[Senate Hearing 105-860]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 105-860
 
       AN INDUSTRY VIEW OF THE SATELLITE EXPORT LICENSING PROCESS

=======================================================================

                                HEARING

                               before the

  SUBCOMMITTEE ON INTERNATIONAL SECURITY, PROLIFERATION, AND FEDERAL 
                                SERVICES

                                 of the

                              COMMITTEE ON
                          GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE

                       ONE HUNDRED FIFTH CONGRESS

                             SECOND SESSION


                               __________

                             JULY 29, 1998

                               __________

      Printed for the use of the Committee on Governmental Affairs

                               ----------

                    U.S. GOVERNMENT PRINTING OFFICE
50-653 CC                   WASHINGTON : 1999

_______________________________________________________________________
For sale by the Superintendent of Documents, Congressional Sales Office
         U.S. Government Printing Office, Washington, DC 20402




                   COMMITTEE ON GOVERNMENTAL AFFAIRS

                   FRED THOMPSON, Tennessee, Chairman
WILLIAM V. ROTH, Jr., Delaware       JOHN GLENN, Ohio
TED STEVENS, Alaska                  CARL LEVIN, Michigan
SUSAN M. COLLINS, Maine              JOSEPH I. LIEBERMAN, Connecticut
SAM BROWNBACK, Kansas                DANIEL K. AKAKA, Hawaii
PETE V. DOMENICI, New Mexico         RICHARD J. DURBIN, Illinois
THAD COCHRAN, Mississippi            ROBERT G. TORRICELLI, New Jersey
DON NICKLES, Oklahoma                MAX CLELAND, Georgia
ARLEN SPECTER, Pennsylvania
             Hannah S. Sistare, Staff Director and Counsel
                 Leonard Weiss, Minority Staff Director
                       Lynn L. Baker, Chief Clerk

                                 ------                                

   SUBCOMMITTEE ON INTERNATIONAL SECURITY, PROLIFERATION AND FEDERAL 
                                SERVICES

                  THAD COCHRAN, Mississippi, Chairman
TED STEVENS, Alaska                  CARL LEVIN, Michigan
SUSAN M. COLLINS, Maine              DANIEL K. AKAKA, Hawaii
PETE V. DOMENICI, New Mexico         RICHARD J. DURBIN, Illinois
DON NICKLES, Oklahoma                ROBERT G. TORRICELLI, New Jersey
ARLEN SPECTER, Pennsylvania          MAX CLELAND, Georgia
                   Mitchel B. Kugler, Staff Director
               Linda J. Gustitus, Minority Staff Director
                      Julie A. Sander, Chief Clerk




                            C O N T E N T S

                                 ------                                
                                                                   Page

Opening statement:

    Senator Cochran..............................................     1
    Senator Levin................................................     7
    Senator Stevens..............................................     8
    Senator Specter..............................................     9
    Senator Cleland..............................................     9
    Senator Thompson [ex officio]................................    10
    Senator Durbin...............................................    12

                               WITNESSES
                        Wednesday, July 29, 1998

C. Michael Armstrong, Chairman and CEO, AT&T, and Chairman, 
  President's Export Council.....................................     2
Steven D. Dorfman, Vice Chairman, Hughes Electronics.............    12

                     Alphabetical List of Witnesses

Armstrong, C. Michael:
    Testimony....................................................     2
    Prepared statement...........................................    47
Dorfman, Steven D.:
    Testimony....................................................    12
    Prepared statement...........................................    54

                                APPENDIX

Letters dated September 7, October 21, October 29, and November 
  16, 1993 from C. Michael Armstrong, Chairman and Chief 
  Executive Officer, Hughes......................................    62
Article from the Washington Post, dated July 5, 1998, entitled 
  ``Blueprint for a China Policy''...............................    68
Letter dated October 8, 1997 to the U.S. Department of Commerce 
  from M.E. Mersch, Manager, Export Compliance, Hughes Space and 
  Communications Company.........................................    70


       AN INDUSTRY VIEW OF THE SATELLITE EXPORT LICENSING PROCESS

                              ----------                              


                        WEDNESDAY, JULY 29, 1998


                                     U.S. Senate,  
                Subcommittee on International Security,    
                     Proliferation, and Federal Services,  
                   of the Committee on Governmental Affairs
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 2:02 p.m. in 
room SD-342, Senate Dirksen Building, Hon. Thad Cochran, 
Chairman of the Subcommittee, presiding.
    Present: Senators Cochran, Domenici, Specter, Stevens, 
Levin, Durbin, Cleland, and Thompson [ex officio].

              OPENING STATEMENT OF SENATOR COCHRAN

    Senator Cochran. The Subcommittee will please come to 
order.
    I would like to welcome everyone to today's hearing of our 
Governmental Affairs Subcommittee on International Security, 
Proliferation, and Federal Services. Our subject today is ``An 
Industry View of the Satellite Export Licensing Process.''
    This hearing is a continuation of our Subcommittee's review 
of the export control policies of this administration to 
determine if they were designed and administered to protect our 
national security interests as well as to promote exports.
    We have recently concentrated specifically on the 
commercial satellite industry because of the proliferation 
concerns that surround the transfer of militarily useful 
missile and satellite technology that can occur when our U.S.-
manufactured satellites are exported to or launched by other 
countries.
    We have learned from witnesses that, in the process of 
launching a satellite, technology can be transferred to other 
countries, such as China, that could be useful in improving 
their space launch vehicles and ballistic missiles. This is 
particularly troubling when these other countries have sold 
missiles or missile components to hostile, rogue nations for 
delivering weapons of mass destruction.
    The experience and perspectives of the U.S. business sector 
must be taken into account as we try to understand all sides of 
this issue. Therefore, the viewpoint of current and former 
executives of the Hughes Electronics Corporation, one of the 
leaders of the aerospace industry, will be heard today.
    We're pleased to have before the Subcommittee two 
distinguished officials who have served in the highest offices 
of Hughes Electronics Corporation, C. Michael Armstrong and 
Steven D. Dorfman.
    Mr. Armstrong is chairman and chief executive officer of 
AT&T Corporation and chairman of the President's Export 
Council, and he is the immediate past chairman and chief 
executive officer of Hughes Electronics Corporation. Mr. 
Dorfman is vice chairman of Hughes Electronics Corporation. He 
has been with the company since 1957.
    Gentlemen, we appreciate very much your attendance and your 
assistance to our Subcommittee. We have copies of your prepared 
statements, which we thank you for and we will include in the 
record in their entirety at this point. We invite you to make 
whatever comments you would like to make, summarizing your 
statement or reading it, as you like.
    Mr. Armstrong, you may proceed.

 STATEMENT OF C. MICHAEL ARMSTRONG,\1\ CHAIRMAN AND CEO, AT&T, 
            AND CHAIRMAN, PRESIDENT'S EXPORT COUNCIL

    Mr. Armstrong. Thank you, Chairman Cochran, and Senator 
Stevens.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Armstrong appears in the Appendix 
on page 47.
---------------------------------------------------------------------------
    I appreciate the opportunity to participate in this hearing 
on industry's view of the commercial satellite export process.
    It appears there are currently three issues being examined 
on the commercial satellite export licensing process. One, what 
is the right jurisdiction for export licensing of commercial 
communicating satellites. Two, was the process violated due to 
the handling of the Loral launch failure analysis report. And 
three, did campaign contributions influence the process.
    Mr. Chairman, let me state first, foremost and 
unequivocally that as a recent past chairman of Hughes, I know 
that its leadership, its people, its values and its technology 
are firmly committed to the national security of the United 
States of America. So much of this company's life, history and 
future are dedicated to that purpose, that Hughes would never 
endanger the security of this country.
    In response to the last question on campaign contributions, 
as I recall, my only Presidential contributions were $1,000 to 
George Bush in 1991, and, though frankly, I didn't recall it 
until preparing for this hearing, $1,000 as well to Bill 
Clinton in 1995. And Hughes, while I was chairman, contributed 
only PAC money, split about 50-50, between the political 
parties.
    Regarding the handling of the Loral failure analysis, I 
have no personal knowledge of how the Loral failure report was 
handled. I was aware that two Hughes scientists were on the 
Loral team but have no personal knowledge of what function they 
performed.
    As to the correct jurisdiction for export licensing of 
commercial communicating satellites, my response is that it's 
in the Commerce Department and that's where it should be. From 
August 1993 to 1996, I worked to convince many in Washington to 
transfer commercial communicating satellites from the munitions 
list, where they are under State Department jurisdiction, to 
the commerce control list which is administered by the Commerce 
Department.
    There's a fundamental reason for this. I felt strongly, and 
still feel, that commercial communicating satellites are not 
munitions, and should not be treated by the government as if 
they are. Doing so has in the past only hurt American companies 
and helped our foreign competitors. And in the end, after a 
long and careful review, the U.S. Government ultimately agreed. 
May I explain why I believe our government made the right 
decision.
    First, all satellites are not the same. Some satellites can 
perform tasks that should not be considered for export. Hughes 
and others build these only for United States national security 
interests.
    However, a commercial communicating satellite performs no 
tasks that are a threat to our national security interests. A 
commercial communicating satellite is the equivalent of a 
telephone wire or a television cable. The satellite only 
enables video, voice and data that transmits up to reflectors 
in the sky and down to receivers on the ground. It's like a big 
mirror that reflects communications.
    It competes with wires and cables and cellular. In fact, 
commercial communications satellites carry television, fax, e-
mail and telephony that today are doing so much to open 
societies and bring people around the world closer together.
    For example, back in 1972 when President Nixon went to 
China, Hughes deployed its satellite resources into China to 
broadcast to the world this historic American step to begin the 
opening of China. It was a big step in history, not only 
because President Nixon was there, but because Hughes and its 
satellites enabled us all to be there.
    However, besides being convinced that a commercial 
communicating satellite is a commercial product and is not a 
munition, a little history may explain why I worked for 
consideration to move jurisdiction to the Commerce Department. 
When I joined Hughes as chairman in 1992, America had won the 
cold war. The Defense budget was being cut in half. And this 
proud defense firm had to lay off tens of thousands of people, 
people whose only reason for their layoff slip was that they 
had worked hard and successfully to our victory.
    People were devastated. Los Angeles was suffering 
economically and the company was in serious decline. We had to 
change and change fast. Change from mostly defense to 
commercial, change from primarily domestic to global, change 
from being technology-driven to market-driven, and change from 
mainly government satellites to also commercial satellites. And 
I'm proud to say, change we did.
    As borders around the world came down, as societies opened, 
as countries sought to participate in the global economic 
order, they needed a communications infrastructure to 
participate commercially. Commercial communicating satellites 
are essential in doing that job.
    Our commercial satellite backlog began to grow as we 
invested to expand our commercial satellite products and 
modernize our factory. Then in August, 1993, we were notified 
the State Department had implemented category 2 MTCR sanctions 
against China. I learned that this meant we could not export 
commercial satellites to China for launch or for use.
    As a result, two of our customers in Australia and Hong 
Kong who had selected China launches could not launch. In 
addition, the two satellites we were building for China's 
banking system, worth approximately $100 million, were canceled 
and given to our competitor, DASA, in Germany.
    This was followed by China canceling a memorandum of 
understanding that could potentially have totaled over a 
billion dollars of satellite work. They also gave that to DASA. 
China simply replaced American-built satellites with German-
built satellites. China was not hurt, but America was.
    Billions of dollars lost, thousands of jobs affected, and 
an uncertain future at a very critical time. Of course, I 
wondered how the American workers and companies building a 
commercial product got singled out by these sanctions. And I 
wondered, what was the rationale to internally penalize when 
trying to influence external errant behavior.
    I learned that the State Department judged the commercial 
communications satellite to be the munitions list items due to 
embedded technology. I never learned why satellites were 
singled out, since there are other products with embedded 
technology. And I never understood why penalizing our country's 
exports made any sense versus punishing the errant country's 
export to us.
    So with Hughes people being laid off by the thousands, with 
the company trying to survive the cold war victory, with our 
sitting in double digit unemployment and slowly climbing back 
from riots as we worked to rebuild Los Angeles, something had 
to be done. We needed help from Washington.
    About that time, December 4, 1993, President Clinton came 
to Los Angeles to see and learn about the economic problems of 
Southern California. I was asked to participate with a group in 
an economic roundtable with the President. This was a very open 
and public roundtable, in fact, it was televised on C-SPAN.
    When it came my turn to speak on what could be done to help 
Southern California, I shared the plight of the thousands of 
workers affected due to the application of sanctions to our 
commercial satellite products. The President agreed to look 
into the situation.
    However, besides just asking the President, I thought it 
was necessary to share our situation with Congress and the 
Federal agencies involved, and to respond to any questions or 
concerns. So I went to Washington in pursuit of four 
objectives.
    One, to promote an understanding that a commercial 
communicating satellite was not a munition and did not belong 
on the munitions list. Two, to request permission to let the 
Australia and Hong Kong companies launch their satellites. 
Three, to explain why the satellite embedded technology was 
secure, protected, guarded and not a national security risk if 
launched from China. And four, to obtain predictability in the 
licensing process, to seek support to transfer commercial 
communicating satellites from State Department munitions list 
to the Commerce Department's commerce control list.
    Before setting up these Washington appointments, I again 
reviewed the security implemented in our China launches, and 
the review confirmed that the satellite was boxed, freighted 
and locked for shipment. That Hughes people accompanied and 
oversaw all handling and storage, that the satellite, upon 
arrival at the launch site, was under lock and that we had 
continual video surveillance of the satellite. And that the 
mounting of the satellite on the rocket was under our 
surveillance, and that there was no opportunity for access, 
intrusion, or understanding of the embedded technology.
    So I came to Washington to share my story. And I met with 
Dr. Bill Perry, Secretary of Defense; Jim Woolsey, Director of 
the CIA; Mickey Kantor and Charlene Barshefsky, USTR; Admiral 
McConnell, NSA; Senator Sam Nunn; Secretary Lloyd Bentsen; 
Secretary Ron Brown; Sandy Berger, National Security Advisor; 
Bob Rubin, National Economic Advisor; Peter Tarnoff, Under 
Secretary of State; Senator John McCain; Speaker Newt Gingrich; 
Senator Diane Feinstein; Congressman Toby Roth; Congresswoman 
Jane Harman and many members of the California delegation, as 
well as numerous others.
    During each of these discussions, I would pursue two 
questions. Would you agree that a commercial communicating 
satellite is a commercial product, and not a national security 
risk? And if you are asked to get involved, would you give your 
support for jurisdiction transfer?
    After discussion, no one expressed disagreement with the 
explanation, and I left believing I had their support. Indeed, 
30 members of the California delegation of both parties signed 
a letter to Secretary Christopher in support of excluding 
commercial satellites from any list of sanctionable items. 
Certainly the situation was known, it was openly discussed, and 
I was encouraged by the support and the lack of opposition from 
those that I spoke with.
    I spoke out publicly. I testified before the Congressional 
committee which was rewriting the Export Administration Act. 
And I wrote letters to government officials. In addition, since 
1994, I have had the honor of chairing the President's Export 
Council. The PEC, as it is most often called, is comprised of 
nearly 50 men and women drawn from business, industry, 
agriculture and labor as well as from the executive and 
legislative branches.
    By charter, the PEC advises the President and the 
government on export matters and recommends ways of expanding 
U.S. exports. Our goal is to find ways to promote American 
exports, to identify any problems and to recommend solutions. 
As intended, the PEC has advised the government on a full range 
of issues regarding the expansion of America's exports, 
including submitting a report on unilateral sanctions prepared 
by PECSEA. The PECSEA, a separately chartered subcommittee on 
export administration, which is chaired by Michael Jordan of 
Westinghouse, and now of CBS, also addressed the question of 
commodity jurisdiction with the PEC.
    Also, I was on Secretary of State Warren Christopher's 
advisory council. And I asked the Secretary if he would review 
the sanctions process, or really a lack of a sanctions process, 
and he agreed to initiate a review.
    The Secretary never told me the outcome of his review. Of 
course, I learned later that the President, in consultation 
with his cabinet and advisors, approved the change in 
jurisdiction to Commerce. And I believe this was the right 
decision.
    But there is a key question. Did it work? Was it worth it 
to transfer jurisdiction from State to Commerce? The answer is 
yes. I believe this change in jurisdiction, moving commercial 
communicating satellites from the munitions list to the 
commerce control list sent three messages around the world. 
One, that the United States would not compromise its 
nonproliferation principles. MTCR sanctions did not change, and 
wrong behavior still brings U.S. sanctions.
    Two, that the U.S. has not compromised its national 
security. The process and U.S. agencies are in place to protect 
it. If the process needs to be tightened, this country, this 
Congress, the companies involved, can tighten it. There must 
not be any question that the satellite licensing and failure 
review processes assure our national security.
    And three, that the countries that need commercial 
communicating satellites to open their society internally and 
compete in the world economic order externally can now have 
more confidence in buying U.S. commercial communications 
products.
    Certainly, the results support that the communications 
market is there and this change has helped U.S. companies 
participate. U.S. satellite exports are growing, and the 
prospects for continued U.S. satellite leadership are supported 
by the industry's commercial growth.
    As we're discussing these three important issues, I hope 
this Subcommittee will keep in mind the underlying reasons U.S. 
companies have been forced to look overseas for launch 
capacity. The failure to develop a U.S. launch industry had 
resulted in an inadequate launch capacity to meet worldwide 
demand for commercial satellites. The two main launch 
providers, Lockheed Martin in the United States, and France's 
Arianne, did not plan to invest to expand capacity. China and 
Russia have U.S.-imposed launch quotas, and the United States 
was not interested in investing in additional launch capacity.
    Therefore, to expand U.S. launch capability, Hughes 
initiated and committed hundreds of millions of dollars in 
future launch contracts, future contracts, so that McDonnell 
Douglas would develop the new Delta 3, and Boeing the new Sea 
Launch. As a result of Hughes initiatives, new U.S. launch 
technology is being developed, a more competitive market is 
unfolding. U.S. launch supply is going up, and launch lead 
times are coming down.
    It was Hughes that took the risk, that committed the 
capital, to improve this country's launch technology 
capability. But in my opinion, the need for further investment 
in U.S. rocket systems and alternative launch technologies is 
still warranted.
    In summary, Mr. Chairman, I submit Hughes would not and did 
not violate any national security interests or process. The 
commercial communicating satellite is not a munition and does 
not belong on a munitions list. As a commercial product and 
with embedded technology fully protected, commercial 
communicating satellites belong on the commerce control list 
administered by the Commerce Department.
    If the licensing or failure review process needs to be 
tightened, government and industry should tighten them. And if 
this country is concerned about its rocket and launch 
technology, then we must invest in it, just as Hughes did.
    I hope that this provides the Subcommittee with an 
understanding of the problems we faced and my efforts to seek, 
by petitioning the decision makers in Washington, an 
appropriate solution. Thank you for listening to me.
    Senator Cochran. Thank you for your statement, Mr. 
Armstrong.
    Before proceeding to hear from Mr. Dorfman, I'm going to 
yield to the distinguished Senator from Michigan, the Ranking 
Member, for any opening statement he might have to make, and 
then to other Senators who are here as well.
    Senator Levin.

