize it, to
join with the universities, where the universities are getting
the majority of the funds under the ATP program. Companies
participate with them in what is a basic level of research
which actually leads us to have higher productivity, to come up
with new ideas and new technologies that can assist all of us
in achieving the productivity gains that we need to achieve to
grow as a Nation.
Senator Abraham. Mr. Logan.
Mr. Logan. My view is one that encouraging manufacturing
productivity is the essence of our industry. And in order to do
that, we need to continuously reinforce the competitiveness of
the industry itself. And, to me, the shortest distance between
where we are today and where we should be is a review of tax
issues, border adjustability issues, tax credit issues. Those
are the steps I think that could be most effective in promoting
the industry and hence promoting productivity.
Senator Abraham. Jeff.
Mr. Clevenger. I think my colleagues have covered the two
areas I think that are probably the most important. But I would
leave you with the thought that technology development is still
a business. It is not some inventor in the basement of his
house inventing things. Today technology development is a
collaboration, as I said, of academia, of government and of
business. It cannot be competitive alone.
I think ATP has facilitated, through the grant efforts, us
working together. If we could learn to work together on and on
and on, we can increase productivity. It is our goal, every
time we sit down with a major manufacturing business or
company, it is our goal to increase their productivity. That is
all we think about in terms of gaining orders is what can we do
new, different and better. And sometimes it does not exist
within the cobwebs or the experience of a 100-person factor and
it does require working with other people.
So our company has been very successful at it. We will
continue to use it. But, clearly, the cost of doing business
has to enter into everything we do.
Senator Abraham. Good. We have been joined by Senator
Ashcroft, who is, I know, very interested in a number of these
issues. I have come sort of to the end of my questions, and the
panel has made their statements. If you had either an opening
statement or questions, either one really, John, I think the
floor can be yours.
I know we have a Senate Republican conference coming up at
3. So what I am inclined to do is to turn this over to you and
let you finish. I have got a few more questions, but I think I
may submit them in writing so that we can make it to that
meeting. So I will just turn it over to you.
STATEMENT OF HON. JOHN ASHCROFT,
U.S. SENATOR FROM MISSOURI
Senator Ashcroft. Thank you, Mr. Chairman. Let me just
commend you for your interest in the fundamentals of American
productivity.
There are industries that are sort of the last participants
in the line of productivity. There are industries that are the
first elements of the line of productivity. The machine tool
industry is at the very beginning of our capacity. For that
reason, I think it is very, very important. No one understands
or cares about that more than you do, Mr. Chairman. I am
grateful.
I believe that the genius of America is not that you come
to Washington and hear Senators speak, not that you come to
learn, but that you come to teach, and it is for us to hear
you. I thank you for coming.
I think you can help us make informed judgments and
decisions about things we can do to make sure that the U.S.
machine tool industry participates in a tremendous surge in the
next century, as America leads the world. And I am aware of the
sort of double hit that is come on the machine tool industry,
that has come from lowered exports because of the depressions
in some parts of the world, and the rise of individuals in
other settings that would compete.
I want you to know that I want to do everything within my
power to make it possible for the United States superiority,
creativity, vitality, energy, and understanding of productivity
to be reflected in the U.S. machine tool industry. I know that
we have that industry present in the State of Missouri. It is
not only present in the State of Missouri, close to my home in
the southwest of Missouri, in Lebanon there, but in other
settings around the State.
Machine tools are the foundation of an industrialized
society, and I think we need to make sure that there is an
environment in which we operate which provides a basis for you
to be competitive. If you are the foundation of industry,
America and its governmental setting needs to be a foundation
for you, to put you on a playing field that makes it possible
for your superior skills to prevail.
Mr. Chairman, without a healthy and robust machine tool
industry, I strongly believe that not only our economic
freedom, but our national security is at risk. I hope this
committee will work with industry and other committees in the
Senate to explore areas where our national policies have, in
the past, maybe hindered the ability of the machine tool
industry to survive and thrive, and that we could adjust those
policies to make it possible for us to be the world leaders and
continue to be the world leaders.
We have watched as the Asian response to reduced demand at
home in the Pacific Rim was to unload their machine tools at
cut-rate prices in other markets. And we have got to make sure
that our industry has the great opportunity.
The last point I would like to make is sometimes other
foreign manufacturers do not suffer from what would be referred
to as the long tail of liability that follows the American
machine tool industry. We cannot add a cost that is not only
substantial, but very difficult to estimate and ascertain and
sort of an undetermined liability hanging over the head of this
industry. I think we need to correct that, to make it possible
for this industry to thrive.
With that, I have exhausted our time. I want to thank again
these folks for coming, and I look forward to your written
submissions, as well.
I would ask that the entirety of my remarks be made a part
of the record.
Senator Abraham: Without objection, it will be.
[The prepared statement of Senator Ashcroft follows:]
Prepared Statement of Hon. John Ashcroft,
U.S. Senator from Missouri
Mr. Chairman, I thank you for holding today's hearing. The machine
tool industry is vital to the American economy. It also is vital to the
security and defense of this nation. It also is very important to my
state. During the fist five months of 1999, U.S. machine tool
consumption was down 39% from the same period in 1998. Compounding the
decrease in U.S. machine tool consumption, imports also are growing--
rising from 50 percent of the entire U.S. market in 1995 to an
estimated 60% in 1999--resulting in a reduction in business and jobs
for U.S. machine tool producers. The Asian response to reduced demand
at home is to unload their machine tools at cut-rate prices to the
United States.
