Where Industry and Security Intersect
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Chairman Manzullo, Congresswoman Velázquez, and Members of the Committee:
Thank you for the opportunity to testify today before the committee on the state of the nation’s defense industrial base and manufacturing capabilities. This is an important issue, as small businesses play a vital role in the nation’s defense industrial base.
My testimony will cover the ongoing work of the Department of Commerce related to the state of the defense industrial base in particular and the U.S. manufacturing capabilities in general. I will then address issues raised by Subtitle B of Title VIII of H.R. 1588.
The Department of Commerce’s mission is to create the conditions for economic growth and opportunity by promoting innovation, entrepreneurship, competitiveness, and stewardship. This mission encompasses responsibilities related to the subject of this hearing. In particular, the Department’s Bureau of Industry and Security carries out several functions related to the defense industrial base. In addition, the Department’s International Trade Administration works with prospective and current exporters which include businesses involved in manufacturing, aerospace, and other related industries.
The Department of Commerce conducts a range of activities related to the defense industrial base. Activities most germane to this hearing are:
• Assessing the state of defense-related industrial and technology sectors; and
• Promoting the approved export of U.S. defense systems.
Under Section 705 of the Defense Production Act and Executive Order 12656, the Department conducts assessments of specific sectors of the U.S. defense industrial base. These studies are usually requested by one of the Armed Services but can also be requested by Congress or industry. The Department develops industry-specific surveys to obtain essential employment, financial, production, research and development, and other data directly from firms in the relevant industry sector. This information is unavailable from other sources.
Typically, one of the Armed Services contacts the Department with a request for an assessment of the health and competitiveness of a particular industry or sector. We enter into a formal agreement with the requestor, and collaborate with the requestor on the scope of the analysis. After gathering input from government, industry, and academic experts, we create a survey, compile and analyze the data, and prepare the final report.
While we gather proprietary data as the basis for our analyses, we carefully aggregate data in the final report so as not to disclose individual company information. We also take steps to make the survey process easier for small businesses, by limiting the amount of data that they are required to provide.
The goal of these industry assessments is to enable the private sector and government agencies to monitor trends, benchmark industry performance, and raise awareness of diminishing manufacturing capabilities. The final reports provide findings and recommendations for government policy-makers and industry leaders. Using these industrial base studies, the Departments of Commerce and Defense can, for example, measure industry capabilities in a specific area, such as high-performance explosives, or gauge industry dependence on foreign materials in manufacturing U.S. defense systems.
The Department has completed more than 30 such assessments since the mid-1980s, looking at a variety of defense-related sectors, including precision optics, ball and roller bearings, advanced ceramics, and ejection seats.
The Department has two major assessments currently underway. One covers biotechnology in U.S. industry and the other covers the U.S. textile and apparel industry.
The biotechnology study is the first comprehensive federal assessment of this critical industry. The Commerce Department recognized the importance of reliable data on the use of biotechnology in U.S. industry, and the growing importance of this industry to the nation’s security. Commerce joined with the Biotechnology Industry Organization (BIO) and others to conduct this assessment. To obtain the data needed for the assessment, the Department surveyed and compiled data from more than 1,000 companies. Of note, 66 percent of all respondents were classified as small businesses, with 500 or less employees.
This is an extremely dynamic industry, with many new products poised to come to market. The companies surveyed reported more than 23 thousand current biotechnology-related patents, with more than 32 thousand patents pending. The value of U.S. biotechnology activity was at least $34 billion in 2001; as a relatively new industry, this is a significant share of the $10 trillion U.S. economy. About 11 percent of survey respondents have held defense contracts in the last five years; as a group, they invested about 10 percent more in biotechnology-related research and development in 2001 than respondents that have not had defense contracts.
These preliminary results were distributed at the recent Biotechnology Industry
Organization annual conference here in Washington. The President spoke at
the event, highlighting the importance of biotechnology to all aspects of
our lives and our national and economic security.
The final report will be available in September.
More recently, at the request of the Congress, the Department initiated an assessment of the U.S. textile and apparel industry. Pursuant to the Conference Report on the Omnibus Appropriations Act of 2003, this assessment will include review of:
• the current health and competitiveness of the U.S. textile and apparel industry;
• the contribution of the textile and apparel industry to the U.S. economy;
• the contribution of the textile and apparel industry to the U.S. armed forces;
• whether the United States is increasing its dependency on foreign sources for critical textile-related materials;
• potential threats to internal security from increased foreign sourcing and dependency; and
• whether the Berry Amendment and other Buy-American restrictions are being effectively enforced by the Department of Defense.
We are in the process of collecting and compiling data from more than 1,500 firms. This report will be completed by September 10, 2003.
In addition, we have three focused assessments of defense industry sectors underway. We are currently assessing the state of the U.S. air delivery (parachute) industry and the munitions power sources (batteries) industry at the request of the Army, and the shipbuilding subcontractor base at the request of the Navy. When completed, these assessments will provide the requesters with information needed to understand the status and viability of each sector.
Let me also describe one of our completed assessments to illustrate their utility to the industry and the government agencies involved. In 1995 and again in 2000, the Department worked with the Navy to assess the domestic manufacturing base for cartridge- and propellant-actuated devices (CAD/PADs). These devices are used to eject pilots from fighter jets and, on the commercial side, are used in automotive air bags. The Navy recognized a potential problem due to a declining number of U.S. suppliers and approached the Department to request a full assessment of the remaining firms in the industry and to develop recommendations for stabilizing the sector.
The 1995 report recommended that the Navy:
• institute biannual meetings with the CAD/PAD producers in order to deal with challenges facing the industry and to get to know their suppliers.