               OPENING STATEMENT OF SENATOR LEVIN

    Senator Levin. Thank you, Mr. Chairman. And thank you for 
holding these hearings. We've had numerous hearings over the 
past few months that have examined the issue of whether the 
current export control process for communications satellites is 
adequate to protect our national security and to promote our 
national interests.
    Under the current system established by executive order in 
1995, and made effective in 1996, the Department of Commerce 
issues license for exports of U.S.-made satellites through a 
multi-step process that both requires interagency agreement and 
provides for a multi-level appeal process when full agreement 
isn't reached. Each agency, including the Departments of State, 
Defense, Commerce and Energy, and ACDA, the Arms Control 
Disarmament Agency, has an opportunity to object to the 
issuance of the communications satellite license and the 
decision to license can ultimately be elevated by any of those 
agencies to the President.
    Companies like Hughes lobbied to get communications 
satellites off the State Department munitions list where they 
were subject to State Department licensing and onto the 
commerce control list because they wanted greater certainty and 
a quicker timetable on their business operations. Unlike the 
State Department, when it comes to export licenses, Commerce 
operates openly and with deadlines. Items on the commerce 
control list are not subject to automatic sanctions in the 
event a country violates our anti-proliferation policy. 
Moreover, no other country treats communications satellites as 
munitions.
    But the telecommunications industry was not the only voice 
that was heard in the Executive Branch advocating this position 
a few years ago. Congress, in 1993, also expressed its interest 
in modifying the export control process for communications 
satellites. In a letter dated September 20, 1993, to the 
President, then House Minority Whip Gingrich, then Majority 
Leader Gephardt, the chairman and ranking member of the key 
trade Subcommittee in the House, Sam Gejdenson and Toby Roth, 
respectively, urged ``dramatic reform in U.S. export control 
policy'' to enhance the ability of the United States to compete 
overseas.
    The letter explains that by ``imposing controls we are 
limiting the ability of the American businesses to export some 
of their most marketable items.'' The letter goes on to 
recommend the ``decontrol of all telecommunications equipment 
for civilian end users,'' and in closing, the authors ask the 
President, ``to take the immediate steps necessary to remove 
these unnecessary and burdensome obstacles to U.S. 
competitiveness.''
    Some may want to attribute sinister motives to those who 
lobbied hard for communications satellites to be licensed by 
the Commerce Department. And there are some who argue that 
satellite licensing decisions made by the Clinton 
administration were affected by campaign contributions. Yet the 
witnesses here today are persons who helped lead the effort to 
change the licensing process, to assist their business's 
ability to compete. Individually and as a company, they gave 
campaign contributions almost equally to both parties.
    What's really at issue here is a public policy question. By 
preventing our own companies from selling their latest 
equipment abroad, when companies in other countries are eager 
to take up the slack, are we protecting or hurting our national 
interests? Is placement of satellite licensing in Commerce, 
with the additional control by executive order, a good one with 
respect to our national interest?
    How we balance our interest in protecting our technology 
with our interest in selling our technology is no easy answer. 
And there are legitimate arguments on both sides of the issue. 
We have four or five committees in the Senate alone probing 
those questions.
    Today, we have the opportunity to hear the views of one of 
the major companies in the telecommunications industry, and the 
insights of our witnesses developed during years of experience 
in manufacturing and selling U.S.-made satellites 
internationally, and lobbying Congress and the Executive Branch 
will be valuable to the Senate as we grapple with this issue.
    And again, I want to thank you, Mr. Chairman, for your 
leadership in this area.
    Senator Cochran. Thank you, Senator Levin.
    Senator Stevens.

              OPENING STATEMENT OF SENATOR STEVENS

    Senator Stevens. Mr. Chairman, I'm pleased I was able to 
come and hear this statement by Mr. Armstrong, because I have 
had some questions in the past about this practice, not about 
the export of commercial satellites, but about the definition 
of what is a commercial satellite. I think that Mr. Armstrong 
properly raises the question of having that defined by our 
security people, rather than having it defined by the State 
Department in terms of a munitions list that's not applicable, 
obviously, to commercial satellites.
    And I think that it is a very timely subject, because we're 
going to have this amendment on the Floor tomorrow, I'm sure 
you know, concerning the question of where that authority 
should be, whether it should be in the State Department or the 
Commerce Department.
    I do believe we have to draw the line between those 
satellites which have embedded technology which is highly 
classified and those that have embedded technology which 
unfortunately is in the whole range of things. I had one of the 
computer experts of the country, if not the world, tell me the 
other day that we have embedded technology in ovens and in the 
thermostats and even in some of the small objects we take for 
granted, such as our fax machines and our machines to print out 
the product of our computers.
    It is not an easy question. We must protect our national 
security. But I believe Mr. Armstrong has made the point about 
protecting our commercial ventures overseas, too. So I 
congratulate you for your statement, and I thank you very much.
    Senator Cochran. Thank you, Senator Stevens.
    Senator Specter, do you have an opening statement? We are 
interrupting our witnesses to take opening statements from any 
Senators at this point.

              OPENING STATEMENT OF SENATOR SPECTER

    Senator Specter. Thank you very much, Mr. Chairman.
    I would like to make a few comments, and shall be 
relatively brief. I commend you, Senator Cochran, for chairing 
these hearings, and your initiative on this important matter.
    As we all know, Justice and Pentagon officials have 
advanced the proposition that during the exchange of 
information, Loral may have given the Chinese restricted 
information that could improve the guidance system of their 
rockets. This is similar technology to that which guides long 
range nuclear missiles to their targets.
    When Mr. Armstrong has testified that ``a commercial 
communicating satellite performs no tasks that are a threat to 
our national security interests,'' as I understand it, he has 
taken up only one aspect of that capability inherent in the 
satellite itself. There are a couple of other factors. 
Technological know-how that can be transferred in the process 
of ensuring the satellite and launch vehicle are properly 
integrated before launch, and in the case of a failure, 
recovery of useful satellite components and using the launch 
failure analysis to perfect the country's ballistic missiles.
    The testimony also relates to discussion with the President 
and others in Washington on the economic impact to Hughes of 
the August 1993 MTCR munitions technology control regime 
imposed against China. I think it's of interest to the 
Subcommittee to know about any discussions with Chinese 
officials, about the relationship between the sanctions and 
their proliferation behavior.
    Then there is the overarching question, although not 
touching Mr. Armstrong, the issue that has been before this 
full Committee in some detail on campaign finance reform about 
Loral's chairman and CEO, Bernard Schwartz, and the large 
contribution which he made and the largest personal contributor 
to the Democratic National Committee last year.
    So there are a number of very important issues which we 
have to take up. I'm delighted to see Mr. Armstrong and Mr. 
Dorfman here today. Not unexpectedly, I have other commitments, 
so I'll be submitting a number of questions in writing. Thank 
you very much.
    Senator Cochran. Thank you, Senator Specter.
    Senator Cleland, we have interrupted our witnesses' 
testimony for any opening statements from Senators. You are 
recognized for that purpose, if you would like to make a 
statement at this time.

              OPENING STATEMENT OF SENATOR CLELAND

    Senator Cleland. Thank you very much, Mr. Chairman.
    I'd like to thank you for taking the time to continue the 
examination of the adequacy of satellite export controls. An 
issue of this magnitude certainly requires a thorough 
investigation before any conclusions can be reached. We have 
previously heard testimony from the Departments of Commerce, 
State, and Defense on this issue. Safeguarding our national 
security interest while striving for economic growth can be a 
challenging balance to achieve.
    Mr. Chairman, all three of the departments have discussed 
the procedures in the licensing process and the obligation 
industry incurs in protecting militarily sensitive technology. 
Earlier this year the news broke regarding allegations that 
Loral and Hughes provided technical information to China, 
triggering widespread concern about the question of technology 
or technical expertise being transferred to China.
    There is, however, disagreement as to the extent of such 
transfers and their impact on our national security. For 
example, concern was raised regarding three satellites launched 
by Hughes in 1995 and 1996 which were not monitored by the 
Department of Defense personnel. Satellites did not require the 
State Department's license and monitoring had been tied to 
licenses for munitions list items.
    Ideally, we would like to create policies and procedures 
that would preclude every possibility for the potential of 
militarily sensitive technology transfer or any other 
disastrous outcome. Unfortunately, that's not realistic. Then 
how do we ensure against technology transfer or any compromise 
to national security? I'll be interested in what our witnesses 
have to say in regard to that, some of your ideas. We'll 
appreciate those ideas.
    A critical part of investigating this issue is to address 
improving our export control policies and procedures as well as 
exploring the immediate response required should, say, an 
incident occur. What lessons have we learned and how can we use 
them to improve the way we conduct business?
    It's interesting to me that on June 22 of this year in that 
issue of Defense Daily, Major General Robert Scales, Commandant 
of the Army War College, was noted to have said that China is 
the top visitor to the Fort Leavenworth Center for Army lessons 
learned web site. Well, if China is willing to learn from our 
shortcomings, perhaps we can, too.
    I look forward to hearing from our witnesses, and Mr. 
Chairman, again, thank you very much for these hearings. In 
terms of campaign finances, I'm an original co-sponsor of 
efforts to reform our ways in which we raise money in terms of 
running for offices in this Congress.
    Thank you very much, Mr. Chairman.
    Senator Cochran. Thank you, Senator Cleland.
    Senator Thompson.

