[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]
MANUFACTURING R&D: HOW CAN
THE FEDERAL GOVERNMENT HELP?
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON ENVIRONMENT, TECHNOLOGY,
AND STANDARDS
COMMITTEE ON SCIENCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
__________
JUNE 5, 2003
__________
Serial No. 108-11
__________
Printed for the use of the Committee on Science
Available via the World Wide Web: http://www.house.gov/science
______
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COMMITTEE ON SCIENCE
HON. SHERWOOD L. BOEHLERT, New York, Chairman
LAMAR S. SMITH, Texas RALPH M. HALL, Texas
CURT WELDON, Pennsylvania BART GORDON, Tennessee
DANA ROHRABACHER, California JERRY F. COSTELLO, Illinois
JOE BARTON, Texas EDDIE BERNICE JOHNSON, Texas
KEN CALVERT, California LYNN C. WOOLSEY, California
NICK SMITH, Michigan NICK LAMPSON, Texas
ROSCOE G. BARTLETT, Maryland JOHN B. LARSON, Connecticut
VERNON J. EHLERS, Michigan MARK UDALL, Colorado
GIL GUTKNECHT, Minnesota DAVID WU, Oregon
GEORGE R. NETHERCUTT, JR., MICHAEL M. HONDA, California
Washington CHRIS BELL, Texas
FRANK D. LUCAS, Oklahoma BRAD MILLER, North Carolina
JUDY BIGGERT, Illinois LINCOLN DAVIS, Tennessee
WAYNE T. GILCHREST, Maryland SHEILA JACKSON LEE, Texas
W. TODD AKIN, Missouri ZOE LOFGREN, California
TIMOTHY V. JOHNSON, Illinois BRAD SHERMAN, California
MELISSA A. HART, Pennsylvania BRIAN BAIRD, Washington
JOHN SULLIVAN, Oklahoma DENNIS MOORE, Kansas
J. RANDY FORBES, Virginia ANTHONY D. WEINER, New York
PHIL GINGREY, Georgia JIM MATHESON, Utah
ROB BISHOP, Utah DENNIS A. CARDOZA, California
MICHAEL C. BURGESS, Texas VACANCY
JO BONNER, Alabama
TOM FEENEY, Florida
VACANCY
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Subcommittee on Environment, Technology, and Standards
VERNON J. EHLERS, Michigan, Chairman
NICK SMITH, Michigan MARK UDALL, Colorado
GIL GUTKNECHT, Minnesota BRAD MILLER, North Carolina
JUDY BIGGERT, Illinois LINCOLN DAVIS, Tennessee
WAYNE T. GILCHREST, Maryland BRIAN BAIRD, Washington
TIMOTHY V. JOHNSON, Illinois JIM MATHESON, Utah
MICHAEL C. BURGESS, Texas ZOE LOFGREN, California
VACANCY RALPH M. HALL, Texas
SHERWOOD L. BOEHLERT, New York
ERIC WEBSTER Subcommittee Staff Director
MIKE QUEAR Democratic Professional Staff Member
JEAN FRUCI Professional Staff Member
OLWEN HUXLEY Professional Staff Member
MARTY SPITZER Professional Staff Member
SUSANNAH FOSTER Professional Staff Member
AMY CARROLL Professional Staff Member/Chairman's Designee
ELYSE STRATTON Majority Staff Assistant
MARTY RALSTON Democratic Staff Assistant
C O N T E N T S
June 5, 2003
Page
Witness List..................................................... 2
Hearing Charter.................................................. 3
Opening Statements
Statement by Representative Vernon J. Ehlers, Chairman,
Subcommittee on Environment, Technology, and Standards,
Committee on Science, U.S. House of Representatives............ 9
Written Statement............................................ 10
Statement by Representative Mark Udall, Minority Ranking Member,
Subcommittee on Environment, Technology, and Standards,
Committee on Science, U.S. House of Representatives............ 10
Written Statement............................................ 11
Prepared Statement of Representative Nick Smith, Member,
Subcommittee on Environment, Technology, and Standards,
Committee on Science, U.S. House of Representatives............ 12
Prepared Statement of Representative Jim Matheson, Member,
Subcommittee on Environment, Technology, and Standards,
Committee on Science, U.S. House of Representatives............ 13
Witnesses:
Mr. Thomas W. Eagar, Professor, Massachusetts Institute of
Technology
Oral Statement............................................... 14
Written Statement............................................ 15
Mr. Lawrence J. Rhoades, President, Extrude Hone Corporation
Oral Statement............................................... 19
Written Statement............................................ 21
Mr. Herman M. Reininga, Senior Vice President, Special Projects,
Rockwell Collins
Oral Statement............................................... 23
Written Statement............................................ 24
Mr. Jay R. Dunwell, President, Wolverine Coil Spring
Oral Statement............................................... 44
Written Statement............................................ 46
Mr. Jason Farmer, Director of Advanced Technology, nLight
Photonics Corporation, accompanied by Scott Keeney, President
and CEO, nLight Photonics
Oral Statement............................................... 50
Written Statement............................................ 51
Discussion
Issues in International Competition............................ 54
Transforming Research into Development......................... 55
Engineering Degrees and Employment............................. 55
Addressing the ``Valley of Death'' Issue....................... 56
The Role of ATP in Product Development......................... 57
Developing a High-Tech Manufacturing Workforce................. 58
Lifelong Workforce Education................................... 59
Successful Competition Against Low-Cost Labor.................. 59
The Role of Vocational Training Programs....................... 61
Developing a National Manufacturing Policy..................... 62
Investing in Development and Deployment........................ 62
The Need for More Applied Research............................. 64
Employment in Local Economics.................................. 64
Industries in Transition....................................... 65
Is ATP Helping Manufacturing?.................................. 66
Directing Applied Research in Federal Funding.................. 68
The Need for Incentives........................................ 69
Expansion of Existing Federal Programs......................... 69
Appendix 1: Biographies, Financial Disclosures, and Answers to Post-
Hearing Questions
Mr. Thomas W. Eagar, Professor, Massachusetts Institute of
Technology
Biography.................................................... 74
Financial Disclosure......................................... 75
Response to Post-Hearing Questions........................... 76
Mr. Lawrence J. Rhoades, President, Extrude Hone Corporation
Biography.................................................... 78
Financial Disclosure......................................... 79
Response to Post-Hearing Questions........................... 81
Mr. Herman M. Reininga, Senior Vice President, Special Projects,
Rockwell Collins
Biography.................................................... 83
Financial Disclosure......................................... 84
Response to Post-Hearing Questions........................... 85
Mr. Jay R. Dunwell, President, Wolverine Coil Spring
Biography.................................................... 88
Financial Disclosure......................................... 89
Response to Post-Hearing Questions........................... 90
Mr. Jason Farmer, Director of Advanced Technology, nLight
Photonics Corporation
Biography.................................................... 91
Financial Disclosure......................................... 92
MANUFACTURING R&D: HOW CAN THE FEDERAL GOVERNMENT HELP?
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THURSDAY, JUNE 5, 2003
House of Representatives,
Subcommittee on Environment, Technology, and
Standards,
Committee on Science,
Washington, DC.
The Subcommittee met, pursuant to other business, at 10:15
a.m., in Room 2318 of the Rayburn House Office Building, Hon.
Vernon J. Ehlers [Chairman of the Subcommittee] presiding.
hearing charter
SUBCOMMITTEE ON ENVIRONMENT, TECHNOLOGY, AND STANDARDS
COMMITTEE ON SCIENCE
U.S. HOUSE OF REPRESENTATIVES
Manufacturing Research and Development:
How Can the Federal Government Help?
thursday, june 5, 2003
10:00 a.m.-12:00 p.m.
2318 rayburn house office building
Purpose
On Thursday, June 5, 2003, at 10:00 am the House Science
Committee's Subcommittee on Environment, Technology, and Standards will
hold a hearing to review the most serious problems facing U.S.
manufacturing with a particular focus on federal research, development,
and technical assistance programs.
Manufacturers are raising concerns that the United States is losing
its competitive advantage in manufacturing technology, and that this
will contribute to permanent job losses to oversees competition. The
manufacturing community, industry analysts, and economists believe that
significant, extensive changes are afoot in the manufacturing sector
beyond the effects of the recent recession. Although U.S. firms,
particularly the small and medium-sized manufacturers, cannot compete
with the wage differential in many foreign countries, they can compete
through factors influenced by the application of technology, knowledge,
and skills. There are federal programs designed to help firms develop
these capacities. Although effective, the funding levels of these
programs have been controversial.
The Subcommittee plans to explore several overarching questions,
including:
1) What are the most serious long-run problems facing U.S.
manufacturing? To what extent do these represent significant
structural problems beyond the recession?
2) To what extent can these problems be alleviated through
greater investment in research and development related to
manufacturing products and processes?
3) To what extent can federal R&D programs help alleviate the
problems faced by manufacturing firms, including small and
medium-sized businesses?
Witnesses:
Thomas Eagar, Thomas Lord Professor of Materials Engineering and
Engineering Sciences, Massachusetts Institute of Technology, Cambridge,
MA.
Larry Rhoades, President, Extrude Hone Corporation, Irwin, PA.
Herman Reininga, Senior Vice President, Special Projects, Rockwell
Collins, Cedar Rapids, IA.
Jay Dunwell, President, Wolverine Coil Spring, Grand Rapids, MI.
Jason Farmer, nLight Photonics Corp., Vancouver, WA.
Background
I. Increased globalization has allowed larger firms to divest
themselves of their in-house manufacturing capabilities, exposing
smaller supply firms to increased foreign competition.
U.S. manufacturers face immediate and growing challenges from
foreign competition. These challenges vary from country to country.
Many of our trade partners have the advantage of much lower wage rates
that enable their firms to trade goods at much lower prices. Some--but
not all--nations engage in unfair trade practices such as dumping, or
failing to or choosing not to enforce standards of intellectual
property. However, many of our trade partners, for example in Europe,
Japan, and Singapore, compete with the U.S. based on the quality,
technological advantages, or customer services they offer, despite
their lack of a distinct wage advantage. The other ``less advanced''
countries are investing billions of dollars in their human capital and
technology to catch up.
In response to price competition, many large companies are
divesting themselves of their in-house manufacturing capabilities and
have turned to outsourcing--ordering component parts and raw materials
from other companies--to reduce their costs of production (the
``foundry'' model of manufacturing). This has created large and
elaborate supply chains. Globalization, facilitated by advances in
communications technology and reductions in transportation costs, has
enabled firms to do business with each other across borders and oceans
with increasing ease. This has allowed the internationalization of
supply chains, as firms around the world are able to sell intermediate
goods to larger manufacturers. Since the U.S. is the world's biggest
market, foreign firms naturally turn to it for the greatest profit.
Many U.S. firms have benefited greatly from this arrangement since they
are able to purchase what they need at lower prices. But it has exposed
thousands of small and medium sized firms in the U.S. to fierce
competition for which they are unprepared. Lately, many large companies
in a range of different industries have located their newest factories
or entire supply chains abroad.
There are some disadvantages to this dispersed model, most
obviously that the risks to just-in-time manufacturing are much greater
when the shipping time for components is three to six months and
subject to delays, as it is for the automotive supply chain when
importing components from Asia or Europe by container. In addition,
there are advantages to geographical proximity for product and process
development synergies, problem-solving, and generally closer working
relationships. The development of clusters, such as information
technology in Silicon Valley, California, the automotive industry in
Detroit, Michigan, and biotech in Research Triangle Park in North
Carolina, was a success because it maximize these advantages. The U.S.
is considered to be the model for other countries for clusters, and
also for federal-industry-university research and development
partnerships and consortia, which can provide a nucleus around which
clusters can be developed. Several U.S. states, and many foreign
countries, are pursuing their own cluster strategies, with varying
success. However, with the loss of key industries or factories,
clusters can dissolve, too.
II. Investments in research, development and education are important
to increases in productivity in the long-term, but industry's research
efforts, which represent the bulk of all domestic investments in R&D,
have begun to shrink.
According to the Bureau of the Census, between 1988 and 2000, the
manufacturing trade balance for advanced technology products remained
positive (though shrinking), whereas all other products went from an
annual deficit of $100 billion to more than $300 billion. This may
indicate that a key to the U.S.'s exports strength in the long run may
lie in higher technology goods rather than lower.
Technology and education drive productivity growth. Sustained
productivity growth requires sustained investment in research,
development, and education. Our trade partners are making new and
significant efforts towards increasing the education level of their
workforces, investing in manufacturing-specific research and
development, and creating a generally attractive technological
environment for manufacturers to site manufacturing and, recently,
research and development facilities. The U.S., although still advanced
in many areas, does not have all the technological and educational
advantages it once did. Increasing global technological capabilities do
not bode well for the long-term prospects for the moderate and low R&D-
intensive portions of U.S. manufacturing are not good, and even the
more ``hi-tech'' industries are likely to experience increased
competitive pressure. Nevertheless, industry experts and economists
suggest that the U.S. can compete successfully in global markets in the
less R&D-intensive industry areas, like the transportation sector
supply chains, by improving supply chain management. The more R&D-
intensive industries can compete more successfully, they say, by
developing and implementing technology more effectively. For example,
in the consumer electronics industry, Sony is famed for its ability to
quickly translate new technological developments into improved
displays, sound quality, and miniaturization, incorporate them into its
model updates, and get them to market faster than other companies.
Today, industry conducts 75 percent of all U.S. R&D, of which the
manufacturing sector contributes approximately 70 percent. Industry-
based R&D has generally focused on short or mid-term, goal-oriented
research, while proposal-driven, long-term research is supported by the
Federal Government. Between these two stages of development is the so-
called ``Valley of Death,'' where ideas and basic research that
theoretically could become useful products are thought to languish for
lack of funding. For the private sector, supporting these types of
projects is too risky, according to some, and if good ideas are to be
turned into useful products, the government must step in to provide
funding. For others, the government should play no role in the
development stages beyond basic research.
Generally speaking, the Federal Government today does not fund
manufacturing-specific research and development, and its commitment to
applied manufacturing-related research has declined. As industrial
competition becomes more fierce, the trend in industrial research has
been to cut research budgets and focus on an even narrower horizon of
innovation. Long-term, high-risk research is what fosters sustained
growth, according to most economists. They believe that companies'
ability to grow and develop will suffer from these R&D cutbacks.
III. A number of federal programs help manufacturing, but support for
some has been weakening.
There are federal programs whose mission is to support
manufacturing. The Department of Commerce houses several programs
within the National Institute of Standards and Technology (NIST) as
well as the NIST laboratories themselves, which have a direct impact on
manufacturing technology and practices. NIST's two laboratories, one in
Boulder, CO, and the other in Gaithersburg, MD, and its extramural
grant program have a mission that includes the enhancement of
productivity and facilitation of trade. They do this on a budget of
approximately $380 million a year. NIST is also responsible for
implementing the Enterprise Integration Act of 2002, the purpose of
which is to develop and implement standards and protocols to enable
major manufacturing industries and their suppliers to electronically
exchange product- and standards-related information. This would be an
important part of strengthening domestic supply chains and other
relationships between firms. Last year, however, Congress allocated no
additional funding for this program, and none was requested by the
Administration for FY 2004.
Also within NIST is the Manufacturing Extension Partnership program
(MEP). Although not exclusively a technology program, it does assist
small and medium-sized manufacturers in areas involving technological
change, lean manufacturing (``lean'' principles include perfect first-
time quality, waste minimization by removing all activities that do not
add value, continuous improvement, flexibility, and long-term
relationships), and acquisition of equipment, as well as business
organization, and is considered critical in maintaining the
competitiveness of small and medium-sized manufacturers. MEP is funded
at $106 million in federal funds and requires a state match, but its
budget is in jeopardy every year because some see it as a service that
would be more appropriately provided by the private sector. In
addition, the state budget crisis is threatening the state match for
many MEP programs.
The Advanced Technology Program (ATP) supports emerging and
enabling technologies for improved products and industrial processes
that promise significant commercial payoffs and widespread benefits to
the Nation. It has been funded in the range of $150-$180 million. ATP
has been controversial because some believe that the government has no
role in providing funding for research beyond basic research.
Beyond the Department of Commerce, in the Department of Energy, is
the Office of Industrial Technology (OIT) whose mission is to increase
the energy efficiency of the 12 most energy-intensive industrial
sectors in the economy, most of which are manufacturing industries, and
some of the DOE laboratories have some manufacturing programs. OIT also
runs the Industries of the Future (IOF) program. The Department of
Defense has various programs including the Defense Advanced Research
Programs Agency (DARPA), and the ManTech program, which are oriented
towards technology development and the domestication of the defense
supply chain, respectively, but are only peripherally associated with
commercial products. The Small Business and Innovation Research program
(SBIR), funded at approximately $1.5 billion, is a multi-agency grant
and contracting program intended to assist the commercialization of the
products of basic R&D to advance the missions of the agencies. Although
not manufacturing-specific, some of the SBIR projects have impacts on
products and processes. Some companies say they have found that the
size of the SBIR grants is not sufficient to cover the costs of doing
research.
IV. Our trading partners also support manufacturing assistance
programs.
Our trading partners are starting or are have already established
manufacturing-specific R&D initiatives, many of which are modeled on
U.S. programs. There are also efforts afoot by such countries as China
and India to lure U.S. industrial R&D oversees, where there is an
increasing number of highly-trained workers with Ph.D.s and valuable
technical skills.
Some examples of manufacturing-specific, non-basic R&D efforts in
other countries include: Taiwan's Industrial Technology Research
Institute (ITRI), whose nanotechnology initiative alone is $660 million
over six years. MITRE Corporation, a U.S. national security research
contractor, has recently signed an agreement with the ITRI to establish
an innovative R&D center to work on aerospace communications
technology. France has a program modeled on the U.S.'s ATP, called the
Fund for Technological Research (FRT), funded at approximately $200
million and requiring a 50 percent non-government match. Israel also
has an ATP-like program, called the Magnet Program, currently funded at
$65 million and requiring a 66 percent non-government match. Japan has
an Industrial Technology Development Support Program, which has a 50
percent cost-share requirement, funded at around $380 million. The
Netherlands created a new program in 2001 called the Technology
Cooperation Program, merging several business and manufacturing-
oriented programs. The program will be funded this year at
approximately $70 million with a 50 percent cost-share.
While some of these totals may be small relative to U.S.
expenditures, for example President Bush has requested $847 million for
the U.S. nanotechnology initiative for FY 2004, as a proportion of
these countries' GDP and total R&D, the applied sciences get a greater
share of government funding than in the U.S. because these countries
have articulated policies of economic growth in terms of increased
technological competitiveness.
Related Issues
Employment and Productivity
Manufacturing employment has changed little since the 1970s,
ranging between 17 million and 21 million workers. Manufacturing's
share of the total workforce has declined steadily since the 1950s.
This is due in part to the increasing productivity of the manufacturing
sector (measured in output per worker), which now contributes 17
percent to U.S. GDP and $1.5 trillion in annual profits. During the
economic expansion of the 1990s, the dollar output of the manufacturing
sector grew by 47 percent. Simultaneously, productivity rose 31.6
percent, which was more than twice the productivity gains for the rest
of the non-farm economy. Real productivity gains are achieved in two
ways: technological development, and education. Productivity increases
are a double-edged sword, however. Although it increases the efficiency
of an company or industry, this efficiency means the industry needs
less workers to meet the same demand, one of the reasons why
manufacturing employment has remained stagnant, whilst output has
increased.
The Economic Downturn
Manufacturing's effect on the economy is bi-directional, as it can
lead an economy both into and out of recession. Manufacturing
indicators gave the first warnings of the economic slowdown when
employment in that sector peaked in 1998. Since then over 2.6 million
manufacturing jobs were shed as factories slowed production, closed, or
implemented efficiency measures to try to cut production costs. The
manufacturing sector accounts for more than 90 percent of the jobs lost
since the beginning of the recession. The lack of strength in
manufacturing is considered by most economists to be the most important
hurdle to getting the economy going again. Durable goods orders fell
2.4 percent in April--the largest amount in seven months--a figure that
included a 3.0 percent drop in orders for new automobiles. The
continued manufacturing slump has had a profound effect on the
economies tied to manufacturing, particularly in the communities where
manufacturing plants are located.
The Trade Deficit
The trade deficit is 16 times larger today than it was 20 years
ago. The U.S. monthly trade deficit rose to its second-highest level
ever in March, at $43.5 billion. (The highest monthly deficit was in
December of 2002.) The import of manufactured good constituted $36.5
billion, or 84 percent of the total deficit for the month. Contributing
to this figure were the high oil prices, but overall imports of foreign
goods were at their highest historic level of $126.3 billion. Of the
manufactured goods, computer and electronic equipment, transportation
equipment, and apparel posted the largest deficits. The five highest
individual country/region deficits were: Western Europe $7.8 billion,
China $7.7 billion, Japan $5.8 billion, Canada $5.2 billion, and OPEC
$5.0 billion. In 2000, the latest year for which data was available, 14
percent of U.S. imports were from foreign affiliates of U.S. companies.
Another 20 percent were imports from the foreign ``parents'' of U.S.-
located companies.
The trade deficit has been exacerbated by the strength of the
dollar, which makes it cheaper to buy products from abroad and more
expensive for other countries to import U.S. goods. The dollar
appreciated 33 percent in international value between 1995 and 2003.
The recent fall in the value of the dollar is expected to have a
moderate effect on trade. However, this change has not offset the
dollar's gains in recent years. Furthermore China and several other
Southeast Asian countries considered a threat to U.S. manufacturing
have pegged the value of their currencies to the dollar, and thus U.S.
trade with many of these nations will not be immediately affected.