• improve its forecasting process, communicating its needs to the CAD/PAD producers in such a time frame that the sector could respond to the requirements.
• in most cases, eliminate the requirement for firms to ship their product to the Navy for testing, allowing on-site testing instead.
• send much of the rework of expired CAD/PADs back to the manufacturers, rather than conducting the rework at Navy facilities. This helps the firms maintain employment levels in times when demand for new product is low.
The Department also recommended that the Department of Transportation streamline its process for reviewing requests to ship CAD/PADs around the country and to overseas markets.
In addition, the Department addressed another of the assessment’s recommendations – that jurisdiction over export licenses for air bag components be with the Department of Commerce while leaving the export licensing of defense-related ejection seat components licensing with the Department of State. This has greatly reduced the waiting period for licenses and allows commercial air bags to be exported more quickly, thus strengthening that industrial base sector.
Commerce reevaluated the status of the industry in 2000, and found that each of the recommendations from the earlier report had been implemented. The industry has stabilized at about thirty companies, large and small, down from more than 60 in the early 1990s. We have not been approached by the Navy regarding any production shortfalls.
The Department also successfully teams with other U.S. Government agencies to help U.S. defense companies compete and win in the highly competitive international defense market. We advocate on behalf of small and large U.S. companies for foreign defense contracts, in close coordination with the Departments of State and Defense, to engage foreign decision makers on the strategic, military, and economic issues associated with major defense procurements.
In FY 2002, working with interagency partners, my agency successfully assisted U.S. companies in obtaining four substantial contracts to supply foreign governments with defense articles worth approximately $7.8 billion, specifically fighter aircraft and naval combat systems to South Korea, attack helicopters to Kuwait, and aircraft electro-optical equipment to Australia. Earlier this year, we successfully help conclude the sale of U.S. fighter aircraft to Poland in spite of strong “Buy EU” pressures on Poland.
These major sales help maintain all segments of the U.S. defense industrial vendor base and preserve high-tech employment. A U.S. fighter aircraft is comprised of components manufactured by thousands of U.S. companies of all sizes.
We work closely with the Department of Commerce’s global network of U.S. Commercial Service offices, including Export Assistance Centers across the country, to identify defense trade opportunities for U.S. industry, to support U.S. defense trade exhibitions overseas, and to provide export counseling to U.S. industry exploring new emerging market opportunities worldwide.
The Department’s ongoing collaboration with the U.S. Coast Guard to promote overseas the Integrated Deepwater System is an example of another way we work to help maintain and enhance the U.S. defense industrial base. The Integrated Deepwater System is the Coast Guard’s multiyear effort to upgrade its Deepwater assets (ships, airplanes, helicopters, and their sensors, communications, and logistics systems). Our collaboration is an outgrowth of the Department’s comprehensive assessment of the U.S. shipbuilding industry completed in 2001. In the assessment, the Department recommended that the U.S. shipbuilding industry refocus its attention on the world market and form partnerships with foreign firms.
The U.S. Coast Guard’s Integrated Deepwater System provided an opportunity for the Department to assist the shipbuilding industry in focusing on the world market. We have been collaborating with the Coast Guard to promote its new Integrated Deepwater System worldwide. The Deepwater assets can be used by foreign governments for a variety of missions, including search and rescue, fisheries protection, drug interdiction, and homeland security.
The Department works closely with the Coast Guard, its Deepwater industry partners, and government export financing institutions to promote sales of the Deepwater assets worldwide. Increased sales abroad will lead to lower per-unit production costs, which lowers the acquisition cost for the Coast Guard. U.S. industry and its workforce at the prime and subcontractor level benefit through increased demand for their products and services.
Turning to more general work on U.S. manufacturing capabilities, the International Trade Administration of Commerce is leading a Department-wide effort to obtain manufacturing industry insight and feedback by holding approximately 30 roundtables across the country for a report that Secretary Evans requested. Specifically, industry is being asked to comment on:
• Current Status – competitiveness, industry trends, technology leadership, the domestic business environment, manufacturing practices, and outsourcing/off-shore procurement.
• The Future: 2020 – the manufacturing environment in 2020, what products will be produced in the United States, competitive advantages that U.S. manufacturers will carry forward, and human resource management issues.
• Suggestions for policy makers – government policies that enhance our manufacturing competitiveness, the government’s role in developing technologies that industry will need to remain competitive, and the trade barriers that most affect industry competitiveness.
The report will describe the problems U.S. manufacturers are facing and, more importantly, make recommendations on actions the Administration should take to revitalize the manufacturing sector of the U.S. economy.
Mr. Chairman, you’ve asked that I comment on Subtitle B of Title VIII of H.R. 1588 - provisions that relate to the U.S. defense industrial base. Care must be taken so that in attempting to assist one part of the industrial base, another part is not hurt. For example, section 826 of H.R. 1588 effectively requires defense contractors to replace foreign-made machine tools with those manufactured in the United States. Machine tools are expensive and long-lasting assets. While this requirement may ultimately provide additional sales for U.S. companies, requiring that they be replaced, even for large defense contractors, would entail expenditures of money that would be better spent on other areas, such as research and development, new plants, or job training programs, areas that would strengthen the defense industrial base.
My colleague from the Department of Defense has provided the Committee with specific additional concerns about H.R. 1588. The Department of Commerce will continue to work with the Defense Department to assess and monitor the health and competitiveness of sectors critical to the nation’s security.
Thank you, Mr. Chairman. I would be pleased to answer any questions that
you and the committee may have.