             OPENING STATEMENT OF SENATOR THOMPSON

    Senator Thompson. Thank you very much, Mr. Chairman. I 
appreciate your continued leadership in this important matter. 
You've been dealing with this issue for some time, in fact, 
some time before many people were paying much attention to it 
in terms of overall proliferation policy and issues. And I 
appreciate that very much.
    I do think what we're dealing with here today is within the 
broader context of our relationships to countries such as China 
and Russia. I certainly have no quarrel with a business that is 
in business to make money by legitimate means however they can. 
You owe it to your stockholders. I expect you to be a forceful 
advocate for the things that you believe which will also put 
money into the pockets of the corporation. The missile 
business, or the satellite business is a very important and 
lucrative business, and as long as you keep your cards on the 
table, I have no problem with that. I think you're looking out 
for the legitimate interests of the corporation.
    In cases like this where companies deal with countries such 
as the Chinese, I have no problem with them looking out for 
their legitimate interests. However, American corporations 
should not serve as mini-state departments. While I have no 
problem with them looking out for their legitimate interests 
and trying to make sales and put forth the points that support 
the sale, when you've got billions of dollars at stake, it 
makes it even more important that we have a system and that we 
have people inside our government that can take an objective 
look at this thing, take what you say into consideration, weigh 
that, and make an objective determination.
    We've heard some evidence that with regard to the transfer 
of responsibility, with regard to the downsizing of the 
significance of the agencies within the government that look 
out for the military significance of these things, look out for 
the proliferation aspects, that they have been downgraded and 
commerce and economic situations have been upgraded.
    That's not a balance I understand you gentlemen to make, as 
I say. But it's very, very important for our government to make 
it. And it's also important, I think, to keep in mind that 
we're dealing with countries that are proliferators of weapons 
of mass destruction. Again, as long as you're abiding by the 
rules, that's not solely your determination to make.
    But as I look at the documentation, it's clear, Mr. 
Armstrong, that you had quite a few discussions with the 
Chinese. That's fine, that you were trying to seek agreements, 
that you were trying to maybe work out disputes between our 
government and their government on occasion. It was your 
opinion November 16, 1993 that the Chinese were committed not 
to proliferate missile technology.
    But as late as last year, our own CIA says the Chinese are 
the greatest proliferators of weapons of mass destruction in 
the world. So your perception, while not correct, certainly did 
not stand alone. I think there were many in our government who 
made the same kind of mistake.
    But as I say, it's within a larger context and my concern 
is when you've got an important commercial venture, and you're 
dealing with an important commercial customer such as the 
Chinese or the Russians, how do you maintain that when more and 
more we know, from the Rumsfeld Report, from our CIA report, 
that they are continuing to transfer missile parts, missile 
technology, biological and chemical capabilities, to nations 
that we deem proliferators?
    So again, that's not your ultimate responsibility, but it's 
something that I think corporate America needs to be mindful 
of, it's something that those who administer these matters have 
to balance, and it's something that the Congress of the United 
States certainly should take very seriously from an oversight 
responsibility. So I'll look forward to exploring these issues 
with you.
    Thank you.
    Senator Cochran. Thank you, Senator Thompson.
    Senator Durbin, you are recognized for any opening 
statement you'd like to make.

              OPENING STATEMENT OF SENATOR DURBIN

    Senator Durbin. I'll be very brief, Mr. Chairman. I 
apologize for being late. I thank Mr. Armstrong and Mr. Dorfman 
for joining us today.
    From what I have learned, the decision during the Reagan 
administration for the United States to forswear its commercial 
launch capability really put American business at facing a 
challenge and maybe somewhat of a disadvantage, in shopping 
around the world for adequate launch capacity. I think we all 
have come to appreciate the importance of satellite technology 
in our daily lives, and the quality of life in America.
    What the Subcommittee is trying to do is make certain there 
is a national security balance, that in no way do we compromise 
national security in the name of expanding our economy or 
expanding this new technology.
    I'm glad that we're having these hearings. I've joined the 
chairman in previous amendments to try to hold back the 
proliferation of technology that might assist those who would 
use it the wrong way. I believe the questions that we'll now 
promulgate and the testimony which will be elicited will help 
us reach that conclusion.
    Thank you.
    Senator Cochran. Thank you, Senator.
    Senator Domenici.
    Senator Domenici. Mr. Chairman, I have no opening 
statement. I just congratulate you for holding these hearings, 
and I appreciate that Mr. Armstrong and Mr. Dorfman are here. I 
think you can help us, if we can discuss facts and if you will 
discuss thoroughly with us your understanding in these areas. I 
think it will be very helpful for us to try to determine some 
policy changes if they are necessary, or perhaps look back on 
some things that were done in a mistaken way in the 
administration of our current laws.
    Thank you very much.
    Senator Cochran. Thank you, Senator.
    Mr. Dorfman, you may now proceed with your statement.