Questions for Witnesses
Questions for Thomas Eagar, Professor of Materials Science and
Engineering, Massachusetts Institute of Technology.
1) To what extent is manufacturing a critical component of the
U.S. economy?
2) What are the most serious long-run problems facing U.S.
manufacturing for both large and small firms? To what extent do
these represent significant structural problems beyond the
recession?
3) To what extent can these problems be alleviated through
greater investment in research and development related to
manufacturing products and processes? What role should the
Federal Government play in this effort?
Questions for Larry Rhoades, President of Extrude Hone Corporation.
1) What are the most serious long-run problems facing U.S.
manufacturing? To what extent do these represent significant
structural problems beyond the recession?
2) Is there anything in the existing inventory of Federal or
State research and development programs that could play a more
significant role in establishing a stronger manufacturing-
specific R&D and technical assistance base?
3) In addition to current efforts, please provide specific
suggestions of what the Federal or State governments could do
to assist manufacturing with research, development, and
technology in meeting their long-term needs.
Questions Herman Reininga, Senior Vice President for Special Projects,
Rockwell Collins.
1) What are the most serious long-run problems facing your
industry?
2) To what extent can these problems be alleviated through
greater investment in research and development related to
manufacturing products and processes?
3) How much of your research and development is geared towards
manufacturing?
4) How much do you work with the small firms in your supply
chain on manufacturing issues?
Questions for Jay Dunwell, President, Wolverine Coil Spring, Grand
Rapids, Michigan.
1) What are the most serious challenges facing your business?
What role does technology play in addressing these challenges?
2) Please describe the differences in the problems faced by
small-to-medium-sized manufacturers versus large manufacturers.
3) How did the Manufacturing Extension Partnership (MEP)
program help you become more competitive?
4) What problems facing small and medium-sized manufacturers
today and in the future are beyond the capabilities of MEP to
solve? Do you have any suggestions of how the Federal or State
governments can help meet these challenges?
Questions for Jason Farmer, nLight Photonics Corp., Vancouver, WA.
1) What are the challenges facing your business now and in the
immediate future? For small high-tech start-up manufacturers
are most of your competitors domestic or international? If
international, do these companies have any inherent advantages
over U.S. companies?
2) What are the challenges in raising venture capital for
small high-tech firms? How do you convince venture capitalists
to provide funding in the gap between a research concept and
making a demonstrable product or does the so-called ``valley of
death'' really exist?
3) What changes have you seen in the start-up, high-tech
sector during the past few years? What role, if any, can
government provide to assist small, high-tech start-up
companies?
4) How did the SBIR program assist in the initial development
of nLight's technology? What are the good points of the SBIR
program? What improvements or changes do you think should be
made to the SBIR program?
Chairman Ehlers. I will call the hearing to order. I am
pleased to begin today's hearing on manufacturing research and
development: what can the Federal Government do? That reminds
me of my standard joke when I go back home and speak to my
people and say, ``I am from the Federal Government, and I am
here to help you.'' But we truly mean it here, and we are very
diligently trying to do what we can to improve the
manufacturing research and development climate in this country.
Manufacturing is a subject dear to my heart, and more
importantly, to the hearts of my constituents in Grand Rapids,
Michigan, a hive of manufacturing activity since the Industrial
Revolution and currently the proud bearer of the title
``Furniture Capital of the Nation.'' Over roughly 50 percent of
all office furniture made in the United States is made within
20 miles of Grand Rapids' city center.
This hearing is an opportunity to discover the most serious
long-term problems facing U.S. manufacturing and whether these
are structural problems beyond those caused by the recession.
In addition, we will learn today whether or not these problems
can be solved through a greater investment in research and
development. Finally, we will hear about what federal role
research, development, and technical assistance programs could
play in ensuring the long-range sustainability of U.S.
manufacturing.
Grand Rapids, like communities all over the U.S., has been
struggling with multiple threats to its industries.
Globalization is rapidly changing the way business is done and
where materials and components are purchased. And small and
medium-sized firms, in particular, are at the mercy of this
process. More and more frequently, large companies are
purchasing components for their final products from firms
overseas where the cost of labor is lower and those components
are therefore cheaper.
While the U.S. cannot compete on the wage differential, it
must draw on its other assets to keep manufacturing at home.
Today, we will look at our research and development assets and
how they help manufacturing. The private sector accounts for 75
percent of total R&D investment in the United States, of which
manufacturing contributes 70 percent. The vast sum of our
national investment, both public and private, in scientific
research would suggest that America will always have the
technological edge on other nations in commerce, as we have in
military capability.
Indeed, productivity growth in the U.S. during the last
decade was unprecedented, largely as a result of technological
change. And that growth, I might add, also led to incredible
economic growth during that same period. But the global
challenge to U.S. manufacturing has come partly as a result of
other nations achieving technological parity with the U.S. They
have been investing specifically to build themselves into
manufacturing powerhouses and sell their products here in our
country.
We are in a potentially worrisome situation today with the
prospect of losing many different industries to foreign
competition together with their supply chains and ultimately
our R&D. It is my hope that by the end of this hearing, we will
have a better idea of what is happening to manufacturing today,
what role technology plays in maintaining our competitive edge,
and what federal programs of research, development, and
technical assistance could be brought to bear on the problems
that confront U.S. manufacturers.
I look forward to hearing from our witnesses about this
important topic, and I am especially pleased to have Jay
Dunwell, President of Wolverine Coil Spring, which is located
in the Grand Rapids, Michigan area, my Congressional District.
[The prepared statement of Mr. Ehlers follows:]
Prepared Statement of Chairman Vernon Ehlers
I am pleased to begin today's hearing on ``Manufacturing Research:
What Can the Federal Government Do?'' Manufacturing is a subject dear
to my heart and, more importantly, to the hearts of my constituents in
Grand Rapids, Michigan, a hive of manufacturing activity since the
industrial revolution and proud bearer of the title of Furniture
Capital of the Nation.
This hearing is an opportunity to discover the most serious long-
run problems facing U.S. manufacturing, and whether these are
structural problems beyond those caused by the recession. In addition,
we will learn whether or not these problems can be solved through a
greater investment in research and development. Finally, we will hear
about what role federal research, development, and technical assistance
programs could play in ensuring the long-run sustainability of U.S.
manufacturing.
Grand Rapids, like communities all over the U.S., has been
struggling with multiple threats to its industries. Globalization is
rapidly changing the way business is done and where materials and
components are purchased, and small- and medium-sized firms in
particular are at the mercy of this process. More and more frequently,
large companies are purchasing components for their final products from
firms overseas where the cost of labor is lower and these components
are therefore cheaper. While the U.S. cannot compete on the wage
differential, it must draw on its other assets to keep manufacturing at
home. Today we will look at our research and development assets, and
how they help manufacturing.
Industry accounts for 75 percent of total R&D in the U.S., and is
also why manufacturing contributes such a large share--70 percent--of
this private research and development funding, The vast sum of our
national investment, both public and private, in scientific research
would suggest that America would always have the technological edge on
other nations in commerce, as we have in military capability. Indeed,
productivity growth in the U.S. during the last decade was
unprecedented, largely as a result of technological change. But the
global challenge to U.S. manufacturing has come partly as a result of
other nations achieving technological parity with the U.S. They have
been investing specifically to build themselves into manufacturing
powerhouses and sell their products here. We are in a potentially
worrisome situation today, with the prospect of loosing many different
industries to foreign competition, together with their supply chains,
and ultimately, our R&D.
It is my hope that, by the end of this hearing, we will have a
better idea of what is happening to manufacturing today, what role
technology plays in maintaining our competitive edge, what federal
programs of research, development, and technical assistance could be
brought to bear on the problems that confront U.S. manufacturers.
Chairman Ehlers. I now recognize the Ranking Member, Mr.
Udall from Colorado for an opening statement.
Mr. Udall. Thank you, Mr. Chairman. I, too, want to welcome
all of you to today's hearing, and I want to thank you for
taking time away from your companies to appear before the
Subcommittee. I hope that you will feel that this time will be
well spent as we seek your advice on how the Federal Government
can better assist our manufacturing base.
Chairman Ehlers has already outlined the importance of
manufacturing to our economy and employment base. He has also
cited the challenges facing small and medium-sized
manufacturers and the significant job loss that has occurred in
this sector over the past two years. I hope that our hearing
today will begin the start or mark the start of concrete
actions by the Federal Government to assist our manufacturers.
I don't want to fall into the trap, I don't think any of us up
here do, of--that we have in Washington of studying the problem
and then not taking action. Study alone won't stem the erosion
of our manufacturing base.
Lots of other parties have carried out studies that can
guide us in our actions. The Manufacturers' Council, the
National Coalition for Advanced Manufacturing, and the National
Association of Manufacturers have all made a number of
recommendations on how the government can assist the
manufacturing community. One recommendation that they all make
regarding direct assistance is to fully fund the Manufacturing
Extension Partnership, the MEP, and the Advanced Technology
Program, the ATP. However, we in the Federal Government
continue to send very mixed messages to the manufacturing
communities and to the states. There is a bipartisan consensus
that we need to fund both the Manufacturing Extension
Partnership and the Advanced Technology Program yet the
Administration continues to target these programs for
elimination. And although the Administration has announced that
it is studying the long-term health of manufacturing, it will
not issue a report until later this year.
I believe that we need now to provide appropriate
assistance to our manufacturers. Any serious economic growth
strategy has to take measured, targeted steps to provide
support to the firms that tend to provide the greatest
innovation. I hope that the Science Committee will
substantively engage the Administration, developing a unified
and coordinated agenda to assist our small and medium-sized
manufacturers. That certainly has been the tradition in the
history of the Science Committee.
So Mr. Chairman, I want to thank you, and I look forward to
hearing from our witnesses today. I would yield back any time I
have remaining.
[The prepared statement of Mr. Udall follows:]
Prepared Statement of Representative Mark Udall
I want to welcome everyone to this morning's hearing, and I want to
thank our witnesses for taking time away from their companies to appear
before the Subcommittee. I hope they will feel that this is time well
spent as we seek their advice on how the Federal Government can better
assist our manufacturing base.
Chairman Ehlers has already outlined the importance of
manufacturing to our economy and employment base. He has also cited the
challenges facing small- and medium-sized manufacturers and the
significant job loss that has occurred in this sector during the past
two years.
I hope today's hearing will mark the start of concrete actions by
the Federal Government to assist our manufacturers. I don't want to
fall into the Washington trap of studying the problem and then not
taking action. Study alone won't stem the ongoing erosion of our
manufacturing base. Many other parties have carried out studies that
can guide us in our actions: the Manufacturer's Council, the National
Coalition for Advanced Manufacturing, and the National Association of
Manufacturers have all made a number of recommendations on how the
government can assist the manufacturing community. One recommendation
they all make regarding direct assistance is to fully fund the
Manufacturing Extension Partnership and the Advanced Technology
Program.
However, the Federal Government continues to send very mixed
messages to the manufacturing community and the states. There is a
bipartisan consensus in the Congress that we need to fund both the
Manufacturing Extension Partnership and the Advanced Technology
Program, yet the Administration continues to target these programs for
elimination. And though the Administration has announced that it is
studying the long-term health of manufacturing, it will not issue a
report until later this year. I believe that we need to provide
appropriate assistance to our manufacturers now.
Any serious economic growth strategy has to take measured, targeted
steps to provide support to the firms that tend to provide the greatest
innovation. I hope that the Science Committee will substantively engage
the Administration in developing a unified and coordinated agenda to
assist our small- and medium-sized manufacturers.
Chairman Ehlers. The gentleman yields back his time.
Without objection, all additional opening statements submitted
by Subcommittee Members will be added to the record. Without
objection, so ordered.
[The prepared statement of Mr. Smith of Michigan follows:]
Prepared Statement of Representative Nick Smith
I'd like to thank Chairman Ehlers for holding this hearing to
examine America's investment in manufacturing research and development.
I've been meeting with workers and employers in my district. They and I
are troubled about the continuing decline in manufacturing in Michigan
and the whole country. Products from China and other countries are
taking away our business. The manufacturing sector accounted for 41
percent of non-farm employment in 1946, 28 percent in 1980, 18 percent
in 1990, and just 12 percent in 2002. This means that millions of
people are being pushed out of manufacturing jobs into service sector
jobs that often pay less. With other sectors of the economy weakening--
we lost 560,000 high tech jobs in 2001 and 2002 alone--we need those
manufacturing jobs now more than ever.
Manufacturing is especially important to the economy because it is
a leader in innovation. Manufacturing contributes 57 percent of total
U.S. research and development funding. These new technologies often
spill over into other sectors of the economy. For example, the
technology in ATM machines originated with equipment used on the
factory floor.
Manufacturing has made up an almost constant share of total U.S.
GDP since the late 1940s. Over that period, it has varied between about
20 and 23 percent of total U.S. output. Recently however, efficiency
and productivity growth in the manufacturing sector--much stronger than
in the economy as a whole--has created a situation where output has
increased at a faster rate than employment. This productivity has grown
by 3.4 percent annually since 1983 and risen even higher recently, with
manufacturing productivity surpassing 4.7 percent per year from 1996 to
1999.
With these aggressive improvements in efficiency, we would expect
the manufacturing sector to be growing faster in the international
market. But it has been under attack from foreign competition, much of
which seems to be unfair. I've spoken with constituents who say that
Chinese companies sell products for less than the raw materials are
worth here. Many suspect that these companies are receiving covert
subsidies from the Chinese government. We think that a variety of other
governments use similar underhanded methods to boost their sales here
and reduce our sales in their home markets.
Another problem is the overzealous regulation and taxation imposed
by government. One especially harmful action has been the steel tariff
imposed by the Administration. Though the increased price of steel has
protected some steel workers from foreign competition, it has also
resulted in more layoffs in the steel-using industries than the total
employment of the steel making industry. With prices rising by 50
percent or more, hundreds of manufacturers that use steel have simply
let workers go or have transferred production out of the country where
steel is cheaper.
It isn't healthy to have too much of a service economy where we
import most of our goods and fewer and fewer people actually build
products. One way to improve things for our manufacturers is to do a
better, more careful job of negotiating trade treaties and then
enforcing them. Another is to end counterproductive tariffs like the
one on steel. We need to make sure our taxes and regulations avoid
putting our manufacturers at a significant disadvantage. If we don't do
something, we could weaken our economy and lose our productive
capacity.
In this hearing, we will examine the role that manufacturing
research and development plays in improving American productivity and
global competitiveness. I recently signed a letter to President Bush
asking him to establish a panel of experts to analyze the factors
causing the recent decline in U.S. manufacturing. I look forward to
learning what this panel of experts think is the problem and why they
feel that increasing investment in manufacturing R&D can play a major
role in reinvigorating the American manufacturing industry.
[The prepared statement of Mr. Matheson follows:]
Prepared Statement of Representative Jim Matheson
Mr. Chairman and Ranking Member Udall, thank you for your
consideration. Our nation is facing a protracted economic downturn, and
manufacturers have been particularly hard hit. It is crucial that the
Federal Government assists the smaller manufacturing businesses, which
contribute significantly to the economy particularly in my home state,
Utah. This is why I am a supporter of the Manufacturing Extension
Partnership (MEP) program.
Many small businesses in Utah have benefited substantially from the
MEP and in its absence, it is unclear where these companies can go for
information, resources, and assistance. Unless the Federal Government
is prepared to invest in another, similar program in the immediate
future, I am wary of efforts to dismantle or eliminate the MEP.
I agree with many of my colleagues in Congress that if the Federal
Government is content to merely study the problems of manufacturers,
without providing a plan of action or tangible assistance, then our
efforts to improve local economies will necessarily fall short.
I hope that this hearing sheds light on why Federal Government
assistance is crucial to small businesses in general and why
manufacturers depend on this program in particular, thank you.
Chairman Ehlers. At this time, it is my pleasure to
introduce our witnesses for today. And we have a star-studded
cast present. I am very pleased to have all of you here,
ranging from the theoretical to the practical. First we have
Thomas Eagar. He is the Thomas Lord Professor of Materials
Engineering and Engineering Sciences at the Massachusetts
Institute of Technology in Cambridge, Massachusetts. He is also
a member of the National Academy of Sciences Board on
Manufacturing and Engineering Design, which is running a new
program entitled, ``New Directions in Manufacturing.''
Our second panelist is Larry Rhoades, the President of
Extrude Hone Corporation located in Irwin, Pennsylvania. He
chairs the Association for Manufacturing Technology, and is
also a member of the National Academy of Sciences.
Third we have Herman Reininga. He is a Senior Vice
President for Special Projects with Rockwell Collins in Cedar
Rapids, Iowa. His company is a member of the National Coalition
for Manufacturing Technology.
Next is Jay Dunwell, whom I have previously mentioned, and
I am pleased to introduce him. He is the President of Wolverine
Coil Spring located in my Congressional District in Grand
Rapids.
Finally, we have Jason Farmer, who will be introduced by
Representative Baird.
Mr. Baird. I thank the Chairman for this opportunity to
introduce Jason Farmer, who is Director of Advanced Technology
at nLight Photonics. This is a semiconductor laser plant
operated in Vancouver, Washington, my home District. Jason is
responsible for all aspects of advanced technology at nLight,
including exportation of new concepts, applications, and
opportunities that will allow fundamental advances in the field
of semiconductor lasers. He was a principle scientist at
Aculight Corporation, holds a BS from University of California
at Santa Barbara, and an MS from the University of Colorado at
Boulder. The products this company makes have the opportunity
to revolutionize the telecommunications industry as well as
defense and homeland security. And it is precisely this kind of
manufacturing opportunity that I think will move us forward
into the next economic burst that we are hopeful to see.
And I thank the Chairman for hosting this hearing.
Chairman Ehlers. Thank you for the introduction. Just a
brief word about the ground rules. I presume you are all aware
that your testimony is limited to five minutes. We have some
lights there and there, which will show green during the first
four minutes, yellow during the fifth minute, red indicating
you should stop. I have borrowed a laser light saber from Mr.
Farmer. And so if you stay in the red too long, you are going
to be in deep trouble.
We will start our testimony with Mr. Eagar. Could you turn
on your microphone, please?
STATEMENT OF MR. THOMAS W. EAGAR, PROFESSOR, MASSACHUSETTS
INSTITUTE OF TECHNOLOGY
Mr. Eagar. Mr. Chairman Ehlers, Members of the Committee,
ladies and gentlemen, it is an honor to speak with you this
morning to provide my views on the role of technology on
manufacturing competitiveness in the United States. Mr.
Christopher Musso, a doctoral student at MIT in the engineering
systems division, is here with me and has assisted me in
organizing our thoughts, many of which relate to his doctoral
thesis on innovation in manufacturing industries.
Some people note that manufacturing in the United States is
in crisis. If crisis means that the number of direct labor jobs
in manufacturing has been decreasing for several decades, then
I must agree. But if crisis means that American manufacturing
is less abundant and is losing its ability to compete for the
best manufacturing jobs in the world today, then I take strong
exception to the word ``crisis.''
Over the past 50 years, we have experienced a manufacturing
revolution in the United States at least equal to the
Industrial Revolution of the 19th century. An American worker
today produces four times as much as her father or grandfather
produced in 1950. Over the past two decades, manufacturing
productivity has exceeded the gains of all U.S. business by
more than one percent per year.
``To live well, a nation must produce well,'' and we have.
Our productivity gains are a phenomenal success, but they have
their difficulties. Growth in consumption and exports has not
matched these great strides in productivity. As a result,
direct labor employment has dropped. Factories have over-
capacity, prices have decreased in real terms, and corporate
profits have been squeezed or eliminated. This trend is not
new. In 1820, 85 percent of the workforce was farmers. Today,
it is three percent and declining. We have lost textiles,
shipbuilding, consumer electronics, much of our steel industry,
and we are starting to decline in semiconductors. I submit that
this is a natural process as these industries grow, mature, and
decline, resulting in producing commodities on the world
market.
The only way for us to survive is to innovate and create
new, high-value industries to replace these maturing
industries. Technology is the engine that drives the innovation
process. Manufacturing is critical to the U.S. economy, because
it not only provides new sources of employment, but in the
automotive sector, it provides over six spin-off jobs for every
direct labor job, according to a University of Michigan study
in 1998. The U.S. economic census notes that the U.S.
manufacturing payroll is 14 percent larger than the next two
largest sectors, even though manufacturing employs 15 percent
fewer people. This 30 percent pay differential matters to many
Americans. A nation without manufacturing is like a car without
gas: it will not move forward.
The most serious challenge for U.S. manufacturing is the
continuing ability to innovate. The world admires our capacity
and flexibility to innovate and create new industries. There
are three things necessary for innovation: technology, capital,
and people. We must have all three. When I ask audiences which
of these three is the most difficult, I get near unanimous
agreement that the greatest need is in educating our workforce.
We must change the cultural premise that learning ends upon
graduation from high school or college. Learning is a lifelong
process, and the best jobs go to those who never cease their
education.
What can the government do to help innovate new industries?
We can improve the continuing education of the workforce. We
must strive for 100 percent literacy and numeracy. No worker
can be left behind. We must balance the non-military federal
R&D ratio to avoid the ``valley of death'' in longer ranged
development projects of the 5- to 20-year horizon. The ATP and
SBIR programs are steps in the right direction. We must ask our
R&D researchers to consider a cost benefit return on investment
of taxpayers' dollars. The taxpayers deserve a return on their
investment. Knowledge for its own sake is a wonderful goal, but
it doesn't necessarily give a return.
