[Senate Hearing 109-1088]
[From the U.S. Government Publishing Office]
S. Hrg. 109-1088
MANUFACTURING COMPETITIVENESS IN A
HIGH-TECH ERA
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HEARING
before the
SUBCOMMITTEE ON TECHNOLOGY, INNOVATION, AND COMPETITIVENESS
OF THE
COMMITTEE ON COMMERCE,
SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
__________
JUNE 8, 2005
__________
Printed for the use of the Committee on Commerce, Science, and
Transportation
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SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
TED STEVENS, Alaska, Chairman
JOHN McCAIN, Arizona DANIEL K. INOUYE, Hawaii, Co-
CONRAD BURNS, Montana Chairman
TRENT LOTT, Mississippi JOHN D. ROCKEFELLER IV, West
KAY BAILEY HUTCHISON, Texas Virginia
OLYMPIA J. SNOWE, Maine JOHN F. KERRY, Massachusetts
GORDON H. SMITH, Oregon BYRON L. DORGAN, North Dakota
JOHN ENSIGN, Nevada BARBARA BOXER, California
GEORGE ALLEN, Virginia BILL NELSON, Florida
JOHN E. SUNUNU, New Hampshire MARIA CANTWELL, Washington
JIM DeMINT, South Carolina FRANK R. LAUTENBERG, New Jersey
DAVID VITTER, Louisiana E. BENJAMIN NELSON, Nebraska
MARK PRYOR, Arkansas
Lisa J. Sutherland, Republican Staff Director
Christine Drager Kurth, Republican Deputy Staff Director
David Russell, Republican Chief Counsel
Margaret L. Cummisky, Democratic Staff Director and Chief Counsel
Samuel E. Whitehorn, Democratic Deputy Staff Director and General
Counsel
Lila Harper Helms, Democratic Policy Director
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SUBCOMMITTEE ON TECHNOLOGY, INNOVATION, AND COMPETITIVENESS
JOHN ENSIGN, Nevada, Chairman
TED STEVENS, Alaska JOHN F. KERRY, Massachusetts,
CONRAD BURNS, Montana Ranking
TRENT LOTT, Mississippi DANIEL K. INOUYE, Hawaii
KAY BAILEY HUTCHISON, Texas JOHN D. ROCKEFELLER IV, West
GEORGE ALLEN, Virginia Virginia
JOHN E. SUNUNU, New Hampshire BYRON L. DORGAN, North Dakota
JIM DeMINT, South Carolina E. BENJAMIN NELSON, Nebraska
MARK PRYOR, Arkansas
C O N T E N T S
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Page
Hearing held on June 8, 2005..................................... 1
Statement of Senator Allen....................................... 14
Statement of Senator Ensign...................................... 1
Statement of Senator Kerry....................................... 17
Prepared statement of Senator Lautenberg..................... 26
Statement of Senator Pryor....................................... 22
Witnesses
Clough, Dr. G. Wayne, President, Georgia Institute of Technology. 27
Prepared statement........................................... 29
Frink, Albert A., Assistant Secretary for Manufacturing and
Services, International Trade Administration, Department of
Commerce....................................................... 2
Prepared statement........................................... 5
Howell, Thomas R., Partner, Dewey Ballantine LLP................. 34
Prepared statement........................................... 37
Murray, Sebastian, President/CEO, FPI Thermoplastic Technologies. 33
Prepared statement........................................... 34
Appendix
Inouye, Hon. Daniel K., U.S. Senator from Hawaii, prepared
statement...................................................... 53
Murray, Sebastian, supplementary information..................... 54
MANUFACTURING COMPETITIVENESS IN A HIGH-TECH ERA
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WEDNESDAY, JUNE 8, 2005
U.S. Senate,
Subcommittee on Technology, Innovation, and
Competitiveness,
Committee on Commerce, Science, and Transportation,
Washington, DC.
The Subcommittee met, pursuant to notice, at 9:30 a.m. in
room SR-253, Russell Senate Office Building, Hon. John Ensign,
Chairman of the Subcommittee, presiding.
OPENING STATEMENT OF HON. JOHN ENSIGN,
U.S. SENATOR FROM NEVADA
Senator Ensign. Welcome to the first hearing of the
Subcommittee on Technology, Innovation, and Competitiveness. I
want to thank Chairman Stevens for the opportunity to chair
this important Subcommittee. I also want to thank Co-Chairman
Inouye and Ranking Member Kerry for their participation in this
Subcommittee, and for their interest in manufacturing
competitiveness.
Manufacturing competitiveness is a critically important
issue to America in the 21st century. In today's economy, the
global competitiveness of America's manufacturers is impacted
by rapid improvements in computing, communications, and
distribution technology, reductions in tariff and non-tariff
barriers to trade, and litigation--for example, asbestos class-
action lawsuits with over 730,000 claimants have already
bankrupted 73 American companies and cost nearly 60,000 jobs.
Unreasonable medical malpractice liability jury awards
increase healthcare costs. I hope that we can enact medical
liability reform, which would result in significant savings to
our entire healthcare system, and would help competitiveness in
the United States.
Frivolous lawsuits make it extremely difficult for
manufacturers of all sizes to function. In 2002, litigation
cost the U.S. economy $233 billion, which is greater than the
gross domestic product of Greece.
Taxation. The private sector pays $250 billion just to
comply with our income tax laws.
And on the regulation front, economists estimate that
compliance costs of Federal, state, and local government
regulatory mandates are $1.2 trillion, more than double the
1988 level. Complying with Federal regulations, alone, costs
manufacturers nearly $8,000 per employee, almost twice the
average for all U.S. industries.
Litigation, taxation, regulation, healthcare, and energy
costs add approximately 22 percent costs to U.S. manufacturers,
as compared to the rest of the world.
American manufacturers are a cornerstone of our economy.
The United States remains the world's top producer of
manufactured goods. Making one dollar worth of goods generates
an additional $1.50 in other economic activities. Nearly 15
million manufacturing jobs create an additional eight million
jobs in non-manufacturing sectors, including retail, wholesale,
and finance.
A healthy manufacturing sector is key to developing better
jobs, fostering innovation, increasing productivity and
obtaining higher standards of living in the United States. In
addition, the United States cannot continue to grow and prosper
in the new information economy if we cannot compete with
countries like India and China. As private industry responds to
dynamic market forces, the Federal Government should examine
its appropriate role in this process.
Today, we are pleased to have two panels of witnesses to
testify on the challenges and opportunities that confront
American manufacturers today. Before the testimony begins,
we'll give the Ranking Member an opportunity to make an opening
statement. Any of the other Senators can submit their
statements for the record.
In addition, we have received full written statements from
all of our witnesses. We will include those statements in the
record. But if the witnesses could summarize, so that we can
have as much time for give and take questions, and make this
more of a discussion this morning, I would greatly appreciate
it. I'm here to learn, and I know that the Subcommittee is
interested in hearing the views of the panels.
Our first witness will be Al Frink. Mr. Frink is the
Assistant Secretary of Commerce for Manufacturing and Services.
Prior to joining the government, Mr. Frink worked for 30 years
in private industry, building an internationally recognized
carpet manufacturing company, Fabrica International.
Mr. Frink, we receive your testimony.
STATEMENT OF ALBERT A. FRINK, ASSISTANT SECRETARY FOR
MANUFACTURING AND SERVICES, INTERNATIONAL TRADE ADMINISTRATION,
DEPARTMENT OF COMMERCE
Mr. Frink. Thank you, Mr. Chairman. And good morning to
you, Ranking Member, and members of this Subcommittee.
I'll begin by asking that my written testimony please be
accepted into the record.
Thank you for asking me to appear today and providing me
with an opportunity to discuss the current state of
manufacturing. Like the Chairman said, American manufacturers
are a cornerstone of America's economy, and embody the best in
American values. Manufacturers are full partners in the effort
to build the future of the country, with a thirst for new
products and new opportunities. Simply put, a healthy
manufacturing sector is a key to better jobs--jobs that foster
innovation and higher standards of living for our Nation.
Strengthening American manufacturers is a top priority for
the President, Secretary Gutierrez, and me. That said, the
challenges facing U.S. manufacturers raise important questions
for both industry and government. The President addressed these
challenges by providing initiatives to help revive the economy.
As a result, the manufacturing sector now has expanded for 24
consecutive months. And, though that number is good, we will
not be complacent. The domestic and global economies are
fiercely competitive, and we need to work very hard to stay on
top.
Mr. Chairman, since taking office, I have made industry
outreach a major priority. I have visited 71 manufacturing
facilities, addressed 35 associations, chaired 57 manufacturing
roundtables. In total, I've addressed over 14,000
manufacturers. And, I am pleased to report there is a renewed
optimism in the manufacturing sector, as a majority of these
firms have plans to increase investments and hire new workers.
The Manufacturing in America report was released in January
2004 by former Secretary Evans, and it represents in effect, my
marching orders. We are making great strides, in that we have
implemented 21 of the 57 recommendations in that book. The
22nd, and key, recommendation will be the establishment of an
interagency workgroup on manufacturing. This is vitally
important, because manufacturers' issues cut across numerous
Federal agencies. As such, this group will provide a
coordinated approach to challenges facing manufacturers. We
expect to have this group in place within the next 2 weeks.
Also, to enhance the government's focus on competitiveness,
we established the first-ever manufacturing council. This
council plays an integral role in identifying priority
manufacturing issues and providing advice to the Secretary.
With my newly created position and this council, along with
industry associations, manufacturers now have the strongest
voice they've ever had in Washington.
One of the many issues the council will address is
innovation. The U.S. must have a policy environment that
promotes innovation and helps industry grow and prosper.
President Bush's 2006 budget addresses that need. It includes a
record $132 billion for research and development. This
represents a 45 percent increase from the budget in 2001. The
proposed 2006 budget also allocates 13.6 percent of its
discretionary funds to conduct research and development. In
total, this represents the highest percentage dedicated to R&D
since the Apollo program 37 years ago. Furthermore, this
investment does not include nearly $200 million invested by
businesses, and $27 million provided by states, colleges,
universities, and other entities.
But, with that funding, we also need to work more
intelligently with what we have. To address that, we have
established an interagency working group on manufacturing R&D.
This group will focus on the development and implementation of
advanced manufacturing technologies.
In the area of intellectual property rights and
particularly in view of all the recent technical advancements,
intellectual property protection must be provided, especially
for small manufacturers. For this reason, the Commerce
Department has appointed trade specialists committed to
protecting U.S. intellectual property in China and all over the
world. In total, we have increased intellectual property
enforcement and compliance staff by 25 percent since 2001.
On the important issue of maintaining competitiveness, we
continue to work to lower the costs of manufacturing in the
U.S. As you stated, Mr. Chairman, the United States faces a
22.4 percent disadvantage, relative to our foreign competition.
This advantage comes from burdensome high taxes, frivolous
lawsuits, high energy costs, regulatory excesses, and
healthcare costs--all the things you mentioned. This has its
highest impact on small to medium-sized manufacturers, and they
represent 98 percent of all manufacturing, and 70 percent of
all new manufacturing jobs.
To maintain our cutting edge of technology, our tax policy
must support innovation and entrepreneurship. Simply stated,
that's why we needed to make the President's tax cuts
permanent.