   STATEMENT OF STEVEN D. DORFMAN,\1\ VICE CHAIRMAN, HUGHES 
                          ELECTRONICS

    Mr. Dorfman. Thank you, Mr. Chairman, Members of the 
Subcommittee, Senator Levin, Senator Durbin, Senator Cleland, 
Senator Thompson, and Senator Domenici. I appreciate hearing 
the introductory comments that you've made. And I'll try to 
pick up at least some of the questions you raised in my 
prepared testimony and then I will be glad to answer more 
detailed questions as we go along.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Dorfman appears in the Appendix 
on page 54.
---------------------------------------------------------------------------
    As vice chairman of Hughes Electronics, I represent 15,000 
employees who are manufacturing satellite and 
telecommunications equipment internationally and for the U.S. 
Government and providing telecommunications services around the 
world. Hughes' heritage in the satellite communication business 
touches back to the launch of the first communications 
satellite 35 years ago in 1963, and today close to half the 
communications satellites, the commercial communications 
satellites in orbit, are built by Hughes Electronics.
    Our heritage as a defense contractor goes back even 
further, to our original roots in the 1940's. Hughes was built 
on a strong commitment to preserving the national security of 
the United States. And that commitment continues as a 
significant component to our corporate culture.
    It is largely for this reason that both Hughes management 
and employees have been deeply distressed by the allegations 
that Hughes had engaged in activities with respect to our 
satellite launches in China that have strengthened the Chinese 
military capability and weakened the national security of the 
United States.
    I welcome this opportunity to set the record straight. We 
at Hughes have undertaken a thorough examination of our actions 
and conduct and we have found no, underscore no, evidence that 
Hughes employees have transferred any missile technology to the 
Chinese. I realize that there are several Congressional 
committees looking into the relevant facts. I am confident when 
all the facts are out in the open, Hughes will be exonerated of 
any wrongdoing.
    The second point I'd like to make today is that in the 
interest of national security, it's good to have a strong, 
competitive domestic satellite manufacturing industry. I 
strongly urge the members to take particular care when 
legislating in this area. It is all too easy to sacrifice for 
the sake of perceived short-term security benefits the long-
term ability of our country to be preeminent in the critical 
technology of satellite communications.
    I believe Senator Thompson properly raised the question 
about profits being more important than national security. And 
of course, we at Hughes need to turn in profits for our 
shareholders. They expect it as part of the capitalistic system 
that we've worked so hard and so long to defend against the 
communist system during the cold war. No apologies.
    But I do want to make it clear, Senator Thompson, that at 
Hughes, we would never compromise the U.S. national security, 
would never tolerate an employee compromising the U.S. national 
security.
    Senator Thompson. I've never suggested that you would.
    Mr. Dorfman. And that's kind of the persona of Hughes 
Electronics.
    For example, as Mr. Armstrong sketched it out, satellites 
are delivered to China intact, with any potential sensitive 
technology already embedded in the satellite, not available. 
For the short period they are in China, the satellites are 
guarded 7 days a week, 24 hours a day, by a team of security 
specialists. In fact, approximately a quarter of the Hughes 
people that are at the launch site are security personnel.
    Any employee who fails to comply with the Hughes plan is 
subject to disciplinary action. And I would add that Hughes has 
always followed the same security procedures, whether or not 
DOD monitors were present at the time.
    We believe the decision made in 1996 to transfer leadership 
of the interagency process to Commerce was a correct one. That 
being said, we believe there are improvements that can be made. 
One serious area where security can and should be improved and 
tightened is that in the context of launch failure reviews. I 
think in truth when the regulatory process was set up, launch 
failure reviews were just not anticipated.
    As this Subcommittee is aware, the most serious allegations 
relating to technology transfers to the Chinese have occurred 
in the context of Loral, Loral's review of a Chinese launch 
failure, or I should say Loral's leadership of a review of the 
Chinese launch failure. This is an area that is presently not 
explicitly regulated, and this deficiency in the regulatory 
framework must be filled.
    And Hughes suggests that this Subcommittee consider 
legislation or urge administrative changes that would firmly 
place the jurisdiction for launch failure reviews in the 
Department of State with strong participatory role from the 
Department of Defense. I think that would improve the current 
system and give everybody more confidence that there is no 
inadvertent exchange of technology.
    A second change that Hughes would strongly support would be 
the presence of DOD monitors at all China launches. This was 
also mentioned in the preliminary statements. It is true that 
there were three Hughes launches in which there were no DOD 
monitors there. And incidentally, the DOD was welcome to 
attend, and the process permitted them to attend. They elected 
not to attend for their own purposes, I don't know why they 
didn't come, but they weren't there, and I think we should fix 
that.
    And the presence of DOD monitors would be one more layer of 
protection that Hughes believes is well advised, and in case, 
in the event that the failure of DOD to show up was for 
budgetary reasons, I want to say here and now that Hughes will 
pay for the costs of DOD surveillance during the launches as an 
extra layer of protection against inadvertent transfer of 
information.
    And I might add, having looked at the records, I see no 
sign that any technology was transferred, even though the DOD 
monitors weren't there. Because we followed the same exact 
procedures and processes that were followed when the DOD 
monitors were there.
    Now, as this Subcommittee is well aware, we've discussed 
Hughes' support of the transfer of licensing jurisdiction to 
the Department of Commerce. This was not based on preference 
for one government department over another. Rather, it was 
concern based on a series of issues that deserve consideration 
as you consider changing jurisdiction.
    The most important one is in the past when satellites were 
licensed by the Department of State, this was because they were 
on the munitions list. Hughes supported removing commercial 
satellites from the munitions list for the simple reason that 
commercial satellites are not weapons. Commercial 
communications satellites are not munitions. They have no 
inherent military characteristic.
    And that is, if they were military satellites, they should 
be on that list. But they are not. They are commercial. Their 
generic electronic communication functions make them 
overwhelmingly civilian in nature, and treating them that way 
is not special treatment, it is normal and realistic treatment, 
just like it would be for telephone switches or cellular 
telephone equipment.
    As the Members of this Subcommittee know well, the effort 
to rationalize licensing policy took many, many years, and was 
thoroughly debated. There were plenty of glitches along the 
way, but we presently have a process in which all interested 
departments and agencies have a participatory role. This is an 
important characteristic of the present structure that Congress 
should endeavor to preserve. To simply reverse policy now 
without due consideration to preserving those aspects of the 
current regulatory framework that are positive and make the 
system workable and balanced would reintroduce some of the same 
problems that we worked so hard to fix in the middle 1990's.
    If we raise unnecessary barriers to satellite exports, we 
will jeopardize the continued U.S. preeminence in this critical 
technology. And I believe putting satellites back on the 
munitions list will raise just such barriers. As we move out, 
European manufacturers will move in. One less American-made 
satellite positioned over the globe means one more non-American 
made one.
    I believe this will damage national security, not enhance 
it. I also believe it's in our national security interests to 
have modern communication technology sending information into 
countries, such as China, or the former Soviet Union, that were 
previously closed. I believe it enhances our national security 
when Chinese citizens can receive CNBC, CNN, BBC, and other 
western programming. And that's just what's happening as we 
speak, through Hughes-built satellites, some of them launched 
on the Long March-2E launch vehicle.
    Today, it is even possible that these hearings or part of 
them will be seen in China, so that Chinese people can view the 
American political process.
    There are two additional specific items that the 
Subcommittee asked me to address, and I will briefly. There is 
more in the record. And that is the 1995 APSTAR 2 launch 
failure investigation and the second is the pending contract 
between Hughes and a company called APMT.
    Insofar as the APSTAR 2 launch failure investigation, I 
have a fuller account in my testimony. I think if you read it, 
you'll find that we took a very thorough investigation and 
coordinated it very closely with the U.S. Government. The 
APSTAR 2 launch involved a Chinese launch vehicle that exploded 
while carrying one of our satellites.
    We notified the State Department within 24 hours. We began 
collecting debris using a plan that had been worked out with 
the State Department and the Defense Department in an earlier 
launch failure. We informed the Commerce Department when we 
sent a review team to China and reaffirmed that we would 
conduct our review by the terms of our export license.
    During the review, we met with Commerce officials to 
present materials we planned to share with the Chinese. After 
the review, we met again with Commerce officials to discuss 
findings we planned to share with our international customers, 
the insurance community, and the Chinese. In each case, 
Commerce gave us the approval to go ahead.
    And of course, the simple fact is, in this operation, as 
always, we were working as partners with the U.S. Government, 
sharing responsibility for the national security and relying on 
the government's judgment and guidance. As I've said before, 
with that experience behind us, I would propose that we do even 
more for launch failure reviews, and get greater participation 
from DOD and State.
    The Subcommittee has also asked that I discuss the Hughes 
satellite contract with the Asia Pacific Mobile 
Telecommunications Satellite Company, which is APMT. APMT is a 
partnership of affiliates of the Chinese government and private 
companies in Singapore and soon Japan and Thailand. If APMT 
follows the same course as other similar systems, it will 
eventually be listed on either the New York Stock Exchange or 
NASDAQ and publicly traded in stock markets in the United 
States and elsewhere.
    There's been a lot of erroneous reports about the APMT 
system and its capability. So I'd like to speak for just a 
moment about it.
    The APMT system, when deployed, will be providing satellite 
mobile telephone service to over 20 countries in the Asia 
Pacific region. It's basically a cellular phone system in the 
sky. It turns out it's identical to a satellite we're building 
for a Middle East consortium called Thuraya, for which we have 
been fully licensed by the licensing process.
    The system is designed so that anyone with a satellite 
phone can make a call to anywhere on Earth. This is true for 
the Chinese military if they choose to use it, or for that 
matter, any military that has a phone and the amount of money 
necessary to make the telephone call. And of course, it's 
really aimed at commercial customers, entrepreneurs, students, 
journalists, intellectuals, anybody with a phone and enough 
money to make a call, just like any cellular phone system.
    It is also true that the APMT satellite to perform this 
function, along with its clones, requires a large reflector and 
some on-board processing. That makes it a little bit more 
sophisticated than some of the other satellites. And thus it 
has some more advanced technology.
    We have safeguards to keep design details from any 
unauthorized people, any foreigners, to protect this design 
information. The State Department has approved our processes 
for protecting the sensitive design information for APMT and 
Thuraya. We do not want to release any design detail on this 
sensitive information.
    Hughes received critical approvals for APMT from State and 
Commerce in 1996. This included the approvals that I mentioned 
for safeguards of sensitive technology. Minor design changes 
now require we get a renewal of this license. And I hope this 
Subcommittee will encourage the Departments of State and 
Commerce to act promptly so that we can meet our contractual 
obligations with APMT.
    Once again, I thank the Subcommittee for the opportunity to 
be here today and discuss these issues which are so critical to 
our Nation's competitive strength and to our national security 
and to our company. And I look forward to your questions.
    Thank you very much.
    Senator Cochran. Thank you, Mr. Dorfman, for your 
statement, and for your continued assistance in trying to give 
us answers to questions that we advanced to you before the 
hearing. We thank you for that as well.
    One thing that occurs to me at the outset is that when the 
changes were made in the export control policies and the 
Commerce Department was given the lead role on issuing 
licenses, one thing we learned from our government witnesses at 
an earlier hearing was that it was the Commerce Department that 
really made the decision as to whether a license was required 
or not, which was an interesting thing for us to find out. And 
that there really was not an interagency review process in 
place to review that decision.
    It was an interesting anomaly, it seemed to me, in the 
process. And Hughes must have been troubled by that, too. 
Because back in October 1997, a letter was written. And I'm 
going to ask the staff to hand Mr. Armstrong and Mr. Dorfman a 
copy of this letter. It's dated October 8, 1997.\1\ And it 
expresses concerns and questions about whether or not certain 
satellite components and satellites required a license to be 
issued.
---------------------------------------------------------------------------
    \1\ Letter dated October 8, 1997 to the U.S. Department of Commerce 
from M.E. Mersch, Manager, Export Compliance, Hughes Space and 
Communications Company appears in the Appendix on page 70.
---------------------------------------------------------------------------
    And this calls to the attention of the Commerce Department 
that Hughes had asked questions about whether a license was 
required, and they hadn't gotten an answer. And they wrote 
again and hadn't gotten an answer.
    Well, this letter dated October 8, 1997, according to the 
Commerce Department, still hasn't been answered. And we raised 
this question on July 8 with Under Secretary William Reinsch.
    So we're coming up on 10 months since the letter was 
written. And Hughes, as far as we know--maybe you can tell us 
different--still hasn't heard from Commerce. And it seems to me 
that if the rules about issuing licenses for these satellite 
exports are so ambiguous that Hughes, which is the leading 
company in this area, doesn't understand what's covered and 
what's not covered, and the Commerce Department can't figure 
out how to answer the letter, we've got a problem.
    I wonder what your reaction is, Mr. Armstrong, to this 
situation. And whether this is an indication of a part of the 
process that needs to be fixed right away.
    Mr. Armstrong. Mr. Chairman, I never saw this before the 
staffer just handed it to me. So I wasn't aware of a letter 
sent by Hughes that had not been answered by the Commerce 
Department. I don't think specifically I have any insight to 
bring to the situation per se. I guess I would go back that if 
the assertion is that there's an October 8 letter that the 
process doesn't serve in terms of getting an answer, that would 
serve the licensing process, that ought to be part of 
tightening the licensing process.
    Senator Cochran. Mr. Dorfman, what's your reaction?
    Mr. Dorfman. Well, I'm just reading this letter as we talk. 
But what I think we see here is an effort by Hughes to get 
answers and details on licensing that Hughes is, I believe, 
reading this thing, is doing its utmost to get the 
clarification it needs to get on with its job.
    Senator Cochran. Well, this is an example, it seems to me, 
of the fact that even putting the responsibility at Commerce, 
where industry says we get more response, we get specific time 
tables and all the rest, that we've still got a problem with 
this administration in export licensing. If this industry, if 
your company can't get an answer to straightforward inquiries 
about what's covered and what isn't covered by a license 
requirement, I don't know how anybody else is going to 
understand the regulations.
    Has this not come to your attention, Mr. Dorfman?
    Mr. Dorfman. I'm aware of continued discussions as the 
agencies in the new environment trying to comply with the 
licensing process is working out, how to operate. So I am aware 
of that in general. I think it's constructive in that people 
are moving forward with good intentions.
    The process of licensing technology, as I think was said 
earlier, is not a simple one. It's not a black-white one. It's 
got some grays to it. I think what we're seeing here is 
Commerce's striving to deal as Hughes is with the new arena of 
licensing.
    Senator Cochran. I know there might be some reluctance to 
criticize the Commerce Department, if you're having to deal 
with this regulatory regime every day. But could you tell us of 
any other difficulties that your company has had in trying to 
comply with Commerce Department regulations in this area?
    Mr. Dorfman. I have some advisors here who do know about 
this thing, and they have advised me there is an explanation 
for this letter which I'm not aware of, but we'll certainly be 
glad to supply this to the Subcommittee.
    Senator Cochran. That would be very helpful.
    What about any other problems that have come to your 
attention as a result of Commerce Department having the 
responsibility for administering this regulatory regime?
    Mr. Dorfman. Well, I've already referenced one of them. I 
think, in hindsight, even though we did everything properly, it 
would have been better and made everybody feel more comfortable 
if there was more DOD activity in launch failure reviews. I 
mean, that's an area that's come to my attention, I think I've 
explained, described my views on the subject.
    Other than that, I know of no specific complaints that 
Hughes has to make about the performance of the Commerce 
Department.
    Senator Cochran. We've talked about this problem of launch 
failure review. And I noticed in your comments, Mr. Dorfman, 
you mentioned that a launch failure review is not specifically 
regulated. At our last hearing, Acting Under Secretary Holum 
from the Department of State, when discussing this business of 
launch failure review, said that in his judgment, the work done 
by U.S. companies in connection with reviewing the launch 
failure, would be a defense service. And as a defense service, 
would require State Department approval before providing that 
service.
    It raises a question to me, again, whether or not there is 
a breakdown in communication or understanding between the 
companies that are being regulated and the agencies that have 
responsibility for administering those regulations. Here we 
have on the one hand the State Department saying, that's a 
defense service, and therefore you have to come to the State 
Department to get approval before you engage in a launch 
failure review where you are providing information and you 
interact with, for example, the Chinese in the case of this 
APSTAR 2 launch failure.
    What is your reaction to that difference of opinion that we 
obviously have between you and Secretary Holum?
    Mr. Dorfman. I do not see that as a difference of opinion. 
I wasn't aware of that testimony, but if that was the 
interpretation, that would be entirely consistent with my 
suggestion that the State Department take an active role in 
administering launch failure reviews, which is one area where I 
think a tightening up of the process should be done.
    So I don't know the details of that statement, but it 
sounds like it's consistent with what I am proposing here, in 
an administrative way.