In closing, I hope that you will be able to state, as once
did Henrico Fermi, ``Before I came here, I was confused on this
subject. Having listened to your lecture, I am still confused
but on a higher level.''
Thank you very much.
[The prepared statement of Mr. Eagar follows:]
Prepared Statement of Thomas W. Eagar
``To live well, a nation must produce well.'' \1\
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\1\ Dertouzos, Michael, Lester, Richard, Solow, Robert (1989), Made
In America, The MIT Press, Cambridge, MA, page 1.
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A manufacturing revolution has emerged in the past 50 years that is
as significant as the industrial revolution of the 19th century. From
1950 to 2000, the average productivity growth in manufacturing in the
United States was 2.8 percent per year, and this figure has been
accelerating for the past two decades as manufacturing productivity
growth has exceeded the average of other sectors by more than one
percent per year (please see table below). Stated more simply, a U.S.
manufacturing worker can produce four times as much per hour today as
compared with fifty years ago. This gain has resulted from competitive
pressures, the advent of new technologies, and a series of product and
process innovations. It has also resulted in a much higher standard of
living for Americans, as products become more useful and more
affordable. In order to utilize this new manufacturing capacity, U.S.
firms (and others) have expanded their marketing abroad, creating rapid
increase in global trade.
The perception of a crisis in American manufacturing is the result
of one of the most difficult realities of large gains in productivity:
additional capacity almost always exceeds increased consumption. This
results in an inevitable shift of labor. Industries become more
productive as they mature, and competitive pressures increase. These
two factors require companies to decrease their workforce and often
result in movement of commodity industries overseas. The end result is
a loss of jobs in the United States. Displaced workers must shift to
new occupations, requiring new skills and abilities. History has shown
that this shift can be either detrimental or beneficial to workers; the
most important determinant of benefit is the presence of innovative new
industries, which, create high value for their markets. The
sustainability of growth in the U.S. manufacturing sector is based on
the ability of America to continue to innovate. Innovation is the key
to a vibrant U.S. manufacturing base and continued generation of new
jobs.
Industry-creating innovations can come in many forms--from plastics
to consumer electronics to the Internet--but they all depend on the
ideas of individuals. As technologies become more complex, the role of
science and technology education in the creation of new innovations
becomes ever more important because technological breakthroughs depend
on the understanding of technology. The greatest challenge facing the
United States manufacturing sector is the limited knowledge and ability
of its people to create new innovations. Failure to continuously
strengthen our knowledge base will result in a declining ability to
provide for the wants and needs of our people.
The Importance of Manufacturing in the U.S. Economy
It is difficult to underestimate the importance of manufacturing in
the U.S. economy. According the 1997 U.S. Economic census, the payroll
of the American manufacturing sector is 14 percent larger than the next
two largest sectors (finance and insurance, retail trade) combined,
despite having 15 percent fewer employees!\2\ Some have said that other
industries, such as financial services and trade will replace
manufacturing in the future. An examination of the economic sectors
refutes this argument. There are only four economic sectors that
generate material wealth: agriculture, mining, manufacturing, and
construction. Other sectors, such as services and trade, redistribute
this wealth, and are built on the products created by the wealth
generators. Of the four wealth-creating sectors, manufacturing plays a
unique role because, unlike agriculture and mining, it is not directly
limited by natural resources and, unlike construction, most
manufacturing products are easily transferable across national and
international borders. As a result, manufacturing is and will continue
to be the fundamental base for the economic health and security of the
United States.
---------------------------------------------------------------------------
\2\ 1997 Economic Census: Summary Statistics for United States 1997
NAICS Basis.
---------------------------------------------------------------------------
The economic impact of the manufacturing sector is not limited to
direct employment of manufacturing employees. A recent University of
Michigan study concluded that more than 6.5 ``spin off'' jobs
(including trade, service, and indirect manufacturing) were created in
1998 for every direct automotive manufacturing job.\3\ This illustrates
the importance of measuring manufacturing as a generator of wealth
instead of as a source of direct employment. When manufacturing is
viewed as a generator of wealth, the importance of new innovation is
clear. Direct employment in many maturing industries will shrink as
productivity increases, and indirect employment can be expected to
follow suit. The effects of layoffs in the manufacturing sector will be
multiplied by layoffs in other sectors. Conversely, if new, high value
industries are created, the indirect impact of manufacturing can be
expected to increase, because high value industries create more wealth
among workers and society. The Federal Government can help the
manufacturing sector by measuring it as a generator of wealth instead
of as a direct employer.
---------------------------------------------------------------------------
\3\ Fulton, Grimes, Schmidt, McAlinden, Richardson, et al. (1998),
``Contribution of the Automotive Industry to the U.S. Economy in 1998:
The Nation and Its Fifty States,'' page 28.
---------------------------------------------------------------------------
Because of its impact on other industries, manufacturing is the
fuel that drives the economy. In today's world of global competition,
the economy of a nation without manufacturing will not move forward, it
will become stagnant and decay over time. States compete for
manufacturing jobs, and other countries are willing to import any
capacity that the U.S. doesn't want--manufacturing matters!
The Most Serious Challenge to U.S. Manufacturing: Lack of New
Innovation
It was mentioned earlier that the growth of new industries is one
of the key determinants of opportunities for a displaced worker.
America's workforce wants to work, and takes pride in self sufficiency;
displaced workers will seek the best opportunities. If innovative,
high-value industries are present, workers will find jobs within them.
If they are not present, workers will be forced to take lower paying
service jobs. Faced with competitive pressures and globalization, U.S.
manufacturing firms must increase productivity in order to survive.
However, without nurturing of our knowledge base, there is no assurance
that innovation will continue producing new industries, and even less
assurance that those new industries will be based in the United States.
This is the most serious challenge to the future of American
manufacturing.
The United States is the most prolific innovator in the history of
nations. This success is clearly not explained by abundant natural
resources or geographic location alone. Previous government policy
decisions, such as implementation of the free-market system, public
education, and infrastructure investment have been crucial to economic
advancement and the generation of new ideas, and have helped to harness
the willingness and abilities of our people. The attitudes and ideas of
our people have been our greatest economic assets, and will become more
important as innovations are required to balance the pace of increasing
productivity. Future government policy that stimulates innovation will
help ensure the creation of new industries. We must provide the
incentives to build the foundation for those new industries.
Most of the innovation that results in new industries is based on
the combination of new technology and market needs. Technology can be
defined as the practical embodiment of knowledge--the useful
application of basic science. Thus, in order to create new
technological innovations, our workforce must understand existing
technology. Education is a lifelong process, and Americans must be
endowed with technical knowledge to promote continuous improvement.
This does not mean that everyone needs to be trained as a scientist,
but rather that a commitment should be made by industry, government,
and higher education to increase the knowledge of every worker. It is
the skills of the people that drive us forward, so there should be no
illiteracy or illnumeracy in manufacturing. Channels and incentives
should be created to encourage everyone to enhance their skills. Just
as no child should be left behind in America's elementary education, no
worker should be left behind in lifelong education.
This enhancement of skills will require investment on the corporate
and national level. Any knowledge that is attained in a current job can
be expected to help people rise to the challenges of future industries,
and will help everyone. An investment in anyone is an investment in the
nation. Experience has shown that the confluence of new knowledge and
existing products and processes results in better products and more
efficient processes--the fruits of innovation. Better education gives
workers new tools to improve their jobs, making themselves, their
companies, and America more competitive in the global market.
Stimulating Innovation by Investing in Development
The path to commercialization of new technology has three major
steps: research, development, and innovation. Research is the mechanism
by which new knowledge is discovered. Development is the application of
this knowledge into technology that solves practical problems.
Innovation is the application and commercialization of developed
technology into specific markets, through which industries are born.
Each of these steps must be approached differently, and each step
involves significant risk. The Federal Government has shown a
willingness to bear the risk of basic research by funding projects
through agencies such as the NSF and NIH, and has built paths and
mechanisms to perform such research in national labs and universities.
Entrepreneurs and existing industries have shown a willingness to bear
the risk of commercialization of developed technology, and have built
paths and mechanisms, such as venture capital, to encourage such
commercialization. However, there are very few organizations willing to
bear the risk of development, and even fewer mechanisms designed to
encourage it. This is unfortunate, because investment in research is
squandered without sufficient development funding to balance the
research portfolio.
Development projects have traditionally been viewed as the domain
of industry, but competitive pressures of the past 20 years have
resulted in a business climate that places a premium on immediate
profits. While this push improves many aspects of business, it is
detrimental to the development of new technology. For various reasons,
development periods for certain advanced technologies, such as new
materials, can span 10-20 years.\4\ For a company requiring a 17
percent return on investment, a 15-year development period means that
the potential must exist to earn more than 10 dollars per dollar
invested. This is unreasonable for most industries. Furthermore, entire
industries can disappear in 15 years, so businesses face significant
market risk with advanced development projects. In fact, the
pharmaceutical industry, which has a clear market for its products, is
one of the few industries that has shown an ability to sustain 10-15
year development periods.
---------------------------------------------------------------------------
\4\ Eagar, Thomas, `` Bringing New Materials to Market,''
Technology Review, February/March 1995.
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Development is considered to be the ``Valley of Death.'' It has
earned this name for two reasons. First, many scientific results go
unused because they are unable to attract development funding, and many
development projects die early because companies are unable to see the
returns necessitated by long development timeframes. Second, academia,
where a large portion of federal research is performed, does not
respect or reward development: following a path of development can kill
careers. It is virtually impossible to get tenure at a top U.S.
research university with development projects. Development requires a
different type of creativity than science, and that type of creativity
is not valued in the current university environment.
The Federal Government can help create innovation in the
manufacturing sector by creating policies that bridge the ``valley of
death'' by encouraging development of basic science and by implementing
programs that share the risk of development with the private sector.
The Department of Defense has an excellent track record of technology
development, in part because it has the right ratio of research to
exploratory development--roughly equal shares. The DOD avoids
squandering its research by maintaining this ratio. The Federal
Government can improve innovation by encouraging other research funding
agencies to meet the same R:D funding ratio as the DOD.
Because the DOD has clear needs, it requires that each research
proposal include a section on potential applications. This forces
scientists to focus on realistic and practical uses of new knowledge.
The Federal Government can improve innovation by requiring most
research proposals to include such sections, but should also require a
cost/benefit justification. Taxpayers deserve a return on their
investment in research.
Small businesses and individuals have proven to be very effective
technology developers. Unfortunately, few small businesses can afford
to engage in long-term development projects because of capital
constraints. The Small Business Innovation Research (SBIR) and the
Small Business Technology Transfer (STTR) programs take advantage of
the intelligence, incentives, and flexibility of small groups by
sharing the risk of long-term development. The Federal Government can
improve innovation by expanding these programs to provide incentives
for risk taking with medium and large businesses, as well.
Conclusion: The Federal Government Can Help Manufacturing
The manufacturing sector is crucial to the U.S. economy. It is the
sector with the largest payroll, and every direct job in manufacturing
creates several indirect and ``spin-off'' jobs. Because of this,
manufacturing is the economic foundation of other sectors, and cannot
be measured solely in terms of direct employment.
Competitive pressures and globalization have forced the
manufacturing sector to make large investments in improving
productivity. Increases in productivity and efficiency bring higher
standards of living to societies and better prices for consumers, but
also result in reduction of direct manufacturing jobs because capacity
often outstrips demand. This reduction is an inevitable outcome of
increases in productivity, and is painful in the short term, since
workers are forced to find work elsewhere. However, if innovative,
high-value industries are present, displaced workers can actually
improve their situation by moving to those industries. Innovation is
the key to continued increases in the manufacturing sector, and is
therefore the key to improvements in the overall standard of living of
America. Conversely, a lack of innovation is the most serious challenge
facing the U.S. manufacturing base, because global competition will
continue to force increases in productivity, movement of commodity
manufacturing overseas, and displacement of American labor.
The American workforce must understand current technology in order
to create new product and process innovations. This understanding will
become more important as technologies become more advanced, and the
mobility of the workforce will be limited by the knowledge of
individual workers. The United States must invest in continuing
education of its workers if it is to maintain its competitive
advantage.
Long-term development projects are a ``valley of death'' for many
advanced technologies, because there are no clear development channels.
Industry cannot afford the risk of 5- to 20-year development projects.
Small businesses, which have been the most effective technology
developers, lack the resources to even attempt such projects. The
culture of academia is skewed heavily toward science, and the type of
creativity necessary for development projects is neither encouraged nor
rewarded.
The Federal Government can enact structural changes that will
improve the ability of industry and academia to create industry-
creating innovations. Most of these changes deal with two major
problems: the limitations of our people in dealing with technology, and
the lack of technology development structure. These changes include:
Measuring manufacturing as a generator of wealth
instead of as a direct employer, to help policy makers
understand the true impact of changes in the manufacturing
sector.
Improving continuing education of manufacturing
workers, to help improve direct product and process innovation,
and to prepare workers for future industries. Every worker
should be numerate and literate.
Balancing federal research budgets between research
and development, so that research expenditures aren't
squandered by failure to fully develop the new knowledge.
Requiring researchers to include potential
applications and cost/benefit justification, to ensure a
favorable return on taxpayer investment.
Christopher Musso, Engineering Systems Division, Massachusetts
Institute of Technology, contributed to this testimony.
Chairman Ehlers. Thank you very much. And I have heard many
stories, since I am a physicist, but that is one of the better
ones.
Mr. Rhoades.
STATEMENT OF MR. LAWRENCE J. RHOADES, PRESIDENT, EXTRUDE HONE
CORPORATION
Mr. Rhoades. Good morning. Manufactured products are the
currency of international trade. The efficiency and value added
in a nation's manufacturing operations defines the standard of
living for the entire nation. America is the world's largest
and most open market. It is U.S. manufacturers nose-to-nose
with their competitors on the shelves at Wal-Mart or the
showroom of your Chevy dealer. Products made in America sit
side-by-side and must compete to do so with those from Brazil,
Hungary, India, and China.
Yet as a nation with one of the world's highest labor costs
and standards of living, we produce all our food needs and
export, and why? Agriculture, which was once a very labor-
intensive activity, changed in America to become highly
automated, highly scientific. The technology and the equipment
used in agriculture today combine with an infrastructure of
technical support and the most modern methods made this so.
We can do the same in manufacturing, but we must find new
methods, new approaches, new technologies, and we must
understand how those new manufacturing technologies can be used
to make new and better products that deliver more value to
their buyers. We must drive the manual out of manufacturing and
capture America's innovative spirit to transform it into
``innofacturing.''
Emerging industrial nations have clear, national policies
to encourage the competitiveness of their manufacturing
sectors. In contrast, the U.S. is in need of a coordinated
national program sized sufficiently to provide a manufacturing
technology infrastructure that would enable U.S. manufacturers
to compete. And U.S. manufacturers could compete. There are
rational and appropriate responses to the massive loss of
manufacturing jobs, loss of exports, and loss of federal tax
revenue that is inherent in this systemic and seismic shift in
how the world makes things.
Although tax policy that encourages investment surely
helps, it does not directly respond to what is happening. In my
view, we must also mount a national offensive to do the
following. First, recognize that we are building a national
manufacturing technology infrastructure, one that is accessible
to U.S. manufacturers and enables them to make things with
methods that are appropriate to U.S. economics, with the size
and dynamics of our markets and that embraces America's unique
creativity. There must be critical mass to the effort. We are
building highways and bridges, in a sense, and we need an
integrated system to really benefit from our investment. As the
Nation's taxing authority, the Federal Government takes a share
wherever the benefits of this investment fall within the U.S.
economy. The private sector can not and will not build the
needed manufacturing technology infrastructure alone any more
than they could or would build a road system or a school
system.
Secondly, I feel we must focus the investment on
innovatives. These include universities, and they include the
manufacturing equipment builders, the specialty material
suppliers, and the tooling suppliers, and the technology
support organizations that make up the manufacturing technology
infrastructure. The act as resources and champions for new
ideas and new methods that all U.S. manufacturers can turn to
for implementation support, accelerating the transformation of
new science into new tools for America's factory floors.
I feel that we should support, indeed substantially expand
support for defense manufacturing technology programs to
strengthen the U.S. defense industrial base, that we should
expand and strengthen NIST's MEP program that provides critical
assistance to small manufacturers that now perform the bulk of
U.S. manufacturing tasks, NIST's ATP program with a special new
focus on creating a menu of innovative manufacturing processes
from technology providers along with innovative products that
are enabled from these new methods from end-product
manufacturers.
And finally, support creation and expansion of open-
membership U.S. industry collaborative R&D consortium, like the
National Center for Manufacturing Sciences, that help their
members learn how to do cross-industry collaborative
manufacturing technology development, uniting technology users,
who design and manufacture end products, with technology
providers, who pioneer the development of new manufacturing
methods that enable those products, and together help to define
and create the manufacturing technology infrastructure of
tomorrow.
Thank you for the opportunity to be here and to express my
concerns and hopes for a manufacturing technology
infrastructure that would unleash America's ability to build
its future.
[The prepared statement of Mr. Rhoades follows:]
Prepared Statement of Lawrence J. Rhoades
Manufactured products are the currency of international trade.
The efficiency, and value added in, a nation's manufacturing
operations defines the standard of living for the entire nation.
America, as the world's largest and most open market, pits U.S.
manufacturers nose to nose with their competitors from all parts of the
world. On the shelves of WalMart, or the showroom of your Chevy dealer,
products made in America sit side-by-side, and must compete to do so,
with those from Brazil, Hungary, India and China.
This is a boon to consumers. Low cost manufactured goods allow us
to have ``more for less.'' And, on balance, it is a boon to those
workers in emerging industrial nations who are fighting their way out
of subsistence agrarian economies through manufacturing. Manufactured
products, along with information technology products, provide a special
opportunity for economic growth because they permit human effort--both
physical and intellectual--to be moved through space and time--and
offered half way around the world in a market where that human effort
has a high value. And this has implications for the entire national
economy.
A haircut in Wushi is pretty much the same quality as a haircut in
Washington. Yet, outside of the fancy hotels, it costs less than ten
percent of the cost of a Georgetown haircut. Why?
Because the value of that same labor, the same effort with
equivalent skills as the barber, working in a manufacturing operation
has the same relative productivity to his counterpart as the difference
in the cost of the haircuts. As America loses its manufacturing
productivity advantage, the Washington barber's ability to buy things
will fall to the level of his Wushi counterpart. And America is well on
its way to losing its productivity advantage. Not only is the direct
labor used in manufacturing less expensive, massive new investment has
equipped China and Brazil and Hungary with some of the world's newest
and most modern plants.
Some say, in time, the market price of labor in those emerging
industrial nations will rise as well. But consider the scale of the
labor supply. In the past 25 years, 1.5 billion workers, not just
people, but workers, have entered the global market from Brazil,
Eastern Europe, India and China alone. This is nearly three times as
many people as are in the current G7 countries that make up the bulk of
the current market for manufactured products. It will be a long time
indeed for that labor market to see broadly rising labor costs.
Some say that the more advanced economies will simply substitute
capital for labor. Yet the data doesn't support this. I chair the
Association for Manufacturing Technology which comprises America's
machine tool industry--the companies who build the machines that make
things on the factory floor. So, I am painfully aware of the plunge in
U.S. machine tool consumption. In the past five years, U.S. consumption
of machine tools has fallen by 63 percent so that the USA--the world's
``strongest'' economy--ranks fifth in its investment in manufacturing
equipment. The first, of course, is China who last year spent one and a
half times as much on manufacturing equipment as the U.S.
To be honest, just buying more capital equipment isn't enough. We
need new ways to make things, new technologies for manufacturing. And
our manufacturing enterprises must have dependable guidance in changing
how they make things--not just advice on the technologies, but help in
understanding the implications of those technologies on the business
practices that organize production.
As a nation with one of the world's highest labor costs--and
standards of living--we produce all our food needs and export. Why?
Agriculture, which was once a very labor intensive activity, changed in
America to become highly automated, and highly scientific. The
technology of the equipment used in agriculture today, combined with an
infrastructure of technical support in the most modern methods, made
this so.
We can do the same in manufacturing. But we must find new methods,
new approaches, new technologies--and we must understand how those new
manufacturing technologies can be used to make new and better products
that deliver more value to their buyers. We must drive the ``manual''
out of ``manufacturing'' and capture America's innovative spirits to
transform it into ``innofacturing.''
And, U.S. product designer/manufacturers must embrace these new
manufacturing processes to make products with features and
functionality that weren't previously possible.
Most of U.S. manufacturing today is done by small and medium-sized
enterprises--a substantial shift over the past twenty years, as large
Fortune 500 manufacturers ``down-sized'' and ``out-sourced.''
Increasingly, it is this sector of the economy that is locked in
competition with low labor rate emerging industrial nations (and those
nations have clear national policies to encourage the competitiveness
of their manufacturing sectors).
In contrast, the U.S. is in need of a coordinated national program
sized sufficiently to provide a manufacturing technology
``infrastructure'' that would enable U.S. manufacturers to compete. And
U.S. manufacturers could compete. There are rational and appropriate
responses to the massive loss of manufacturing jobs, exports and
federal tax revenue that is inherent in this systemic and seismic shift
in how we make things.
Although tax policy that encourages investment surely helps, it
does not directly respond to what's happening. In my view, we must also
mount a national offensive to do the following:
1. Recognize that we're building a national manufacturing
technology ``infrastructure.'' One that is accessible to U.S.
manufacturers and enables them to make things with methods that
are appropriate to U.S. economics, with the size and dynamics
of our markets, and that embraces America's unique creativity.