Streamlining regulations is another important component of
our economic agenda. Manufacturing and Services (MAS) is now
working closely with OMB to find ways to achieve regulatory
objectives that minimize cost to U.S. manufacturers, while not
compromising the spirit of those regulations.
In May, we launched an intensive 5-day training seminar for
our analysts to develop expertise in the Federal regulatory
process, and we are recruiting skilled economists to support
this new initiative.
On standards and services, we have also engaged in an
ongoing effort to address barriers associated with standards,
which are now one of the greatest challenges in expanding
exports. Our specialists are working diligently to address
standards that affect competitiveness on both the domestic and
the international fronts.
CAFTA is another vital instrument for boosting exports. We
strongly believe in free trade. Eighty percent of all the
exports coming into this country right now from that region are
tariff free, and 90 percent of all agriculture is coming in
tariff free. Our U.S. manufacturers do not currently share
these benefits, but they will after CAFTA.
From my travels, I have seen firsthand why education and
training are clearly critically essential to ensure our
workforce is fully equipped to compete in the global
marketplace. The President has a number of initiatives that
will support education and workforce needs. One example is the
$250 million in competitive community-based grants. And we at
MAS are partnering with the Departments of Education and Labor
to strengthen worker training in technical community colleges.
Mr. Chairman, as you listen to my comments, you can see
that we have considerable work to do. But I should mention I'm
also an optimist. If we can lift the burdens from our
manufacturers, we firmly believe that their creativity, their
innovation, and their work ethic will continue to make our
economy the marvel of the world. I am very committed to working
closely with this Committee to advance our vital manufacturing
sector. And I thank you very much.
[The prepared statement of Mr. Frink follows:]
Prepared Statement of Albert A. Frink, Assistant Secretary for
Manufacturing and Services, International Trade Administration,
Department of Commerce
Introduction
Good Morning, Mr. Chairman, Ranking Member and members of the
Subcommittee. My name is Al Frink, Assistant Secretary for
Manufacturing and Services in the International Trade Administration of
the Department of Commerce. Thank you for inviting me to appear today
to discuss the current state of manufacturing and solutions to
strengthen manufacturing. I look forward to working closely with you
and the other members in the months ahead.
Let me begin by reviewing the state of our very vital manufacturing
sector.
Current State of Manufacturing
American manufacturers are a cornerstone of the American economy
and embody the best in American values. They enhance U.S.
competitiveness while improving lives domestically and internationally.
Manufacturers are full partners in the effort to build the future
of the country in the marketplace for new products and ideas. Simply
put, a healthy manufacturing sector is key to better jobs, fostering
innovation, rising productivity, and higher standards of living in the
United States.
The United States is the world's leading producer of manufactured
goods. Standing alone, the U.S. manufacturing sector would represent
the seventh-largest economy in the world--nearly equal to China's
economy as a whole. The U.S. manufacturing sector also leads in
innovation, accounting for more than 90 percent of all U.S. patents
registered annually. Investments in technology create new industries
and careers in manufacturing as U.S. firms introduce products and
cutting-edge techniques. Perhaps most importantly, productivity in
manufacturing has continued to rise significantly.
Strengthening American Manufacturing
Strengthening American manufacturing is a top priority for
President Bush, Secretary Gutierrez, and myself. We are taking
definitive steps to ensure that U.S. manufacturers remain competitive
in the global marketplace. Manufacturing is an integral part of the
U.S. and global economies. It is part of the network of inter-industry
relationships that creates a stronger economy and the conditions for
growth. The sector currently accounts for roughly 13 percent of GDP \1\
and employs over 14 million workers. \2\ The United States is the
world's largest economy and has the world's largest manufacturing
sector.
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\1\ Bureau of Economic Analysis, Department of Commerce.
\2\ Bureau of Labor Statistics, Department of Labor.
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That being said, the challenges facing U.S. manufacturers raise
important questions for both industry and government. For industry, the
question is how best to reinforce the sector's strengths and maintain
its competitive edge in an increasingly competitive global economy. The
competitive pressure on U.S. manufacturers has forced them to cut
costs, to adopt lean manufacturing techniques, and to implement quality
assurance programs that guarantee zero defects in production.
Innovation in products, processes, and services has become a key
determinant for success. The right policies in Washington, D.C.--and
across the Nation--can unleash the great potential of the U.S. economy
and create the conditions for growth, prosperity, and job creation.
The President recognized this and responded quickly with an
economic program of tax cuts and other initiatives soon after taking
office. These initiatives are continuing to help revive the general
economy, with expansion in the manufacturing sector beginning in mid
2003. Let me give you a few economic indicators to describe the current
state of play in manufacturing:
Manufacturing output in April 2005 was 10 percent above the
levels in the fourth quarter of 2001.
Manufacturing exports totaled $726 billion in 2004, which
represents 63 percent of all U.S. exports of goods and
services, and grew by 9.3 percent from a year ago.
Manufacturing profits have continued their upward trend
since the recession low and rose by more than 57 percent in
2004 compared to 2003.
Manufacturing wages and benefits have increased since the
fourth quarter 2001. Average hourly wages in manufacturing rose
in May 2005 to $16.52, up 2.7 percent from a year ago. Benefits
have increased 6.3 percent in the 12 months ending March 2005.
Manufacturing productivity has increased 83 percent over the
past 15 years, while productivity in the total non-farm economy
has risen only 45 percent.
Institute for Supply Management (ISM)--data indicates that
manufacturing has had 24 consecutive months of growth.
At the Department of Commerce, we are confident that the outlook
for manufacturing is good, but we cannot be complacent. The domestic
and global economies are fiercely competitive and we will need to work
very hard to stay on top. The Administration is committed to furthering
conditions for economic growth and improving the overall competitive
environment for U.S. manufacturers.
The President's Plan
President Bush is committed to policies that create the business
environment that encourages innovation, lowers the cost of doing
business, makes our economy more flexible and promotes economic growth.
For example, the President's plan:
Allows families to plan for the future by making tax relief
permanent.
Encourages investment and expansion by restraining Federal
spending and reducing regulation.
Makes our country less dependent on foreign sources of
energy through a comprehensive national energy policy.
Expands trade and levels the playing field to sell American
goods and services across the globe.
Protects small business owners and workers from frivolous
lawsuits that threaten jobs across America.
Lowers the cost of health care for small businesses and
working families through Association Health Plans, tax-free
Health Savings Accounts, and tax credits for employer
contributions to Health Savings Accounts, Medical Liability
Reform, and health information technology.
Prepares workers for jobs of the 21st century by improving
school standards, reforming workforce training and increasing
the number of people served.
Implementing Recommendations From the Manufacturing in America
Report
Mr. Chairman, in order to advocate more strongly for the interests
of U.S. manufacturers, my first priority was to learn what was most
important to them. As such, since taking office in September 2004, I
have:
Visited more than 71 manufacturing facilities;
Chaired 53 roundtable discussions;
Addressed 33 industry association groups;
Participated in five President's Export Council meetings;
Presided over three Manufacturing Council meetings;
Attended 11 Chamber of Commerce meetings;
Led an eight-day trade policy mission to China; and,
Met with senior officials in Japan.
In total, I have addressed over 14,000 manufacturers.
I am pleased to report that there is a renewed optimism in the
manufacturing sector as the majority has plans to increase investments
and hire more workers.
We are making great strides in supporting the President's plan
through implementing the recommendations of the Manufacturing in
America report released by Secretary Evans in January 2004. With over
21 recommendations implemented thus far, the Department of Commerce
will continue making progress to ensure the competitiveness of all U.S.
industry. The recommendations are grouped in the following categories:
1. Enhance Government's Focus on Manufacturing Competitiveness.
2. Invest in Innovation.
3. Create the Conditions for Economic Growth and Manufacturing
Investment.
4. Lower the Cost of Manufacturing in the United States.
5. Strengthen Education, Retraining, and Economic
Diversification.
6. Promote Open Markets and a Level Playing Field.
I would now like to discuss with you our progress in each of these
areas.
1. Enhance Government's Focus on Manufacturing Competitiveness
Establishment of the Manufacturing Council
Secretary Evans established the Manufacturing Council to provide
oversight and advice on the implementation of the President's
Manufacturing Initiative. Secretary Gutierrez is working with the
Council and values its input. In fact, his first domestic trip as
Secretary was to the Manufacturing Council's February 2005 meeting in
Dearborn, Michigan. In addition, most recently, he hosted a Council
meeting in Washington attended by Members of Congress.
The Manufacturing Council plays an integral role in identifying
priority manufacturing issues and advising the Secretary. We will
continue to work very closely with the Council, which has prepared
reports on workforce issues, tort reform and market access. These on-
going dialogues provide sound information regarding needs of U.S.
manufacturing and the impact of Federal Government efforts.
Establishment of the Interagency Working Group on Manufacturing
Because manufacturing issues cut across numerous Federal agencies,
Secretary Gutierrez has asked fellow cabinet secretaries to name a
manufacturing liaison to serve on an Interagency Working Group on
Manufacturing. This Working Group will facilitate a coordinated Federal
approach to the challenges facing this sector both domestically and
internationally.
Establishment of the Office of Industry Analysis
In January of 2004 the Administration launched the Office of
Industry Analysis, which is responsible for assessing the cost
competitiveness of American industry and evaluating the impact of
domestic and international economic policy on U.S. competitiveness,
particularly in the manufacturing sector.
2. Invest in Innovation
Introduction to Innovation Challenges
The rapid advancement in technology has presented challenges and
opportunities to U.S. industry. The United States must have a policy
environment that promotes innovation, and allows industry to grow and
prosper. Success or failure will depend on our ability to support
technology investment, research and development, and create new
industries, new processes, and important services--setting the stage
for advancing innovation. A partnership between the Federal Government,
industry, and academia can accomplish this through strong support of
research and development (R&D).
Federal Research & Development
President Bush's FY 2006 Budget request includes a record $132
billion for Federal research and development.
This represents a 45 percent increase compared to 2001's
$91.3 billion.
President Bush's 2006 budget allocates 13.6 percent of total
discretionary outlays to the conduct of R&D--the highest level
in 37 years. Not since 1968 and the Apollo program have we seen
an investment in R&D of this magnitude.
In FY 2006, the Networking and Information Technology
Research and Development (NITRD) program is budgeted for $2.2
billion, including research directly related to broadband
technology.
Since 2001, funding for nanotechnology R&D under the
President's National Nanotechnology Initiative has more than
doubled to $1.1 billion.
These investments are a reflection of the importance that President
Bush assigns to science and technology to enhance U.S. competitiveness
and our ability to solve challenges we face in health, defense, energy,
and the environment.
Even in an environment of tight budgets, President Bush recognizes
that one of the best tools we have for ensuring that the United States
remains the world's innovation headquarters is to lead the world in
cutting-edge fundamental research that industry can apply to its
processes.
The Administration also recognizes that Federal R&D is just one
part of the investment that keeps our Nation at the forefront of so
many fields. Business and industry invests another $200 billion in
research--the largest source of R&D funding in the U.S., providing 63
percent of total 2003 R&D funding. State governments, universities and
colleges, and nonprofit institutions invest an additional $27 billion.
Interagency Working Group on Manufacturing R&D
The Interagency Working Group on Manufacturing Research and
Development was established as a result of the President's
Manufacturing Initiative in 2004. Participating agencies include
Commerce, Agriculture, Defense, Education, Energy, Health and Human
Services, Homeland Security, Labor, National Aeronautics and Space
Administration, National Science Foundation, the Office of Management
and Budget, the Office of Science and Technology Policy,
Transportation, and the Small Business Administration.