    Senator Cochran. We've heard that some companies, where 
there is some question about whether the State Department or 
Defense Department ought to be involved, have voluntarily 
invited them to participate or send monitors. I think this has 
occurred in the case of launching U.S. satellites in China, 
where it was not certain whether DOD monitors were required. 
They were invited.
    In the case of the APSTAR launch failure investigation, you 
could have invited the Department of Defense or the Department 
of State to participate or to review what you were doing. But 
you did not, is that right?
    Mr. Dorfman. Well, as I said earlier, the Department of 
State was aware that there was such a failure and a failure 
review underway. We did not invite them, to my knowledge, that 
may have happened and I'm just not aware of it. But I'm here 
today publicly saying, as vice chairman, I want them there.
    Senator Cochran. Mr. Armstrong, you were the CEO at the 
time. What is your recollection about that event? Do you recall 
there being any discussion at Hughes about whether the State 
Department or Defense Department ought to be involved in the 
launch failure review?
    Mr. Armstrong. No, sir, I do not. I would receive reports 
as to the progress of the review from time to time. They were 
verbal reports, as you might expect, as the situation related 
to the company. But the details of what was going on and how it 
was being conducted was not something that I was personally 
involved in.
    Senator Cochran. There was a launch failure back in 1992, I 
think it's referred to as the Optus B2 launch investigation. 
Are you familiar with that, Mr. Dorfman?
    Mr. Dorfman. Yes, I am, sir.
    Senator Cochran. That first launch failure in 1992 resulted 
in a review, and Hughes participated in that, did it not?
    Mr. Dorfman. Yes, it did.
    Senator Cochran. And in that instance, I'm told that 
monitors were present. And that reports, as they were 
developed, were given to the Department of Defense or the 
Department of State or both. And they were reviewed before they 
were released to the Chinese.
    Why wasn't that same procedure followed in the APSTAR 2 
launch failure review?
    Mr. Dorfman. As I said, that was under the jurisdiction of 
the Department of Commerce. We had all of our coordination with 
the Department of Commerce, who was in charge of that process.
    Senator Cochran. OK, now, that leads me to the inescapable 
conclusion, and I'm going to ask Mr. Armstrong if you agree, 
that having the Department of Commerce with the primary 
responsibility for licensing has spilled over to include--in 
the view of the regulated companies as well as the Department, 
the responsibility to supervise, a launch failure review, if 
any supervision is given. Is that your conclusion?
    Mr. Armstrong. Well, I think there's a lot of homework 
being done by some of the committees that are looking into 
this. From what I know, on launch failure reviews, it does not 
appear that the process is as it should be. And that more 
designed involvement, rather than invited involvement, would 
really be the right steps to tighten that. So I guess I would 
have to agree with that, on the review process.
    Senator Cochran. Looking back over it all, do you agree 
that it would have been the better practice to communicate that 
view to the Department of Defense or to the State Department or 
to the President in your capacity as president of the Export 
Council? Or as a citizen of the United States where you see the 
possibility of the conveyance of information or technology to 
China in an unauthorized way?
    Mr. Dorfman. Mr. Chairman, I would like to make it clear 
that I have gone back over what was done, not in detail, but 
enough detail to convince me there was no improper technology 
exchange, in the sense of no material technology was 
transmitted to the Chinese that would help them build missiles. 
I want to start from that point, because that's an important 
point to keep up with.
    But in hindsight, I think the DOD should have been there. I 
can't tell you what the reasons were that they weren't asked. 
They certainly were invited to be there by the whole licensing 
process. They didn't show up.
    Perhaps we should have then taken a more active role in 
getting them there, only for the reason to make absolutely sure 
and make everybody feel good that there was no improper 
technology transfer. But I don't believe there was any improper 
technology transfer, anyway.
    Senator Cochran. Senator Levin.
    Senator Levin. Thank you.
    Just on that point, according to your testimony, Mr. 
Dorfman, you said that immediately after that flight failure 
that the Department of State was notified, is that correct?
    Mr. Dorfman. Yes.
    Senator Levin. So they knew about that. And then your next 
sentence is that your recovery program was conducted according 
to a debris recovery contingency plan worked out with the State 
and Defense Departments following a previous launch failure. So 
apparently at a previous launch failure, State and Defense had 
worked out some kind of a contingency play to recover debris 
with you, is that correct?
    Mr. Dorfman. That's correct, sir.
    Senator Levin. So at some point, then, State and Defense 
were involved in approving a contingency plan following a 
launch failure, is that safe to say? But not in this particular 
launch failure?
    Mr. Dorfman. There was a very similar launch failure in 
1992. We worked out a plan, it was approved by DOD and State. 
That was the same plan that we went forward with in a similar 
failure in 1995.
    Senator Levin. Now, you're suggesting that formally, the 
launch recovery, excuse me, the launch failure review, be 
basically under State Department jurisdiction, or in effect be 
on the munitions list for State Department approval. I think 
that makes a lot of sense, by the way, just the way State and 
Defense were involved in producing that plan following the 
previous review. There's no reason why they shouldn't be in 
charge, it seems to me, following any launch failure of any 
approval of recovery plans. So I think that makes a lot of 
sense.
    Why do you stop there, though? Why do you both believe, 
which you obviously do, that the licensing to begin with should 
remain with Commerce, rather than being transferred back to the 
munitions list? That is the issue which was voted on by the 
House of Representatives overwhelmingly to transfer back, 
despite the fact that the House of Representatives put 
tremendous pressure on the President to transfer those same 
satellites to the commerce control list just a few years 
before.
    Now, following these events, we've got the House of 
Representatives voting overwhelmingly to transfer satellites 
back. But you think that would be a mistake, and the Senate is 
going to be facing that issue either on the Floor or in our 
defense authorization bill, which we're currently negotiating, 
or both. So I'd like to hear a little further explanation as to 
what difference does it make, and more important, is national 
security protected as much with satellites on the commerce 
control list as it would be on the State Department munitions 
list? Because that may be our interest, it's surely mine.
    Mr. Armstrong. Exactly the question I had coming to 
Washington. Because I had gone through, of course, my own 
briefings, both on what was the embedded technology, how was it 
protected and guarded, and what risks would we have. Because as 
we've already tried to both explain, we're very sensitive to 
national security.
    The first people that I called on, I think you could tell 
from the testimony, were Dr. Perry, Dr. Kaminsky, the DOD 
staff, CIA, the National Security Advisor, ERO, and NSA. And 
Senator Levin, I asked the same question, is there some risk, 
is there some process, or is there some procedure. Because this 
is not about us trying to in any way jeopardize or put at risk 
national security. This is about a commercial product that goes 
up there and competes with other commercial products.
    And I asked them for their questions, their concerns, their 
input. And then if they would support it, their support. And 
anything in the process that they wished to change, that this 
company, in this case I'm talking when I was with Hughes, was 
prepared to do.
    Because we were not trying to transfer the oversight of 
national security. We were trying to get a commercial product 
that was competing with other commercial products to go through 
a review process that would not be a munitions process that 
would be subject to sanctions. Because sanctions cost us very 
dearly, not only in China in terms of launch or China in terms 
of a customer, but throughout the world. If the commercial 
products of this country, in this case satellites, were subject 
to those sanctions, the degree of uncertainty in dealing with 
us and all the companies that build satellites, was there.
    So it was all about moving it as a commercial product off a 
munitions list, not in any way, shape or form attempting to in 
any way diminish national security. That's why I started there, 
and that's what they told me.
    Senator Levin. Why is national security protected to the 
same degree with satellites on the Department of Commerce 
control list as they would be on the munitions list?
    Mr. Armstrong. When I called on the respective security 
agencies, I did not assume that was Hughes' job to put forward, 
but rather to offer that Hughes, whatever the national security 
interests of those particular agencies would be, that we would 
absolutely comply with them and to make sure that they 
understood that we would not resist or try to change.
    Senator Levin. I just have two questions more for this 
round. One argument that is heard is that when American 
companies are required by their clients to use Chinese launch 
vehicles, that American companies then have an irresistible 
incentive to help the Chinese engage in successful launches so 
that their satellites aren't blown up.
    What's your response, then, to the argument that Hughes, 
like other companies, has this irresistible incentive to help 
launch Hughes satellites successfully, and that necessarily 
contributes to the knowledge of launching rockets?
    Mr. Dorfman. Well, of course we want the rockets to work 
and the launch vehicle to perform its job. But we've never, and 
would never, go beyond working with the interface that we have. 
We wouldn't go through, in fact we have really at Hughes no 
knowledge of launch vehicle technology to improve their launch 
vehicles. We understand that if we improve their launch 
vehicles, it could improve missile technology.
    But we have rules, regulations, procedures, processes that 
prohibit specifically anything that would transfer missile or 
launch vehicle technology to the Chinese. We don't do it.
    I would also like to add to the point that Mike made, which 
was a passionate advocacy for why it should be in the Commerce 
Department. The Commerce Department is really leading an 
interagency operation here, so that all agencies do participate 
in the process. And I think the process can be improved, in the 
ways that I suggested.
    But I don't think the fix is to move it back to State. I 
think the fix is to improve the process, the interagency 
process that Commerce has going now.
    Senator Levin. An article on June 25 this year quoted an 
unnamed Hughes official as follows: ``Hughes followed all the 
correct procedure. We just didn't want somebody from DOD 
looking over our shoulder.'' That's the quote, New York Times, 
June 25. Could you comment on that quote? I assume it wasn't 
you.
    Maybe I shouldn't assume it wasn't you. [Laughter.]
    Would you comment on that quote, please?
    Mr. Dorfman. First of all, it's not my policy or Hughes' 
policy, and I'd like to find out who said it, if anybody from 
Hughes said it, so maybe if the New York Times could help me by 
divulging the name, I'd be happy to talk to that person. It is 
not Hughes' policy.
    Senator Levin. I think you'd better move on to a different 
part of the answer, though.
    But are you saying then that is not accurate, that you had 
no problem with DOD looking over your shoulder? Since 1996, DOD 
is monitoring every launch. It's only true since 1996, since 
that executive order. Now every launch is being monitored. 
Whereas when the satellites were divided between the two lists, 
that was not true.
    Now, my question to you is, that statement, do you have any 
objection whatsoever to the Department of Defense monitoring 
every one of these launches or doing anything else that it 
determines to be in this national security interest, and if so, 
please let us know now.
    Mr. Dorfman. Not only do I have no objections, I encourage 
it. And I don't rule out the possibility that some of the 
Hughes people out there in the field, trying to get their job 
done, would have problems. Nobody likes people looking over 
their shoulder, whether it's Hughes' security people or DOD 
security people. So that's a natural fact of life, Senator 
Levin.
    But that's where the leadership and the management of the 
company has to step in. And as a policy, I would support DOD 
monitoring launches, even if there are some people at the 
working level that find it objectionable for the reasons that 
I've described.
    Mr. Armstrong. Senator Levin, if I may just reiterate, 
because I don't want it to be remembered that that is something 
we thought up today, when I called all those top security 
officials that I went through, I offered, we would cooperate 
with whatever security that they would wish to apply to the 
process. And every person, I think if you would like to call 
them back, would attest to that, in that Hughes was never 
resisting anything to be imposed in terms of national security.
    Senator Cochran. Thank you, Senator Levin.
    Senator Thompson.
    Senator Thompson. Thank you.
    Could we have our exhibits, four and five, eight and nine, 
given to Mr. Armstrong? I believe these are all Mr. Armstrong's 
documents. Mr. Armstrong, these are all letters that you wrote 
back in 1993.\1\ And it has to do with our sanctions policy. 
And you were encouraging the administration, I think it's fair 
to say, to reconsider sanctions that had been imposed on China 
or Chinese entities. Let me give you a few minutes.
---------------------------------------------------------------------------
    \1\ Letters dated September 7, October 21 and 29, and November 16, 
1993 appear in the Appendix on page 62-67.
---------------------------------------------------------------------------
    Letters dated September 7, October 21 and 29, and November 
16, 1993--have you checked over them? If you need any more 
time, I'm not going to dwell on any particular language here, 
too long.
    I just think it's important to note that you were concerned 
and advised the administration of your concern about their 
sanction policies toward China. This is something that we're 
still dealing with today as far as our sanction policies with 
regard to various countries, especially those who have 
proliferation problems.
    And this goes back to 1993, and you're writing the 
President, second paragraph, on September 7: ``However, I have 
a problem at Hughes, and would appreciate your help. The State 
Department has recently imposed category 2 MTCR sanctions 
against China, significantly impacting Hughes, and potentially 
could cost us thousands of California jobs. While we support 
the objective of controlling the spread of nuclear delivery 
systems, the Hughes communication satellites in no way 
contribute to nuclear proliferation. In fact, our satellites 
will be transmitting CNN, HBO, ESPN, BBC, and other western 
programs directly to the Chinese people.''
    So here I take it you're pointing out that the things the 
Chinese are being sanctioned for have nothing to do with what 
you're trying to sell them, is that the point?
    Mr. Armstrong. Yes, that's the point. It's not a munition, 
it's a commercial product doing commercial stuff.
    Senator Thompson. Yes. You see, that raises a policy 
question for us that we're going to have to deal with as to 
whether or not, let's just take a hypothetical situation, you 
have a country that we're carrying on commercial activity with, 
but we know that they're carrying out major proliferation 
activities.
    But our commercial activity has nothing to do with those 
items. It could be anything from grain to commercial 
satellites. And we have a determination to make as to whether 
or not there needs to be a direct relationship.
    My own opinion is, if you wait for a direct relationship, 
you never will have sanctions. But this points out, I think, 
the policy question that we have, and the perspective of 
industry and the communications that industry has with this 
administration and perhaps any other administration.
    October 29, on down the line here, ``I am respectfully 
requesting your involvement to resolve the China sanctions at 
the upcoming Seattle APEC meeting November 18-19.''
    In the October 21 letter, you tell Secretary Christopher 
Warren, second paragraph, ``Counselor Song, as well as Vice 
Minister Wong of the Ministry of Aerospace both stated, China 
is prepared to recommit to the MTCR, this is with regard to the 
missile policy, if the United States will drop sanctions. As 
best I can understand what we're trying to accomplish, this 
would enable the President to make a positive foreign policy 
announcement, put a difficult industrial technology and jobs 
issue behind us, and communicate to the world that the United 
States and China can agree on something that's important.''
    So you were getting an opportunity for an input with the 
Secretary of State with some pretty broad national policy 
questions, weren't you there, Mr. Armstrong?
    Mr. Armstrong. Yes, sir, Senator, I was. I would have to 
share that the State Department had asked me to have 
conversations. And in all cases, before I left I was briefed. 
When I arrived in the countries, I went to the embassy and met 
with the ambassadors. Before I left the country, I met with the 
ambassador. When I came back I was briefed or debriefed by 
appropriate officials.
    Senator Thompson. Right. In other words, you served as an 
intermediary with regard to some of these things? Between the 
two governments?
    Mr. Armstrong. On some very limited, one or two points, I 
was asked to.
    Senator Thompson. And in your November 16 letter, you're 
writing to Sandy Berger and Leon Fuerth, Assistant to the Vice 
President, National Security Affairs, second paragraph: ``I 
briefly described that in meetings with the Chinese and the USG 
over the past several months, it was obvious that both sides 
were in agreement, i.e., one, the Chinese are committed not to 
proliferate missile technology, and two, with the Chinese 
commitment, the USG is prepared to drop sanctions. The problem 
is, who and when, who takes the first step? ''
    I think we know now that of course, the Chinese apparently 
were not committed to stopping their proliferation policy. But 
I think there's a broader question here. Again, I would expect 
you or anyone else in industry to make your case as you saw it. 
But it really does point out the need for a strong counter-
balance within our government.
    I think many of us, certainly I feel that we have not 
judiciously used our sanction policy when we should have. You 
take the Chinese for example, members had concerns about the 
only time this administration has ever imposed sanctions on 
China. And they were category 2 sanctions, which were milder 
than they could have been.
    And they lifted those sanctions. And the Chinese violated 
their agreement again.
    The background of that, of course, had to do with the M-11 
missiles. We caught them sending M-11 missiles to Pakistan. 
However, our administration's conclusion was that we could only 
prove M-11 missile canisters, that we didn't know whether or 
not there were missiles in those canisters. Therefore, we would 
only impose the level 2 sanctions.
    Later on, we found out they were sending ring magnets to 
Pakistan, which could only be used for uranium enrichment that 
would go into a bomb. Our administration concluded then that we 
couldn't prove that people at high levels in the Chinese 
government knew about it. No sanctions.
    Then they shipped anti-ship cruise missiles to the Gulf, to 
Iran, and a pretty clear violation of the Gore-McCain Act. The 
administration there concluded that they were not 
destabilizing, as required by the statute.
    So the policy issue really is set out in stark terms. On 
instance after instance after instance of proliferation up to 
the present time, sanctions have not been imposed. Yet where 
they did, they run right headlong into a very, very real 
industry concern. My concern is that industry is getting its 
input, but where is the input coming from the other side?
    That's what we have to contend with. If you have any ideas 
on that, I would welcome them. It's not your job. This transfer 
to the Commerce Department, it may be interagency, but we've 