There must be critical mass to the effort. We are building
``highways and bridges,'' in a sense, and we need an integrated
system to really benefit from our investment.
2. Recognize that it is an appropriate investment on behalf of
the U.S. taxpayer and one that cannot rationally be made by the
private sector, who must recognize that a solo investment in
the manufacturing technology menu is unlikely to be able to be
``harnessed'' to allow the pioneer, who risked the investment,
to ``toll'' the benefits of that investment and reap a reward.
The benefits will pass largely to the technology users and
their customers and ultimately to the end product consumers,
who will enjoy more functional and cost effective products and
who, in the end, are the taxpayers. Patents and copyrights on
manufacturing methods do not provide, cannot provide,
sufficient protection to allow this recovery and reward for the
innovator--typically a small focused company.
As the Nation's taxing authority, the Federal Government
takes a share wherever the benefit falls within the U.S.
economy. The private sector cannot and will not build the
needed manufacturing technology infrastructure alone, anymore
than they could or would build a road system or a school
system.
3. Focus the investment on innovators in industry and research
centers (e.g., universities). The innovations lead to pilot
production sites which lead to full production facilities and
finally to industry ``clusters'' in the U.S.
4. Structure the investment so that it includes research
centers generating ``new science'' and influential (and
probably large) product designer/manufacturers who will design
products that exploit innovative manufacturing techniques. But
center the investment on the usually smaller companies that act
as the ``technology providers'' to the U.S. industrial base.
These are the manufacturing equipment builders, the specialty
materials and tooling suppliers, the technology support
organizations that make up the ``manufacturing technology
``infrastructure'' of the Nation. They act as resources and
champions for new ideas and new methods that all U.S.
manufacturers can turn to for implementation support,
accelerating the transformation of ``new science'' into ``new
tools'' for America's factory floors.
5. Support, indeed substantially expand:
(a) Defense manufacturing technology programs to
strengthen the U.S. defense industrial base.
(b) NIST's MEP program that provides critical
assistance to the small manufacturers, that now perform
the bulk of the U.S. manufacturing tasks, so they can
identify, understand and successfully implement modern
manufacturing methods and practices that are
appropriate--indeed that exploit--U.S. manufacturing
capability advantages.
(c) NIST's ATP program with a special new focus on
creating a menu of innovative manufacturing processes
from technology providers along with innovative
products that are enabled by these new methods at
influential (i.e., probably ``large'') end-production
designer/manufacturers who are technology users.
(d) Support creation and expansion of open membership
U.S. industry collaborative R&D consortia, like the
National Center for Advanced Manufacturing, who help
their members learn how to do cross industry
collaborative manufacturing technology development,
uniting technology users who design and manufacture end
products with technology providers who pioneer the
development of new manufacturing methods and together
help to define and create the manufacturing technology
infrastructure of tomorrow.
Thank you for the opportunity to be here and to express my concerns
and hopes for a ``manufacturing technology infrastructure'' that would
unleash America's ability to build its future.
Chairman Ehlers. Thank you very much.
Mr. Reininga.
STATEMENT OF MR. HERMAN M. REININGA, SENIOR VICE PRESIDENT,
SPECIAL PROJECTS, ROCKWELL COLLINS
Mr. Reininga. Good morning, Mr. Chairman, Subcommittee
Members. Thank you for this opportunity.
Rockwell Collins is an avionics and communications provider
for both the military and commercial aviation industry. Fifty
percent of our business is military and is doing quite well
today. All airlines, at the present time, are losing money. The
domestic and global economies remain sluggish since 9/11, and
our European competitors are receiving large governmental
supplements in aviation. The Far East customers want offsets to
build their products in their country. Capital investments have
been delayed. Research investments and manufacturing process
have been reconfigured, and our supply chain is now under new
vulnerabilities and weaknesses.
Even with this environment, we are performing at the 90
percent level of our markets, but maintaining this position
creates major challenges for Rockwell Collins. Investments in
manufacturing processes and technologies are required for the
utilization of new technology projects. Manufacturing is the
transformational link, bringing new ideas, technology advances,
and creativity to the market. Public and private leadership,
linking manufacturing to innovation, is a key step to future
productivity improvements and a competitive advantage.
We can compete on new technology if we have developed it,
especially if that is disruptive technology. We have minimal
display technology and manufacturers in the U.S. We procure our
CRTs and our LCDs from the Far East. Display glass is almost
entirely produced in the Far East. Projection displays, or 3-D
holographics, are examples of disruptive technologies that we
can compete on.
Rockwell Collins has targeted five areas for manufacturing
research and development. We will invest in emerging
technologies and intelligent enterprise systems, utilize the
common factories for both military and commercial products. The
old models for time to market and unique factories to do work
are no longer a requirement and will not work today. And we
require new advanced transformation concepts. Technologies,
such as nanotechnologies or embedded parts and circuit cards,
are examples, which we are pushing. We can not compete on raw
printed circuits, which we produce today. Ninety-five percent
of the circuit cards are produced outside the United States.
We can compete for circuit card production if the process
is for embedding parts or mass customization or production at
the point of need are successfully obtained and affordably met.
Keys to meeting these requirements are enabled by eliminating
hand-offs and making all intelligent systems and knowledge
management processes seamless.
Fifty percent of Rockwell Collins' material comes from
small businesses. With the reduced number of new aircraft and
the reduced retrofits, our supply base is changing. With the
lower volumes and the change in type of parts due to new
technologies, it has forced our suppliers to look to different
markets. We utilize our supply chain during our design process,
which improves our interoperability and our availability, but
our increase in military avionics has not been able to offset
the decrease in our commercial operations. And that gap is
continuing to widen.
Small enterprises sometimes lack the incentive, finances,
and technical resources to improve cost and cycle times. The
Air Force's ManTech program used for the JDAM missile is an
exception and it provided cycle time reductions of 60 percent
and 45 percent for inventory reductions and may be used as a
model.
What can the Federal Government do? Rockwell Collins is
working with a consortium called the Defense Manufacturing
Technology Program, which is recommending increased
collaborative development and funding for DOD ManTech. I have
attached to my notes a report, which describes the industrial
transformation key to sustaining productivity boom. This was
derived from a planning session of 44 companies and 26 other
organizations on increasing manufacturing productivity and
competitiveness in the U.S. industry. Rockwell Collins
obviously participated.
And I have attached a proposal for the Next Generation
Manufacturing Technologies Initiative, transforming the U.S.
manufacturing base. The proposal includes the need for a high-
level advocate for manufacturing within the Administration,
which would help stimulate public/private collaboration. Taking
such steps, you would accelerate the rate of manufacturing
innovation, stimulate investments in manufacturing equipment,
improve the workforce skills, and create a voice in the Federal
Government to ensure continuation of manufacturing productivity
and growth.
Thank you.
[The prepared statement of Mr. Reininga follows:]
Prepared Statement of Herman M. Reininga
Good Morning.
Rockwell Collins is an avionics and communications provider for
both the military and commercial airline industry. Fifty percent of our
business is military and is doing quite well. All airlines at the
present time are losing money; the domestic and global economies remain
sluggish since 9/11. European competitors are receiving large
government supplements in aviation and the Far East customers want
offsets to build products in their country. Capital investments have
been delayed, research investments in manufacturing processes have been
reconfigured, and our supply chain now has new vulnerabilities and
weaknesses. Even with this environment, we are performing in the 90
percent level of our markets and S&P 500 Peers. Maintaining this
position creates major challenges for Rockwell Collins.
Investments in manufacturing processes and technologies are
required for utilization of new technology products. Manufacturing is
the transformational link: bringing new ideas, technology advances and
creativity to market. Public and private leadership, linking
manufacturing to innovation, is the key step to future productivity
improvements and a competitive advantage. We can compete on new
technology if we have developed it, especially disruptive technology.
We have minimal display manufacturers in the U.S. We procure our CRT's
and now our LCD's from the Far East. Display glass is almost entirely
produced to in the Far East. Projection displays or 3-D Holographics
are examples all of disruptive technologies where we can compete.
Collins has targeted five key areas for manufacturing research and
development. We will invest in emerging technologies to intelligent
enterprise systems and that are utilized in common factories for both
military and commercial products. The old models for time to market and
unique factories do not work and require new advanced transformation
concepts.
Technologies such as nanotechnology's or embedded parts in circuit
cards are areas which we are pursuing. We cannot compete on the raw
printed circuit cards which we produce today. Ninety-five percent of
circuit cards are produced outside the U.S. We can compete for circuit
card production if new processes for embedding parts, mass
customization and production at point of need are successfully and
affordably met. Keys to meeting these requirements are enabled by
eliminating handoffs and making all intelligent systems and knowledge
management processes seamless.
Fifty-five percent of Rockwell Collins materiel comes from small
businesses. With the reduced number of new aircraft production and
reduced retrofits--our supply base is changing. With the lower volumes
and the change in type of parts--due to new advanced technology--it has
forced our suppliers to look to different markets. We utilize our
supply chain during our design process, which improves our
interoperability and availability. BUT--our increase in military
avionics has not been able to offset the gap established by the
downturn in commercial avionics. Small enterprises typically lack the
incentive, finances and technical resources to improve costs and cycle
times. The Air Force's MANTECH program as used for the JDAM missile, is
an exception and provided cycle time reductions of 60 percent and 45
percent inventory reductions and can be used as a model.
What can and the Federal Government do???
Rockwell Collins is working with a Consortium called the coalition
for defense manufacturing technology which is recommending increased
collaborative development and funding for DOD MANTECH. I have attached
to my notes a report from NACFAM which described the ``Industrial
Transformation Key to sustaining the productivity boom.'' This was
derived from a planning session of 44 companies and 26 other
organizations on increasing manufacturing productivity and
competitiveness of U.S. industry. Rockwell Collins participated. And I
have attached a proposal for generating the Next Generation
Manufacturing Technologies Initiative for transforming the U.S.
manufacturing base. The proposal includes the need of a high level
advocate for manufacturing within the Administration which would help
stimulate public-private collaboration. In taking such steps you would
accelerate the rate of manufacturing innovation, stimulate investments
in advanced manufacturing equipment, improve work force skills and
create a voice in the Federal Government to ensure the continuation of
manufacturing productivity and growth.
Thank you for your time.
Chairman Ehlers. And thank you.
Mr. Dunwell.
STATEMENT OF MR. JAY R. DUNWELL, PRESIDENT, WOLVERINE COIL
SPRING
Mr. Dunwell. Good morning, Mr. Chairman, and Members of the
Subcommittee. I am Jay Dunwell, President of Wolverine Coil
Spring Company located in Grand Rapids, Michigan.
Wolverine Coil Spring is a 57-year-old, third-generation,
family-owned business employing over 50 highly skilled
individuals in the design and manufacturing of custom metal
fabricated products. Besides my role with Wolverine, I also
serve as the vice-chair of the Manufacturers Council, an active
network of 35 manufacturers in the Grand Rapids area, who
volunteer their time to organize and lead the advancement of
the manufacturing industry. The Council is supported and
organized by the MEP and its Michigan Manufacturing Technology
Center and the Local Office, The Right Place, Inc. The Council
published a 100-page paper in 2002 entitled, ``A Growth and
Innovation Agenda for Manufacturing'', which can be found on
the web at the address noted in my statement. I have brought
copies of the executive briefing of this paper, much smaller,
and I request that the Subcommittee enter this executive
briefing into the record of this hearing.
My statements today will reflect two perspectives: first,
my personal experiences; and secondly, the recommendations of
the Manufacturers Council.
Our competitive situation: Wolverine follows a business
model of operational excellence and customer intimacy.
Wolverine does not pursue a product leadership position typical
of many larger manufacturers. The products we manufacture are
the components or subassemblies of larger products.
The focus for the past decade of many operationally
excellent companies has been to continuously improve our
manufacturing processes and techniques to eliminate waste,
reduce scrap and inventories, and to strive to be the low-cost
producer. As a second and third-tier automotive supplier,
Wolverine is constantly under pressure to reduce prices. Annual
price givebacks, Internet auctions, and market tests are
becoming regular events. In some cases, Wolverine has told our
customers to move the business, because we can not compete
below certain price levels.
Wolverine also incorporates into our mission statement that
we must evolve as our customers' needs evolve. If new products
or new capabilities are needed, Wolverine realizes that we must
evolve to meet those changing needs or jeopardize our close
relationships and customer base.
The most significant serious challenge facing our business
is customer migration to Asia. According to Industry Week,
foreign companies invested $52 billion into China in 2002. I
don't know how many jobs each billion dollars of investment
equates to, but my fear is that it represents significant loss
of American jobs.
One of our customers, a pump manufacturer, requested
Wolverine's design assistance. Unfortunately, from the outset,
the pump manufacturer had plans to produce this pump in Asia
and only needed Wolverine for the design and prototype phase.
We were asked to charge accordingly for our engineering
services but not to anticipate any production runs. This is a
particularly disturbing example. If more of our customers move
their production overseas and only require Wolverine's design
assistance, our business model will evolve dramatically: more
engineers and dozens less manufacturing setup technicians and
machine operators.
Technology plays an important role in Wolverine's business
model. New CNC manufacturing equipment reduces setup times,
provides more value-added capabilities, and increases pieces
produced per hour. Wolverine has implemented in-process sensors
and vision systems to ensure zero defects in a world striving
for quality levels measured now in rejected parts per billion.
Technology helps make communication with customers and
suppliers more efficient every day. Through Internet-based
websites, Wolverine can manage our customers' inventory with
real-time access to their production plant operations.
Although technology improves operational excellence,
operational excellence is not enough. Innovative breakthroughs
and process technologies or how we manufacture parts will not
make a difference if larger product-leadership companies
migrate either their supply base or their assembly operations
overseas.
Although many small manufacturers face different challenges
than their larger partners in manufacturing, together we face
the common threat of remaining competitive in the United
States. Typically, small manufacturing issues include price
strategy, being the low-cost producer, even return on
investment. Plante and Moran reported that many small
manufacturers in the automotive supply chain are not making
enough return on their investment to continue support of levels
of that investment.
Larger manufacturers often have international operations,
and I assume, struggle with what new products to introduce and
in which of their plants around the globe to produce them. I am
not a trade expert, but when U.S. steel tariffs make it less
expensive for my customers to manufacture outside the U.S. and
import a finished assembly, Wolverine has lost another
opportunity.
MEP supports Wolverine in numerous ways around shared
learning and peer-to-peer networking, most of which Wolverine
has been very involved with. Examples include user groups,
workshops, sunrise breakfast series, tours of best practices,
economic development, and of course, workforce development.
Building close relationships with dozens of other
manufacturers has been the most important aspect of MEP's
support. Often I will call another company to discuss an issue
and be granted plant tours or, ``Come and see how we did it,''
experiences. Some of my long-term employees have seen for
themselves how some challenges can be met can be extremely
helpful in making organizational improvements.
The MEP's efforts to improve the manufacturing environment
in our region and our country are extremely valuable. Their
support has led to competitive improvements and reduced setup
times, smaller inventories, shorter lead-times, and improved
quality. Funding for such a valuable program should not be
reduced, rather increased.
Trade policies, tax incentives, healthcare, and other
insurance costs are all examples of issues I feel are beyond
the focus of MEP's support of small and medium-sized
manufacturers. Issues of this scope require a national economic
strategy. The position paper makes specific strategic
suggestions. This paper is not about subsidies or handouts. We
do want federal, state, and local support for an innovative
infrastructure. The paper makes it very clear that operational
excellence will not sustain the manufacturing base in the U.S.,
rather we must reevaluate our position and pursue a national
economic strategy that will ensure that innovative and high
value-added manufacturing remains the purview of U.S.
manufacturing firms.
The paper highlights six recommendations: the appointment
of a Secretary or Undersecretary for Manufacturing, increased
federal investments in manufacturing-related research and
development, expand collaborative research consortia and R&D
partnerships, rebuild the dwindling pool of scientists and
engineers, and provide economic develop support to
manufacturing that is proportionate to its contribution and to
the economy, and finally to drive strategies to strengthen
regional clusters of innovation.
To conclude, as my comments have highlighted, small
manufacturing companies face their own set of challenges in
today's changing world. Yet both large and small manufacturers
are concerned about the increase in foreign manufacturing and
face the very important challenge of building a successful
infrastructure to sustain and improve manufacturing here in the
U.S. federal support of this innovation infrastructure will
assist all manufacturers and the health of the U.S. economy.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Dunwell follows:]
Prepared Statement of Jay R. Dunwell
Introduction
Good morning, Mr. Chairman and Members of the Subcommittee. I am
Jay Dunwell, President of Wolverine Coil Spring Company located in
Grand Rapids, Michigan. Thank you for inviting me to speak about the
challenges facing manufacturing companies and how the Federal
Government can help.
Background
Wolverine Coil Spring Company is a third-generation, family-owned
business, employing over 50 highly-skilled individuals in the design
and manufacturing of custom, metal-fabricated products. We specialize
in springs, stampings, wire forms, and assemblies. Founded 57 years ago
by my grandfather, Raymond Carlberg, Wolverine supplies products mainly
to the automotive and office furniture markets. Wolverine is registered
to the ISO and QS-9000 quality standards.
Besides my role with Wolverine, I also serve as the vice-chair of
the Manufacturers Council, an active network of thirty-five
manufacturers in the Grand Rapids area who volunteer their time to
organize and lead the advancement of the manufacturing industry. The
Manufacturers Council is supported and organized by the MEP and its
Michigan Manufacturing Technology Center (MMTC) and the local office--
The Right Place, Inc. The mission of the Manufacturers Council is to
promote, facilitate, and enable implementation of ``world-class
manufacturing'' principles and practices among manufacturers. To
fulfill this mission, the Council follows three basic strategies:
Provide a forum for interaction among executives to
network
Articulate and prioritize the needs of area
manufacturers
Improve the preparation of the local workforce and
the workforce development systems (I co-chair the workforce
development subcommittee)
The Manufacturers Council published a 100-page paper in 2002
entitled: ``A Growth and Innovation Agenda for Manufacturing: A
Manufacturers Council Position Paper'' which can be found on the web
at: www.rightplace.org/Info-Center/library.shtml. I have
brought copies of the Executive Briefing of this paper, and I request
that the Subcommittee enter this Executive Briefing into the record of
this hearing.
My statements today will reflect two perspectives. First, my
personal experiences as the leader of Wolverine Coil Spring Company and
the issues facing our small business. Secondly, the recommendations of
the Manufacturers Council paper and its broader view of the
manufacturing industry.
Competitive Situation
Wolverine follows a business model of operational excellence and
customer intimacy. Wolverine does not pursue a product leadership
position typical of many larger manufacturers. The parts we manufacture
are components or sub-assemblies of larger products.
The focus for the past decade of many operationally excellent
companies has been to continuously improve our manufacturing processes
and techniques to eliminate waste, reduce scrap and inventories, and to
strive to be the low-cost producer. As a second and third-tier
automotive supplier, Wolverine is constantly under pressure to reduce
prices. Annual price give-backs, Internet auctions, and market tests
are becoming regular events. In some cases, Wolverine has told our
customers to move the business, because we cannot remain profitable
below certain price levels.
Wolverine also competes within a customer intimacy model. Through
strong and close customer relationships, Wolverine strives to create
customer loyalty. Ken Blanchard, author of ``Raving Fans'' describes a
level of customer service so exemplary that customers rave about their
experiences to friends and coworkers. Wolverine pursues this ``raving
fan'' customer satisfaction in our approach to customer service. In
fact, our true competitive advantage lies solely in our customer
relationships. To support ``raving fan'' customers, Wolverine provides
design and engineering assistance at the start of our customers'
projects as well as other services.
Wolverine also incorporates in our mission statement the principle
that we ``. . .must evolve as our customers' needs evolve.'' If new
products or new capabilities are needed by our customers, Wolverine
realizes that we must evolve our product offerings and services to meet
those changing needs or jeopardize our close relationships and customer
base.
Serious Challenges Facing Our Business
Customer Migration to Asia
According to Industry Week magazine's June 2003 issue, foreign
companies invested $52 billion into China in 2002. I do not know how
many jobs each billion dollars of investment equates to, but my fear is
that it represents a significant loss of American jobs. Further, this
investment is expected to multiply in the coming years. The migration
of manufacturing to Asia, and in particular China, is gaining steam
with no end in sight.
One of our customers, a pump manufacturer projecting to make 20,000
units per year of a new pump, requested Wolverine's design assistance.
Unfortunately, from the outset, the pump manufacturer had plans to
produce this pump in Asia and only needed Wolverine for the design and
prototype phase. We were asked to charge accordingly for our
engineering services, but not to anticipate any production runs.
This is a particularly disturbing example. If more of our customers
move their production overseas and only require Wolverine's design
assistance, our business model will evolve dramatically--more engineers
and dozens less manufacturing setup technicians and machine operators.
Typically, Wolverine and our competitors do not charge for design
assistance, choosing rather to fold the cost into the production
tooling or piece price, thereby recouping the cost when the production
phase begins. Many customers may not be as forthright with their
intentions to source their production quantities overseas as this pump
manufacturer was, leaving Wolverine with the difficult customer
relationship issue of whether to charge for design services or not.
The pace of this overseas migration is moving like a wildfire. Just
last month, an airplane full of office furniture managers toured Asia
in search of new supply chain opportunities. Wolverine has been in
business for over fifty years, and we will evolve and survive. But will
we have only engineers, CAD operators, and prototype production
capabilities? As a component manufacturer, the migration of each final
assembly to an overseas production line represents one less assembly
requiring component pieces. Will a market remain for component
manufacturers--typically the small and medium-sized manufacturers?