The goal of this multi-agency focus is to lead the development and
promote the implementation of advanced manufacturing technologies for
the benefit of the U.S. economy and the U.S. manufacturing sector, in
particular. The Group will also improve planning, coordination, and
collaboration among Federal agencies in these key technology areas and
to increase the effectiveness and the visibility of the overall Federal
manufacturing effort. The working group's objectives are to:
Identify and integrate requirements;
Conduct joint program planning; and,
Develop strategies for the Federal Government's
manufacturing R&D programs.
Its functions are to:
Engage in interagency manufacturing R&D program planning and
budgeting;
Identify opportunities for collaboration, coordination, and
leverage among agencies in specific technical areas related to
manufacturing R&D; and,
Identify agency priorities within these areas and gaps among
them.
Protection of Intellectual Property
In such an age where competitiveness is increasingly determined by
access to new ideas, rather than ownership of physical materials or
fixed assets, an innovative society must have sound intellectual
property rights (IPR) protection. This includes strong global
enforcement, with faster processing of patents. This is of even greater
importance today due to the convergence of nanotechnology,
biotechnology, information technology, and cognitive technology that
will create new industries and new jobs now and in the future.
The Commerce Department, through the U.S. Patent and Trademark
Office, has placed an expert IPR Attache in China to deal specifically
with intellectual property rights abuses in that country. We have
increased our intellectual property enforcement and compliance staff by
25 percent since 2001.
Secretary Gutierrez is committed to IPR protection and enforcement.
He highlighted this commitment on his recent trips to Russia and China,
where he sent a clear message that the gap between IPR laws and
enforcement needs to be closed. He stated, ``Violators need to face
prohibitive financial penalties and real jail time, and it's time to do
away with small, insignificant slap-on-the-wrist suspended sentences
that allow IPR violators to go back into business.''
To meet these challenges, the Administration is committed to
upgrading the U.S. Patent and Trademark Office. Policies underway will
allow the hiring of several hundred new patent examiners. This, in
turn, will help ensure that the intellectual property rights of U.S.
companies and innovators are upheld across the globe.
Strategy Targeting Organized Piracy (STOP!) Initiative
Commerce is a key member of the STOP! Initiative, which was
announced in October 2004. The STOP! Initiative was created to
coordinate government-wide activities to confront global piracy and
counterfeiting. It seeks to:
Secure and enforce intellectual property rights in overseas
markets;
Stop fakes at U.S. borders;
Keep global supply chains free of infringing goods;
Dismantle criminal enterprises that steal America's
intellectual property; and
Reach out to like-minded trading partners and build an
international coalition to stop piracy and counterfeiting
worldwide.
In order to provide a one-stop shop, we have established a
hotline--(866) 999-HALT--which has received 300 calls since its
inception in October of 2004, and set up a website, www.StopFakes.gov.
With this initiative, Federal agencies work with America's trading
partners to crack down on global piracy and counterfeiting.
3. Create the Conditions for Economic Growth and Manufacturing
Investment
If we wish to remain a nation of innovators, we do not want to
over-tax industry and commerce and dampen the entrepreneurial spirit.
There are key elements of the tax relief passed by Congress and signed
into law by President Bush that will expire in a few years.
The Administration has urged Congress to make these vital tax
reductions permanent so American families and businesses can make
better decisions for their financial futures.
The President has proposed to make the Research and Experimentation
(R&E) Tax Credit permanent. The R&E tax credit promotes private sector
investment in research and the development of new advanced
technologies.
4. Lower the Cost of Manufacturing in the United States
The National Association of Manufacturers has claimed that United
States manufacturers faced a 22.4 percent overall cost disadvantage
relative to our chief foreign manufacturing competitors as of 2002.
The cost disadvantage comes from:
Higher corporate taxes;
Frivolous lawsuits;
Energy costs;
Unreasonable and excessive regulatory burden, and
Health care costs.
This burden has had the highest impact on small to medium-size
manufacturers--which represent 98 percent of all manufacturing firms,
half of all the manufacturing jobs, and 70 percent of all new
manufacturing jobs.
Cost of Regulations
High regulatory costs have a negative impact on job creation. As
mentioned previously, the U.S. manufacturing sector currently accounts
for roughly 13 percent of U.S. GDP, employs over 14 million workers,
and accounts for over 60 percent of U.S. exports. It is also still the
largest in the world. However, the regulatory regime is substantial and
compliance costs are rising.
The Office of Management and Budget (OMB) estimated that the cost
of regulations imposed over the last 10 years by the U.S. Government is
$35 to $39 billion per year. \3\ A 2001 study by Crain and Hopkins
found that manufacturing firms face a regulatory burden approximately
six times greater than the average firm, and when adjusted for the
number of employees, manufacturing firms face a regulatory burden per
employee approximately two times greater than the average firm. \4\ In
addition, technology advances at times outpace the legal and regulatory
system. Regulators must support innovators by incorporating private
sector input in rulemaking.
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\3\ Draft 2005 Report to Congress on the Costs and Benefits of
Federal Regulation, available at: http://www.whitehouse.gov/omb/
inforeg/regpol-reports_Congress.html.
\4\ Crain, W.M. and T.D. Hopkins 2001. ``The Impact of Regulatory
Costs on Small Firms.'' Report prepared for the Office of Advocacy,
U.S. Small Business Administration. Available at http://www.sba.gov.
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Government-mandated regulations are designed to influence business
behavior in favor of the public interest and focus on areas such as
environmental protection, health and worker safety, national security,
individual privacy, and commercial competition. However, contributions
to the public good must be balanced against especially unnecessarily
burdensome regulations that increase business costs, reduce
productivity, and hinder job creation.
In addition, cost estimates often address only the direct expense
of regulation compliance, such as reporting requirements and factory
retrofitting, but these rules can also lead to increased prices, lower
product quality, and other intangible costs like loss of business
freedom. Most importantly, from a global competitiveness and economic
growth standpoint, regulations can reduce innovation by inhibiting new
ideas, constraining product development, restricting production process
design, or encumbering marketing strategies.
Streamlining regulation is an important component in the
President's economic agenda. The Administration has taken several
positive steps toward targeting burdensome regulations for reform. The
Office of Management and Budget's Final 2004 Report to Congress on the
Costs and Benefits of Federal Regulations outlined 189 regulations
nominated for reform through private sector input.
After a Federal agency review, including the Office of
Manufacturing and Services, OMB published a list of 76 priority
nominations. Manufacturing and Services (MAS) is now working with OMB
to assess these regulations to find how any proposed changes might
affect manufacturers. In MAS, we are focused on enhancing our
regulatory expertise and will continue to work with OMB and other
agencies.
Tort Reform
We must also be mindful of the effect that higher levels of
expected liability costs have on innovation. Due to the higher level of
expected costs, firms often have to limit innovation, withhold a
product from the market, or forgo hiring. If we are going to have an
innovative society, we have to have a strong legal policy that supports
innovation, entrepreneurship, and allows business to allocate risk in a
transparent manner.
The President has proposed measures that would support this goal.
We took an important step when Congress passed and the President signed
legislation aimed at bringing back fairness to our Federal class-action
lawsuits. We need to keep working to address other important related
issues such as asbestos reform and medical liability.
Health Care Costs
Another aspect of competitiveness is health care costs. Healthcare
costs represent the largest and fastest rising cost faced by U.S.
businesses. In order to maintain a competitive and innovative
environment where business and job-creation can flourish, we need to
make health care more affordable and predictable.
In response, the President has proposed Association Health Plans
that would afford small businesses greater leverage in negotiating the
cost of health insurance with providers. This proposal allows small
businesses to pool together to purchase health coverage for workers at
lower rates. The Administration also worked to establish health savings
accounts to give workers more control over their health insurance and
costs. The Administration believes it is important to also reduce
frivolous lawsuits against doctors and hospitals that drive up
insurance costs for workers and businesses. In addition, the
President's Health IT Initiative is designed to reduce errors, cut
waste, and lower costs. The President's goal is to make electronic
medical records universally available for most Americans in the next 10
years.
National Energy Policy
Energy costs are a major concern for manufacturers. Manufacturers
consume about one-third of the U.S. energy supply--including 40 percent
of the natural gas and 30 percent of the electricity. That is why the
President's energy policy is really a manufacturing jobs plan.
President Bush believes the growing U.S. economy requires
affordable, reliable, and secure supplies of energy. The President has
outlined his broad vision to move America toward less energy dependence
and urged Congress to enact a national energy policy.
5. Strengthen Education, Retraining, and Economic Diversification
Increasingly, sophisticated education and training systems are
essential to ensuring that our workforce is fully equipped to compete
in a truly global marketplace. A talented and skilled workforce allows
manufacturing companies to succeed and drive innovation. Innovation
increases the role of high value-added work to sustain our economic
prosperity.
In order to stay competitive in the face of rapid technological
change, we need to build the best skills and attract the best minds.
Securing a high quality labor force requires an education system that
is second-to-none and an effective worker training infrastructure that
includes vocational training as well as worker retraining programs.
To address these issues, the President has a number of initiatives
that would support U.S. manufacturers' education and workforce needs.
For example:
The President has announced a new High School Initiative
that will allocate $1.5 billion in his Fiscal Year 2006 Budget
to ensure that every high school student graduates with the
skills needed to succeed in college and in a globally
competitive workforce.
In the area of training, the President has provided $250
million in new competitive community-based grants under the
Jobs for the 21st Century Initiative to strengthen worker
training in technical and community colleges.
He has also called for the creation of Innovation Training
Accounts under which workers would have more choices about
their training through increasing the use of personal job
training accounts focused on instruction in high-growth job
fields.
Under the President's High Growth Job Training Initiative
for Advanced Manufacturing, we have invested more than $60
million to develop model partnerships between employers,
training providers, and the workforce investment system, in
order to identify and replicate best practices in workforce
development that help U.S. manufacturers retain and increase
their competitiveness in the global economy.
6. Promote Open Markets and a Level Playing Field
Opening export markets and removing trade barriers are the key to
U.S. manufacturing competitiveness. Free and fair trade provides U.S.
companies with new markets and opportunities for our products and
services.
Free Trade Agreements
As an example of our approach to opening markets, the President has
signed into law several new Free Trade Agreements (FTAs) that will
enable U.S. manufacturers to compete on a level playing field in these
markets for the first time.
The Chile FTA, which became effective on January 1, 2004, boosted
U.S. exports to Chile by almost a billion dollars, and increased U.S.
market share of Chilean imports for the first time since 1995.
Looking at another example--the U.S.-Australia FTA--more than 99
percent of U.S. manufactured goods exports to Australia have
immediately become duty free. Manufactured goods account for 93 percent
of U.S. exports to Australia.
CAFTA-DR is another vital instrument for leveling the playing
field. Eighty percent of all exports from the CAFTA region enter the
United States duty-free. U.S. manufacturers do not currently share in
these benefits. However, they will under CAFTA. With this agreement,
remaining tariffs will be phased out over the next 10 years.
Bilateral and regional FTAs help us encourage integration to meet
some of U.S. industry's most important goals--a level playing field for
exports, intellectual property protection, and a single set of
standards leading to a more cohesive, integrated trading environment
for our exporters and investors in that region.