heard testimony from witnesses from DTSA and others who have 
the responsibility of raising warning signals when sensitive 
military related technologies are transferred. They say that 
Commerce controls the process, it's on a real fast turnaround, 
that there is a prejudice against appeal. It's made very 
difficult to appeal up during the process and so forth.
    So I think that's something we're going to have to address. 
I know that's more a statement than a question. But any 
comments or observations either of you have on that?
    Mr. Dorfman. I might respond a little bit, Senator, because 
I was very much involved during that time period. And I have a 
series of thoughts on that. The first one is, why satellites? 
Satellites, as I said before, it's just like a telephone 
switch. It's not an aerospace device, it's a telephone switch. 
Why not IMUs that go on Boeing 747 airplanes, which probably 
have more technology in it than do satellites? That's the first 
thought I have, why satellites? They are really commercial 
items.
    Second is----
    Senator Thompson. Well, can I interrupt you there?
    Mr. Dorfman. Sure.
    Senator Thompson. At least up until the time of the 
transfer, there were apparently significant players within the 
government, within the State Department, who thought that there 
was sensitive militarily relevant technology within these 
commercial satellites. They even had a criteria that if you had 
any of these nine features in this commercial satellite, that 
it had military sensitivity, and therefore would remain on the 
munitions list.
    At least I think we can say that there has been, apparently 
for some time over administrations, a disagreement as to 
whether or not that is really militarily significant. Prior 
administrations have thought there was, this administration 
continued the same policy for a while, then this administration 
made the change.
    You can argue a case that the change should have been made. 
But I don't think that you can really raise the question as to 
why there's any sensitivity there simply because they're 
commercial satellites. Because people of more than one 
administration have concluded in times past that there was 
military sensitivity there. Wouldn't you agree with that?
    Mr. Dorfman. I would like to get to that point, but I think 
there's also another, a second point, which I think the people 
who are meeting on discussing the very important issue that you 
raised about sanctions and their effectiveness. I do want to 
make the point that what happened here, and I think it would 
happen in any other instance in which commercial satellites 
were used as sanctions, is that the party that was to be 
punished had a very simple solution, which is just to buy 
satellites from the Europeans.
    The European satellites I believe are not as good as our 
satellites, but they're pretty close. We're in a very 
competitive environment. And the simple solution, which is what 
was done, as a matter of fact, back a few years ago, was just 
to go buy from the Europeans who have no such sanctions and 
were willing to sell a satellite.
    So satellite sanctions or any sanctions, I think, need to 
be multilateral. But of course, that's another subject. I want 
to point out, there's two levels. First, satellites didn't 
belong there on the sanctions, and second, they were 
ineffective in any leverage at all, because it's easy to go and 
buy European satellites.
    Getting back to your point about the nine items, it is 
correct, there were nine items that were identified as 
potentially military technology. And none of the satellites 
that were considered for sanctions had any of those nine items 
on the satellite. So we went ahead and proceeded to launch.
    Today we have a process where if any of those sensitive 
items are on a satellite, that we go through a process with the 
State Department, this is part of the interagency agreement 
where the State Department then does have a licensing process 
for those components.
    And I need to make one more point here. Because I want to 
do this all from the standpoint that we at Hughes, and I 
personally, are very much opposed to proliferation of weapons 
of mass destruction. I think the situation in the world is 
still dangerous. It's not so much the cold war any more, but 
it's dangerous to come from any place.
    So we strongly support that policy, individually and 
collectively. But going through these nine items, which include 
things like encryption, include things like extra large 
antennas and others which might be used for military 
satellites, that when the satellite has completed its 
construction, they're embedded, you can't see them, you can't 
do anything about it, you can't learn anything about it. The 
current process has a way of dealing with those nine items.
    Senator Thompson. Then why do you insist that DOD monitors 
should be present for launches and involved in failure 
analysis?
    Mr. Dorfman. Frankly, just to eliminate any concerns of the 
kind that you raised, which is that there might be conflicts 
with Hughes people, I don't believe there are any such 
conflicts, sir. But I don't want to have any inference, any 
concern, any doubt about the efficacy of Hughes in controlling 
technology. That's the only reason.
    The processes we use would be the same in either event. 
There was no missile technology transferred, even though the 
DOD people weren't there. But I feel in order to make sure 
everybody is comfortable that there is no technology transfer, 
that we go ahead and voluntarily pay for DOD monitors.
    Senator Thompson. Thank you.
    Mr. Armstrong. Senator Thompson, could I make a comment, 
please?
    Senator Thompson. Sure.
    Mr. Armstrong. I just learned more about the Chinese 
activities than anybody ever told me at the time. Because I 
always assumed that the Chinese had violated and deserved the 
sanctions. And that was always the premise from which I dealt.
    Second, disagreement about the embedded technology. The 
Department of Defense didn't disagree. The CIA didn't disagree. 
The NRO didn't disagree. And when I called on Admiral 
McConnell, the only thing that he offered, he said, Mike, I'd 
really like to work with you all on how we can get this 
encryption thing properly controlled, and that's my greatest 
concern. And I don't know how it worked out between agencies, 
and we had some people assigned to it. Evidently it did work 
out.
    But I think the whole security establishment and national 
defense establishment understood that this embedded technology 
could be protected and supported it, the disagreement was the 
State Department. And within the State Department, there was 
division as well.
    Senator Cochran. Thank you very much.
    Senator Cleland.
    Senator Cleland. Thank you very much, Mr. Chairman.
    Mr. Armstrong, nice to be with you. Mr. Dorfman, thank you 
very much.
    I'm trying to, as somewhat of an amateur here, make sense 
of this. I'm an old Army signal officer, so I understand a 
little bit about telecommunications, but not much. Things have 
changed dramatically since I was in the military and dealing 
with some satellite technology.
    I might just talk about launch capability just for a 
second. I understand that there's maybe a backlog of some 2,000 
satellites now over the next few years that American industry 
would like to launch. In other words, that there is a backlog, 
a market, a need out there for launch. Is that basically true?
    Mr. Dorfman. Well, I can't vouch for the total number. I 
can tell you for sure that today the demand for launches 
exceeds the supply for launches.
    Senator Cleland. And I understand that the U.S. capability 
to launch is only about 40 percent of the need to launch or the 
desire to launch. In other words, as you say, Mr. Dorfman, the 
demand exceeds the ability to supply, the need for launch 
capability.
    Did we, as a country, get off track back in the late 1980's 
when President Reagan decided that this country, in effect, 
would abdicate to other nations launch capability for 
commercial satellites, and then in effect open it up to the 
Chinese, the French and the Russians? Is that where we got off 
track and is that how we got into this question ultimately of 
this piece or that piece or that satellite or that embedded 
technology or whatever being transferred over to some missile 
launch capability, then that helped some country's nuclear 
proliferation? Is that how we got to here?
    Mr. Dorfman. I would like to step back a few years to the 
mid-1980's, as you suggest. In 1986, January 1986, the 
Challenger exploded, and six people were killed, including a 
friend and colleague from Hughes. Prior to that explosion, it 
was the policy of this government that all commercial 
communications satellites were to be launched in the shuttle. 
In effect, the U.S. expendable launch vehicle industry was 
dismantled.
    Shortly after that failure, that policy was reversed, and 
no commercial communications satellites were to be launched on 
the shuttle. And this was a terrific blow to Hughes, because we 
had a handful of satellites that needed launching.
    What that started was, Hughes started to have to go 
overseas. And at that point in time, it was only the Arianne 
spots that were available to us. And the U.S. industry 
scrambled to try to recreate the launch capability. Even today, 
many years later, there is only one U.S. expendable launch 
vehicle that's in the category of most of our launches, which 
is the Atlas, currently run by Lockheed Martin.
    During that time period, Hughes, myself personally and Mike 
Armstrong, went here to Washington to urge expenditures on 
developing a next generation launch vehicle. Lockheed Martin 
and McDonnell Douglas felt like it would be imprudent to make a 
major investment. Their perception of the world, for whatever 
reason, was that there wouldn't be a tremendous demand for 
satellites. That was different than our perception. We saw an 
increased need for satellites, which I have to say today, even 
I underestimated, to be frank with you.
    So here we were talking to the major companies saying, 
invest in launch vehicles, U.S. Government, and there was not a 
lot of sympathetic response. So of necessity, we were forced to 
go overseas.
    Now, I have to say at the same time, roughly, the cold war 
ended. And now, the policy of constructive engagement with the 
former Soviet Union and China took place. And that was a 
national policy which I think was the background for Ronald 
Reagan and subsequently George Bush to say, on balance, 
national security interests, it would be prudent to allow 
launching from China and Russia, effectively it's Kazakhstan, 
and we and others started launching.
    But that wasn't all we did. Because I still feel personally 
that it's important for the United States to have a strong 
launch vehicle capability for government reasons as well as 
commercial. So we went as Mike Armstrong alluded earlier, he 
was our leader at that point in time, and strongly endorsed us 
going to our board for permission to make a major commitment, 
which now is over, he mentioned hundreds of millions, it's been 
going up since he left, it's over two billion of commitment, 
first to McDonnell Douglas for the Delta 3. Then to Boeing for 
the Boeing Sea Launch. And our way of committing was to buy 10 
launches at a time to give their board the confidence to make 
their own investment in launch vehicle capability.
    We've done a similar thing in Japan with the H2A rocket. So 
we are now the world's biggest buyer of launch vehicles around 
the world, including the Long March-2E. But the Long March-2E 
is really a small part of it. It's really more of the others 
that I've mentioned.
    Senator Cochran. Senator Cleland, we've had the second bell 
on a vote. I'm going to go over and vote, and yield the duties 
of the chair to the Senator from New Mexico, Mr. Domenici, who 
has some questions. If you have further questions, we'll 
entertain those.
    Senator Cleland. Well, I do, but I'll go over with you to 
vote.
    Senator Cochran. We'll protect your right to ask questions 
when you come back.
    Senator Cleland. Thank you very much.
    Senator Cochran. Senator Domenici.
    Senator Domenici [presiding]. Mr. Chairman, I thank you. 
When I go vote, I cannot come back, I'm sorry about that.
    For you all, you haven't seen me ask very many questions on 
this subject because I have been unable to attend these 
hearings until this date.
    But let me say, Mr. Armstrong, I am concerned as I read the 
letters that preceded your appointment to the chairmanship of 
the Export Council relating to these issues. I don't find them 
in similar language with statements about, ``I support you, you 
support me,'' after you became chairman. But I assume that 
perhaps you didn't have to do that then, because you were 
chairman and in contact with the White House.
    But I think it is important that we understand this issue 
as best we can. Most of us are free enterprisers, and I am 
proud of what you do. I am on your side. You can check my votes 
around here. I would rather have the private sector assume 
responsibilities in these fields than I would the government of 
the United States.
    But we have a very serious issue here, because however 
confused it is, somebody has to determine whether these 
licenses are in the best interests of the United States. Not 
only because of jobs in California, which you are concerned 
about in one of these letters, but because the security 
interests of the United States may be involved. And I am ready 
to admit that it's not easy to determine when the security 
interests of the United States are involved.
    But I am concerned when I read a letter from somebody like 
you, who then becomes chairman of the Export Council the 
President puts in charge of the licensing issue, when you say: 
``You asked me to improve the economic environment through 
legislative change, I did.'' This is October 29. ``You asked me 
to support your changes in export policies, I did.'' This is 
directed to the President.
    ``You asked me to support NAFTA more strongly, I did.'' And 
then you say, ``I most respectfully request your involvement to 
solve the China sanctions at the upcoming Seattle APEC meeting, 
the PRC state counselor Song has told me that you are `positive 
to do this,' '' and then you go on to some other statements.
    Now, I think we have a responsibility to find out, in the 
process that we are using, wherein we involve businessmen, and 
there are a number of business executives from the satellite 
communications industry that are on this council. And I'm not 
saying they shouldn't be there. I think they should be on it, 
just as other people should, because we need their expertise.
    But I'm somewhat concerned about whether or not there is 
undue pressure on the system to determine whether or not our 
national security interests are at stake, if in fact we have 
people there who are very powerful and in political contact 
with the President, urging that we do certain things. While I 
trust business implicitly, and I'm not arguing that you would 
ever intentionally do anything to jeopardize our national 
security, I do believe the power to get your business with the 
Chinese and the Russians is a very powerful force.
    Then when we find that the satellite export process gets a 
little bit looser when we give it to Commerce than when it was 
at State, and when you are willing to admit there's at least 
one major thing that wasn't occurring when it got to State that 
you'd like to see changed, I just wonder, and I lay it before 
the Subcommittee and before you, I wonder if we ought not be 
more concerned about who serves on these advisory groups and 
what their relationship is to the Executive Branch of 
Government, because of the undue influence that might occur.
    And I'm not accusing anyone. But as I read your letters it 
strikes me that there was an awful lot of politics involved 
prior to your becoming chairman. And I would logically assume 
there would be as much or more when you're chairman, unless I'm 
grossly mistaken about human nature, or you quit being whatever 
you were and got mad at the President, which I assume you 
aren't, even as of today.
    So would you comment for one minute?
    Mr. Armstrong. Yes, sir, Senator, I'd like to. First, 
before I came to Hughes, I did not have any activities, per se, 
in Washington. I cannot remember meeting the President, I think 
I shook George Bush's hand once. But that was it.
    And when I wrote that, in fact, the first time I ever met 
President Clinton was with that group at that economic 
roundtable that I mentioned, where he came to Los Angeles to 
look into Southern California, because we were really having 
tough times out there. And that was the first time I had a real 
opportunity to express myself directly to him, please look into 
this.
    When I was writing that letter, the President had asked me, 
as the chairman of Hughes, not to do with the chairman of the 
Export Council, as you rightly state, would I look at the 
policy relative to economic development. He had asked me, and I 
responded positively to it. And he had asked me to look at the 
NAFTA situation and the policy on NAFTA. And I positively 
responded to it.
    All I was doing as the chairman of Hughes, not as the 
chairman of the Export Council, was asking him to look at this 
policy. It doesn't belong on the munitions list.
    Mr. Domenici. Well, Mr. Armstrong, let me just say, I've 
been at it a little longer than you up here, not as long making 
the equipment that you make in your company. But at the bare 
minimum, you need some help in letter writing. That is not the 
way to write a letter to the President that is going to be made 
public seeking relief with reference to something that is 
pending in the Federal Government, in my humble opinion.
    And this is causing as much concern as many of the other 
things. Because the politics of all this, while we aren't 
talking about it much today, is in the air. And it might be 
nothing. There may be no politics to any of these changes in 
policy, and yet there may be some. And the letter just plants 
the seed that----
    Mr. Armstrong. Well, I'm sorry it does that, because it was 
all about policy. I was not involved in the politics of it.
    Mr. Domenici. Thank you very much.
    He gave me the Chair, so we're in recess until he arrives.
    [Recess.]
    Senator Cochran [presiding]. The Subcommittee will please 
come to order. I apologize for the interruption of our hearing, 
but it was probably nice to have a little break.
    I know other Senators have other questions, and while they 
are coming back from the Senate floor, from this vote that 
we've just had, let me ask Mr. Dorfman this question about the 
APSTAR 2 launch failure analysis. I talked about that some 
before yielding to other Senators for their questions.
    And in the lessons learned section of the launch failure 
analysis, there is this quote, and I'm going to read it: ``It 
also appears that HSC,''--that's Hughes Space and 
Communications--``has limited understanding of CALT's,''--
that's Chinese Academy of Launch Technology--``real 
capabilities. For example, in the area of aerodynamic buffeting 
analysis loading, they are in the launch business. They know 
their job, and it's their problem. Cannot be an acceptable 
position in future use of Chinese launch services.''
    It raises the question in my mind: What does it mean? 
``They are in the launch business, they know their job, it's 
their problem, cannot be acceptable in future use of Chinese 
launch services? Doesn't that really suggest that the problems 
with the Chinese launch vehicle, which in many ways are 
indistinguishable from an ICBM, will become problems for Hughes 
to help resolve in future Chinese launches of Hughes-built 
satellites?
    Something, in other words, has to be done by Hughes or by 
the United States. You can't just leave it up to China in the 
future.
    Am I correct in assuming that's what that means?
    Mr. Dorfman. Well, this is the first time I've seen this 
document, Mr. Chairman, so I'd only be speculating about what 
was intended by these statements. I will say the following, 
because I do have knowledge at least at a higher level. And 
that is the issue with the APSTAR 2 failure was most likely the 
satellite fairing.
    The satellite fairing is something that's unique to launch 
vehicles in that it protects the satellite on its ascent into 
orbit. It has nothing to do with missile launches, for example, 
which is of course the concern that all of us have, that there 
not be any technology transfer to improve missile launching.
    So it appears from the discussion here that it probably 
dwelt on the fact that the failure of the APSTAR 2 was most 
likely a failure of the satellite protection fairing. And I 
can't comment on the other parts of that document. I can say, 
as a general statement, that Hughes is also not knowledgeable 
about satellite fairings, so we would be depending upon the 
Chinese to solve that problem, if they did solve that problem.