Attracting Students to Careers in Manufacturing
From my work with the workforce development systems in Kent County,
I continue to see an aversion to careers in manufacturing. Parents,
counselors, teachers, and administrators often portray careers in
manufacturing as they have been portrayed for years--dark, dirty,
dangerous, and dead-end. Rather, today's manufacturing often requires
highly-skilled individuals to work with the latest in technology in
bright, clean work environments. Without a good supply of talented,
technically-skilled individuals, the strength of manufacturers will be
reduced.
The Role of Technology in Addressing these Challenges
Technology plays an important role in Wolverine's operational
excellence and customer intimacy business model. New CNC manufacturing
equipment reduces setup times, provides more value-added capabilities,
and increases pieces produced per hour. Wolverine has implemented in-
process sensors and vision systems to insure zero defects in a world
striving for quality levels measured in rejected parts per billion.
Technology helps make communication with customers and suppliers
more efficient every day. Through Internet-based web sites, Wolverine
can manage our customers' inventory with real-time access to their
production plant operations and product demand schedules. Electronic-
based financial transactions have replaced the invoicing and accounts
receivable paper process of year's past. Engineers work collaboratively
with customer and supplier CAD drawings connected via the Internet.
Even quality issues can be addressed more quickly and accurately when
the digital picture of the problem arrives moments after discovery.
Although technology improves operational excellence, operational
excellence is not enough. Innovative breakthroughs in process
technologies, or how we manufacture parts, will not make a difference
if larger, product-leadership companies migrate either their supply
base or their assembly operations overseas.
Different Challenges Faced by Small-to-Medium Sized Manufacturers
versus Large Manufacturers
Although many small manufacturers face different challenges than
their larger partners in manufacturing, together they face the common
threat of remaining competitive in the U.S. Typical small manufacturing
issues include:
Price strategy. With the economic slowdown and
increased migration to foreign soil, many small companies are
lowering prices in a desperate attempt to keep their machines
running and doors open.
Lowest-cost producer. Small manufacturers are
implementing lean manufacturing principles.
Return on investment. Plante and Moran reported that
many small manufacturers in the automotive supply chain are not
making enough return on investment to continue to support the
levels of investment. Consolidation will continue until excess
capacity is reduced.
Larger manufacturers often have international operations and I
assume struggle with what new products to introduce and in which of
their plants around the globe to produce them. I am not a trade expert,
but when U.S. steel tariffs make it less expensive for my customers to
manufacture outside the U.S. and import a finished assembly, Wolverine
has lost another opportunity.
Small companies often struggle with small staff sizes where each
individual wears many hats. This organizational structure makes it
difficult for small manufacturers to keep informed of important,
bigger-picture issues. The MMTC/Right Place has been very helpful in
keeping manufacturers, of all sizes, informed of broader issues.
MEP/Michigan Manufacturing Technology Center (MMTC)/The Right Place,
Inc. Support
MMTC/Right Place has further supported Wolverine in numerous ways.
The Right Place, Inc. organizes many opportunities for shared learning
and peer-to-peer networking, most of which Wolverine has been involved
with. Examples of MEP support include:
User Groups--(setup time reduction, lean
manufacturing, QS-9000, Family Owned Business)
Workshops--(strategic planning, working in teams,
workplace organization, continuous improvement techniques)
Sunrise Breakfast Series--(supply chain management,
economic forecasting, automotive industry analysis)
Tours of Best Practices--(plant tours to dozens of
manufacturers highlighting a particular best practice)
Economic Development--(position papers, manufacturing
industry policy, renaissance zone, plant renovation)
Workforce Development--(skills needed in today's
manufacturing, work-based learning www.workpaths.com,
guaranteed diploma, advisory boards and committees)
Building close relationships with dozens of other manufacturers has
been the most important aspect of MEP support for Wolverine. Often I
will call another company to discuss an issue and not only have I been
greeted with sincere support, but I have often been granted plant tours
or ``come-and-see-how-we-did-it'' experiences. For some of Wolverine's
20-year plus employees, seeing for themselves how some challenges can
be met can be extremely helpful in making organizational improvements.
The MEP's efforts to improve the manufacturing environment in our
region and our country is extremely valuable. Their support has lead to
competitive improvements in reduced setup times, smaller inventories,
shorter lead times, and improved quality. Funding for such a valuable
program should not be reduced, rather increased.
Problems Beyond the MEP Capabilities and How the Federal or State
Government Can Help
Trade policies, tax incentives, health care and other insurance
costs are all examples of issues beyond the focus of MEP's support of
small and medium-sized manufacturers. Issues of this scope require a
national economic strategy. The position paper, ``A Growth and
Innovation Agenda for Manufacturing,'' makes specific strategic
suggestions.
Let me now turn our focus to the paper and its innovation theme.
This paper is not about subsidies. We are not looking for handouts. We
do want Federal, State, and local support for an innovation
infrastructure. The paper makes it very clear that operational
excellence will not sustain the manufacturing base in the U.S. Rather
we must reevaluate our position and pursue a national economic strategy
that will ensure that innovation and high value-added manufacturing
remains the purview of U.S. manufacturing firms.
The paper highlights six recommendations:
1. Increase the visibility and priority of the manufacturing
sector within the Federal Government, including the appointment
of a Secretary or Undersecretary for Manufacturing.
2. Increase federal investments in manufacturing-related
research and development.
3. Expand collaborative research consortia within the private
sector, and R&D partnerships between industry and the public
sector (via higher education, federal laboratories, and
others).
4. Rebuild the dwindling pool of scientists and engineers
starting at the K-12 level and including support for
undergraduate and graduate training in technical disciplines.
5. Provide economic development support to manufacturing that
is proportionate to its contribution to the economy.
6. Drive strategies to strengthen regional clusters of
innovation.
Conclusion
As my comments have highlighted, small manufacturing companies face
their own set of challenges in today's changing world. Yet both large
and small manufacturers are concerned about the increase in foreign
manufacturing and face the very important challenge of building a
successful infrastructure to sustain and improve manufacturing here in
the U.S. Federal support of this innovation infrastructure will assist
all manufacturers and the health of the U.S. economy.
Thank you, Mr. Chairman and Members of the Subcommittee, for
providing me the opportunity to address you today. I will be happy to
answer any questions.
Chairman Ehlers. And thank you, Mr. Dunwell. And let me
just mention on the one point you raised, there is a bill in
the House currently to create a new position of Undersecretary
for Manufacturing in Commerce Department. I think it is badly
needed. The Commerce Department has, in a sense, lost its focus
on that partly because 71 percent of their budget goes into
science and only 29 percent goes into commerce at this point.
We hope that will change.
Mr. Farmer. Microphone.
STATEMENT OF MR. JASON FARMER, DIRECTOR OF ADVANCED TECHNOLOGY,
NLIGHT PHOTONICS CORPORATION, ACCOMPANIED BY SCOTT KEENEY, CEO
AND PRESIDENT, NLIGHT PHOTONICS CORPORATION
Mr. Farmer. Oh. Mr. Chairman, and Members of the Committee,
thank you for having me here today. Today I am here with our
CEO and President, Scott Keeney, to talk to you about our
experiences with the SBIR program and the company nLight
Photonics that that program enabled us to found. The challenges
that we face, moving forward, and also outlined our thoughts on
how the government can help.
A little bit on my background, I was the principle
investigator on, perhaps, a half a dozen SBIR programs that
enabled us to move a new technology in high-powered
semiconductor lasers from a concept to a real working
technology demonstrator, a prototype device. That device
enabled us to raise over $55 million to found a new company to
manufacture that technology.
High-power semiconductor lasers have many important
applications in defense, medical, and industrial markets. In
defense markets, those applications are not only crucial today,
they are also crucial in the future. Today, high-power
semiconductor lasers are used for illuminators, for target
designators, and precision-guided weaponry, as well as for
night vision equipment. In the future, this technology will
also be used in tactical weaponry and advanced systems that
will enable us to continue to be leaders.
In the medical arena, there are applications that range
from dermatology, actually removing acne, tattoo removal. There
are a lot of applications in surgery, therapeutic applications,
treating cancer, and many other leading edge applications that
will enable new medical applications.
In the industrial markets, these high-power lasers are used
for cutting and welding in a wide variety of manufacturing
areas.
This technology, high-power semiconductor lasers, was
really invented in the United States and first demonstrated in
the United States. There was government funding that led to the
initial developments in the communications industry that saw
such explosive growth in the late '90's, not only to send data,
but also to pump fiber amplifiers that continue the data on its
transmission, on its path through many thousands of kilometers
across the Nation. When that industry imploded recently, all of
the big manufacturers in the United States exited that business
and have moved overseas. The large competitors in this area
today are either headquartered or have--most of them, large
parts of their facilities overseas in Europe and Japan.
The current leaders in the United States are largely small
businesses. The technology still exists in the United States,
but moving forward, there are challenges that these small
businesses face. These small businesses, I believe, are largely
in that ``valley of death'' that you described in the hearing
introduction. This ``valley of death'' is about bringing the
technology to market and continuing to improve the technology,
maintain U.S. leadership and enable these new applications that
will enable the markets for semiconductor--high-powered
semiconductor lasers to expand.
The government can execute on a very different strategy
than the equity markets can today. The venture capital funding
that is available today is focused on very near-term
applications and markets. The government is in a different
position in the sense that it can execute a more strategic
plan. That strategic plan can focus on the right technology for
long-term markets that will enable the U.S. to maintain a
leadership position in high tech.
Specifically with respect to the SBIR program, I believe
that there are two key points. One is improved and external
governance for that program. This will not only enable that
program to continue to focus on the right technologies for the
future, it will also provide the--I am sorry. I lost that
thought.
The other key thing that I believe can be helpful in the
SBIR program is to improve or increase phase one funding
levels. Phase one funding levels today are at such a level, at
$70 to $100,000, that it is difficult for companies to execute
on and make meaningful progress on a program of that size.
Further, at companies that focus on SBIR funding to
commercialize technology, they can often wind up with numerous
phase one programs that are oftentimes unrelated. That makes it
very difficult with a team of people focused on different
technologies or having a variety of small programs to execute a
focused commercialization strategy for their technologies.
In summary, I think that improving external governance for
the SBIR program and continuing to involve and increase the
involvement of product centers within the services as well as
external, perhaps, commercial boards to review the program as
well as improving phase one. And, perhaps, phase two funding
levels would go a long way to enhancing the commercialization
rates of SBIR technologies.
Thank you.
[The prepared statement of Mr. Farmer follows:]
Prepared Statement of Jason Farmer and Scott Keeney
I. EXECUTIVE SUMMARY
Semiconductor diode lasers are a crucial part of U.S. high tech
industry with important applications in defense, industrial, medical
and telecom markets. However, the U.S. industry is now threatened due
to the current recession in the technology and telecommunications
sectors and many of the key companies have either exited the market or
moved offshore. Federally funded programs such as the SBIR and the
MANTECH programs have had a significant impact on the development of
this industry. Increasing the funding in these programs would play a
crucial role in this industry during this severe downturn.
II. BACKGROUND ON THE SEMICONDUCTOR LASER INDUSTRY
Technology Overview
Semiconductor lasers are crystalline devices that convert
electricity directly into light. Semiconductor laser manufacturing
processes are very similar to those used to fabricate semiconductor
integrated circuits (ICs), however unlike an IC that manipulates
electrons, lasers primarily manipulate photons. This leads to a
different set of technology issues that are faced by the laser
industry. Because the wavelength of electrons is far smaller than the
size of individual transistors within an IC, the key issue driving the
electronics industry is size reduction. Photons, on the other hand,
have much larger wavelengths and fabricating devices on this size scale
can be done with standard semiconductor processing equipment. The key
issues in the semiconductor laser industry surround performance issues
such as output power, efficiency of conversion of electrons to photons,
and long-term reliability.
Key Markets--Telecom Applications
While there are a wide range of applications for high power
semiconductor lasers, semiconductor lasers have received a great deal
of publicity as the crucial enabling technology for telecommunications
providing the extraordinary expansion in bandwidth in fiber optic
systems over the last ten years. These lasers not only send data
through fiber optic cables by blinking on and off as many as 10 billion
times per second, they are also used to optically pump fiber amplifiers
that amplify these signals as they are absorbed and scattered through
thousands of kilometers of fiber optic cable. Both of these
technologies were largely developed in the U.S. and allowed the
explosive growth in this industry; between 1999 to 2000 the whole
market grew by nearly 200 percent. Currently this market is in a major
recession as this extraordinary expansion in capacity has led to a glut
of bandwidth. Over time, this market will again become important as
lasers will remain a crucial technology for meeting the ever-increasing
demands for data transmission.
Key Markets--Defense Applications
While telecommunication applications have been highly volatile,
there are many other applications that are equally important to the
U.S. and have continued to experience strong growth. Most recently the
defense applications have received significant attention, as
semiconductor lasers have been crucial in transforming the modern
battlefield. Today semiconductor lasers are used in precision-guided
weaponry, target designators, night vision equipment, and counter
measure devices to defend aircraft against shoulder fired heat sinking
missiles. Without semiconductor lasers, which, as an example provided
night time covert illumination for Coalition Forces, recent conflicts
in Afghanistan and Iraq would have been very different indeed. In the
future, semiconductor lasers will play an ever-increasing role in the
military. Perhaps one of the most important new applications for high
power semiconductor lasers is in the directed energy weapons arena
where they could be used to defend high value assets against missiles
and other highly maneuverable threats. To date, semiconductor laser
technology has provided our war fighters with vastly superior
capabilities on the battlefield. Future improvements in the technology
will be crucial to maintain and improve upon this advantage.
Key Markets--Industrial and Medical Applications
Semiconductor lasers are also important in a wide range of
commercial applications in both industry and medicine. In industry,
semiconductor lasers are one of the fastest growing market segments as
they replace other, older technologies currently used in welding, heat
treating, and semiconductor processing applications. In medicine,
semiconductor lasers are used in a wide range of diagnostic and
therapeutic applications in such fields as ophthalmology, cardiology,
oncology, and dermatology. Many of these applications will benefit from
the cost reductions occur as the manufacturing technologies are
improved and production levels increase.
III. CURRENT CRISIS IN THE U.S. SEMICONDUCTOR LASER INDUSTRY
Despite these important applications, the current U.S.
semiconductor laser industry is undergoing a severe downturn. While
this downturn has been driven in part by a downturn in the general
technology sector, the semiconductor laser industry has been hit
particularly hard by the unprecedented downturn in the
telecommunications sector. As a result most of the major manufacturers
in the U.S. have closed down their manufacturing operations and laid
off tens of thousands of employees. Two years ago the U.S. had a
significant lead over the rest of the world in semiconductor lasers. As
a result of the downturn, the biggest semiconductor laser fabrication
facilities are now in Europe and Japan while China is beginning to
expand into this market.
Although the U.S. still has state-of-the-art technology, most of
the semiconductor laser companies in the U.S. are now small businesses
struggling to survive.
Changes in U.S. Venture Capital
The U.S. venture capital industry provided the primary source of
funding for many new companies that were formed in the last five years.
However, the downturn has led to significant changes in venture funding
and it is currently extremely difficult to get funding for
semiconductor laser engineering and manufacturing improvements--let
alone get funding for any new technology developments. As recently as
two years ago, venture capitalists were more focused on distinctive
technology that could dominate a large market, whereas today they are
more focused on investing in companies with current sales in near term
markets. This has created a ``valley of death'' for many small
companies that can't bridge the chasm between new technology prototypes
and products ready to enter commercial markets. In particular, the
funding for optical components (including semiconductor lasers) has all
but disappeared relative to the investments of just two years ago.
IV. POTENTIAL AREAS OF SUPPORT FROM FEDERAL GOVERNMENT
Over the past thirty years the semiconductor laser industry has
received funding for critical technologies from a wide range of Federal
Government programs--including SBIR, MANTECH, and ATP. This has enabled
the U.S. to lead not only in defense applications of semiconductor
lasers but also in many commercial applications. As venture capital
funding has diminished, continued federal support is crucial to
maintain a strong competitive advantage. Indeed, with a few focused and
effective investments through programs such as these, the Federal
Government can play a significant role in strengthening this and other
key industries within the U.S.
SBIR Program Example
The SBIR Program was established by the Small Business Innovation
Development Act of 1982. It invests over $1.3 billion dollars a year in
a wide range of technologies through ten government departments and
agencies. This early stage funding for new concepts and technologies,
is an important example of how the government can impact small
businesses competing in high tech markets. While this program has been
highly effective in commercializing numerous technologies continuing to
improve the governance and increasing the flexibility in funding levels
will make this program even more successful.
1. Governance
As with any successful technology development program, it is vital
to have a strong governance system that ensures the technology meets or
exceeds the requirements of the end application. Recently, governance
of the SBIR program has been significantly improved by increasing the
involvement of product centers within the services. Such efforts need
to be continued and increased to ensure successful commercialization.
Historically, without such governance, many small businesses with SBIR
funding have become merely extensions of the research labs supporting
them and thus not fulfilling the commercialization objectives of the
SBIR program. A focused strategy to improve governance across the SBIR
program will enhance the productization rate of SBIR technologies.
2. Increased Award Levels
Increasing the size and reducing the number of individual awards
would dramatically improve the commercialization SBIR technologies. The
SBIR program plays a critical role helping small businesses to
commercialize new and innovative technologies. With the current lack of
venture funding and other investors, the SBIR program is more important
now than it ever has been.
Increasing the funding level of Phase I efforts to $300 to $500k
would enable small businesses to produce a meaningful result and to
execute a focused commercialization strategy. The typical funding level
for a Phase I SBIR program is between $70k and $100k, sufficient to
support one full time technical employee for three to five months. With
such limited funding it is challenging to produce a meaningful result.
Further, a company that targets SBIR funding to develop new technology
inevitably wins numerous Phase I awards that are often unrelated.
Managing many small and disjointed technology development programs
makes it exceptionally difficult to execute a focused commercialization
strategy.
Phase II SBIR programs are typically funded at just under $750k and
support one and a half to two full time technical employees. While this
level of funding is often sufficient to produce a device that
demonstrates key aspects of the new technology, there are many cases
where it is insufficient. In these cases, a ``bucket of parts'' is
delivered with a final report and the investment is lost. Increasing
the flexibility of Phase II funding levels would alleviate this issue.
At the conclusion of a successful Phase II, the technology is at
the edge of the ``valley of death.'' Turning the new technology into a
product requires a sustained engineering effort that goes beyond the
scope of a Phase II. Increasing the involvement of entities capable of
providing Phase III funding is critical to keeping these new
technologies from languishing in the valley of death.
V. SUMMARY
SBIR, MANTECH, ATP, and other technology programs have shown a high
return on investment, especially in the area of lasers and electro
optics. Recently, significant U.S. semiconductor laser capacity has
been shut down and the competitiveness of the U.S. industry has
diminished. However, crucial capabilities still reside in a number of
smaller firms. Increased flexibility in Phase I and Phase II funding
levels and a concomitant focus on effective governance would produce
much higher commercialization rates of SBIR technology. Further,
bringing a new technology to market requires funding levels that exceed
that of the SBIR program. With higher their funding levels, the MANTECH
and ATP Programs as well as agencies with Phase III SBIR funding, will
play a crucial role in revitalizing the U.S. semiconductor laser and
other vital industries and ensure that U.S. technology continues to be
competitive.
VI. BACKGROUND ON NLIGHT PHOTONICS
Light Photonics was founded in 2000 to commercialize novel high
power semiconductor laser technology that was originally developed on
several small SBIR programs. nLight has raised over $55 million from
premier U.S. venture capital firms and has established a world-class
diode laser fabrication facility in Vancouver, WA. After the downturn
in the telecommunications industry, nLight successfully leveraged its
high power semiconductor laser technology to enter medical, industrial
and defense markets. nLight Photonics is representative of the small
businesses that are trying to maintain and improve this critical
technology within the U.S. Unlike larger businesses that ceased U.S.
operations and a plethora of the other small businesses that continued
to focus on the telecommunications industry and were subsequently shut
down, nLight and a few others have survived by refocusing their
technologies on important new applications.
Discussion
Issues in International Competition
Chairman Ehlers. Thank you. And thank you to all of the
witnesses for your testimony. Thank you, also, for abbreviating
your statements. And without objection, all of your complete
statements will be entered into the record.
The--I have a host of things I could ask questions about.
Let me make a few comments. First of all, Mr. Eagar, I totally
agree with you that the greatest need is education. And I have
spent a good share of the last--of my entire life working on
this problem, but particularly the last five years of my
political life trying to improve math, science, engineering,
and technology education in the K-12 system, where I think the
greatest need is. I see things starting to turn around.
Certainly, I have been able to get greater funding in for
teacher training in those areas, but it is a major national
problem, and that has to continue. So I appreciate your
emphasis on that.
I especially appreciate your emphasis on the--that learning
is a lifelong process. As you might expect, I get asked to make
a lot of commencement addresses, and I generally include a
statement along the line that this diploma you have received is
not a union card. It is a learners' permit. And I think we
really have to view that into our students. But the purpose of
education is to learn how to learn and to learn how to think.
It is not to acquire a body of knowledge and say, ``Okay. That
is it.'' I--and so I really appreciate your emphasis on that.
Mr. Reininga, on your one comment you made about an
opportunity to analyze all of these different aspects that are
troubling to American business, but the one you raised about
difficulty to compete with other nations because of subsidies,
I assume you mean primarily the European nations, in this case.