The United States has concluded a total of ten FTAs--opening up the
export markets of these countries to American industry and its workers.
Of the ten agreements, the Bush Administration has entered into force
FTAs with five countries--Jordan, Chile, Singapore, Australia, and
Morocco (Morocco FTA in force as of July 1, 2005). New and pending FTA
partners, taken together, would constitute America's third largest
export market and the sixth largest economy in the world.
These agreements are meaningful for the United States. They are
comprehensive and in many cases carry immediate benefits. They contain
broad commitments that provide a predictable environment for our
exporters and investors.
Standards
The Department of Commerce Standards Initiative launched by
Secretary Evans in March 2003 underscores the need to have consistent
technical standards worldwide. The initiative responds to strong U.S.
industry concerns that barriers associated with implementation of
foreign standards and technical regulations are now one of the greatest
challenges to expanding exports.
Increasingly, technical standards are being mandated around the
world through government laws and regulations. This is becoming a
critical issue for global competitiveness, since they can either
facilitate or impede international trade. In the United States,
technical standards are largely voluntary and market-driven, although
with strong government participation and support.
Many U.S. companies view discriminatory or unnecessarily trade
restrictive standards as the primary trade barrier today, and it is
estimated that standards issues impact 80 percent of world commodity
trade. Major impediments to free trade include the establishment of
standards specific to a nation or region, redundant testing and
compliance procedures, and unilateral and non-transparent standard
setting processes.
Open and transparent standards adoption generally has a positive
effect on fostering innovation. Vendors that adopt the standard
determined by the marketplace are rewarded by greater sales and
production efficiencies. This, in turn, provides additional funding for
new rounds of research and innovation.
The Department of Commerce supports the adoption of voluntary
standards, whenever possible and the development of standards in an
open and transparent manner with industry input. The Department also
supports a policy of technology neutrality in government procurement
and other public actions. Technology neutrality allows the market to
decide which products are best and stimulates technology advancement.
Conclusion
Prior to this job, I have spent my entire career in the business
sector building a manufacturing company. One of the lessons I have
learned is that business continually needs to innovate to grow, produce
new and better products, and remain competitive. Many manufacturers are
implementing lean production procedures to remain competitive. While
improved means of production is important, I continue to convey that
without innovation there is no life after lean. American leadership in
innovation and the development of new ideas and technologies holds
great promise for our generation and the next.
There are no magic formulas. We realize there are many challenges
facing U.S. manufacturing, and while we are making progress, there is
much more to do. A strong and vibrant manufacturing sector is critical
to providing jobs and maintaining a growing healthy economy.
Like the President and the Secretary, I am an optimist. I know that
when we lift the burdens from our manufacturers, their creativity,
their innovation, and their work ethic will continue to make our
economy the marvel of the world.
I look forward to working with this Subcommittee to meet the
challenges facing U.S. manufacturing and welcome any questions you may
have. I am also very interested to listen to the views of the
Subcommittee on how we at the Department of Commerce might best advance
these efforts. Together we can work to ensure that the U.S. continues
to remain the technological and economic power that it is well into the
21st century.
Thank you.
Senator Ensign. Thank you, Mr. Frink. We appreciate your
testimony. I have a number of questions for you this morning.
You mention education. As I have gone around talking to
various people, one of the statistics that comes out is the
number of engineers that we are graduating in the United States
versus the number of engineers that are graduating in China or
in India. What specifically, does the President and his
Administration plan to do to get more children to become
interested in science and math? We have some of the finest
colleges and universities in the world. I realize that the
President believes passionately in improving K-through-12
education, and that the No Child Left Behind Act is making a
positive impact on K-through-12 education. But, specifically,
what are the Administration's plans for getting children
interested in science and math, and motivating them in science
and math?
Mr. Frink. Well, I agree with your concern, and, what I
hear, with regard to having engineers, is that China is
producing about five times as many as we are. I would say that,
to put that in perspective, they also have five times the
population. But that does not minimize, in my mind, the concern
for, and the need for, engineers.
The Administration has many programs that are in place to
address this.
Senator Ensign. By the way, they are not graduating fives
times as many lawyers.
[Laughter.]
Mr. Frink. No. And I'm very----
Senator Ensign. We're probably graduating five times as
many lawyers as they are.
Mr. Frink. I am very pleased to be a part of an
Administration that's probably short on lawyers and very strong
on business people.
I can say what I'm doing in my area. I am very concerned
about education. People who have gotten to know me from my
speaking events know that if I have any legacy, it'll be
driving education. I see a big concern with marketing of
opportunities in manufacturing with regard to engineers--
mechanical engineers. As I was part of an awards ceremony on
Saturday, one of the students accepting an award mentioned that
his class will no longer be available, and that he will be the
last graduate in mechanical engineering, which was a tragedy to
hear. And I think that part of it is a bad marketing job. I'm a
very big believer in marketing and what it can do. I don't
think that it's been marketed effectively, in terms of
academics knowing the opportunities that are there. I have
found that there are so many job opportunities in the
marketplace that it defies description. Of the 71 manufacturers
I visited, almost all of them have ``help wanted'' signs
hanging from their doors, but they need educated workers for
the 21st century, workers with more advanced education, and
they don't have the people. So, there's a demand, and there is
a disconnect with the chain that creates the supply.
So, one of the reasons I want to get together--well, I have
gotten together, so far, with labor--Emily DeRocco, in the
Department of Labor, and Labor Secretary Chau, and will with
the Department of Education, as well--is to form a committee,
or a group, under the interagency working group. I know
committees are not exactly the best term to use, so we're going
to create a group that will seriously try to get together with
the best minds of academia and the business community to come
up with solutions for how we can drive education, especially in
engineering, because that is a critical concern. So, that's a
big part of my focus.
Senator Ensign. Well, thank you. I would love to hear any
ideas that you all come up with, especially if any of the
proposals that you put forward involve the Congress.
I want to take you down a little different road, toward the
National Science Foundation. The President had proposed--and
we've doubled funding for NIH, and, for the life sciences,
we've done a good job on increasing funding. Some of the
complaints that I've heard from the private sector, though, is
that we are not paying enough attention to the physical
sciences. I realize we're in tight budget times, and I am
certainly a fiscal conservative. But there are areas where it
is important for the Federal Government to spend its money. One
of the areas where I believe we get pretty good bang-for-the-
buck is investing in basic research. Investing in the National
Science Foundation and the research it funds in the physical
sciences helps our country to remain competitive in the global
economy. Does the Administration think that we are adequately
funding NSF?
Mr. Frink. Well, I think what I would like to do is, rather
than give you an inefficient answer, or a bad answer, I'd like
to come back with that in the form of an educated answer.
I know that the President, as I mentioned in my report, has
allocated $132 billion to research and development. Where it's
allocated and where it goes, I don't have the breakdown. I
think, in general terms, that program, like others, that drive
manufacturing at the high-tech level or other levels, has been
addressed in budget cuts. And I don't have, always, the good
answer for that. I know that in business you have to make
difficult decisions. And sometimes, unless you're in the
forefront of that decision process, you may have a reason for
why that decision was made. And so, my sense is that we should
put some trust and faith in the people that made those
decisions for having had a reason, but I also believe that it's
our job to question them.
Senator Ensign. I would encourage the Administration--you
know, I'm a big believer in using the dollars that we have
effectively. While $132 billion is a lot of money, the
necessary question is how is its usage prioritized. You know,
up here in the Congress, we have a lot of defenders of NASA,
but NASA is one of the most inefficient bureaucracies that we
have in the Federal Government, and a lot of the money we spend
on NASA development could be spent a lot better at the National
Science Foundation in grants and research that encourage
innovation. There is not a lot of innovation coming out of NASA
these days. But we continue to spend a lot of money there.
We ought to be looking at the dollars that we're spending,
and using good metrics to find out where we're getting the bang
for the buck. The Administration started doing that, and I
realize, with the PAR, that they are about 60 percent through,
of the dollars that they're measuring with metrics. But I would
continue to encourage the Administration, in this area,
especially when the dollars are so precious and when they can
be stretched so far if we spend them correctly to use metrics
in order to determine our return-on-investment.
I have some additional questions, but I want to turn it
over to Senator Allen.
Senator Allen?
Mr. Frink. Sure.
STATEMENT OF HON. GEORGE ALLEN,
U.S. SENATOR FROM VIRGINIA
Senator Allen. Thank you, Mr. Chairman. I really want to
commend you for holding this hearing. You and I both are very
passionate about the technology, but competitiveness is
absolutely essential for us, as a country. If we're going to
compete and succeed, we need to embrace the advances of
technology, particularly in manufacturing, for the
manufacturing will be performed with greater efficiency, better
quality, and less waste. It's the only way that we're going to
compete and succeed. We're not going to be able to do it with
lax environmental laws or low wages.
And I was looking at your statement here, overall, on--Mr.
Frink--on the President's plan, things that are important. Tax
policies--absolutely important if we're going to get investment
in this country. We can't have taxes that are so high that it
prohibits investment here. Same with regulations. Regulations
need to be based on sound science, not political science.
What the Chairman talked about on education--a concern that
I have, as well--is that the engineering graduates that we're
matriculating in this country, they will be the ones, in the
future, who will be designing and developing the new
innovations, inventions, and intellectual property. And when
you look at the numbers that we are matriculating, compared to
China, compared to India, it is very worrisome. In fact, 40
percent of our engineering graduates are from overseas. Now, I
want this country to be the magnet for the world's best minds.
I want them to come here. And we need to be the world capital
of innovation, including manufacturing.
So, most of the things you're saying here--make a great
deal of sense. I keep this insourcing survey from the
Organization for International Investment, and looking at their
matrixes and things that are important for it. And I know my
Chairman here, and I, worked together on repatriation of
profits. If just U.S. companies get their money back in here to
invest in this country, that's an important tax policy. Also,
let's get companies from France, Germany, and Japan to invest
in the United States to serve the North American market, rather
than go to Brazil or somewhere else.
I'm not going to ask any more than the Chairman did, on the
students getting interested in science and technology and
engineering, but it really is important for the security of our
country. The energy bill that we're going to be passing in the
next few weeks will be important for security and jobs, and
also competitiveness of our country, because energy costs
matter.
Where we're behind, that are important issues, but we have
a weak performance, are tax system, legal system, labor costs,
and healthcare costs. So, those are important ones to address.
One other thing on our trade agreements that I'd like to
ask you, Mr. Frink, is that we have free trade agreements, but
what is the Administration doing to level the playing field, as
far as manufacturers, globally? China, in the past, for
example, for the fabrication of semiconductor chips--they have
a 17 percent value-added tax in China on microchips; however,
if they're designed in China, they get a rebate. And, in fact,
if they're designed and fabricated in China, they get a 14
percent rebate. So, if you're a manufacturer assembling some
product in China, and you get a choice between microchips,
semiconductor chips, fabricated in the United States, or
elsewhere, and it's a 17 percent tax, where it's a 3 percent
tax if it's Chinese, it's not going to be too hard for--you
know, a fourth-grader could figure this out, that, gosh, you're
going to go with the cheaper chips. And so, it's important that
we enforce trade agreements so there's a level playing field.
Could you share with us what the Administration is doing to
make sure that there is a level playing field, that other
countries, insofar as manufacturing, are living up to their
agreements?