    Senator Cochran. It seems like it's just the opposite, that 
you can't depend upon the Chinese to solve the problem. 
Somebody's got to do something about it.
    Mr. Armstrong. Let me just put it in context, not that I am 
above in terms of understanding fairings. But I remember back 
then, there was this big dispute, and the Chinese were pointing 
to Hughes that our satellite caused the explosion. And he was 
saying, that just doesn't make sense. And they were doing 
technical work on the satellite, to determine, how could the 
satellite possibly have caused this explosion to happen.
    And although I've never seen this either, I might speculate 
that whoever wrote this was quoting the Chinese, who are 
saying, it's your fault, Hughes, that this happened. And that 
they were saying about themselves, the Chinese, that they're in 
the launch business and they know it's their job, it's their 
problem, and they're going to blame Hughes, it's their job, 
they'll blame Hughes.
    Senator Cochran. So there was some question of liability, 
then, in effect? Or who would bear the financial consequences 
of the launch? Was that at issue at all in this?
    Mr. Dorfman. Well, I can tell you one thing that resulted 
from that is, we have an agreement, an option for future 
launches. But from a business practice standpoint, we have said 
that there has to be a proven success rate before we'll launch. 
That doesn't mean we're helping them figure out how to solve 
the problem. It means that we're asking them to demonstrate 
they can indeed successfully launch.
    These problems have to be fixed by the launch vehicle 
provider, and all systems. There's problems with European 
satellites, too, and we expect them to fix their own problems. 
And that's the situation we have today with the Chinese launch 
vehicle. We have a contract, we have a right to buy more launch 
vehicles, but only after they prove that they have reliability.
    Senator Cochran. There's another question or two on this 
subject that I'm going to ask. We were talking about the Loral-
led launch failure review, that was really caused by the 
insurance carriers who were sustaining the risk of failure, in 
effect insisting that there be an investigation to determine 
what caused the launch to fail. And expecting that somebody was 
going to do something about that.
    How does China in this situation improve its likelihood of 
success without the benefit of advice or assistance from some 
outside entity, whether it's Hughes or Loral or someone who's 
technically capable of giving them advice about how to improve 
their launch vehicles? Isn't it something that just necessarily 
follows from that exercise?
    And the insurance company had to be told by somebody that 
the problem had been fixed, or it's less likely in the future 
that this is going to happen. As a practical matter, isn't that 
correct?
    Mr. Dorfman. To answer that question, I think it would be 
useful to go back to what happened in 1996. As you know, there 
was a failure of a launch of an Intelsat satellite. And the 
launch vehicle went out of control very early in the mission.
    The Chinese did their internal inquiry on the cause of 
failure. And they went to the insurance company and said, here 
is why this launch vehicle failed, and it's something we intend 
to fix before our next launch.
    Hughes had nothing to do with that launch. It was a Loral 
satellite launched for Intelsat. So we really weren't involved. 
But the insurance company said, in effect, we don't trust your 
conclusions. There's been too many failures. We'd like to 
subject your conclusions to an independent review committee to 
validate that, your conclusion. And such an independent review 
committee, called the IRC, was formed.
    Loral, because it was their satellite, assumed leadership. 
They asked if Hughes would participate. On balance, I wasn't 
enthusiastic about it personally. But on balance, we had the 
insurance companies, which were important to us. We had the 
Chinese and some agencies of the Chinese government were in the 
process of buying Hughes satellites.
    So we said we would participate. I accepted that with the 
understanding our only role was to look at whether or not the 
Chinese evaluation was something we could agree with, and 
really whether the data they presented was consistent with 
their conclusions.
    And that's what happened. And our people, who are pretty 
well versed in export controls, sat in on these meetings. It 
was really relatively short compared to the ordinary failure 
investigation. It was just a few meetings.
    And the report, which was inappropriately released prior to 
State Department approval, I think Loral has voluntarily 
disclosed that to be the case, was in essence a statement that 
the reviewers agreed with the data that was presented to 
validate the Chinese conclusion.
    That was the practical matter, sir. And the people that we 
sent to participate really weren't launch vehicle experts, 
probably couldn't have contributed in any even. But they were 
there to do nothing more than look at the data.
    Senator Cochran. In connection with the licensing process, 
we've heard from agency witnesses who told us about the 
practical ways the process works. And I've heard you both 
describe it today in the context that both the State Department 
and Defense Department have a role to play in the review 
process. And if they disagree with the issuance of a license 
then they have an opportunity to say so. And that can be 
appealed.
    And as a practical matter, in the case of Tiananmen Square 
sanctions, it can be appealed all the way to the President, 
who's got to find that it's in the national interest to give a 
waiver.
    So there are two kinds of processes at work here, the 
licensing process and then the waiver process, to get around 
sanctions that may have been imposed. But what happens as a 
practical matter, according to Defense Department witnesses who 
testified at our last hearing, is that it's designed to keep 
dissent under control and to prevent it going up the ladder.
    You have a certain period of time within which to voice an 
objection. And if you're not satisfied and can't work it out 
with those at your level, to go to the next level, you've got 
to act pretty quickly, get a letter signed, sent up the line.
    Anyway, after we heard the details about this procedure, 
some serious questions arose as to whether this really gives 
Defense and State equal opportunity to analyze and actually 
make their views known and to have any influence in the 
process. The Department of Commerce really does dominate the 
process, the procedure. And the impression I get is that's what 
you wanted, that's what the industry wanted in the beginning.
    And in connection with communications satellites, it's a 
very compelling and persuasive argument that you make that this 
is harmless communications, like a telephone line system. You 
can put the quarter in the slot, you ought to be able to make a 
call. So what's the harm in that. And that's easy to 
understand.
    But I guess we get to the problem of embedded technology. 
There is some question about whether the encryption information 
in one of those failed launches was actually ever found, and 
did the Chinese end up with that. I think one witness said 
everything pretty well burned up. And it wouldn't be useful and 
wouldn't be helpful to anybody, and you wouldn't notice it if 
you found it, you wouldn't even know what it was.
    Well, I don't know that we'll ever find out the real answer 
to that. But the other issue that I want to raise now is, we 
heard recently that the Chinese military has had a breakdown in 
its own communications system, and that one of these satellites 
is going to provide an opportunity for the Chinese military to 
reinvigorate and bring up to higher standards its own 
communications capabilities. And here we are permitting an 
export of a communications system that is certainly going to be 
militarily useful to the Chinese.
    The question is, does that threaten our national security? 
Does that put at risk the security of American citizens?
    I'm not capable of making that judgment, but I don't think 
the Commerce Department is, either. Now, maybe the Defense 
Department would have a better understanding of how 
communications capabilities can be used, without which you 
couldn't operate an intercontinental ballistic missile system, 
or a command and control system. I don't know the answers to 
that.
    But I would trust somebody, I think, from the Defense 
Department, to make a judgment on that issue. Not somebody from 
the Department of Commerce, necessarily.
    Am I being unrealistic in making that assumption about a 
sophisticated new communications system for the Chinese 
military to use?
    Mr. Dorfman. Mr. Chairman, I'd like to make one comment 
there. It's possible that the Chinese military will be using 
communications satellites, commercial communications 
satellites. But it's also likely they will be using the 
telephony system, for which Lucent and others are providing 
telecommunications capability for via line. It's also likely 
that they will be using cellular systems that Motorola is 
building.
    So I want to make one point that I made to Senator 
Thompson, which is why select satellites as the thing to worry 
about? I think you've got to really at that point in time talk 
about the communications infrastructure that is being 
commercially marketed in China, which goes well beyond just 
satellites. Because the satellites are, I mean, it may be I'm 
doing ourselves a disadvantage for making it seem so simple, 
but basically, they are communications switches, just like the 
switches that are on the ground. The only difference is you've 
got to get them up into orbit on top of a rocket.
    So I would first start off with saying, I don't think it's 
proper or appropriate to pick just on satellites for the issue 
that you raised about the Chinese military using commercial 
communications technologies.
    Senator Cochran. Mr. Armstrong, do you have a reaction to 
that?
    Mr. Armstrong. Steve makes, of course, a very valid point. 
I happen to be in the business of cellular today, and lots of 
wires today. I think I can tell you, Mr. Chairman, from being 
in both businesses, his observation is right on the point. All 
of these technologies are commercial technologies. I think as 
you said, if a general or soldier, let alone a student or a 
scholar, can put a quarter in, they can use any one of them.
    As far as the Defense Department review, I really hope you 
take from both our testimony that we have no objection at all 
to any level of Defense Department review of any licensing 
process. From the outset, I have tried to make that clear, on 
my calls and on my questions. I think that's why there was 
support.
    And second, if there is something you found in this process 
that's not working, then we ought to fix it, we ought to 
tighten it, we ought to make it work. Just don't put it back on 
the munitions list.
    Senator Cochran. I understand, too, from Mr. Dorfman's 
statement, that there is a pending request for a license that 
relates to the APMT license application.
    Mr. Dorfman. Yes, sir.
    Senator Cochran. My understanding is there's a question 
about whether it's a renewal of an existing license that was 
issued in 1996, or whether it is really in effect an 
application for a license of a new satellite. Tell us about 
this and whether that has anything to do with this new 
regulatory regime and process. Wasn't this satellite changed 
and shouldn't it require a new license?
    Mr. Dorfman. Yes, sir, and it does require a new license. I 
want to make that clear. We have applied for a new license. The 
only point I would make is the critical issues on that 
satellite have hardly changed at all.
    For example, in the original license which was approved, 
there was a 12.25 meter antenna that was on board the 
satellite. That's a major item, because it's one of the nine 
items on the list. So we went to the State Department to get 
approval to proceed with that antenna and start having design 
reviews with the APMT customer, which includes Chinese.
    And they approved it. We had a process and approval for 
proceeding on with that design, and the design reviews for that 
system. Then as part of the design process, we made changes 
which I would like to describe to you as insofar as the items 
on the munitions list, the changes were almost nothing. The 
changes were mostly on the satellite structure and the 
satellite portion of the system, the bus, the power.
    And that was designed to make it compatible with the other 
system, which was purely a commercial interest in making all 
the satellites the same for the Mid-East, for Africa, for the 
APMT. This was just a practical consideration.
    We made those changes, and to the credit of our people, 
they immediately displayed these changes to State Department 
and Commerce, and applied for a new license, even though I 
believe, and we believe, that the changes are, insofar as 
sensitive technology practically none. And we're now awaiting 
the granting of that license.
    I'm concerned because State Department and Commerce and the 
other departments are watching this hearing. And in fact, many 
of them are participating in presenting data in this hearing. 
And this has clearly slowed down the granting of the license.
    Now, Mr. Chairman, you've got to understand the practical 
business relationships we have with every customer we supply 
internationally. Every contract we negotiate has in it a clause 
which says, you, Hughes, and I think the same thing will 
probably apply for Lockheed Martin and Loral, are responsible 
for getting all the U.S. licenses necessary. And if you don't 
do that, you default. That means we give back all the money.
    In each case, we say, this is an unreasonable request, we 
can't afford to take that much risk, and they consistently, 
every customer says, in the U.S. Government we can't depend 
upon you getting the licenses, there's been too much problem in 
the past. This is one of the barriers that both Mike and I 
alluded to. And it's exacerbated when it's in the Department of 
State and the licensing is part of an instrument of national 
policy, which is appropriate when it's in the Department of 
State.
    So we finally agree, in every instance, we have to agree, 
OK, it's reasonable that we take responsibility for the 
licenses, if we don't get them, we default. We were in a 
situation like that back in 1993 or 1994 when Mike was properly 
advocating the licensing of APSTAR 2, and we're in the same 
situation with APMT, the same exact situation. If we don't get 
the license in a fairly short period of time, we are in serious 
trouble, from a business standpoint. It's possible that we will 
have to default.
    And that means jobs, it means damage to Hughes 
shareholders. And it likely means the job is going to go to the 
Europeans. That's why I'm concerned about that particular APMT 
program. And I hope that the State Department and the Commerce 
Department, while this group is considering what to do, 
proceeds with business as usual and grants us a license, which 
I think on the surface of it should not be a problem.
    Senator Cochran. At this point, this is in the hands of the 
regulators at the Department of Commerce, I presume?
    Mr. Dorfman. No, this is specifically Department of State. 
That's the area. This is on the list of nine items that we 
said. So we go to the Department of State. Recall, this still 
is an interagency operation. And so all the appropriate 
agencies get involved. It's under the leadership of the 
Department of Commerce, but everybody participates, there's a 
process, and everybody has the opportunity to participate.
    So this is under John Holum, who I think testified not too 
long ago. And so it is at Department of State.
    And Mr. Chairman, if you'll permit, because I want to tag 
onto something that Mike Armstrong said, which I also 
passionately believe in, we're learning as we go about the 
system. I believe there are improvements that can be made. I 
suggest the way to improve the system is not to transfer back 
to the State Department and put it on the munitions list. I 
think the munitions list is the thing that concerns me and Mike 
also the most.
    Fix up the problems with the system now rather than 
changing it.
    Senator Cochran. You may have seen an article that James 
Baker wrote on July 5, printed in the Washington Post.\1\ The 
subject is ``Blueprint for a China Policy.'' A copy is being 
handed to you and will be included in the record. He talks 
about the different aspects of current policy and the 
commitment to engagement with China, rather than isolation or 
containment.
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    \1\ The article from the Washington Post appears in the Appendix on 
page 68.
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    And he supports that engagement commitment, but he also 
concludes that many in Congress and various interest groups, 
particularly on the left of the Democratic party and the right 
of the Republican party when they talk about containing rather 
than engaging China, are trying to find an enemy.
    But then he concludes by saying, ``the President must 
reverse his highly questionable decision, made against the 
express counsel of his Secretary of State, Secretary of Defense 
and Director of Central Intelligence, to vest in the Department 
of Commerce lead agency authority for satellite launch 
exemptions relating to China.''
    I think the interesting thing here is that he's not 
criticizing necessarily the export of communications 
satellites, which is what's been the subject of much of your 
statements today. But he's talking about the launching of U.S. 
satellites, and that is a different thing, it seems to me.
    Couldn't we make as a part of our national priorities the 
development of more launch capacity here in the United States? 
That's been brought up, I think Senator Cleland was discussing 
that when we went over to vote. And Mr. Armstrong talked about 
the fact that we must do more in that regard.
    Do you know of any movement in the President's Export 
Council or within U.S. industry to get behind a new commitment 
to develop U.S. launch capacity, so we don't have to run the 
risk of turning over the launching of U.S. satellites to other 
countries?
    Mr. Armstrong. Mr. Chairman, I can make a couple comments, 
please. I certainly wasn't even given information or insight as 
to how the vote took place around the President's table. I was 
led to believe, however, with all the interaction I had with 
the Secretary of Defense, Dr. Perry, and Jim Woolsey, the 
Director of Central Intelligence, that they very much supported 
the transfer to Commerce, and worked hard to make their 
presence in the process the appropriate presence.
    So I would take issue with this author, although I'm sorry 
I never saw this article or this statement. On the other hand, 
I would stand corrected if that table, indeed, those gentlemen 
expressed a different opinion than I was led to believe that 
they had.
    Second, Steve and I called on a lot of people. Some people 
think we called on too many people. But there's a lot of people 
on an important issue like this who should be part of the 
process. I did my best to call on all of them.
    And during that process, there was a terrific debate in the 
government and in industry that the satellite industry was 
going to go into decline after the turn of the century. This 
was back in 1992, 1993, and 1994. And in fact it was a 
declining industry.
    What really needed to be done was not promote investment in 
more, but protect the launch capability of what was here.
    We could not convince people otherwise. And so we took it 
on our own risk, our own balance sheet, our own board of 
directors, to make those ten PACs. We went to McDonnell 
Douglas, and they would not have invested in the Delta 3 
without the commitment for 10 launches. And Boeing thought it 
was a terrific idea to have a Sea Launch, but they had to have 
an underpinning order.
    And we put our money on the table and we took the risk that 
we were right, that we needed launch capability and the country 
needed launch capability and we would commit our company to 
that. And I've seen no movement since then.
    Mr. Dorfman. I would add that we continue to strongly 
support the U.S. Government investing in expendable launch 
vehicles. I think it's prudent for two reasons. One is, I think 
it's important for the U.S. Government program, that the U.S. 
Government have an efficient, reliable, affordable, available 
launch vehicle capability. That position, which I have 
personally advocated for about 10 years now, since shortly 
after the Challenger failure, has not gotten a lot of 
encouragement until recently.
    That's why we went to McDonnell Douglas directly and to 
others directly, to start taking the demand capacity curve to 
be in balance. Because we still have more demand for launches 
than capacity.