There are a number of reasons for this decline in demand for U.S.
machine tools. First, the U.S. export controls are the toughest in the
world and frequently are unilateral. Second, unlike foreign
manufacturers, who do not suffer from a ``long tail of liability,''
U.S. machine tool producers must factor into their prices the cost of
product liability insurance and litigation on overage products. Other
countries, the U.S.' main competitors, have a ten-year statute of
repose while our companies have unlimited liability. Finally, the Asian
economic crisis has created an overcapacity in the industry. Most
economists conclude it may take 2 to 5 years before the various
overcapacities throughout Asia can be absorbed. U.S. market share in
Asia has all but disappeared in some countries: machine tool exports to
Korea dropped 69% from 1996-1998. Meanwhile, South Korea has increased
its exports to the U.S. from 15% of its machine tool production in 1995
to an astonishing 50% of that production in 1998.
The U.S. machine tool industry suffers from a double hit -- a
decrease in domestic demand for machine tools and lowered exports
while, at the same time, imports, particularly from Asia, are seizing
more and more market share in the United States. Historically, the
machine tool industry is the first to suffer in an economic decline and
the last to recover.
Because machine tools are the foundation for an industrialized
society, the state of the machine tool industry should be of concern to
all Members of Congress. If American's machine tool industry is
severely weakened, how long can America's productivity continue to
improve and its economy continue to grow? If U.S. buyers of machine
tools become too dependent on imports, they will be at risk of
receiving yesterday's manufacturing technology while the productivity
of their foreign competitors will be enhanced by the infusion of
tomorrow's technology into their facilities.
Mr. Chairman, without a healthy and robust machine tool industry, I
strongly believe that not only our economic freedom but also our
national security is at risk. I hope this Committee will work with the
industry, and other committees in the Senate to remediate areas where
our national policies hinder their ability to thrive. Again, thank you
for holding this very important hearing.
Senator Abraham. Thank you very much, Senator Ashcroft.
I want to thank our panelists and our audience. Again, we
apologize. The convening of this conference was not on the
agenda when we set today's meeting date, but I think that it
may account for a couple of our other members who we thought
were going to be able to join us not having gotten by yet. And
so we will ask them to submit any questions they have in
writing.
Senator Abraham. We look forward to working with each of
you and with the various associations that have helped us put
today's hearing together; for the future, to try to focus more
specifically on the issues that we talked about today and some
of the solutions we have heard about. We thank you all for
being here.
With that, our hearing is adjourned.
[Whereupon, at 3 p.m., the hearing was adjourned.]
A P P E N D I X
Prepared Statement of Hon. Ernest F. Hollings, U.S. Senator
from South Carolina
Mr. Chairman, I too am troubled by the downturn of the machine tool
industry in this country. Because of the industry's importance to other
manufacturing sectors and to the economy in general, this is a trend
that we need to continue to monitor closely. I thank the Chairman for
holding this hearing so that we can talk more about the specific
problems confronting machine tool makers.
I would like to speak to one of the issues that I expect to come up
at this hearing, namely product liability. We often hear small
manufacturers, both in the machine tool industry and in other sectors,
complaining that they are forced to spend too much money on litigation
to defend themselves against liability claims. Their solution to this
problem is to ask Congress to enact statute-of-repose legislation to
shelter them from claims on products that are older than a specified
age. I disagree with this course of action.
Manufacturing firms can protect themselves against lawsuits by
purchasing liability insurance. It is my understanding that this
insurance is presently widely available, at affordable cost, both for
small and large manufacturers. Of course, if insurance is not available
at reasonable rates, then that is an issue that must be examined. In
fact, if it is shown that insurance is available only at high costs in
an otherwise booming economy, insurance availability is the central
issue. The machine tool industry has already asserted that insurance
costs are too high for them to afford. That being the case, I
definitely want to see numbers that back up this assertion. So far the
industry has not been able to prove that insurance costs make up a
large portion of their revenues, or that insurance is prohibitively
expensive.
My concern is that the statute-of-repose issue is really a backdoor
effort to justify federal tort reform. As I have noted in the past,
tort law is controlled and managed by the states; it has been since the
founding of the Republic. The states have the most experience with
legislating tort laws. Given this tradition, Congress should only
interfere when there is proof of a compelling reason to do so. From
what I have read thus far, this standard has not been met.
I was happy to see that in their written testimony our witnesses
mentioned the value of the Advanced Technology Program (ATP) within the
Department of Commerce. The ATP is a unique partnership between
government and private industry to accelerate the development of high-
risk, pre-competitive technologies that promise significant commercial
payoffs and widespread benefits for the economy. With the help of
people working in industry like yourselves, it is my hope that we can
now move the debate over ATP away from partisan politics and back to
national policy--which is how the program was viewed in Congress when
it was created under the leadership of President Bush.
Measurement and evaluation have been part of the ATP since its
beginning. The benefits of the program are well documented. What the
analysis has shown many times is that the ATP is stimulating
collaboration, accelerating the development of high-risk technologies,
and paying off for the nation. In fact, a March 1999 study found that
future returns from just three of the 50 completed ATP projects--
improving automobile manufacturing processes, reducing the cost of
blood and immune cell production, and using a new material for
prosthesis devices--would pay for all projects funded to date by the
ATP. I strongly support this program, and I thank the representatives
of the machine tool industry for doing so as well.
I thank the Chairman for this time and I look forward to hearing
the testimony of the witnesses, in particular in regard to the product
liability issue.