Mr. Frink. Well, thank you, first of all, Senator. I think
we're so totally on the same page, especially with regard to
education. I'm so very pleased that both of you feel so
strongly about that. It is the single most important concern I
have for the future of manufacturing. And that was addressed in
my marching orders, but probably not with as much emphasis as
I've learned from being in the forefront of manufacturers.
As to the point about trade and what we can do to level the
playing field, we provide, in our office, through the Office of
Industry Analysis, most of the information that is used by our
trade representatives, USTR. So, the input that we get, which
will include what you just mentioned, is what we will provide
USTR, in terms of the areas that we need to be addressing when
we get in negotiations at WTO events, at the JCCT meeting,
coming up in the Doha conferences. These are all the areas on
which we provide information. And I think their arguing points
are only as good as the information that we provide. And so,
what we're trying to do is, not only provide the best
information, but also quantify the impact so they can see what
kind of impact they're having on our economy, on the
businesses. And I think that is such an important area within
my Department. It's Manufacturing and Services. We have Jack
McDougall behind me. He is our new Deputy Assistant Secretary
for Industry Analysis. Jack comes from the private sector. He's
going to take that department and, I think, bring some creative
ideas on how we can take the information we generate and make
it more effective at the point where it will be delivered. We
can't personally deliver that, but we can provide the
information.
And I think that Rob Portman, in this new position, is
going to be an excellent choice to become the lead spokesman
for our trade. And I think that the President's having put him
in place is going to be a big factor in how we level the
playing field as he leads our debates with regard to issues
such as the one you mentioned.
Senator Allen. Well, thank you. And I think that the
evidence that you present is important, whether that's in
bedroom furniture, whether it's in semiconductors, whether it's
in textiles, whether it's in protecting our intellectual
property, or other areas that might arise in the future.
Let me finish, since my time's running out here. The other
aspect, in addition to the tax and regulatory, energy, and
education, which is important is research in key areas of the
future. I actually do think that you're all misallocating a
priority, insofar as NASA is concerned, and that's in
aeronautics. The previous Administration cut aeronautics
research and development by half. The proposals of this
Administration are to cut it in half again. For the first time
in history, our sales of aircraft in the United States were not
first in the world; the Europeans were number one. The
Europeans have a strategic plan to dominate by the year 2020 in
aeronautics, and they're on their way to doing it. And I think
it's shortsighted to--for our military capabilities, as well as
civilian aviation and aircraft, to not have the next-generation
or the new vehicle systems for lighter, faster, quieter, less-
polluting aircraft, or hypersonic flight, as well. And so,
that's the normal differences I suppose one would have between
an Administration and legislative branch, but there are those
of us who think that that is an important aspect for the
future.
The other is nanotechnology. Senator Wyden was once a
Member of this Committee, and I have moved forward, and the
President signed, the Nanotechnology Research and Development
Act. It is the largest increase, and I want to commend you all
for following along with it, the largest increase in basic
scientific research since the space program. And the
nanotechnology area is a very multifaceted one. It'll affect
life sciences, materials engineering, and microelectronics. And
it is important that this country stay in the lead there. And I
want to commend the Administration for, in a very tight and
taut budget, making nanotechnology, which will affect
manufacturing, particularly in materials engineering.
Nanotechnology will affect everything we use, whether that's a
vehicle or whether it's--especially the advancements in some of
the biotechnology areas. So, I want to commend you all there.
And, where you can, make sure that where we're investing in
research and development, in coordination with the universities
and the private sector, that we look at the competitiveness of
this country, in comparison to what other countries are doing,
whether it's in aeronautics or whether that's in
nanotechnology.
Mr. Frink. Thank you, Senator.
I have been in this new position a little over 8 months,
and I have to say I'm still in the learning curve. One of the
benefits I will have to help my education process will be the
fact that I'm going, in a couple of weeks, to the biennial
Paris Air Show, where I will be interacting with all the
leading individuals that drive aerospace, and speaking about
every area you were just talking about. And I'll walk away with
a better sense of where we need to be. I get much more
passionate in how I promote anything when I get to learn how it
affects our economy. And I look forward to that. I'm going to
ask hard questions. I'm always dubious of trips and how much
effect you get from those. I'm going to walk away, hopefully,
with a strong sense of that trip being worthwhile, and that
I'll have a better understanding of where our limited dollars
are going. And if I see there's a need, I will not hesitate to
speak up and provide my recommendations as to where I see the
need.
Part of my job is to provide advice--to take what I see
from my front-line experience and move it up through the chain.
So, I expect to do just that.
Senator Allen. Thank you, Mr. Frink.
Thank you, Mr. Chairman.
Senator Ensign. Senator Kerry?
STATEMENT OF HON. JOHN F. KERRY,
U.S. SENATOR FROM MASSACHUSETTS
Senator Kerry. Mr. Chairman, thank you very much. I
apologize to the witnesses, and to you, for not being able to
be here earlier. I had a meeting off campus, so to speak, which
took longer than I expected.
I thank you for holding this hearing today. I think this is
perhaps the most important topic before the nation, frankly.
And the outcome of the subjects that we're talking about here
today is really linked to a whole series of issues which aren't
in the sole jurisdiction of this Committee, but which are
critical to the Congress, itself--our tax policy, our budget,
our fiscal policy, and our trade policy. They're all linked.
But what disturbs me, candidly, Mr. Frink--and I say this
to the Administration, in absentia, in a sense--is that we
really don't have a national plan. We're, sort of, drifting
around on this topic. In the last 4 or 5 years, we've lost one
out of every six manufacturing jobs. We've lost 2.7 million,
total. There still was not one net new job created under this
Administration in the last four and a half years. And, again,
last month I think it was something like 70,000 or so lost.
I've forgotten the exact figures, but you have to create about
300,000 just to stay even. And we're not.
You guys are cutting at least 90 percent of the
Manufacturing Extension Program, which is hard for me to
believe. I don't understand the rationale of that. Ask any
small enterprise that's been involved with the Manufacturing
Extension Program, and they'll tell you it has helped them take
products to market, it helps them take them from laboratory to
shelf. There are all kinds of upside benefits. But it's being
cut. Why? So we can give the wealthiest people in America
another tax cut? You know, as a Senator you get the privilege
of meeting with some of these wealthy people all the time, and,
I'll tell you, I've sat with them, and not one of them has said
to me, ``I need this cut,'' or, ``I want this cut.'' They'll
take it. It'll put more cash in their pocket, and they'll sit
there and tell you that, but it's not going to change their
investment decisions. How they invest money, what they invest
it in, is going to be the same, with or without the tax cut.
It's going to be based on the prospect of a return-on-
investment. It's going to be based on how fast they will earn
money, and how well the marketplace is working. And our
marketplace is not working very well, for a lot of different
reasons.
Now, you know, astoundingly, when you measure, California
lost 353,700 manufacturing jobs in the last 4 or 5 years;
Michigan lost 210,000. My home state of Massachusetts lost
about 110,000. And we're pretty good in our state, as they are
in California and some other states in the country, at using
technology to its advantage and making new jobs. There has been
a slight upward tick in productivity. But, just this week, the
Institute for Supply Management reported that the manufacturing
sector is again losing momentum. That's their quote. They note
that the rate of growth in new orders continues to decline, the
employment index has failed to grow. And they openly question
whether the manufacturing growth cycle is coming to an end.
This economic slide has hurt businesses, investors, workers,
and communities.
Now, I'm not suggesting to you--and I would never suggest
this--that the government can control, completely by itself,
the direction of the slide. We all know it's much more
complicated than that, and there are other things that play in
it. But all of us understand that we set an overall framework
within which private investors make choices and have the
availability of making those choices.
I had the President of Massachusetts Institute of
Technology come to me the other day, the new president, and
talk to me about their decline in the numbers of people of
caliber who have been coming from abroad, partly because of 9/
11, but also other transition that's taken place, the lack of
American students going into science, math, biology,
technologies, and basic sciences, in addition to the lack of
commitment of the Federal dollars that used to be there in many
of those areas. And so, there's a just general decline.
In Asia, they are catching up to us in areas of innovation
where we have traditionally--in software and other things--been
the leaders. They're turning out 300,000 engineers a year in
China and India. We're going downwards.
That's the future. That is the future. And, you know, when
somebody like Bill Gates tells us that American schools, even
sometimes when they're working very effectively, are obsolete,
we'd better stop and worry. I honestly--I don't see the
Administration grabbing onto this with the kind of urgency and
energy that it ought to be. We have the PCAST but many of the
Council's own recommendations have been ignored, certainly not
implemented. I've heard from executives at mid-sized
manufacturing firms who say they've cut costs dramatically, but
they still can't compete. Healthcare costs are the biggest drag
on our economy. The only proposal of this Administration are
association health plans, which will affect, at maximum, maybe
two million people. But we've got 47 million without
healthcare, and we've got GM, Ford, with the equivalent of junk
bonds. GM is now moving people to China for manufacturing. I
mean, this is so much more serious than I think the
Administration seems to grasp or be willing to deal with.
Tom Howell is going to point out, in his testimony today,
what Japan and the EU are doing in a large-scale, long-range
R&D project that's aimed at developing all leading-edge
technologies. And these projects that they're engaged in are
way beyond what we're doing, or even thinking about.
The fact is that the focus of some entities has been almost
exclusively on tort reform, and, while all of us accept that we
need some tort reform, and there's a reasonable place, with
respect to tort reform, to wind up, it's such a larger playing
field than just tort reform that it's, sort of, astonishing for
me to see the lack of planning and implementation.
So, maybe, Mr. Frink, you want to respond to some of what
I've just said, but I specifically want to ask you why it is
that the Administration is cutting funding to these essential
technology incubator efforts, like the Manufacturing Extension
Program or even some of the basic science and research
programs.
Mr. Frink. Thank you, Senator. There's a lot on the plate
there.
Senator Kerry. Yes, there is. But there is a lot on the
plate.
Mr. Frink. Yes, there is. Speaking to that specific
program, there have been a lot of cuts in the budget, overall.
I----
Senator Kerry. Why?
Mr. Frink. Well, this year's budget has required cuts.
And----
Senator Kerry. Why?
Mr. Frink. I'm not the economist or the person who----
Senator Kerry. What's the priority? What is the priority of
this Administration? What's the top priority?
Mr. Frink. Jobs.
Senator Kerry. OK. And how are they going to create those
jobs?
Mr. Frink. Well, one of the things is my job, which itself
was newly created. This is the first time in history that we've
had a person, an individual, a lead advocate to help
manufacturing. And I came from----
Senator Kerry. It's the only manufacturing job created in
America.
Mr. Frink. Well, it's a good one. It has the potential to
make a difference. And we also have a manufacturing council.
Senator Kerry. But the top priority of this Administration,
if you say it's jobs, why are they cutting the Manufacturing
Extension Program? Why are they reducing investment in the
sciences, in the grants? Why is it harder for kids to go to
school? Pell Grants are down.
Mr. Frink. I think, first, with regard----
Senator Kerry. So we can have a tax cut? That's the
priority--is a tax cut.
Mr. Frink. Well, I'm not a politician. I can't speak to
what you might view as a priority. I can only tell you that my
firsthand experience in the front lines----
Senator Kerry. But if you're going to come and tell me we
don't have the money, why don't we have the money? It's a
simple question.
Mr. Frink. I don't know that we don't have sufficient money
to meet our objectives. I think that a lot of what----
Senator Kerry. Well, why are you cutting it, then?