I have heard this a great deal about Airbus versus Boeing, but
I haven't--I hadn't realized that this was carrying over into
the avionics field as well. Can you expand on that a bit? What
subsidies are you referring to, and to what extent do you
believe they might violate the current free trade laws that we
have?
Mr. Reininga. I can not tell you whether they violate any
laws or not. That I can not tell you, but I can tell you that
what I am referring to is the heads-up display that Airbus
currently put in--just procured. And they competed against one
of our companies, called Kaiser Electronics--I am sorry, Flight
Dynamics. And obviously, we have pretty much cornered that
market up to this point, about 95 percent of it. Tallus has
very little, if any, production in that and design
capabilities. And they received a sizable offset with the
French government to go build that capability and therefore won
the program. It was pretty much out in the open and told us
that is what happened.
Chairman Ehlers. That is interesting. That is a useful
example for us to keep in mind. That argument continues with
the French. It is one of several that we have with them.
Transforming Research into Development
The--I forget which one of you made the comment. Something
to the effect that the U.S. does a good job of developing new
products, but doesn't always follow through with the
manufacture. And I have heard that many times. I wonder if any
of you could elaborate on that and put some meat on those bones
for me.
Mr. Rhoades. There is, indeed, a long distance between the
creation of a new idea and the implementation of that,
particularly in manufacturing, because manufacturing, as an
activity, is very complex, as many components, each of which
having dozens of manufacturing operations to make it, that all
have to converge and come together to have a final product. So
there is a lot of resistance and--resistance to change, so the
implementation of new ideas into--and to actually fabricate
them and make them is a long step. That--there is more science
in the world today, far more science, than there are
organizations that are capable of transforming them into new
tools that people can use to make things.
And that is the infrastructure that, in my remarks, I felt
was a very vibrant opportunity for investment on behalf of the
U.S. taxpayer. Building that infrastructure would enable the
accelerated transformation of a new idea in a science level
into a practical product and manufacturing method that would
build economic value for the Nation.
Engineering Degrees and Employment
Chairman Ehlers. Let me tie that in with Mr. Eagar's
comments earlier, and maybe you can discuss that. I have an
interesting graph, which shows the number of baccalaureate
degrees given in engineering over the past 20 years. And it
peaked about 17 years ago and has been going down ever since.
The graduate degrees have gone up, primarily due to the influx
of foreign students. But is part of the problem that we are
just not getting enough engineers, we are not getting bright
enough engineers, or is it strictly moderate a problem that our
wage rates are so much higher than other countries that it is
difficult to put those together? Mr. Eagar.
Mr. Eagar. If I might address that, I believe there is a
structural problem that we have. You are right; we don't
produce as many engineers on a per capita basis. China produces
two and a half times as many engineers, graduates, per year as
we do. And on an absolute basis, since they are larger, they
produce about ten times as many engineers as we do. And that
investment that they are making is going to pay off in the
future.
Addressing the ``Valley of Death'' Issue
We are investing quite a bit in research, which I define as
something that has some future payback more than 20 years.
Companies invest, today, in the--up to five years out. If you
just look at the profitability of the companies, very few
companies, except the ones that are sort of semi-monopolistic,
can not afford to go look more than about five years out. The
``valley of death'' that people are talking about, and I think
you have heard it from three or four of the panelists here, is
the 5- to 20-year horizon. Now the military has 6-1, 6-2 monies
for exploratory--6-2 is for exploratory development. And when I
talked about balance, that is what I was talking about. They
actually spend roughly the same amount of money on development
as they do on research, which I think is actually--when he is
saying ``bringing it to market'', that is what I am calling
``development''. That is the 5- to 20-year time frame.
To give you an example, about 5 to 10 years ago, a Japanese
scientist invented Gallium nitride, the blue laser, and this
goes to Mr. Farmer's, you know, exciting developments in the
science of laser technology. Well, a lot of people didn't
realize that what a blue laser allows you to do is to make
white light. And so there are a few companies now that--this
thing--this technology has been around for about 10 years, and
some time about 10 to 15 years from now, you are going to see
panels that will just be panels of light that will give you new
architectural possibilities. Not only that, it reduces the
electricity required by 2/3. And given the fact that about 30
percent of the electricity we consume in this country is for
lighting, you are talking about a 20 percent reduction in the
electricity generating capacity, which is going to have
wonderful effects on the environment. It is not going to be so
great for some of the people that make generators, but you
know, there are going to be displacements because of the new
technology.
Who is funding that? Who is going to take the risk? There
are a few companies taking that risk, because the payoff is so
huge, but we have lots of technologies that don't have tens of
billions of dollars of payoff. The ones that have less payoff
are the ones that are dying. We have done the research, and we
are squandering the research investment by not doing the
development in the 5- to 20-year horizon.
Chairman Ehlers. Thank you for that summary. My time has
expired. Let me just observe that in the Energy Bill, which the
House just passed, we did specifically allocate funding for
that--new sources of lighting. But your point is well taken.
There is not enough there, and it is going to be too much of
basic research and very little on the developmental aspects.
My time is more than expired. I am pleased to recognize the
Ranking Member, Mr. Udall.
Mr. Udall. Thank you, Mr. Chairman. Again, I want to thank
the panel. Your testimony has been very interesting and
helpful.
The Role of ATP in Product Development
I am drawn to Mr. Farmer for a couple of reasons. He is a
graduate of the big research university in my District, the
University of Colorado in Boulder. And Chairman Ehlers spent a
year at Jilla, which is a consortium attached to the University
of Colorado, but it also has a relationship with some of the
federal labs in the private sector.
We also in Colorado have close to 300 companies involved in
photonics. And we have a vibrant set of efforts underway there
in this whole exciting area.
I had just a couple questions for you. I hear you say that
the ATP would be a great help to small high-tech companies like
yours. And there are some in the Congress and the
Administration that actually make the case that ATP is nothing
more than corporate welfare. Could you respond to that point of
view?
Mr. Farmer. In my view, the ATP program, like the other
programs with higher levels of funding, are critical to moving
technologies from product demonstrators like what we built on
the SBIR program and like what is enabled by a phase one and
phase two SBIR program and really amplifying that and bringing
it to market. I believe that many companies today, you know,
while their thinking may go out five years, don't have the
funding to actually fund a manufacturing line and to bring the
technology to the point where it is ready to enter a commercial
market. And the ATP program, I think there is probably numerous
examples where the ATP program has supported the sort of
engineering that is needed to put into technology to really
make it commercializable.
Mr. Udall. Yeah, I hear both you and Mr. Eagar and perhaps
other members of the panel suggesting that, in a sense, ATP,
SBIR, and some other programs serve as long-term capital----
Mr. Farmer. Um-hum.
Mr. Udall [continuing]. That the equity markets are more
focused, the private equity markets are more focused on short-
term returns, and that this is the important role that the
Federal Government's monies play. And I think we need to do a
better job of explaining that to the average citizen as well as
to other interested parties and to Members of the
Administration, Members of the Congress. Would you agree?
Mr. Farmer. I would absolutely agree. I think it is
actually even more critical today than it ever has been in the
past. In the past, there was equity funding that could take
those technologies from the prototype phase to the
commercialization, the point where you have actually entered a
commercial market. I think that nLight is an example of that.
We--on, you know, probably under $2 million, developed a
commercial--or a technology prototype and then were able to go
and raise equity capital to cross that ``valley of death''. And
that is--that equity capital is not there today, and so the
role of ATP programs and ManTech programs, I think, is of
heightened importance today.
Mr. Rhoades. If I may respond to that for a moment.
Mr. Udall. Sure.
Mr. Rhoades. My company has received an ATP program to
support the development of a process invented at MIT that is
capable of manufacturing functional metal parts with an
entirely new method that digitally assembles particles of metal
to make functional parts with very complex geometries that
enables the ability to make designs directly from a CAD file
and could transform manufacturing into a methodology that is
appropriate for the U.S. with little labor that can make parts
locally, rather than halfway around the world. So the
difference that the ATP effort made in taking a science from a
university and transforming it into a way that now makes parts
commercially for people that walk up and send us a design. We
can make them a part for so much per pound of any complexity
they choose that is just as functional as conventionally made
metal parts. That transformation is precisely what ATP has
enabled and I think really offers an example of how taxpayer--
U.S. taxpayer investment can have a very high payoff,
ultimately for the U.S. taxpayer, because this is a process
that is appropriate to the United States much more so than
appropriate to a low labor cost country in an emerging
industrial nation.
Mr. Udall. That you are saying, Mr. Rhoades, is it works to
our advantage, works to our strengths in this higher tech
society and environment in which we find ourselves? It takes
advantage of that platform off which we are operating?
Mr. Rhoades. Exactly.
Mr. Udall. I appreciate the panel's presence here today,
and hope we get another round of questions, because I didn't
even get into half of the questions I have. Thank you.
Chairman Ehlers. The gentleman's time has expired. Next we
turn to the Congresswoman from Illinois, Mrs. Biggert.
Developing a High-Tech Manufacturing Workforce
Mrs. Biggert. Thank you, Mr. Chairman. And thank you for
all of that information. I think this is an issue that has been
so important to the Congress and has--really gaining in the
discussions, like in the small businesses and the financial
services and the Science Committee. So it is great to have you
here.
I was in China earlier this year, fortunately before the
SARS. But we were there on really national security, but also
trade involving--certainly manufacturing is a very important
part of that. And looking at the economic base for the Chinese
for their income, average income per year is 900 U.S. dollars,
I believe, and so they obviously are a very labor-intensive
country, who can get into manufacturing for those kinds of
products. And certainly, we would like to increase our exports
to China, but we really don't have the money to purchase the
kind of exports that we can send to them, because they have all
of the products that don't cost that much to produce. So it is
amazing to see, you know, how they have become a real, what I
would say, a capitalist country and are growing and growing and
really have a long-term plan in how they are going to do this.
Now they have had a setback, I guess, with--right now.
But--and the other thing is that they want our high-tech so
that they can begin to do that, too, which is where we really
have an advantage there. How can we continue with innovation
and I think what you all mention is that we need to have the
innovation to provide the new products, because the things that
we used to be able to do, other countries are doing and at less
cost. How can we increase the innovation and yet keep ahead of
the other countries, taking--now you know with the CDs and
things, they say, ``Oh, no, we don't copy those. There is no
intellectual property that we take over.'' And yet you can go
two blocks away from the hotel and find those on sale before
they even are out in the United States. Do you have how we
develop--you know, you have talked a lot about education, which
I think is so important. And how we--but how do we actually
move our workers from those industries and get them into the
high-tech industries where we are also decreasing the number of
workers that we need because of the high-tech capabilities that
we have? Mr. Eagar, you----
Lifelong Workforce Education
Mr. Eagar. Well, one thing on the--I believe some companies
pay for knowledge. And I would hope that as the minimum wage
goes up, maybe we would consider paying for literacy and
numeracy in the workforce. You have got to incentivize the
worker to go to the lifelong education. It is much easier, you
know--it is difficult to continue your education while you are
a full-time worker. And there has got to be some incentive.
There has got to be some incentive to the companies to do this.
Right now, a company that has an active educational program for
their workforce is basically paying an extra tax voluntarily.
If everyone is doing it, no one--everyone is paying a fair
share, so there has got to be some incentive for the companies.
There has got to be some incentive for the worker to learn to
read and write if they don't know how.
And we can't just do K through 12. It is important to do K
through 12, but we need a literate workforce now, not just 20
years from now. So we have got to look at it from that. So
maybe the minimum wage is a sliding scale depending on your
literacy and your numeracy. And you are paying people--you are
incentivizing the people at the bottom end of the workforce pay
scale to go out and improve themselves. The people at the top
end are going to do it anyway. They have already done it. They
have already invested in education, and many of them continue
to do it. It is the bottom end of the workforce that we have
got to help.
Successful Competition Against Low-Cost Labor
Mr. Reininga. If you look at the avionics industry, our
industry, less than three percent of the cost of our product is
labor. So--and Boeing and Airbus together are only going to
make about 400 aircraft, so mass production and highly
automated activities are very important to us, but only from a
reliability and technology standpoint. So from our standpoint,
if we can get mass customization using the latest technology,
we can compete, even with their low labor cost, because the--we
just need to be able to support our technology. And it will be
far past where they are coming up at it.
Mrs. Biggert. Yes.
Mr. Farmer. I would amplify on that saying that the way
that we can compete against low-cost labor is with advanced
manufacturing technologies like the ones that Mr. Rhoades was
telling us about. And I think that to maintain that and improve
on that, we need to both enhance the effectiveness of front-end
research and development on the SBIR program by not only
ensuring that that program is successful by giving companies
the flexibility to have the funding there to execute on
demonstrating those new ideas, but also by keeping important
programs, like the ATP program, alive that can actually move
those technologies from prototype to the types of capabilities
that Mr. Rhoades has brought on line.
Mrs. Biggert. And then with that theory, since we do--
people need jobs, we are going to have to raise all of the--
through education, raise the base of skill level, too, and then
have many more products that we can do.
Thank you very much.
Chairman Ehlers. The gentlelady's time has expired. Next,
we recognize the gentleman from Washington, Mr. Baird.
Mr. Baird. [No response]
Chairman Ehlers. Okay. I am sorry. We had the order changed
here. Pleased to recognize Mr. Miller.
Mr. Miller. Thank you. Dr. Eagar, is that--Dr. Eagar. What
is that? Dr. Eagar, your testimony is essentially that there is
a natural kind of evolution of the economy and that there are
industries like textiles that we should expect will probably
cease to be American industries and will move, naturally, to
other parts of the world. But at the same time, there will be
other industries that will appear instead of industries like
textiles.
Mr. Eagar. Yes, but some of the industries can come back.
Some of consumer electronics, which we lost in the '50's and
'60's----
Mr. Miller. Right.
Mr. Eagar [continuing]. Has come back because of new
technologies, for example. So you don't lose them forever, but
when the--when an industry matures and it becomes--they have
gone down the learning curve and it has become a commodity and
other people develop the technology, you don't really want that
industry, because it is commodity pricing. It is not highly
profitable. You want the profitable, the high-value industries.
And those are built on new technology.
Mr. Miller. You know, at some level, I do agree with you,
on an intellectual level, but I also represent a whole lot of
textile workers, and I have been in a room and looked at them
and heard what their concerns are. They went straight from high
school. Maybe they graduated, maybe they didn't. It didn't much
matter. They went straight to the mill, the same way their
parents did before them. They are now middle-aged. Before they
can be trained for new jobs, they have got to go back and get a
GED. Your testimony reads a lot better than it reads. Those
folks are living that transition. And I just--I understand what
you are saying, and it may be correct. But it may be some value
to you to go spend some time with the textile workers so you
can kind of understand, at the pit of your stomach, what life
is like for the people who are going through that transition.
Mr. Eagar. Two of my uncles got textile engineering degrees
from Georgia Tech, so I think I have some knowledge of what you
are talking about. The transitions that occur are very painful,
extremely. I am a--I was in the steel industry, and you can go
talk to--I have talked to steel workers. I know what it is
like. The problem is, if they have got an education, they can
go on to the next industry. It is when they are out of the job
and--completely, and they have no other skills except going to
McDonald's, that is when the Nation has done a disservice to
them.
Mr. Miller. There are only so many McDonald's that
Rockingham County can sustain, but----
Mr. Eagar. Right.
The Role of Vocational Training Programs
Mr. Miller [continuing]. One of the proposals of the Bush
Administration is to eliminate the principle source of federal
funding for vocational training at colleges--at community
colleges and technical colleges, the Carl Perkins Grant. There
is supposedly something else out on the horizon that will
provide some funding, a block grant program that will probably
end up being more in high schools and technical and community
colleges. What is your take on how sensible it is for this
nation to be reducing our support for technical and community
colleges for vocational training?
Mr. Eagar. We need to encourage everyone at every level to
get--to improve their educational level. Whatever level of
intelligence we gain as a Nation is going to serve us in the
future, and that is for the country as a whole. We need--and
frankly, the elite schools like mine, we are going to take care
of ourselves anyway. My mother was a schoolteacher. My father
used to tell her, ``You can't help the best students. They are
going to do it on their own. They may not--you may not be able
to help the worst, but it is the ones in the middle that really
need the help.'' And that is the community colleges. Okay.
We have got to do something. We have got to make it--
incentivize people. Rather than sitting at home, watching TV,
get out and learn something, read something. I once told a
bunch of people at my church, if you watch more than five hours
of TV at night--or a week, you ought to go out and get a second
job, because you have got too much time on your hands. Okay.
Well, you know, unfortunately, that is 90 percent of America.
Mr. Dunwell. I also sit on an----
Mr. Miller. Yes, sir.
Mr. Dunwell [continuing]. Advisory council of a community
college that recently built a new lab that has construction
trades, automotive trades, and the manufacturing trades in
these sections of this new lab. And it is a wonderful
opportunity for students and displaced workers to go and learn
new skills. And you know, the manufacturing lab has a big
stamping press where we are, you know, training people not only
the specific hard skills but also the soft skills, the working
with teams, the looking at the, you know, continuous
improvement process. And so it is, you know, the community
colleges and the support for those programs. I mean, that is
a--very valuable.
Mr. Miller. Well, a quick executive summary, then. You
would agree with me that it is dumber than dirt to be cutting
back our support for vocational training?
Mr. Dunwell. Right.
Mr. Miller. And Dr. Eagar, you agree as well?
Mr. Eagar. Yes. Yes, I agree.
Developing a National Manufacturing Policy
Mr. Miller. All right. One more question, Mr. Dunwell. You
said that we needed a national policy to be encouraging
manufacturing, that that is--our economy, our standard of
living depends upon having a manufacturing base for the
economy. And Dr. Eagar, I think you said much the same thing.
Is it your impression that we have anything resembling that
now?
Mr. Dunwell. Any type of national policy? Absolutely not.
Mr. Miller. Right.
Mr. Dunwell. I mean, I--you know, I think that is why we
are all here. And it is wonderful to be here. I mean a small
little manufacturer like Wolverine with 50 employees to be able
to talk to, you know, the Federal Government about what it
needs to do is wonderful to know that you are listening to us.
And you know, as we spoke earlier, you know, the action that
comes out of this testimony is what we are after. And I know
that other countries and Asia have very specific national
policies related to, you know, their manufacturing stature and
where they plan to go. If we can come up with a technology vent
and education vent, if we can come up with all sorts of
different action items to improve the national strategy, let us
do it.
Chairman Ehlers. The gentleman's time has expired. Next we
recognize Mr.--the gentleman from Minnesota, the Great State of
Minnesota, the home of the Hormel Company, Mr. Gutknecht.
Mr. Gutknecht. And the manufacturer of the world's finest
lunchmeat. And we want to thank the Chairman once again for
stopping this besmirching of that wonderful lunchmeat.
I want to thank the Chairman and the Staff for putting
together an excellent panel. And I want to thank all of you for
coming here today. And I hope that other Members, who could not
be here for the testimony, will at least get copies and look at
this, because I found myself in agreement with virtually
everything you said.
Investing in Development and Deployment
And some of the other questions that I was going to ask
have already been asked. But I really want to throw this out
for discussion, because it seems to me, in some respects, we
are talking around this problem. And it seems to me that the
core of the problem is why are so many of these manufacturing
jobs leaving. Now I understand that some of the lower end, low-
technology--I mean, I share with my colleague who just spoke,
the problem. We had a small pajama manufacturing plant in my
District. You can call that low-tech. They closed and moved to
Mexico. We lost 200 jobs. The world will go on. But for those
200 people, that was extremely important. You know. And not all
of those people are going to be retrained in--engineers or
computer scientists or are going to sell insurance. I mean,
ultimately, as policy-makers, it seems to me we have to ask
bigger questions.
In fact, let me just throw out something here, because I
think it is something that this committee even forgets. We
spend a bundle in this country on R&D. We represent less than 6
percent of the world's population, and the United States of
America, between the governments, state, federal, local,
between universities, foundations, and private corporations, we
will invest over half of what the world will spend on research
and development this year. The taxpayers--the best estimate I
can get between the various departments, NSF, NIH, DARPA, all
of the other agencies that do research at the federal level, we
will spend about $29 billion on research this year. Now even in
Washington, that is a lot of money.
Now the problem, it seems to me, is many of these ideas,
and the frustration I think we are beginning to face is within
6 months of some of these new technologies coming on line, the
manufacturing is going somewhere else. And it strikes me that
we have to ask an even more important question, and that is:
why is this happening?
And I have some theories, and maybe you can respond to
them, because for example, this year, the average manufacturer
saw their health insurance costs go up 13.7 percent. Now I
don't have an MBA. And I didn't go to MIT, but I know that that
is unsustainable. I met with a representative of General Motors
the other night. Do you know how much they are going to spend
this year--GM alone is going to spend this year on drugs, on
pharmaceutical prescription drugs? They are going to spend $1.3
billion. That is for their employees and for their retirees.
Now I will flat guarantee you Hyundai is not going to even come
close to that in either category. This year, American industry
will spend somewhere between $180 and $280 billion on
liability, in other words, hiring attorneys, buying liability
insurance. I will flat guarantee you they don't have to worry
about those things in the Pacific Rim. That is not happening in
Communist China. And it strikes me that we, as policy makers,
have to ask these questions. Why are these jobs leaving?
Because at the end of the day, we can't all sell insurance to
each other. And I wonder if you guys would like to respond to
that. And frankly, even if you don't want to respond now, I
wish on the plane on the way home, you would take a few minutes
and write the Committee, because these are big questions. We
are spending a lot of money on research. The problem is, as
soon as it becomes marketable, they are manufacturing it
somewhere else and nobody is talking about some of those big
problems that manufacturers face that they don't have to face
if they produce somewhere else. Maybe you want to respond now
or maybe you want to respond in the plane on the way home.
