NCID TESTIMONY IN SUPPORT OF H. R. 486 -15 world affairs. That must never be permitted to happen. Thank you for the opportunity to appear here and to present these views. I'll be pleased to respond to questions that you and other subcommittee Members may have. INDUSTRIAL BASE: Defense officials are realizing that small companies that are sole BY LARRY GROSSMAN erospace-grade continuous filament rayon yarn is an indispensable ingredient for the nose cones and booster rockets of nearly all U.S. space and strategic missile programs. But most Defense Department (DOD) and space agency officials admit they had never even heard of the yarn's sole U.S. supplier-Avtex Fibers of Front Royal, Virginia-until last year when it announced that it was closing its doors and filing for bankruptcy. Alarmed that space programs would be crippled, DOD paid $22.6 million and NASA $18 million to get the 1,300-employee, sixth-tier supplier back into production long enough to build up a rayon yarn stockpile and establish and qualify a second source. Avtex and its critical product, however, are only minor symptoms of a much larger problem: The U.S. arsenal is filled with single-sourced and foreign-made parts that might not be available even in peacetime, let alone during a global crisis. Worse yet, DOD officials concede that they do not know the scope of the problem. "We just dort know how Larry Grossman is associate editor of many situations exist where there is a sin- Such doubts are hardly new. In De- While initiatives to improve the U.S. industrial base have languished since the House panel's report nearly nine years ago, the dynamics of the problemn have changed greatly. "We are losing the technology edge," says Charles H. Kimzey, the Pentagon's staff director for industrial base programs. "What that does is push the issue from a 'when-we-go-to-war' problem to a peacetime problem." The basic U.S. defense strategy of relying on technology to offset superior numbers cannot be maintained, Kimzey stresses, if DOD does not have access to the highest available technology to incorporate into weapon systems design. Members of Congress share the Pentagon's concern. "The United States has always been able to assume that it had the technological base necessary to meet its defense needs," says Democratic Sen. Jeff Bingaman of New Mexico, chairman of the Senate Armed Services Committee's Defense Industry and Technology Subcommittee. "We have now reached a point where we can no longer make that assumption." Congress, the military and the arms industry differ over what to do about the decline of the nation's defense industrial base. But they do agree that in a future global war the United States could not approach the acceleration of armaments production that it met in World War II. This realization has moved the issue back to the front burner and has sparked nearly a dozen DOD initiatives, legislative proposals and independent assessments over the last year. But potential fixes are hard to fashion and complicated by a host of controversial issues-including mounting congressional protectionist sentiments and the skyrocketing national trade deficit-that are inseparable from the capa bilities and health of the defense industrial base. "If we are going to manage the industrial base issue, we've got to look at where dependencies are vulnerabilities," says Jack Nunn, a professor of business administration at the National Defense University's Industrial College. "Once we have done that, then we can decide how we are going to manage those vulnerabilities." Doing this, however, may be tough, because it is often difficult to separate protectionist rhetoric from honest national security concerns in the industrial-base debate. In 1984, for example, George Langstaff, then president of the Footwear Industries of America, wrote in an oftquoted letter to Congress that "[i]mproper footwear can lead to needless casualties and turn sure victory into possible defeat," after the U.S. shoe industry failed to win relief from foreign imports. Nevertheless, a congressionally ordered Defense Logistics Agency study reported last April that U.S. shoe manufacturers could turn out only 2.9 million of the 6.9 million pairs of combat boots required during a mobilization. This would occur in spite of a law mandating that all military footwear must carry a "Made in the U.S.A." label, keeping in business four U.S. boot makers. In fact, imports of non-rubber footwear have risen from 49.5 percent in 1980 to 81.6 per Ithough potential vulnerabilities cut across a wide range of the 215 I basic defense industries that account for 95 percent of all DOD purchases from manufacturers, a shortage of qualified suppliers for many critical materials and components in the lower tiers is seen as the potential "show-stopper." "I am less concerned that there are fewer airframe makers today than I am with the state of the subtiers," says Nunn, "No one knows for sure whether the subtiers can be counted on." A key problem facing DOD as it tries to assess its vulnerabilities is the inability to see what is happening down in the complex world of the subtiers. DOD knows which companies are building its tanks, fighter aircraft and submarines, but it has less insight into the origin of what is under the hood. That is because the military does little to monitor the activities of subtier contractors. According to a recent study, the industrial base shrunk dramatically in the 1980s, a time when defense hardware procurement budgets experienced unprecedented peacetime growth. In 1982, there were 118,489 companies that sold DOD-defined defense-critical goods to the Pentagon. By 1987 that