Mr. Frink. Well, if I can finish, I would like to just say
that I think, to some degree, government may be learning what
business learned a long time ago, and that is how to get by
with less and still produce great results. I don't know that we
didn't have fat in many of the programs we've had. I don't
know.
Senator Kerry. Fat in the Manufacturing Extension Program?
Mr. Frink. I think that program was not intended to be
disbanded. The support that was given was intended to keep all
the centers up and running----
Senator Kerry. It's a 90 percent cut, Mr. Frink.
Mr. Frink. I----
Senator Kerry. A 90 percent cut. That's----
Mr. Frink.--believe the cut was 46 percent.
Senator Kerry. It was 90 percent.
Mr. Frink. Well, the numbers I have show otherwise.
Senator Kerry. Well, what's the justification for 46
percent? The money doesn't go to people; it goes to a project.
Mr. Frink. That's one area with regard to a bigger picture
of what's being done to support manufacturing. I never look at
one targeted area. You could say, ``This is what we're not
doing,'' but then there's also, ``What are we doing?'' I think
the position that I have, the fact that we have a Manufacturing
Council that's working at lowering the barrier costs for
manufacturers around the country is a move forward.
Senator Kerry. The Manufacturing Council's report deals
entirely with tort reform.
Mr. Frink. That's----
Senator Kerry. That's what they've done.
Mr. Frink. No, that's only one of the Subcommittee reports.
The subcommittees have reported on tort reform, on the issue of
healthcare. On energy, we're working on innovation. It provides
advice. It just so happened that that one document was used by
the President, almost verbatim, when he discussed the issue of
tort reform, and the group, itself, felt very pleased that
their work was responded to, which I think is----
Senator Kerry. How was it responded to?
Mr. Frink. Well, as----
Senator Kerry. How has it been----
Mr. Frink.--I said, the information that they put in their
white paper, the President just about used their points in the
white paper----
Senator Kerry. How has it been translated into the budget
and into policies?
Mr. Frink. Well, in the policies, I think that's what drove
that decision recently with regard to tort reform, the first
step in tort reform, that took place--was it in January,
February?
Senator Kerry. I'm asking beyond tort reform.
Mr. Frink. OK. We're on another subject. What was it--I'm
sorry----
Senator Kerry. Well, I'm saying, how has the Council
contributed to the budget or to any policy that's been
implemented or that we're working on today?
Senator Ensign. Mr. Frink, after you answer this--I'm
sorry, Senator Kerry--I'm going to have to go to Senator Pryor.
Senator Kerry. Absolutely.
Mr. Frink. One thing I can tell you is this. I learned a
very good lesson from Senator DeMint when I spent some time
with him in South Carolina. He said, ``Do not get discouraged
with what you do and the fact that it doesn't show immediate
results. Think of what you do as a big ship, and you move the
wheel slightly, and perhaps the trajectory of how your
decisions or what you influence moves down the line will show
up, and, two secretaries from now, somebody might be taking the
bows for what you accomplish.''
I know that we are moving things in the right direction,
and I have confidence that, down the line, a lot of what we do
will show results. The Manufacturing Council is relatively new.
It's less than a year old. It has just had its fourth meeting.
It is still up and running. I am very optimistic. And the
14,000 manufacturers that I have seen in the short time I've
been in this position have been bursting with optimism over how
they feel the economy is moving in their behalf. Certainly,
some of them have had some issues and areas of concern, but
part of my job is to work on those areas, and I intend to do
that. And I do have a passionate concern for people.
Senator Ensign. Go ahead, Senator Kerry.
Senator Kerry. I thank the Chairman for his indulgence on
this, but let me just say to you, Mr. Frink, I know you're new
to the job, but what I'm trying to emphasize is, there's a lot
of frustration in a lot of sectors of our economy. I'm not
speaking for myself, and I'm certainly not putting a party
label on this. I have talked to manufacturers, to business
people all over the country, and to educators across the
country. The 2006 budget, unfortunately, has 4 percent less
than the 2005 level for Department of Labor's training
programs. It has 89 percent less for the Department of
Education's vocational and adult education program. It has $104
million in cuts to the National Science Foundation's education
and human resources account. I mean, I can go down a long list,
where there's just a departure from the stated goals, or even
the Council's findings, and what is really happening. And I
think that's the frustration. And I ask you, take the time to
go look at this, and be an advocate within the Administration
for the reality here. Because the reality that most people feel
out in the sector--I was just out in Silicon Valley, I was out
talking to people--they're deeply frustrated and deeply
concerned. And these are Republicans, Conservatives, Democrats,
Independents, they're just business people trying to compete in
an increasingly difficult world. And we've got to do a better
job of helping create a framework for them to do it.
Senator Ensign. Senator Pryor?
STATEMENT OF HON. MARK PRYOR,
U.S. SENATOR FROM ARKANSAS
Senator Pryor. Thank you, Mr. Chairman.
Let me ask this, Mr. Frink, if I may. Your position was
created as a response to the growing concern in this country
that we've lost about 2 million manufacturing jobs in 4 years.
My question for you is, what would you consider to be your
accomplishments to date in your new post? What have you been
able to accomplish?
Mr. Frink. Well, as I mentioned in my opening statement, I
have reached out to and visited a considerable amount of the
industry that I will be serving. There is a report that was
written, called ``Manufacturing in America,'' which represents
my marching orders. That report has 57 recommendations. We
have, to date, since I've been onboard, accomplished 21 of
those recommendations. That report was a byproduct of
roundtables that took place around the country, asking
manufacturers what their concerns were about their ability to
be competitive. And that report also included the
recommendations to create my position, a manufacturing council,
and many other recommendations, the total being 57. We have 21
completed. We'll expect to make that 22 in the next couple of
weeks, because we'll have an interagency group on
manufacturing. We have also put in a new Deputy Assistant
Secretary for Industry Analysis, and a Director for Economic
Analysis. We're going to continue to build a team that will
ensure that the concerns of manufacturers are heard and
addressed. We established the fact that the Council will play
an integral role in identifying priority manufacturing issues.
They organized a task force addressing a lot of the issues.
We're 8 months into this new position. I admit to the fact
that I still have a lot to learn. But, I think that we have
made progress. I've been on an 8-day trade mission, and I think
that our best work is ahead of us, without a doubt.
Senator Pryor. I will----
Mr. Frink. And I think that for the period of time that
we've been in place, we've made some measurable
accomplishments.
Senator Pryor. All right, well, let me ask that. You talk
about measurable accomplishments. In the Manufacturing in
America report that you cited a moment ago, it calls for you to
lead a benchmark analysis to measure your progress. Have you
done that yet? Have you done a benchmark analysis?
Mr. Frink. We're working on that.
Senator Pryor. OK. When will that be completed?
Mr. Frink. Well, I think at the end of the first year. I
think September 8th or 9th is when I was sworn in, so around
the 8th or 9th, I think we should have that ready to show where
we were and where we are now.
Senator Pryor. And you said there's 57 recommendations in
Manufacturing in America.
Mr. Frink. Correct.
Senator Pryor. And you've completed 21, soon to be 22.
Mr. Frink. Implemented.
Senator Pryor. Implemented.
Mr. Frink. Yes.
Senator Pryor. And does that mean those 21, soon to be 22,
are done--right? They're done.
Mr. Frink. Well, the work's started on those, for example,
my position is not finished. I'm one of those 21
recommendations, so there's a lot of work I will be continually
doing----
Senator Pryor. No, I guess that's what I'm asking you. You
talk about these 21, soon to be 22. Does that mean that they
are--you said implemented or done or completed--I mean, does
that mean that they're done, or they're all, sort of, works in
progress?
Mr. Frink. Works in progress.
Senator Pryor. OK. So, you still have 30-some-odd--35, 36
recommendations to go. Do you have a timetable on those?
Mr. Frink. No, sir.
Senator Pryor. Will that be done----
Mr. Frink. A lot of those require legislation. That's an
area that I'm going to be working on. One of my targets right
now is to get more familiar with the Hill and the people that
will be able to make the decisions on a lot of the legislative
parts of those recommendations so that I can advocate on behalf
of manufacturers, where I view legislation needs to be moved.
Senator Pryor. All right. One thing that Senator Kerry
asked a few moments ago was about this Manufacturing Council
Subcommittee on the U.S. Workforce. As I understand what you
all said in that, and your response to that, was that--
basically, you were talking about one subcommittee report,
right? Not the entire effort, but one subcommittee.
Mr. Frink. No, we actually have three subcommittees, but I
think he was referring to the one on tort reform.
Senator Pryor. Right. And you mentioned the President had
cited that----
Mr. Frink. Yes.
Senator Pryor.--correct?
Mr. Frink. I think that in all councils there is a bit of
frustration as to the work they do and whether or not it gets
used, and I think it was a big triumph for our council to know
that the President cited its report on tort reform, with many
of the recommendations, and used a lot of the facts contained
in it to build a case for tort reform.
Senator Pryor. As I understand--maybe I'm wrong about
this--as I understand the work of that subcommittee, you looked
at issues facing manufacturers, and the focus was healthcare
and rising healthcare costs. And I would say--and I wonder if
you would agree--that there are more challenges facing the
manufacturer than just healthcare and healthcare costs. Would
you agree with that?
Mr. Frink. Absolutely.
Senator Pryor. And as part of the Subcommittee's work, they
seemed to focus on medical liability and tort reform----
Mr. Frink. And energy and innovation.
Senator Pryor. Right, but they seemed to focus on these two
as part of the--as the solution for healthcare and rising
healthcare costs. And I would say--and I wonder if you would
agree--that healthcare and rising healthcare costs is more
complicated than simply tort reform and medical liability.
Would you agree with me on that?
Mr. Frink. I do. I would.
Senator Pryor. What are--if you could list out the top--
say, the top five challenges that American manufacturers are
facing today, what are their top five, or maybe ten--I know I'm
about out of time here--but what are the top five, or maybe top
ten, things that we, in the Congress, should be focusing on to
try to help our manufacturers?
Mr. Frink. There are the big concerns. Probably number one
would be healthcare costs, when you know of the automobile
industry having cited as much as $1,700 per car is what
healthcare affects, in terms of a single automobile. Tort
reform: the Chairman referred to the $230-some billion, I think
it's almost 900-or-so dollars spent per person in the United
States as a result of frivolous lawsuits. Energy is a big
factor. The manufacturing industry uses about 30-35 percent of
all energy, so the issue of affordable energy is huge, to the
majority of the manufacturing world.
We have, in America, a 22.4 percent higher cost of doing
business than our foreign counterparts. These are the areas I
have to work on. But the area that I have seen, the one that Al
Frink has seen from his private-sector experience, is a
critical concern for education. As I entered into this world
and into a kind of very politically charged election--and a lot
of it had to do with offshoring and jobs going away--I visited
71 manufacturers in a relatively condensed period of time, and
every one of those companies had help-wanted signs hanging from
the door: ``Need help,'' ``Desperately need help.'' The first
company I visited was Benson Trucks. They produce one of the
finest truck beds in the business. They couldn't find welders.
They would hire 50 tomorrow, the head of the company, Gary,
said. Mack Truck, if it could, would hire 100 drivers tomorrow.