Thank you.
Mr. Rhoades. If pajamas are made the same way, and there is
a high labor content in manufacturing the pajamas, they will be
made in a market where the value of a unit of labor time is
worth less than it is here. So the only way to keep the
production of pajamas in the U.S. is to change the methods so
that the labor content is lower and the product has some
functionality, some customization, some special feature that
overcomes the commodity product. But if we don't change the way
we make things, then they will migrate to where labor costs are
lower.
Mr. Gutknecht. Mr. Rhoades, I don't disagree with that, and
I understand that. But why did IBM, in effect, spin-off its
very high technology, disk drive business, and ultimately 500
jobs in the last year went to Communist China? Why did that
happen?
Mr. Eagar. Having worked in disk drive industry, it may be
high technology to design them. To actually manufacture them is
very labor-intensive. And so labor-intensive, we have a
disadvantage. I learned that as a young faculty member. I could
not compete with the other universities on a research basis at
the high cost of my university. I had to compete on knowledge,
not hands, how many hands I could put at the problem.
The Need for More Applied Research
But let me say something about the research investment. You
are absolutely right; we invest plenty in research in this
country. The problem is how we are investing it. We are not
asking for a return on the investment. There are many
scientists who have come, I am sure, to this room and told you
knowledge for knowledge's sake is wonderful. They will tell you
that is how we found the transistor. That is a myth. The people
working on the transistor were charged with finding a
replacement for the mechanical switch. They wanted an
electronic switch that would not wear out as quickly. They
weren't just looking for knowledge for knowledge's sake. They
stumbled across an extremely valuable product, just like the
laser and things like that.
We need to get a return on our investment on our basic
research and then have an equal sized investment on the
development of that into a commercially useful product. I could
not get tenure at any major university in this country if I
worked on development projects. It is not scientifically
acceptable at the universities. Well, who is going to do it? We
lost the labs. We don't do it in the companies anymore. What
companies are spending money in the 5- to 20-year horizon?
Where are the research labs in the companies? There are only a
couple of them left at the semi-monopolistic, the Microsofts
and Intels. But even that, you are starting to see some of them
cut back a little bit. You can't do it.
We have got to justify where we spend our money. There are
some huge ticket science items out there. And I am not going to
start knocking a particular thing, that boy, if I had to vote
on it as a taxpayer and as a knowledgeable scientist, you
wouldn't get my vote to--for some of the things that we fund,
because I can't see a return and in my tenth grandchildren's
lifetime.
Mr. Reininga. A question to ask would be how much of that
29 billion that was spent on R&D was on manufacturing R&D? Very
little. That is why we are here. That is what we are asking, to
raise that level in either the DOD or in industry itself or
NIST or wherever.
Chairman Ehlers. Okay. The gentleman's time has expired.
And next we turn to Mr. Baird.
Mr. Baird. I thank the Chairman. I thank my Ranking Member.
Employment in Local Economies
I am particularly pleased at this hearing, because so often
we hear about the loss of manufacturing jobs and I think the
witnesses have done an outstanding job of describing ways in
which we can help improve our manufacturing competitiveness.
And I think the points that were just made were very valid. I
want to use the case in--of nLight Photonics to illustrate that
a little bit and ask Mr. Farmer, can you describe a little bit
about how many jobs you have brought to the area with the
development of your company?
Mr. Farmer. We raised $55 million and created about 70
jobs. This is--we are addressing a market. The entire high-
power laser market today is something like $1.3 billion.
Semiconductor lasers with, you know, smaller sizes, higher
efficiencies, lower cost can, I think, displace a large portion
of that and are positioned to grow by a factor of four or five
and displace most of that market within the next five years or
so. So I think that if--you know, with the investment in the
manufacturing technology that we will get those performance
improvements as well as the manufacturing improvements that
will lower the cost will enable that to happen.
Mr. Baird. One of the aspects that particularly intrigues
me about this and about some of the programs we have described,
is that they often help cutting-edge companies, who might not
have the capital in reserves. A large corporation may have
capital in ready reserve, and it can have its own research
team, etcetera. But if you have got a new idea, the kind of
idea I think was referred to maybe as a disruptive technology,
something that is going to jump us forward, you don't have that
capital reserve. And yet you actually have the thing that is
going to take our economy forward or our defense industry or
homeland security forward. Has that been the kind of experience
you have had? And after Mr. Farmer speaks, if others can
comment on that, I would appreciate it.
Mr. Farmer. Absolutely. I think that is where most of the
technology innovation is going on nowadays is in the small
businesses and small companies. And those companies today don't
have the capital to move these technologies to the point where
they need to be. And that is where programs like the ATP and
ManTech are, I believe, of critical importance.
Mr. Baird. Would anyone else like to comment on that?
Mr. Rhoades. In this process, I mentioned of digitally
assembling metal particles with a device that is a lot like an
inkjet printer printing little droplets of glue that was
enabled by ATP is now embraced in defense manufacturing to make
low-volume spare parts for much needed aging weapon systems
operating at twice their design life. They can't even find the
tooling for the spare parts anymore. The ability to take a
computer-designed file or a replica--or a legacy part and then
make a spare part that is fully functional is saving the
Department of Defense a great deal of money that will then
migrate into other markets where the value of a spare part
isn't quite as high as it is for defense systems. So all of
that is integrated. And there is a normal commercial path once
the validation is done. But the validation step, that ``valley
of death'', that risk area that is not rational for the pioneer
to take on his own, because most of the benefit goes to the
users and their customers and ultimately the consumers where
the Federal Government gets to tax the entire chain, if it
stays in the U.S.
Industries in Transition
Mr. Baird. Interestingly enough, another company in my own
District, Windsor Corp., makes display panels. I was thinking
of Mr. Reininga's comments that--about your need for display
panels. They are in the same kind of situation. It is a very
innovative technology. It is exciting. It is fun to visit their
plant, and yet they are also struggling with that capital
access. And they have a technology that could move us forward.
Maybe we could chat later about that link up.
Part of the reason I raised this, you know, we are in a
transition, a transition in two ways. Our--Vancouver,
Washington was the home of the Liberty ships. And I like to say
that we are moving from Liberty ships to Liberty chips. But at
the same time, we also are making real strides in the
manufacturing. And I am thinking of Mr. Dunwell's type of
company. Maybe a more traditional company, but we need to help
you be more competitive in your manufacturing. Are there ways,
Mr. Dunwell, that we can help a company that may have a more
traditional kind of industry be more efficient, more cost-
effective, etcetera, through government programs?
Mr. Dunwell. As I have--certainly, as I have stated
earlier. I mean, the MEP is very great and very helpful in, you
know, organizing local companies and ideas and best practices.
So that certainly helps the small manufacturer and the supply
chain continue to be successful. But I--you know, the bigger
picture is still that, you know, are we going to wake up some
day and all of our customers have left? I mean, and that is my
serious concern is that it is helping companies around me and
this table that if we can help them be successful, this supply
chain will survive as well. And you know, but my worry is how
fast this is happening.
Mr. Baird. The loss of our manufacturing base is----
Mr. Dunwell. The loss of the jobs is happening----
Mr. Baird [continuing]. Terrifying.
Mr. Dunwell [continuing]. So quickly.
Mr. Baird. Yeah.
Mr. Dunwell. And if there is nothing happening to slow that
down or to prevent this from continuing at the pace it is,
there are going to be a lot of companies like mine that are
just going to wake up someday and say, ``Gee, I was the low-
cost producer, I thought, and I thought I was doing a great
job. And gee, where did all of my customers go?''
Mr. Baird. I thank the Chairman.
Chairman Ehlers. The gentleman's time has expired. I am
pleased to recognize the gentleman from Texas, Dr. Burgess.
Is ATP Helping Manufacturing?
Dr. Burgess. Thank you, Mr. Chairman. And thank you for
holding this hearing. And you may have already covered this
when you answered the Ranking Member's question, Mr. Udall's
question, but I guess the--and at the risk of just sounding too
pedantic and too basic after all of the educated talk that we
have heard here today, are we really helping here at our level,
or are we, in fact, simply delaying the inevitable? Is it
reasonable to continue to do what we do if we are going to
continue to do it with such an anemic response, such as the ATP
program? Would we all be better served if we got out and
stopped being the enabler and let the private sector work this
out on its own? Probably, I would ask Mr. Rhoades, because he
had the--that is a very attractive idea that you have got there
with the digital building of legacy parts. As a former owner of
a very old airplane, I can certainly identify with that. But
are we helping or are we hurting ultimately?
Mr. Rhoades. You are certainly not hurting. The difficulty
and the gap that the ATP program fills, and very intelligently
fills in both where it chooses to invest on behalf of the
taxpayer and in the recognition that it is, indeed, investing
on behalf of the taxpayer in selecting its projects, is a
wonderful model. And the ATP projects that I am aware of,
have--although they are chosen to be quite risky, have a
remarkable rate of return on them and not all of them are
successful, but enough of them are successful that it is a very
wise investment on behalf of the taxpayer.
The issue for the private sector, if the government got
out, then you are asking the private sector to take that risk
entirely on its own. And the ability to fence the benefits of
the value created is quite limited. So it is not rational for a
private sector company to make that investment on their own,
because most of the benefit, and by--when I say ``most,'' I
mean 99 percent of the benefit falls to the customers who buy
the machines that we will sell them to do this and to the
customers of theirs who will be able to get low-volume spare
parts without waiting, and ultimately to the consumers who are
counting on having these products that might have new
functionality because of the abilities of the process. All of
that, I can not capture. I am too small. I don't have the
negotiating position. And ideas and knowledge flow quickly,
especially within a nation. So consequently, the ATP investment
on behalf of the taxpayer has a return, because the Federal
Government is able to tax all beneficiaries within the chain
who fall within its taxing authority, which is within the
United States. And by developing processes that are uniquely
responsive to U.S. imperative advantages in manufacturing as
opposed to world and low-labor rate markets, then we are able
to have a strategy that, on behalf of America Inc., makes a
whole lot of sense with very, very high rates of return, a
small amount of which I will be able to capture as an
innovator. But most of that is going to flow to my customers
and their customers and so on.
Mr. Reininga. We do see some international companies moving
into the U.S., back into the U.S.--or into the U.S. We see BMW.
We see Toyota. And what we are kind of predicting is that that
is the mass customization is coming back to the U.S. So we will
be able to take advantage of that. Do we need support from the
government to help U.S. industry compete? Absolutely. That is
what we need to continue to drive and improve on.
Mr. Farmer. I would submit, very quickly, that your role is
governance and that we are, as we heard, investing $29 billion
a year in R&D. You need to demand that that results in better
U.S. technology and manufacturing and provide the governance
that makes that investment a wise one.
Mr. Eagar. I would submit it is mostly about risk. Research
and development is moving into the unknown, and there are
certain levels of risk. Industry is limited in the amount of
risk it can assume. The government can help take some of that
risk, as they do in the ATP where they pay 40 percent and they
require the companies to pay 60 percent. You just gave us 40-
percent risk reduction. And hopefully the people who are
administering that will make wise choices. I think they have.
So it is all about risk. To assume that industry will take
on any risk possible is sort of absurd. They will not take any
risk possible. They are only going to take the best risks, and
if you help them get over certain hurdles, there is one--there
are some risks they can say, ``Gee, there is a--it is a
beautiful field over there. It is a lot greener pasture over
there, but it is just a little bit more than my stockholders
can afford.'' Well, the government can help them with that,
because the types of things that the ATP is doing are not just
helping that one company. You want to say it is corporate
welfare? As long as it corporate welfare for all of the
companies that are in--competing in that business, so what. If
it is corporate welfare for one company, I agree, that is a
problem. But when it is corporate welfare for the Nation's
manufacturing base, I am not opposed to that.
Chairman Ehlers. The gentleman's time has expired. Next, we
recognize the gentleman from Michigan, Mr. Smith.
Directing Applied Research in Federal Funding
Mr. Smith of Michigan. Mr. Chairman, thank you. And I have
missed a lot of your comments. I have walked in this last time
when you and Mr. Eagar was--were talking about knowledge for
knowledge's sake is fine and dandy philosophically, and I just
wanted to cheer. I have been on the Science Committee now for
11 years pushing that we have got to have more flexibility in
terms of moving into the arena of applied research as well as
basic research. I chair the Subcommittee on Research that
oversees the NSF. We have made progress. Now we are a little
more flexible.
I--by the time I get through my speech, Mr. Chairman, we
might have finished my time limit. Perfunctory, you usually
say, ``Thank you for holding this important hearing.'' This is
probably the damnedest most important thing that the United
States is going to be facing over the next several years. In
1949, 41 percent of our non-farm employment was manufacturing.
Now it is down to a little over 11 percent. We are losing our
manufacturing base. And what concerns me almost as
significantly as we sort of change to a service and high-tech
economy, in the last two years, we have lost 560,000 workers in
the high-tech arena.
I met with the Vice President of Motorola. They are moving
their engineering labs to India. I think, as I have a hearing
in my Subcommittee on Research on tech transfers out of our
university, I would like to have all of you be on those panels,
too. I am not sure what we do. As I meet with Australia and
some of these other countries and asked for their--how they
spend their government money, they say that they spend half of
it on copying what we are doing in basic research in the United
States and the other half trying to get it applied. So we now
see other countries that are taking our knowledge for
knowledge's sake and trying to get it applied faster than we
do.
And with that, your suggestions. Just--I have got two other
Committee meetings going. One discussion was on taxes. We have
modified our taxes a little bit, trying to make our taxes a
little more comparable with some of our competitors. Maybe that
is part of it, but of--the other part is how do we be more
selfish in terms of our basic research and developing--moving
that into the application where it is useful. And just go down
the--maybe go down the row, and you can give me a short
suggestion of where we go from here.
The Need for Incentives
Mr. Eagar. We certainly need incentives. I am not smart
enough to tell you whether that is a tax incentive, an
investment credit, an education break for the--or for the
companies that fund education, because the--investment
education is not just an investment and that--working for that
company. It is a national investment. And the government ought
to find some way to incentivize the company to do that. You
ought to--we ought to find ways, like the ATP program or SBIR
for companies to take higher risks, because with higher risks,
there is higher payoff. And we have got to do that. Companies
are risk averse. And I am sorry, you know. I will try to
irritate everyone here. You know, the universities aren't doing
their job and the companies aren't doing their job. We are risk
averse.
The government needs to encourage and incentivize taking
higher risks in research and development, not risks that are
foolish, but risks that have a good potential payoff.
Mr. Smith of Michigan. Mr. Rhoades.
Expansion of Existing Federal Programs
Mr. Rhoades. I think, first of all, the $29 billion that
has been bandied about, the vast majority of that has been
spent on life sciences and a very, very small amount has been
spent on manufacturing, even as critical as manufacturing is to
the economy. I think you have structures in place that can be
expanded to make significant differences in the economy. One is
certainly the defense manufacturing effort that helps our
nation's defense industrial base strengthen. The second is the
MEP program, which helps the small, medium-sized manufacturers
who carry the bulk of manufacturing tasks in the United States.
That has shifted over the past 20 or 30 years. And small
manufacturers are really the people who are doing the--making
things in the U.S. And the MEP program helps advise them with
an infrastructure to help them be modern.
The ATP program, in my view, should be dramatically
expanded to expand the menu of manufacturing methods that are
available to make pajamas, make metal parts, make semiconductor
display--make semiconductors, make panel displays so that we
have manufacturing methods that are appropriate to U.S.
economics. And third, and finally, I think encouraging the
assembly of many--of consortia of product designers and new
process developers so that the two of them can work together to
enable products to be made in special ways.
Mr. Reininga. The ManTech program should definitely be
expanded beyond where it is at today for the DOD. That would
help a lot. I was pleased to hear about a central focus point
for manufacturing at the Cabinet level or at least working for
the Department of Commerce. That single focal point would be
outstanding and really help drive and create a national policy.
Mr. Dunwell. I will reiterate. I mean, the MEP, the NCFAM,
the National Coalition for Advanced Manufacturing, ATP, I mean
all of these programs seem to be helping companies. And all of
us are saying, I think, the same thing: ``Let us do more of it,
and let us be strategic about it. Let us think about how we can
put this together better and continue to support that very
vital manufacturing base for our country.''
Mr. Smith of Michigan. Mr. Farmer.
Mr. Farmer. I think that the key difference between tax
cuts and the programs that we have been discussing today are
that the tax cuts can help people with larger companies, with a
more established revenue base. Smaller companies that are
facing the ``valley of death'' don't benefit greatly from tax
cuts. And I think the other big difference is that with the ATP
program and other programs such as that, the government can
execute a focused strategy to become the real technology and
manufacturing leaders around the world. And those programs, I
think, are very important.
Mr. Smith of Michigan. Thank you very much. Mr. Chairman,
thank you. Mr. Eagar, I had a job with Bethlehem Steel, and
then I went home and a farm came up for sale, and I got it at a
good price, so I became a farmer.
Thank you all very much. Mr. Chairman, thank you.
Chairman Ehlers. The gentleman's time has expired, and I
must say, you made a wise choice, given what happened to
Bethlehem Steel.
I had hoped to have a second round of questions. There are
a number of things that I would like to ask, but as you heard
bells, we are being called to the Floor for votes. And I don't
want to detain you here for another half-hour or 45 minutes
just for a few more questions. So my suggestion is that what
remaining questions anyone on the panel has, we will send to
you in writing. If you would be kind enough to respond, then we
would--are able to conclude the hearing at this point.
I certainly want to thank you. It has been an excellent
panel: very, very helpful to me. I have given several speeches
in the recent past simply stating that manufacturing in the
United States is in great trouble. That has given me a lot of
press in the technical press, but I don't have answers yet. But
you have helped provide some answers.
One thing I might mention, we just talked briefly about
taxes. When I wrote a book several years ago trying to develop
a new national science policy, I emphasized in there the
essential nature of having a good R&D tax deduction, or better
yet, a tax credit. And that--this, I think, would be a great
help, allowing the companies to decide on their own what to
spend the money on, make it a tax credit, but we have to make
it permanent. And we have had one that goes year by year, which
to me, is absolutely useless, because no one is going to invest
money into research on a year by year basis, because it may
take 5 or 10 years. So that is one step we could do, but there
is much more we can do. And I appreciate the suggestions made.
We will incorporate them into our thinking, and see what we can
come up with in terms of innovative ideas and approaches to
solve some of these problems.
Thank you again. You have been most helpful to us. Your
testimony has been excellent. And we appreciate you taking the
time to be here.
With that, I will recess the--I will adjourn the hearing.
[Whereupon, at 11:55 a.m., the Subcommittee was adjourned.]
Appendix 1:
----------
Biographies, Financial Disclosures, and Answers to Post-Hearing
Questions
Biography for Thomas W. Eagar
Thomas W. Eagar is the Thomas Lord Professor of Materials
Engineering and Engineering Systems at the Massachusetts Institute of
Technology. Prior professional assignments at MIT included head of the
Department of Materials Science and Engineering, director of the
Materials Processing Center and co-director of the Leaders for
Manufacturing Program. Professor Eagar has served on various technical
committees for U.S. governmental departments and agencies, and has held
numerous positions in many professional associations. Professor Eagar's
numerous awards include Nelson W. Taylor Lecturer, Pennsylvania State
University (1995); William Irrgang Award, American Welding Society
(1993); Henry Marion Howe Medal, ASM International (1992); and Comfort
A. Adams Lecturer, American Welding Society. Thomas Eagar holds
Fellowships in the American Welding Society and the American Society
for Metals International, and the American Academy of Arts and
Sciences, and has served on many NRC panels and committees. Professor
Eagar is the author or co-author of over 193 publications in national
and international journals and the co-inventor of 13 U.S. Patents
including 3 additional U.S. Patent Pending.
Answers to Post-Hearing Questions
Responses by Thomas W. Eagar, Professor, Massachusetts Institute of
Technology
Questions submitted by Chairman Vernon J. Ehlers
Q1. How would you define the term ``Manufacturing R&D?'' How does R&D
for manufacturing differ from basic or applied R&D?
A1. I would define basic research as research in search of knowledge.
Applied research or applied development has a purpose of producing
products (other than mere knowledge). Manufacturing R&D has a purpose
of producing products or aiding in production of products which would
be marketed and sold. Manufacturing R&D is market driven.
I would note that I have never heard anyone discuss ``basic
development;'' basic (or knowledge driven) is a term applied to
research, rather than to development. I believe the United States is
well invested in basic research but is significantly under invested in
development of the fruits of our basic research.
Q2. Based on witness testimony and the discussion during the hearing,
there was a sense that it would be beneficial for the United States to
have a manufacturing R&D strategy. How would you recommend such a
strategy be crafted? Who should be included in the development of such
a strategy? What would the major elements of such a strategy be?
A2. The problem with discussion of ``manufacturing strategy'' is that
everyone knows what they mean personally by manufacturing strategy, but
the term manufacturing strategy does not have a universal meaning.