    So I would recommend the Senators here support, when it 
comes up, for funding for the EELV, the expendable launch 
vehicle that has been proposed under Secretary Widnall's 
leadership, and Art Money now in the Department of Defense, to 
come up with a next generation launch vehicle that will have 
the characteristics that I described. And we are very strongly 
supportive of it, we're in discussions with Boeing and Lockheed 
Martin to encourage them to go ahead with this new investment, 
and we are even discussing additional commitments beyond what 
we have now as a possibility to do our part.
    The plan is that there be government investment and 
commercial investment. The government investment is needed, and 
the government will be a beneficiary. Our role is to make sure 
everybody understands there's a commercial application for this 
launch vehicle.
    After a long time, I finally decided that the reason the 
government was reluctant to invest in an expandable launch 
vehicle was because the benefits to the government would come 
later. The investments would be now, and would be substantial. 
The benefits would come to government programs later, and the 
existing capacity was probably adequate for all government 
needs. And you know how difficult it is to spend money now to 
save later.
    So we brought up the additional issue of making U.S. 
expendable launch vehicles competitive in an international 
environment, so it wasn't 30 or 40 percent of the world market, 
but it would get to the stature of the satellite industry, 
which would be 70, or 75 percent, which I think is doable. That 
game is not over with, but it's in process.
    I think the Senate and the House should support DOD in 
investing in this next generation launch vehicle, which they 
call the EELV. And I think that will bring more launches home 
to the United States. And if the characteristics or the virtues 
of the system that's been described are there, I think both the 
U.S. Government programs and the commercial programs will be a 
beneficiary.
    So we continue to support this program. I would point out 
the program is presently going to come on line in the year 2002 
to 2004. We started our advocacy in 1988, shortly after the 
policy decision that caused us so much trouble in regard to the 
shuttle. That's taken a long time. We could not afford to wait, 
our business would be dead if we waited that long.
    So we needed to go, and have gone to launching around the 
world, until the demand-supply gets more in balance.
    Mr. Armstrong. In fact, following up on Senator Cleland's 
point about back when the Challenger failed, that redefined the 
launch industry in the United States. As a consequence, the 
French stepped in and made significant investments with the 
Arianne. I know when I left Hughes, they were like 60 percent 
or so of the launch capacity, and really had the most advanced 
technology at the time.
    So somebody did step in and make the investment.
    Mr. Dorfman. The Europeans have put in probably $6 billion 
or $7 billion of investment for its next generation launch 
vehicle, which is called the Arianne 5.
    Senator Cochran. Senator Cleland.
    Senator Cleland. Yes, sir, thank you very much, Mr. 
Chairman. Fascinating discussion. I have to put it in context, 
because I was just a young sophomore in college when I watched 
that little Atlas booster go up down at Titusville that had 
John Glenn on it in February 1962. And it's quite ironic to be 
sitting in the Senate now with him going up on the crew of 
Discovery 7, all seven astronauts at the same time in one 
vehicle.
    So as we talk about satellite technology, I still have to 
pinch myself sometimes that we regard it as almost a 
happenstance. It hasn't always been that way. And it was this 
government that pioneered the technology here.
    But as I understand it from your discussion, basically it's 
the private sector now that is bearing the brunt, taking the 
risk of filling a need, a demonstrable need out there, if we 
are to keep up with our role in the world as preeminent in 
terms of technology and telecommunications. Is that correct, 
the private sector is now bearing that burden?
    Mr. Dorfman. I would say the principal burden, yes.
    Senator Cleland. I'd like to shift to just two more points 
for clarification. One is the whole concept, the question of 
satellite or payload and the rocket itself. If we acknowledge 
that we should have more lift capacity, more launch capacity, 
there's an obvious need to this Senator that we need that, not 
only for trade, but for our own national security purposes as 
well.
    But if someone else launches our payload, or our domestic 
payload from a domestic company here, do you feel that there's 
enough guarantees basically on a commercial satellite launch 
that it doesn't risk national security or threaten commercial 
espionage or shall we say, security leak that might be 
possible? Do you feel that the payload itself is separate 
enough and protected enough from the rocket that all of a 
sudden, you can't get technology embedded secrets or whatever 
in the satellite, and all of a sudden it transfers to the 
rocket, and the Chinese have their whole missile capacity 
perfected?
    Is that easy to do? Is that hard to do? Or do we have 
enough controls, the way you see it, Mr. Armstrong, start off 
if you will.
    Mr. Armstrong. Well, you can start off with me and I can 
tell you what I have learned and known in my 6 years at Hughes. 
And sitting next to me is a man who has built them all his life 
and knows them so much better.
    But absolutely, Senator, I checked that out both by the 
review that I mentioned in my testimony, about the security on 
a satellite when it goes to either China or Russia. It's 
locked, it's crated, the crate is locked, it's packaged in a 
way that it's not penetrable. We put Hughes security people 
with it. It's under surveillance. It goes into a building that 
is under lock. It has television cameras on it 24 hours a day, 
7 days a week, I understood.
    I also visited the floor many times of our satellite 
manufacturing facility, and observed the embedded technology. 
And I cannot think, I cannot imagine a way that the embedded 
technology could be penetrated. The satellite is moved from the 
building under Hughes surveillance to the launch site under our 
surveillance during its mounting. Of course, then it's locked 
in, and once it's up there, it's up there.
    So I would answer your question very simply, I don't know 
of any way for embedded technology to be exposed to national 
security.
    Mr. Dorfman. Let me give a slightly different perspective 
with the same conclusion. The sensitivity is in the detailed 
designs and the processes for making the various components. By 
observing the satellite, it is impossible to figure out how to 
design one. You might get a few clues by looking at it, but 
those clues are not more than you can get by reading the 
journals, the trade journals associated with the business.
    That is to say, Aviation Week, as an example. On their 
cover and in their magazine, it often has pictures of our 
satellites and other satellites. And you can look at the 
pictures and you can get about as much detail as if you walk 
through our facility or look at it at the launch site.
    So you can get a feeling with the satellite, it's a box and 
there are solar panels that are folded in, and there are 
reflectors folded in. But how to design those devices and the 
processes, the very sophisticated processes that design 
reflectors or traveling wave tubes, you can't deduce that by 
looking at the satellite.
    Now, in order to assure that nobody pokes around, steals 
something, we have guards. They can't do that, there's people 
there 24 hours a day, making sure that nobody has access to the 
satellite to try to steal or get a closer look at any of the 
components. To be frank with you, even then I think it would be 
difficult to capture the design details you'd need to build a 
satellite.
    Now, I think everybody focuses on missile technology. There 
is nothing in the satellite that teaches you how to do missile 
technology. There's nothing on a satellite that does that. And 
as I said earlier, there's probably more sensitive technology 
on the inertial measurement unit in the Boeing aircraft that 
fly all over China. It's been a good source of business for 
Boeing and Airbus and McDonnell Douglas before they folded. 
Those have very sophisticated devices. You can touch them, you 
can take them apart. They have full access to them for the 
whole time.
    The satellite, the Chinese see it, or whoever's launching 
it sees it, you put it on top of the launch vehicle, there's a 
very simple attachment process, and it's gone in space. You 
have no access to it. No way of touching it, feeling it. You 
have ways of sending command signals to it, but that's it.
    And since I mentioned command signals, I also want to talk 
a little bit about encryption. Because there is encryption on 
some of our satellites for commanding purposes. And some people 
don't really understand what the substance of the encryption 
issue is. The concern that people have about encryption is when 
you're encrypting data, data usually goes at a very high data 
rate, and security systems have that kind of encryption.
    The encryption for command is much simpler, and the data 
rate is very slow. It's bits per second to issue commands. And 
there is encryption there for a specific reason. Operators of 
satellites don't want somebody else to control their 
satellites. That's why an encryption chip gets in a satellite. 
It's only a distant cousin to the encryption that people worry 
about for national security purposes.
    Senator Cleland. If I could just shift now to how the U.S. 
Government in its function of licensing or certifying 
commercial satellites to then be launched by foreign nations, 
by that lift capacity that other nations have, I wonder, are we 
in just a catch-22 here? I mean, between State and Commerce, 
are we fighting the wrong battle here, Mr. Armstrong? It seems 
to me there's back and forth and kind of who shot John.
    Given the fact we're all interested in national security 
and nobody wants to jeopardize it, we're all acting in good 
faith, and you've dealt with this process for a number of years 
and are intimately familiar with it, given the realities that 
we have, that we have to depend on other nations to launch some 
of our satellites, how do you feel about the present process, 
and are there some areas that you might want to see it 
strengthened?
    Mr. Armstrong. I'm 10 months old, and sometimes out of date 
if I am. I left Hughes in October of 1997.
    But in hindsight, I think that the licensing process 
between, that I understood when I left with Commerce on the 
launch licensing, was adequate and the Defense Department, I 
thought, and the State Department, as Steve was referencing in 
the APMT case today, has full access to the license review 
process. And so if there is something in that process that 
needs to be fixed, I'm not aware of it, but it ought to be 
fixed.
    Now, what seems to have happened is the launch failure 
review process. It appears to have worked in the 1995 case with 
the APSTAR 2. The right processes were followed, the right 
agency designate was asked for review, and the right approvals 
were given before the report for insurance purposes was let 
out.
    But in the case of the Loral situation, it exported a flaw. 
And that is that there's not enough oversight in the launch 
review process. And I respectfully submit it ought to be fixed, 
and that opening ought to be closed.
    Senator Cleland. Mr. Dorfman, any suggestions on what you 
know about the current process, given our realities, and any 
way that you'd like to see the process strengthened, tightened, 
or improved?
    Mr. Dorfman. Senator, I would like to see the DOD witness 
all launches, so that removes any doubt there would be an 
inadvertent technology transfer. I don't think there has been 
any, but this would make us all feel more comfortable, 
including this Subcommittee.
    And I think we should have a special process for launch 
review failures. I think State should specifically be involved, 
and DOD. I don't think that's been covered. It was an 
oversight, I believe, because nobody anticipated these 
failures.
    Those are two explicit fixes I think could be done either 
by legislation or by administrative steps. I think we see here 
an interagency process that's led by Commerce. As you know, all 
interagency processes have interface issues between the various 
parties. It's possible that one issue is that the agencies 
involved may need more funding to do their job properly. And I 
would support that.
    I think maybe the Subcommittee should ask the various 
agencies the same question that you've asked us, including if 
maybe a few more people would help expedite the process. I 
don't think the baby should be thrown out with the bath water. 
I don't think the solution of putting communications satellites 
back on the munitions control list is the way to solve any of 
the improvements that have to be made. We think the openness 
and the speed of the process and it not being on the munitions 
control list are important attributes that should be retained. 
And in that context, to see if we can improve it. And I think 
there's at least a couple of improvements that I mentioned.
    Senator Cleland. Thank you very much. That's an insight.
    Senator Levin wanted me to ask just a couple of questions. 
Mr. Dorfman, you mentioned in your testimony, I think I'm 
quoting it right, one less American-made satellite positioned 
over the globe means one more non-American made one. You said, 
I believe this will damage national security, not enhance it.
    I'd like for you just to share with us a little bit about 
what you mean, and how less secure are we if one less American-
made satellite is in operation. Just fill us in a little bit 
there.
    Mr. Dorfman. Sure. I'd first like to start by saying that 
satellite communications is currently viewed as a very 
attractive business. We find more and more people anxious to 
get into it, which is going to make the competition even 
tougher. That includes countries.
    So even though I focus on Europe and in Europe there's two 
very powerful consortiums, and this is really analogous to 
Airbus, the Europeans are forming consortiums, and they are 
trying to get increased market share. One is Matra and DASA, 
and it's a British-French-German consortium. The other one is 
Aerospatiale and Alcatel, very active, very capable, strong 
support from their governments.
    But that's not the end of it. The Japanese are also seeking 
to become prime suppliers of satellite communications, and 
there's no question in my mind that both the Chinese and the 
Russians would like to have their aerospace industry be 
competitive in this field. So it's not just the Europeans. I 
think there's lots of people interested in this area.
    And so now I want to talk about national security at 
several different levels. There's one that everybody 
understands, that in our new environment, the strength of the 
economy is important. And the ability for Americans to have 
knowledge-based high technology jobs is going to be a way for 
us to maintain our standard of living as we get more and more 
in a global economy.
    I think the kind of jobs that Hughes and Loral and Lockheed 
Martin are doing are those kinds of jobs. We want to have a 
good balance of exports to imports. And even though the 
industry has been buying launch vehicles from the Chinese, we 
are still in a position where Chinese purchases of satellite 
communications equipment from Hughes and others exceeds western 
purchases of launch vehicles. That is to say, we have a 
positive balance of trade in China and certainly around the 
world.
    So I say from a national economy standpoint, and that 
definition of national security, it's also important that we 
have American satellites. I think it's important for national 
pride. When I got to Narita airport, as many of you do, the 
place is filled with Boeing airplanes. I love it. And I count 
those versus the Airbus. I think a lot of Americans feel that 
way. So there's a kind of national pride issue.
    And then we get to the military. And it's an interesting 
situation here, and 10 or 15 years ago, the most advanced 
technologies were developed by the military and migrated to 
commercial. The military procurement process is admittedly, by 
the military, and Bill Perry and Dr. Kaminsky and others tried 
to change it, it's being changed but it's so slow that the 
speed of commercial had us really doing more technology 
development on the commercial side than on the military side.
    So our space and communications company, which in 1980, 
mid-1980's, was about 75 percent government, 25 percent 
commercial, it's now almost turned around completely. And our 
commercial satellite business is actually supporting, in that 
sense, our military communication satellite business and our 
government business.
    So if that goes down, I think it will weaken our ability to 
support the U.S. Government needs for communications 
satellites. So that's what I mean in that simplistic statement 
that it's bad to reduce the number of U.S. satellites over the 
globe.
    Senator Cleland. Powerful statement. Thank you very much.
    Just one more question Senator Levin wanted me to ask. Can 
you ever export a satellite with one of the nine 
characteristics without having a license from the State 
Department for the data? Apparently there are nine basic 
qualifications, I guess, on their munitions list. And if you 
trigger one of the nine, you have to have a license from the 
State Department. Is that my understanding? Am I understanding 
correctly?
    Mr. Dorfman. Somebody told me never to say never. And this 
is an area where I don't have expertise. But I can say that to 
release any data on those devices, we ask for and hopefully 
receive, a State Department license to release any data.
    Senator Cleland. Thank you all very much. You've been very 
helpful to me in helping me understand this complex issue, and 
we thank you for coming.
    Mr. Chairman, I have no further questions.
    Senator Cochran. Thank you, Senator Cleland, for your 
participation in this hearing, and your assistance in helping 
us develop a record on which we can make better policy 
decisions on these issues.
    I'd like to thank both of our witnesses today and all of 
our Senate colleagues for participating in what I think has 
been a very useful and informative hearing. We have been able 
to determine, I think, how we can better ensure that U.S. 
national security is properly safeguarded when our aerospace 
industry sells and launches satellites abroad.
    I appreciate the witnesses providing us with industry's 
perspective. We all know that trade is a very important 
interest of the United States, and it must be considered as we 
make decisions in the national interest. But trade is not our 
only interest. Our Nation's security interest cannot be 
sacrificed when a conflict arises between those interests.
    Mr. Armstrong's suggestion that more investment needs to be 
made in the space launch capabilities of the United States must 
be given careful consideration by this Congress. And Mr. 
Dorfman's plea that we support the expendable launch vehicle 
appropriations has to be carefully considered as well. Along 
with his suggestion that Department of Defense monitors ought 
to be involved in the processes leading up to a foreign launch, 
and in the event of an accident investigation.
    We've completed four hearings now over the last 3 months on 
various issues related to the export from the United States of 
commercial satellites for launch in foreign countries. We've 
learned that one, reliably launching commercial satellites in a 
country like China requires the perfecting of the space launch 
vehicle that carries the satellite into space.
    Two, there is substantial applicability of space launch 
vehicle technology to ballistic missiles. The CIA gave us this 
information, which we displayed in an open hearing with charts. 
Three, there is great incentive for industry to ensure that 
space launch vehicles work before the launch, and in the event 
of failure, industry has participated in accident 
investigations without U.S. Government agency participation in 
some cases, or supervision.
    National security interests have been given lesser weight 
in the administration's licensing process. As a matter of fact, 
the Department of Commerce has been given the challenging and 
conflicting task of both export control and export promotion. 
Ultimately, our export control policies and processes must 
operate to protect the national security interests of the 
United States. The deficiencies we have identified show that 
changes in the current policies need our immediate attention.
    The hearing is adjourned.
    [Whereupon, at 5 p.m., the Subcommittee was adjourned, to 
reconvene at the call of the Chair.]



                                APPENDIX

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