Can't even find qualified drivers. And he said, ``Twenty-five
percent of our drivers are women.'' I said, ``What did the job
pay?'' He said, ``It starts around $45,000. In a couple of
years, with a good route, you could make $100,000.'' There's a
tremendous shortage of qualified, educated help. Jobs are
plentiful, but there's an insufficient number of trained people
out there. So, I think education is probably the single most
important area that manufacturing faces, moving forward.
Second is innovation. As I work on trying to lower the
barrier costs for companies around the country, I think there's
such emphasis placed on lowering barrier costs. I'm concerned
about raising value. Manufacturing Extension Partnership
teaches Lean and, perhaps, Six Sigma. That's important. But
what I say is, what about life after Lean? What if that isn't
enough? My answer to that is, without innovation, there is no
life after Lean. We need to drive innovation to raise value.
And then, last, there are companies that can build a good
product, that have innovation, but that don't know how to get
that product on the market. The issue that doesn't get
discussed--and it probably wasn't in the report on
manufacturing initiatives--is marketing. It's part of what
allowed me and my company in California to be successful. We
built a marketing story. We created a value such that people
paid more for our products due to the fact that we were
innovative, due to the fact we differentiated, due to the fact
we had a great marketing brand, due to the fact that we didn't
sell to one or two markets, we sold to seven, so we weren't
affected such as a company, for example, that supplies the auto
industry and loses a big customer, and now they're crippled.
They need greater marketing--that needs to be taught. Small
companies need to be taught, not just to lower their costs, but
how to raise their value. How we get there, I haven't quite
figured out, but I know it's a desperate need. So many problems
can be solved by good marketing, for example, education, and
the fact that we don't have people getting into engineering in
the schools, and the schools are cutting classes that used to
help drive our manufacturing educational needs. They don't see
the need. Manufacturing hasn't done a good job in conveying the
needs. Education is disconnected with manufacturing. I want to
work to connect those dots, to drive education, and try to see
if we can fill the educational needs for the future. I am
desperately concerned about that.
Those are the areas where I see a tremendous need for
government to provide help. I know education. I know
innovation. I know how we can drive marketing, and the skills
required for great marketing strategies. I think MEP possibly
should be doing a job. I'm going to look into finding out more
of what they do, and see if they have a good marketing
strategy. I know that good marketing can overcome a lot of
barrier costs.
China does not have a brand. Their brand is, ``Made in
China.'' We have brands in America. We can drive these brands.
And I want to push American companies to recognize who they
are, and not be afraid to compete.
Senator Ensign. Thank you, Mr. Frink. We appreciate your
testimony. I want to call the second panel to the table. And,
as they're coming forward, let me reiterate that it was very
helpful to us to receive your testimony. I know you're new in
this job, and it is difficult coming to Capitol Hill. So I
appreciate what you went through.
Just as the next panel is coming forward, Senator Kerry
mentioned that he has visited--he has gone out to Silicon
Valley. And, you know, depending on our audiences, we all hear
different things, and one of the top concerns that I hear from
people is litigation. I mean, from almost every business sector
I hear that the cost of litigation, the frivolous lawsuits, and
the number of lawsuits are major problems that hinder the
ability of American manufacturers to remain competitive in the
global economy. But of the other issues that we talked about
today, education is a major concern, huge to our industries out
there, whether they are manufacturing or not manufacturing.
It's a huge problem.
On taxation, the way that we treat our companies--
especially if they are investing overseas--compared to the way
the other governments treat their companies is problematic.
Ireland fostered its entire high-tech industry by setting up a
business-friendly tax code and regulations. In the United
States, by contrast, excessive regulation is maybe the biggest
tax that we impose on corporations. I don't know how many of
you have been hearing about section 404 of Sarbanes-Oxley, but
a lot of public companies are now talking about going private.
The cost of compliance with Sarbanes-Oxley is huge, especially
for small and mid-sized companies.
In addition, healthcare is another major concern for
companies and their employees. All the things that we are
talking about today are very important topics to discuss in
this Subcommittee. The last word in the title of this
Subcommittee is ``competitiveness,'' and one of the reasons
that I was really happy that we got that word on there is
because all of these things affect how we're going to keep jobs
in America. And I know Republicans and Democrats, alike, want
to do that, and that is one of the reasons for the hearing
today.
Senator Kerry. Mr. Chairman, I'd ask unanimous consent that
Senator Lautenberg's statement be put in the record, since he
was not able to be here.
Senator Ensign. Without objection.
[The prepared statement of Senator Lautenberg follows:]
Prepared Statement of Hon. Frank R. Lautenberg,
U.S. Senator from New Jersey
Mr. Chairman:
I am sorry I am not able to attend today's hearing. But, I want to
acknowledge one of my constituents, FPI Thermoplastics, and this
company's extraordinary story.
Just 5 years ago, FPI lost a major client to a Chinese supplier
that could provide its product more cheaply. FPI was threatened with
bankruptcy, with dozens of jobs on the line.
In order to compete with the low-cost, Chinese supplies, FPI needed
to modernize. FPI had the will and the work ethic to change, but it
lacked the expertise to transform its operations.
Working with Robert Loderstedt, President of New Jersey's
Manufacturing Extension Partnership (MEP) program, FPI was able to find
savings it never thought possible--MEP showed FPI how it could use
acquisitions to diversify its client base, save money by closing an
offsite warehouse, find unneeded assets it could sell off, implement
lean manufacturing techniques, and reduce its cost of debt.
Today, FPI is competing with China and winning, and it is growing
rapidly. By investing about $210,000 in FPI, the MEP program helped FPI
to produce millions of dollars in economic growth and dozens of
manufacturing jobs that allow middle-class New Jerseyans to provide a
good, stable and healthy living for their families.
FPI is just one of MEP's success stories. It is a shining example
of the important role an active government can play in improving our
manufacturing competitiveness and strengthening our economy. We must
preserve vital programs like MEP that give businesses the tools they
need to be competitive.
Senator Ensign. Now, I will introduce the second panel of
witnesses. Dr. G. Wayne Clough is the President of the Georgia
Institute of Technology. Dr. Clough is also a member of the
President's Council of Advisors on Science and Technology. Dr.
Clough is the Co-Chair of the National Innovation Initiative.
Sebastian Murray is the President and CEO of FPI Thermoplastic
Technologies. His company provides injection molded plastic
products to companies like McDonald's and Bed Bath & Beyond.
Thomas R. Howell is a partner at Dewey Ballantine, LLP. He has
specialized in international trade matters for more than 20
years. In that capacity, he has represented several clients
from the semiconductor industry.
Dr. Clough, we'll start with you.
STATEMENT OF DR. G. WAYNE CLOUGH, PRESIDENT,
GEORGIA INSTITUTE OF TECHNOLOGY
Dr. Clough. Thank you, Chairman Ensign and other Committee
Members. It's a pleasure to be with you to talk about a very
important subject. And I would like my written testimony
entered into the record.
Senator Ensign. All of your written testimonies will be
entered in the----
Dr. Clough. Thank you.
Senator Ensign.--record. If you could summarize in 5
minutes or less, we'd appreciate it.
Dr. Clough. Will do.
The ability of our high-tech manufacturing sector to
compete in a rapidly-evolving world economy is linked to
broader issues of competitiveness of our businesses and
industries at large.
Senator Ensign. If you could just pull that microphone a
little closer to you, it would be appreciated.
Dr. Clough. Manufacturing is a special case within a larger
context, where all our businesses will have to be willing to
compete in the landscape that has changed as other nations
target our technology-based economic sector with greater vigor
and resources than ever before.
I've been fortunate to serve in a number of leadership
positions in national and regional efforts. Some of these the
Chairman mentioned, such as the National Innovation Initiative,
which just issued a report in December on this broad topic. And
I've had the chance to chair the Engineer 2020 Project for the
National Academy of Engineering and serve on PCAST and as a
member of the National Science Board.
I also have the great good fortune to be President of
Georgia Tech, which is one of the top-rated manufacturing
programs in the country, and also operates a statewide business
incubator, as well as a manufacturing technology extension
program that assists local manufacturing companies and is, in
part, funded by the MEP program. Our activities range from
those found in traditional industries, where we're trying to
help our food processing and pulp and paper industries, as well
as introducing new areas, such as nanotechnology, into what
we're doing in manufacturing.
Now, we're all aware of the issues facing the manufacturing
sector, in terms of growing global competition with nations
that have significantly lower wages than ours. We're also
learning to appreciate that, as we improve productivity and
mature the manufacturing sector, this can lead to a decline in
employment, even as the business is succeeding.
The key to employment seems to be a combination approach
that seeks to keep the high-end jobs, where productivity is
increased, but creates new manufacturing sectors or value-added
propositions with it. So new jobs come and create jobs related
to service and support for the manufacturing sector, such as
logistics.
Every 3 or 4 years, Georgia Tech conducts a survey of
manufacturers in Georgia, and I'll give you a few points that
we've learned from our most recent survey.
Those companies that are successful exhibit a willingness
to adapt and improve their customer focus. They need to work on
new product development. They have to have a record, typically,
of filing patent applications. They need to sustain innovation
as part of their culture, utilize upgraded computing and
communications technologies, and have access to information
resources and assistance in training their employees. And,
obviously, these characteristics are likely to become more, not
less, important in the future.
Because small-to-medium manufacturing-sized companies are
often unable to afford some of the technical advice that the
bigger companies would get, that they need to innovate.
Initiatives like the Manufacturing Extension Program, we think,
are important.
Now, the National Innovation Initiative looks at this issue
at a much higher level, and it looks to the future health of
all of our high-tech industry sector. These are some of the
findings in the report, which is now on the website of the
Council on Competitiveness. Some 200,000 copies of it now have
been downloaded since it was published.
We need to find a balance in the Federal funding for R&D
areas, like engineering and the physical sciences, to help form
the ideas that will form the basis for new products and
businesses. These areas have seen flat funding, or even a
decline in the past decade. And we need to balance that
portfolio in the future if we're going to succeed, even in
areas like health.
Second, we need initiatives to encourage U.S. students to
major in engineering and sciences to address workforce needs.
And I'm very pleased to hear everyone express their concerns
about these issues, because, in fact, our graduation numbers in
science and engineering peaked in the 1980s, declined, more or
less holding steady today, but certainly the competing nations
that we're looking at are outproducing us, including the
European Union, as well as China, India and others. And this
gap will continue to grow if we don't do something to
intervene. Added to this, recent studies show international
students coming to work in our companies--or to get degrees at
places like Georgia Tech have declined substantially in the
past couple of years.
Also, we need programs for workforce training and support
for transportable benefits for workers who are displaced by
changes in technology. As you know, technology is changing at a
very rapid pace, and we need to help those adjust as the job
needs change.
And, finally, I would also encourage my fellow university
presidents and university faculty members that it's time for
universities to do this--to undertake innovation, to help our
graduates better understand the new culture that they will be
involved in.
Other recommendations also are included in the report that
was published at the Summit for the National Innovation
Initiative. They are important, but in the interest of time I
won't go through them here.
We've decided that there's no way one entity can get this
done. Multiple approaches to improving the innovation sector
are needed if we're going to succeed. And the National
Association of Manufacturers is one of our significant allies
in this.
We're going to have a number of regional meetings, that are
starting almost as we speak, to talk about local innovation
strategies, talk about local conditions in different states,
and about how we move forward. And, in addition, in October
we're going to have a national meeting with the Business
Roundtable, the National Association of Manufacturers, the
American Association of Electronics, and the Council on
Competitiveness.