If manufacturing strategy means that the government should become
involved in picking winning and losing industries within the United
States, as some countries do within their own borders, then I do not
favor a government mandated strategy. If manufacturing strategy means
that the government should implement policies, which permit
manufacturing industries to grow and develop, then there is a vital
role. For example, in the entrance hall of NIST in Gaithersburg, MD,
there is a nearly century old quote that establishments of standards is
the greatest benefit that government can provide for industry. In our
increasingly complex world, there are many factors which influence the
competitiveness of U.S. companies abroad. These should be identified
and studied, on a continuous basis, by manufacturing leaders for
government, industry and academia. A forum for such studies already
exists as the National Research Council of the National Academies of
Science and of Engineering. The problem is that the finding structure
of the NRC infrequently provides a forum for the high level strategic
questions which should assist Congress in making policy. The National
Academies attract the correct mix and level of people to address the
questions of National Manufacturing strategy; but, the agencies funding
the studies are infrequently asking the Academies to address the higher
level questions of a national manufacturing strategy. If even modest
continuing funding of such questions were provided to the NRC, Congress
would see senior level people competing to serve gratis on such panels,
in hopes of making their voices known.
Congress should charge the NAS-NAE-NRC-IOM with providing an annual
report of national needs in manufacturing.
In my opinion, it would be unwise to create another organization or
Advisory Panel to define a national manufacturing strategy. The
organizational structure to vet a wide range of opinions and to prevent
a few individuals from dominating the agenda, already exists within the
National Academies. Congress should make more complete use of this
resource.
Question submitted by Representative Nick Smith
Q1. What do you think the Federal Government should be doing to
support applied manufacturing research?
A1. I believe that the ATP of NIST within the Department of Commerce is
well conceived and has been well managed, to support the innovation
process which will create new industries and new jobs for the United
States. The view that the ATP is merely welfare for large corporations
who are getting the government to fund the development that they would
be doing themselves without government assistance is too simplistic.
This view pre-supposes that the managers of the ATP are not capable of
assessing risk and pre-competitive technologies. This view assumes that
anything, which comes from basic research should move seamlessly,
without government assistance, to the marketplace. Nearly everyone
associated with the transition from basic research to a marketable
product has been saying for decades that this is not true. The ``valley
of death'' is one of our greatest challenges. The ATP was designed to
bridge this valley. Without a significant investment in the ATP or ATP-
like programs, we are squandering our investment in basic research. The
Department of Defense spends more on development than it does on basic
science, because they recognize the need to assist the development
process if the newest technology is to be brought to market quickly.
Without the ATP, the United States has nothing to assist in bridging
the valley of death for the commercial sector of our jobs creating
industries.
Biography for Lawrence J. Rhoades
Lawrence Rhoades studied Economics and Mechanical Engineering at
Brown University and received his M.B.A. from Northwestern University.
He is President and Chief Executive Officer of Extrude Hone
Corporation--a leading developer and supplier of manufacturing
technology and equipment, serving the majority of the world's largest
manufacturers. Extrude Hone has 22 locations in major manufacturing
centers throughout the world. He holds patents on more than two dozen
inventions related to nontraditional manufacturing processes for
machining, finishing, forming and measurement.
He has chaired the Advisory Committee of the U.S. Export Import
Bank, and has served on numerous advisory groups for the U.S.
Department of Defense and the Department of Commerce, addressing both
technologies and business practices related to manufacturing. Mr.
Rhoades has served on the Boards of Concurrent Technologies
Corporation, the National Center for Manufacturing Sciences, the World
Trade Center Pittsburgh, the Pittsburgh Regional Alliance, the National
Institute for Standards and Technology's (NIST's) Manufacturing
Extension Partnership (MEP) Program, and the Western Pennsylvania's MEP
Center (Catalyst Connection) which he chaired through 2000. He
currently serves on the Boards of the Pittsburgh Symphony Orchestra,
the Society of Manufacturing Engineers' Education Foundation and the
Association for Manufacturing Technology (AMT) which he currently
chairs.
In June of 2001, he was elected a Fellow of the Society of
Manufacturing Engineers. He is also a member of the National Academies'
Government-University-Industry Research Roundtable and the Pennsylvania
Bar Association's Judicial Evaluation Commission.
Answers to Post-Hearing Questions
Responses by Lawrence J. Rhoades, President, Extrude Hone Corporation
Q1. What are the most serious long-run problems facing U.S.
manufacturing? To what extent do these represent significant structural
problems beyond the recession?
A1. Manufacturing R&D is directed to R&D on the processes used to
manufacture products
to make manufacturing tasks more efficient
more importantly, to enhance the value of products
(e.g., by enabling previously unmanufacturable or excessively
expensive designs).
This is connected to, but extends well beyond, most applied R&D,
which is directed to product design--but constrained by ``design for
manufacturability'' concerns.
Q2. Is there anything in the existing inventory of Federal or State
research and development programs that could play a more significant
role in establishing a stronger manufacturing-specific R&D and
technical assistance base?
A2. The manufacturing R&D strategy needs to link the product design
opportunities with the manufacturing process design opportunities--as
well as the ``new science'' that can be harnessed to become new
manufacturing processes.
This suggests--perhaps demands--that rather disparate cultures
collaborate including:
A. Influential product designers/manufacturers (usually
Fortune 100 industrial firms).
B. Manufacturing process technology innovators/implementors--
usually smaller companies who are manufacturing technology
providers supplying machines, tools, manufacturing systems,
etc., to the Nation's industrial base. They are the focal
points and repositories of manufacturing process ``know-how.''
C. ``New Science'' researchers (mostly universities--also
national labs and others).
Public investment should center on the manufacturing process
innovators. This is the leverage point. There are only about 350 key
companies in the U.S. (maybe twice this number). Altogether no more
than 2000 organizations in the U.S. currently comprise the existing
manufacturing technology infrastructure. Impacting 10-20 percent of
these would dramatically improve the Nation's manufacturing technology
infrastructure and consequently U.S. industrial productivity and
competitiveness.
Programs should be directed to the development and rapid,
widespread implementation of advanced manufacturing processes (i.e.,
the methods used to make products), supported by sound science, which
are relevant--indeed transformative and enabling--to the much more
numerous U.S. product manufacturers who use these processes to make
their products.
Funding should encourage integrated teams centered on, and led by,
manufacturing process technology innovators/implementers that link
research centers (providing breakthrough science, or simply sound
scientific understanding, related to manufacturing processes) and
product manufacturers (who can and will design products to exploit the
new value offered by the developed processes).
``Process innovations'' is meant to include new materials and
applications of materials to manufactured products.
Many elements of the NIST ATP ``focused program'' model should be
included, with an emphasis on manufacturing process development,
seeking widespread economic impact and strategies that can build a
durable U.S. competitive advantage.
Q3. In addition to current efforts, please provide specific
suggestions of what the Federal or State governments could do to assist
manufacturing with research, development, and technology in meeting
their long-term needs.
A3. Manufacturing activity represents 17 percent of the GDP. The
inability of manufacturing process innovators to harness the benefits
of their developments and the product (vs. process) focus of large
manufacturing enterprises leaves an under-investment in manufacturing
process development. From a ``USA Inc.'' perspective, this investment
would provide extraordinary yields to the taxpayer. An investment by
the U.S. taxpayer of 0.1 percent of manufacturing's share of the U.S.
economy would be large enough to make a real difference and still small
enough to focus on very high payoff opportunities that would generate
manufacturing related profits, jobs and consequent marginal tax
revenues that are greater than any other investment that the U.S.
taxpayer could make.
with about half this amount going to the manufacturing process
technology innovator/implementers.
Similar investment in education relevant to manufacturing and to
manufacturing technology implementation (ala MEP, but improved) would
have similar yields.
I firmly believe that over a decade these investments would
reinvigorate U.S. manufacturing and return ten times this investment in
annual tax revenue that will otherwise be lost.
Biography for Herman M. Reininga
Herman M. (Herm) Reininga is Senior Vice President of Operations
for Rockwell Collins. Additionally, he is a corporate officer of
Rockwell Collins. Reininga is responsible for overall management of
Rockwell Collins' global production and material operations, including
manufacturing, material, quality, and facilities and manufacturing
activities. He was named to the position in June 2001.
Previously, Reininga served as Vice President of Operations for the
company, a position he was appointed to in 1985. Reininga joined the
company in 1965 and has held positions of increasing responsibility,
including director of Operations CTPD and Director of Production
Operations.
A native of Waverly, Iowa, Reininga earned a Bachelor of Science
degree in Industrial Engineering from the University of Iowa. He earned
a Master of Industrial Engineering degree from Iowa State University.
Reininga is a member of the following organizations: The National
Academies Board of Manufacturing and Engineering Design, AFEI
(Association for Enterprise Integration), Chairman of the U.S. Army's
Future Combat Systems Critical Manufacturing Technologies Independent
Assessment Panel; the U.S. Air Force ManTech 2015 ExCom Committee;
Chairman of the National Center for Advanced Technology (NCAT) and
Chairman of the Subcommittee on Multi-use Manufacturing; Chairman of
the Integrated Manufacturing Technology Initiative (IMTI); member of
the U.S. Air Force ManTech Strategic Planning Executive Committee;
project reviewer for the U.S. Department of Defense (DOD) Technologies
Area Review and Assessment for the National Science Foundation and
National Center of Manufacturing Sciences; appointed member of the
National Research Council; member of the U.S. Navy's Electronic
Manufacturing Productivity Facility Advisory Board, industry
representative on the Electronics Processing and Manufacturing (EP&M)
subpanel; member of the Aerospace Industries Association (AIA)
Technical Operations Executive Committee and Electronics Manufacturing
advisory panels.
From 1990 until 1992, Reininga served on the Defense Science Board
(DSB), a 30-member civilian advisory panel composed of leaders from
industry and academia, appointed by the White House, to provide support
and guidance to the Secretary of Defense. He testified in front of the
Senate Armed Services Committee on Defense Technology, Acquisition and
Industrial Base. Reininga chaired DSB's Production Technology Subgroup
for Weapons Development Production Technology Summer Studies program
which developed a manufacturing technology strategy for the U.S. DOD.
He is called upon regularly to provide perspective for future
manufacturing strategies.
In June 2001, Reininga was inducted into the University of lowa
College of Engineering Distinguished Engineering Alumni Academy. In
1999, he received the prestigious Meritorious Public Service Citation
by the Chief of Naval Research, Department of the U.S. Navy. In 1998 he
was awarded the Defense Manufacturing Excellence award endorsed by nine
national trade associations and professional societies. He received the
Professional Achievement Citation in Engineering (PACE) award from Iowa
State in 1993.
Reininga is a member of the Armed Forces Communications and
Electronics Association (AFCEA). He also has developed and taught
junior college courses on Production Control Master Scheduling.
Reininga is a member of the Board of Directors for the Cedar Rapids
Concert Chorale and is Chairman of the Board of Trustees for the Young
Parents Network. Additionally, he is a member of the University of Iowa
Engineering Development Council, University of Iowa Interaction
Advisory Board for Industrial Engineering and the Iowa State University
College of Industrial Engineering. Reininga is a member of the
Stewardship Committee for Christ Episcopal Church.
Answers to Post-Hearing Questions
Responses by Herman M. Reininga, Senior Vice President, Special
Projects, Rockwell Collins
Questions submitted by Chairman Vernon J. Ehlers
Q1. How would you define the term ``Manufacturing R&D''?
A1. Manufacturing technology contains hardware, software, and human
components. Not only must the future be imagined, it must be
manufactured. Manufacturing takes the engineering designs loaded with
the latest technologies, and by using tools, material, software and
people, create the realization of the design in a product. New
technology requires new processes, materials, and techniques,
manufacturing R&D develops those tools. Manufacturing R&D is a set of
activities that support the design of the product and of the
development of processes, including tools and techniques.
Q1a. How does R&D for manufacturing differ from basic applied R&D?
A1a. Development programs (with few exceptions) do not plan for, nor do
they provide timely development of affordable, producible technology or
their associated manufacturing technologies. Rather in general they
plan and fund for transition of technology performance. This can hinder
technology transition resulting in acquisitions and program schedule
delays. In addition, it can drive cost increases as basic manufacturing
technology issues have to be solved later in the program, either during
systems development and demonstration phase or even during production.
The opportunity to employ a particular technology could, in fact have
been missed entirely if the associated manufacturing processes were not
significantly mature. The U.S. government is spending 29 billion plus
on ``big science,'' in hopes to boost national competitiveness.
Unfortunately only a small amount is being spent on manufacturing R&D.
Basic R&D investigates the scientific foundations with a major
objective of pushing forward the frontiers of intellectual knowledge.
Applied R&D is a much broader umbrella and may include any activity
focused on taking knowledge or science to a functional utility of a
particular new product.
Manufacturing R&D includes both basic and applied R&D, with a focus
on 1) creating a capability to make innovative new products 2)
significantly improving the production efficiency and quality of an
existing product, 3) reducing total cost of ownership with all factors
considered, including the impact on the environment.
Q2. Based on witness testimony, the discussion during the hearing
provided a sense that it would be beneficial for the United States to
have a manufacturing R&D strategy.
A2. Such a strategy should be crafted by starting with the consensus
building planning process and moving to implementation. I believe there
is an opportunity and necessity to do things in a different way than we
have done them before, enabling delivery of results beyond what we have
seen before in cycle time and new processes and new materials.
Q2a. How does a strategy get crafted?
A2a. It is important that a broad national consensus be realized. A
committee to study the problem and write a report will not deliver to
success that is needed. Therefore, the strategy should focus on
building a national consensus. Starting with a core group with proven
success in consensus building, an alliance should be grown to include
hundreds of invested partners dedicated to delivering a plan for
national manufacturing success, and ultimately the implementation of
that plan.
1) Development of a vision for the future--much like to
landing on the moon. This vision, must portray both the use of
advanced technology and the development of processes and
equipment to acquire that technology. Example, cars that use
alternate fuels, require the development of fuel cells that are
affordable and reliable.
2) Establish a high-level focal point within the Executive
Branch of the Government for manufacturing productivity. This
position would be responsible for inspiring the road map
development and stimulating an increase in public and private
collaboration. This will provide an effective means for
mobilizing the Nation's resources and creating a more
supportive infrastructure for the industrial transformation.
Establish a well articulated agenda for building new core
competencies beyond the boundaries of current product,
processes, and/or corporate revitalization plans.
Q2b. Who should be included in the development of such a strategy?
A2b. It is important that this be an alliance of industry and
government. The Government Agencies Technology Exchange for
Manufacturing (GATE-M) was created as a grass-roots movement to better
enable government agencies to work together and manufacturing
technology. There are several organizations that represent the
manufacturing technology interests and industry. Several of these
organizations are already working together. This alliance can and
should be formalized and a national manufacturing technology alliance
formed that is broadly inclusive. Some specific examples of
organizations working in this area are: National Center for
Manufacturing Science, National Coalition for Advanced Manufacturing
and Integrated Manufacturing Technology Initiative.
Q2c. What would the major elements of such a strategy be?
A2c. I believe the strategy has multiple steps.
a. Develop a plan that defines the tools and technologies
needed by American industry and what must be done to deliver
them.
b. Provide a clear understanding of what is being done to
deliver those tools and technologies.
c. Conduct a gap analysis to determine future needs that are
not adequately being addressed in develop a plan to fill those
needs.
d. Create an industry/government alliance, with investment and
funding from all parties, to deliver the solutions.
Six key areas for R&D investment:
Emerging technologies
Intelligence systems
Model based design and manufacturing
Enterprise integration
Knowledge management
Safe secure and reliable manufacturing operations
Questions submitted by Representative Nick Smith
Q1. What do you think the Federal Government should be doing to
support applied manufacturing research?
A1.
Support funding for the development of the Next
Generation Manufacturing Technology Roadmap supported by
Mantech.
Establish a high-level focal point for manufacturing
productivity with in the administration.
Increase support for collaborative development by
increasing funding for DOD MANTECH.
1) The Federal Government should support the development of
manufacturing technologies to assure the strong defense of the
Nation as well as :strengthening our global competitiveness.
The government makes large investments in military systems, but
relatively small investments in new tools and technologies to
build those systems. The government has traditionally relied on
market forces to deliver manufacturing technology advances.
However, the current trend in both the defense and commercial
sectors has been to in fact sharply cut such investments in
order bolster near-term financials. This gap must big filled.
2) Related to National Defense, the government should invest
in producing products that assure the security of homeland and
aggressively combat terrorism. These missions demand the rapid
design and development of detection devices, response
mechanisms and other products that are not now available. New
manufacturing technologies are essential in meeting this
challenge.
3) The Federal Government should invest in manufacturing
infrastructure that supports the economic strength of the
Nation. The U.S. manufacturing sector is under increasing
pressure from overseas competition. The U.S. leadership in
manufacturing technology is being eroded. We must respond with
a strong industry/government commitment to U.S. excellence and
design and manufacturing. The government should provide
financial assistance to collaborative activities that deliver
solutions that benefit all U.S. manufacturers. Pass a
collaborative R&D tax credit for joint industry-national
laboratory and or university research efforts.
4) LThe Federal Government should run lean and efficient
programs that provide fair opportunities for U.S. companies to
compete for applied R&D funding. The SBIR programs and the NIST
ATP programs have shown a high return on investment. There are
areas for improvement in these programs, but the fundamental
models are solid.
Biography for Jay R. Dunwell
President, Wolverine Coil Spring Company, 818 Front Ave. NW, Grand
Rapids, MI 49504. (616) 459-3504
Currently active on the following boards and committees:
Manufacturers Council--Vice Chair
Manufacturers Council Workforce Development Committee--Co-chair
Spring Manufacturers Institute--Board of Directors
Spring Manufacturers Institute--Education Committee
Kent/Allegan County Workforce Development Board
Workpaths.com Advisory Board
Grand Rapids Community College Tassell M-TEC Advisory Board
Butterball Farms, Inc.--Advisory Board
Grand Rapids Chamber of Commerce Family Business Council
Personal
Born October 8, 1964 in Grand Rapids, Michigan. Degree in Economics
from the University of Michigan, 1987. Wife Amy, and two children,
Scott (8) and Bradley (6), both enrolled in Forest Hills Public
Schools' Spanish Full-Immersion Program. Enjoys hockey, soccer,
coaching soccer, sailboat racing, running, and fishing.
Answers to Post-Hearing Questions
Responses by Jay R. Dunwell, President, Wolverine Coil Spring
Q1. How would you define the term ``Manufacturing R&D''? How does R&D
for manufacturing differ from basic or applied R&D? How does R&D for
manufacturing differ from basic or applied R&D?
A1. To me, ``Manufacturing R&D'' implies a direct focus on the
improvement of manufacturing through new technology. This ``improvement
focus'' could be in new products, new processes, new manufacturing
equipment, better materials, more efficient operations, anything that
pushes manufacturing to the next level.
I consider manufacturing R&D to be very similar to applied R&D--
simply the application of the R&D is focused upon manufacturing
challenges. Basic R&D, as others testified, often leaves a ``valley of
death'' between the basic discovery and an economically feasible
application of that discovery. Helping to bridge the ``valley of
death'' is certainly an opportunity for government involvement.
Q2. Based on witness testimony and the discussion during the hearing,
there was a sense that it would be beneficial for the United States to
have a manufacturing R&D strategy. How would you recommend such a
strategy be crafted? Who should be included in the development of such
a strategy? What would the major elements of such a strategy be?
A2. Collaboration must be the foundation of any R&D strategy. Simply
speaking, bringing together those that are advancing technology, making
discoveries, with those that may possibly invent uses and applications
for such discoveries needs to better coordinated. I'm sure it happens
much too often where someone on the East Coast discovers something that
seems to have no useful purpose, yet that same discovery could solve a
problem for someone in Colorado. Yet the two never join. If the
government could establish a system for connecting these parties and
assisting in putting the disjointed efforts together, this would be a
major step in the right direction.
Similarly, the government could assist in establishing new
consortia with the purpose of pushing new technologies into
commercialization. As the Manufacturers Council Position Paper
highlights, expanding collaborative research consortia within the
private sector and between industry and the public sector will help
transfer R&D into new products and processes.
The development of a national strategy must include multiple
players--federal labs, higher education, research organizations,
government officials, private sector business, regional economic
representatives, trade associations, small and medium sized businesses,
just to name a few.
The core and most challenging element of a national strategy is the
transfer of leading edge R&D to other parties. How is this coordinated?
Who participates? What is the economic model that makes sense? These
are the challenges that need the attention of our State and federal
representatives.
Q3. What do you think the Federal Government should be doing to
support applied manufacturing research?
A3. The Federal Government could and should play a key role in
supporting R&D in this country. The current decline in federal spending
on applied R&D must turn around. Increased spending and involvement in
developing a new infrastructure are key responsibilities of the Federal
Government. Key points to this include:
Increase support of current, proven successful
programs such as MEP and ATP.
Renew our national commitment to engineering and
physical sciences research.
Expand research consortia and partnerships between
industry and the public sector.
Manufacturing in the United States is under extreme pressure from
foreign competition. Without a national strategic agenda supporting the
manufacturing infrastructure of our country, we risk the loss of
thousands of jobs and an erosion of our entire economic base. Jobs are
certainly important, but not just any job will maintain the standard of
living and quality of life we expect. Without a strong manufacturing
sector, our quality of life cannot be maintained. The type of job
matters!
Biography for Jason Farmer
Director Advanced Technology, nLight Photonics
Jason co-founded nLight in 2000 after leading the development of
high power semiconductor laser technology with SBIR funding from NSF,
NASA, NIH and the Air Force. Jason is responsible for all aspects of
advanced technology at nLight including the exploration of new
concepts, applications, and opportunities that will allow fundamental
advances in the field of semiconductor lasers. Prior to co-founding
nLight Photonics, Jason was a principal scientist at Aculight Corp.
Jason holds a B.S. from the University of California at Santa Barbara
and a M.S. from the University of Colorado at Boulder.