number had plummeted to 38,007. At the same time, the number of companies in those market sectors providing goods to all buyers, not just DOD, went from 98,659 in 1972 to 122,965 in 1982, and the report projects growth to more than 150,000 companies in 1987, according to the study. The study, "Deterrence in Decay: The Future of the U.S. Defense Industrial Base," released in late April by the Washingtonbased Center for Strategic and International Studies (CSIS). Pentagon procurement increased every year between 1982 and 1987 by an average of 10 percent in fiscal 1989 dollars. "However, the number of firms performing on those procurement dollars declined by over 67 percent during the same time frame," according to the report. "The fact that the number of firms in those same sectors overall increased by about 22 percent means that firms in the defense-critical sectors are leaving the defense business in favor of more profitable endeavors," the report concludes. The most startling shakeout occurred PHOTOGRAPH BY JIM HERITY at the product-specific level, says the report. More than 4,000 companies left the airframe structural components business; 600 companies quit the anti-friction bearing business; DOD's list of non-powered valve suppliers dropped from 1,310 in 1982 to 890 in 1987; and, during the same period, 668 of 834 vendors stopped supplying navigational instruments to the Pentagon. The exodus of companies from the defense subtiers is rooted in DOD's overly bureaucratic acquisition system, says McCormack. "Doing business with us is not the greatest deal in the world," he says. Other studies have uncovered specific problems. In 1985, for instance, a jointservice analysis of the precision guided munitions (PGM) production base revealed that 11 of 20 missile programs headed up by nine different manufacturers were powered by batteries supplied by a single contractor, Eagle Picher of Joplin, Missouri. An average of 61 percent of the components of 20 combined PGM projects were subcontracted and 414 first-subtier suppliers were under contract. A total of 240, or 58 percent, of those 414 first-subtier vendors were either single- or sole-source suppliers. One program, the Navy's air-to-air Sparrow missile, reported that its first subtier contractors had a foreign source dependency in 16 of 57, or 28 percent, of its vendors. A report, "Bolstering Defense Indus trial Competitiveness," issued last year by Robert B. Costello, undersecretary for acquisition, found that many desirable highly qualified suppliers will not do business with defense prime contractors because of the plethora of laws, rules and regulations that are passed on to them through the primes from the federal government. If information truly is power, then the lack of it can weaken any initiative. All defense industrial base watchers concede that they lack knowledge as to where to find the hundreds of thousands of components purchased by prime contractors in the nether reaches of the industrial base. By all accounts, the greatest requirement at this point is for precise data on the subtiers. "There are hundreds of Pearl Harbors out there waiting to happen," says James A. Blackwell, a senior fellow at CSIS. "Part of the difficulty is that the intelligence system today is no better than it was in 1941. The creation of a data base has to be the first step." Rather than initiating a new data base program that would both compete for scarce Pentagon dollars and require more forms to be filled out by an already paperworked-to-death contractor base, industrial base advocates hope to use the vast pools of information that currently exist within the wide array of DOD, Commerce Department and Census Bureau computers. The Pentagon is in the process of establishing pilot programs like the defense industrial network, or Di net, which provides manufacturing data and Project SOCRATES that provides technology data. Dinet, not a unique DOD program, is described by Pentagon officials as a gateway to other data bases that will allow production base information to be assessed. Approximately $1.3 million was spent in fiscal 1988 to establish Dinet, and it is estimated that another $29 million over five years will be required to develop a fully operational system. In the current fiscal environment where every program is routinely scrutinized, that is a lot of money for a project that has to compete with others that go to war. "With our current mind set, $29 million buys an F-16, and that's called 'deterrence," says a Pentagon official working on the program. "Data bases probably don't scare Russians." The Pentagon routinely collects data on prime contracts over $25,000. However, the primes are currently not required to provide detailed information on their supplier base. It is the Census Bureau that is charged with collecting data about the industrial base, according to DOD officials. Every fifth year, the bureau conducts a survey of all U.S. manufacturers. And every year, the agency surveys a sampling of manufacturers representing The sight system for the Army's Bradley fighting vehicle contains foreign as well as sole-source optical components. approximately 70 percent of entire spectrum of the industrial base. "What we have found in talking with the Census Bureau is that an awful lot of the data it produces is useful to us in doing our analysis and understanding industrial-base capability and vulnerabilities," says Kimzey. He says DOD is currently discussing with the Census Bureau ways to modify or better utilize bureau questionnaire methods where data falls short of defense needs. Last year, Dinet's application was demonstrated in the precision decision optics support system. In its current state, the system can provide the user with information pertaining to the precision optics industry. For example, the program can tell the user that a West German manufacturer, Schott, is the sole supplier of a critical optic component in the Bradley fighting vehicle and supplies its product to four vendors at different levels. The user can also use information pertaining to geographical locations of vendors and raw materials. In the near future, the system will identify alternative sourcing. Given a scenario in which a possible foreign policy consideration would potentially restrict trade to a particular region of the world, the precision decision optics support system could immediately identify all sources that exist within that region and the weapon system they support. Officials hope Dinet when fully operational will be able to generate similar analyses for any required weapon system, component, raw material, vendor and region of the world. M any influential observers accuse the Pentagon itself of undermining the defense industrial base by its increased purchases of overseas components and a rising number of granted waivers to the 1933 "Buy American" Act. The Fiscal 1989 National Defense Authorization Act contains legislation that gives DOD higher priority to maintain and strengthen the defense industrial base by directing it to centralize its planning and requiring that each service conduct an industrial base vulnerability analysis on one of its weapon systems. DOD was also told to consult with the Commerce Department in negotiating its overseas memorandums of understanding (MOU)-agreements that govern bi- or multilateral defense trade. It was further ordered to author an omnibus policy on the increasingly controversial, compensatory deals known as offsets, that are 'Data bases probably don't scare Russians,' says a DOD official working on the Dinet program. tagged onto overseas defense sales. The legislation also imposes buy-American provisions on certain special valves and machine tools. Originally, the legislation was intended to give the Pentagon's undersecretary for acquisition the power to designate domestic suppliers for components judged critical for national security. However, the approved version of the bill was watered down, according to its author, Democratic Sen. Alan J. Dixon of Illinois, chairman of the Armed Services Committee's Subcommittee on Readiness, Sustainability and Support. The most vociferous buy-American legislation was sponsored last year by Democratic Rep. Mary Rose Oakar of Ohio, who chairs the House Banking, Finance and Urban Affairs Committee's Economic Stabilization Subcommittee. Oakar's bill would have required the president to limit "to the maximum extent possible" the production of all weapon systems and their components to U.S.based manufacturers within five years. The bill was formally approved in subcommittee late in 1988, but did not make it to a floor debate and vote. Some experts view buy-American requirements as narrowly protectionist; others may embrace them wholeheartedly but take a less strident stance. "Getting into this has always been a delicate thing for me because I don't want to be labeled a protectionist," says Dixon. "I do not like to be at the forefront of what is perceived as protectionism, but I do believe that in both the domestic industrial-base issues and in our national security concerns about productivity, we have to be concerned with any of the necessities of the industrial base." However, other nations are far less apologetic about trade policies that provide advantages to their own industries. says William G. Phillips, president of the National Council for Industrial Defense (NCID), an advocacy group founded in 1986 that represents small defense contractors and subcontractors. Phillips does not hide his interest in buy-American legislation, saying that one person's protectionism is another's industrial-base preservation. As one of the most vocal buyAmerican proponents on Capitol Hill, NCID brought suit against DOD in federal court in 1988, charging that its broad MOU practices violated federal law. "Someone has to yell loud enough to increase awareness and concern over the erosion of our manufacturing capability," says Phillips. DOD officials are cool toward broad buy-American proposals and most strongly oppose propping up moribund industries by financing obsolescence. "Just because an industry appears not to be very successful in world markets does not necessarily suggest that DOD should do anything about it," Kimzey says. Only 17 percent of the U.S. bearing output is consumed by DOD, according to Kinzey, who adds that even if DOD were obliged to consume only U.S. bearings, the couple of percentage points that would be added to output totals would not save the bearing industry. "Using the Defense Department procurement budget as the exclusive tool to deal with a weakened subtier structure is not going to solve the problem," he says. Industrial alert conditions The Pentagon has established a calating scale of six industrial alert gonditions (Indcon), modeled. the defense readiness conditions, or Defcons, which govern the state of alert of U.S. military forces. Under this scale, Indcon 6. represents the day-to-day-condition of the industrial base. If, for example, U.S. intelligence sources warn that the Soviets have begun a rapid movement of troops, the Pentagon would move in Indcon 5 and begin planning for the expansion of U.S. industrial production. Once in Indcon 4, long-lead-time iter would be identified. At Indcon 1, total industrial mobilization would be in effect. Larry GrosSIMON |