We're also working with the Departments of Commerce, Labor,
and Energy, and with businesses, like IBM, who are taking
leadership positions as we move forward. It has to be a public/
private partnership, I think, if we're going to succeed.
So, in summary, the future for manufacturing in high-tech
industries is not going to be secured by doing things the same
old way. Competition for high-tech manufacturing is increasing
rapidly as nations like China, India, and Korea build and
invest in their educational and R&D programs. To succeed--and
we are still in the position to succeed--we need to sharpen and
support a national strategy for innovation that will allow us
to maintain our share of this important market segment.
Thank you.
[The prepared statement of Dr. Clough follows:]
Prepared Statement of Dr. G. Wayne Clough, President,
Georgia Institute of Technology
Manufacturing is an essential part of our economy. Not only are
manufactured goods the currency of world trade, but manufacturing is
what creates wealth. It adds value to resources by making them do
something more, which is something that services cannot do.
For most of the 20th century, manufacturing was based on the Henry
Ford assembly line model. Each worker carried out the same small task
over and over, and a standardized product rolled off the end of the
line, each one identical to the one before. Few of the workers in those
manufacturing plants had more than a high school diploma--if they even
had that. Then, about three decades ago, global competition for
manufacturing jobs began to heat up. Many companies realized that large
pools of unskilled labor willing to work for much lower wages than
those in the U.S. could be accessed by moving plants overseas. This led
to a large scale shift of jobs out of our country. In part due to this
out-migration of jobs, manufacturing accounted for only 14 percent of
the U.S. Gross Domestic Product in 2001, down from 27 percent in the
middle of the twentieth century. Manufacturing jobs declined from 30
percent of our workforce to less than 15 percent.
However, these numbers mask a second major shift that occurred in
the manufacturing industry in the 1980s and 1990s. The manufacturing
processes themselves began to be fundamentally changed with advances in
technology, and this was accelerated with the invention of the
microchip. Manufacturers rapidly adopted new technology that reduced
the need for manpower while at the same time they integrated new
management techniques that called for more sophisticated and adaptable
workers. This led to a vast family of production tools that offer
unmatched precision, quality, and efficiency--rom CAD-CAM to ``just in
time'' and ``demand-pull'' manufacturing. The new technology that has
infused manufacturing is capital intensive rather than labor intensive.
Robotic arms now assemble products. Automated guided vehicles (AVGs)
move supplies and products around the plant. Real-time communication
feeds information back into the process in time to reduce the margin of
defects to virtually zero. Salespeople with cell phones and laptop
computers cover more territory in less time, and sophisticated
logistics systems speed the products on their way. The entire process,
from designing the product to shipping it, has been computerized. The
skill levels expected of workers are now far beyond that of the earlier
era.
The remarkable changes brought about by new technology have enabled
manufacturing to outpace other sectors of the U.S. economy in
productivity. Between 1977 and 2001, overall U.S. manufacturing output,
measured in constant 1996 dollars, almost doubled. While productivity
for the U.S. economy as a whole increased by 53 percent, manufacturing
productivity rose 109 percent. Over the course of the past 25 years,
overall prices rose by 140 percent, but productivity increases held the
increase in the cost of manufactured goods to 60 percent.
The combination of increased automation and greater productivity
meant manufacturers could meet market demand with fewer employees, so
that instead of moving overseas as they had during the 1970s and 1980s,
many manufacturing jobs actually began to disappear entirely. What has
been happening in manufacturing is analogous to what happened
previously in agriculture, which saw an ever-shrinking number of
farmers feed an ever-growing world population. Backing this theory up,
manufacturing has been shrinking not just in the United States but
everywhere. Estimates are that 22 million manufacturing jobs
disappeared worldwide between 1995 and 2002. A new buzzword appeared in
the manufacturing community--``lights-out'' plants--referring to
facilities that are so automated that there is no one around who needs
to see what they are doing. Even though advanced technology caused them
to shed jobs, recent research indicates that had American manufacturers
not moved rapidly to incorporate new technology and improve their
competitive posture, the U.S. manufacturing sector would have lost even
more jobs as more manufacturers closed their doors entirely.
At Georgia Tech, we see these factors reflected in the detailed
survey of the state's manufacturers that we conduct every few years. We
are presently in the middle of the 2005 survey, so 2002 is the latest
for which we have final data. However, when you compare the 2002 data
with the 1999 data, about half of Georgia's manufacturers underwent
major changes in strategy or structure during that three-year
timeframe. Most of these changes involved innovation and/or technology,
and were aimed at quick delivery, adapting to customers, and providing
value-added services.
The 2002 survey showed that companies with new-to-the-industry
products, value-added service offerings, and substantial employee use
of computers had significantly higher growth, profitability, and
productivity than those who did not engage in these practices. About 60
percent of Georgia's manufacturers do some type of new product
development, and more than one in five are developing products that are
new to their industry. These companies who are innovating have
significantly higher growth, profitability and productivity rates.
Manufacturers filing patent applications--another measure of
innovation--also had significantly higher return on sales. Those who
introduced new processes experienced significantly higher return on
sales and growth in value-added per employee, and firms with Web-based
customer/supplier linkages or ordering capabilities had significantly
higher returns on sales.
We have traditionally thought of factories as dusty, greasy, and
full of rows of people operating clanking machinery. However, while
manufacturing of that sort may still be needed to make some products,
it will fall at the lower end of the economic spectrum, which we will
cede to others. American manufacturing of the future will need to be
focused on the high end of the economic spectrum if we want to maintain
our standard of living. We will need to pioneer new manufacturing
techniques and focus on the highest-possible leading-edge precision
technological work that it is not possible to do in other parts of the
world. The strategies even of the latter part of the last century--cost
control, ``total quality,'' and continuous productivity improvement--
will not be enough. To win in the 21st century will require
flexibility, collaboration, customization, precision, global market
savvy and speed. To quote a recent statement on ``Ensuring
Manufacturing Strength through Bold Vision'' by the leaders of the
National Science Foundation, ``The big winners in the increasingly
fierce global scramble for supremacy will not be those who simply make
commodities faster and cheaper than the competition. They will be those
who develop talent, techniques, and tools so advanced that there is no
competition.''
During 2004, I was privileged to serve as co-chair, together with
IBM CEO Sam Palmisano, of the National Innovation Initiative, sponsored
by the U.S. Council on Competitiveness. We involved 400 of the Nation's
best minds from academia, industry, and government in developing an
action agenda designed to help the United States create an economy
based on innovation. The National Innovation Initiative generated 30
recommendations that we grouped under three broad topics: talent, which
is the human dimension of innovation; investment, which is the
financial dimension of innovation; and infrastructure, which provides
the enabling framework for innovation. All three of these have a
bearing on the competitiveness of American manufacturing, so I will
touch briefly on each one.
High-tech manufacturing operations require employees with a much
higher level of skills. For example, technology and processes at the
Timken Company, which is the world's leading manufacturer of roller
bearings, have become so sophisticated that the company now looks for
workers with bachelor's degrees for many of its entry-level positions.
Georgia Tech's survey of Georgia manufacturers has identified human
resource problems as their foremost worry. Yet the United States is
falling behind in the education of technology workers. China, India,
and the European Union each graduate more engineers than the United
States and the gap will continue to grow based on present trends. Also,
our past ability to rely on ample supplies of international science and
engineering graduates will be tested as more of these students are
enticed to take jobs in the growing technology businesses at home, and
as increasing numbers simply choose not to study here because of
concerns about post-9/11 visa and export control policies.
One of the primary investments in innovation is R&D. In January of
2004, the Department of Commerce released the results of a series of
roundtable discussions held with manufacturers around the Nation. Among
the areas that manufacturers believe require immediate attention is a
commitment to sustained and balanced R&D to ensure that the Federal
Government reinforces rather than hinders innovation and bringing new
ideas to market.
About the same time the Department of Commerce published its
report, another report was released by the Subcommittee on Information
Technology Manufacturing and Competitiveness of the President's Council
of Advisors on Science and Technology (PCAST), chaired by George
Scalise, President of the Semiconductor Industry Association. The PCAST
report pointed out that as the speed of technology development
accelerates, the linkage between research and manufacturing becomes
much closer. Locating a manufacturing plant close to an R&D operation
that is generating new process and product ideas facilitates the human
interchange that speeds ideas from the lab to the marketplace. As a
result, places with both strong R&D centers and manufacturing
capabilities have a competitive edge. The good news is that some
semiconductor manufacturers have remained in the United States rather
than moving overseas despite the cost benefits of off-shoring, because
they want to be close to the university R&D that is driving new
developments. The not-so-good news is that the level of R&D being
conducted in countries like China and India is improving and many U.S.
and global companies are building R&D facilities in these countries.
This means competition may increase for more sophisticated
manufacturing jobs as well and if this is so, the United States may end
up with a security problem as well as an economic problem.
The present technological superiority of the United States has
flowed from the strong investments we made in scientific research since
World War II, and that lesson has not been lost on those who aspire to
compete with us. We need to not only consider improving investment
levels in R&D, but also how they are distributed. A recent PCAST report
showed that funding for research in key areas of engineering and
physical sciences have declined while levels in other areas increased.
In a world where future manufacturing developments will come from
interdisciplinary research, care must be taken to support an
appropriate funding portfolio.
As a part of the third topic, infrastructure, the National
Innovation Initiative looked specifically at strengthening America's
manufacturing capacity. We were concerned because while the United
States remains the world's leading nation in the production of
manufactured goods, our rate of growth in manufacturing production has
remained virtually flat over the past 4 years. During the same time
frame, 2000-2004, Asia (excluding Japan), Central Europe and the
Balkans, and Latin America experienced strong growth in manufacturing
production. Our high-end competitors--Western Europe and Japan--also
outperformed us.
The National Innovation Initiative calls for the United States to
design and implement a new foundation for high-performance
manufacturing production. That means new human, organizational,
financial, and policy models must be developed. New designs, processes,
and materials need to be introduced and new manufacturing technologies
should more rapidly be brought to the production cycle. We are moving
in that direction, with flexible automation, complex numerically
controlled tooling, precision engineering, distributed manufacturing,
e-commerce to connect and manage supply chains, materials databases,
and shared-use facilities for R&D and pilot production, which lowers
the risks and barriers to entry. Technologies like these will not only
increase productivity even further, but will also help to offset lower
wages in other countries.
As a technological university, Georgia Tech has a wide range of
experts devoted to evaluating what is happening in manufacturing,
divining future opportunities for this core industrial sector, and
developing the manufacturing technologies and methodology of the
future. Several important themes are emerging from their work.
First, manufacturing technologies of the future will include
molecular and nano-manufacturing, bio-materials and bio-processing,
micro-electro-mechanical systems (MEMS), free-form fabrication, and new
software control technologies. Ideas that will come more strongly to
the fore include innovation, knowledge management, customer
relationships, and waste reduction--not only in the manufacturing
process, but also over the life of the product.
These technologies and ideas are expected to be expressed in the
context of several inter-related trends, including movement away from
mass production toward semi-customization; shifts away from centralized
production locations to distributed sites; and the transformation of
centralized business control toward collaborative relationships between
distributed sites.
We can already see the trend toward customized manufacturing in the
ability to order customized clothing from manufacturers like Land's End
or L.L. Bean, and the opportunity for customers buying a car to send
their specifications to the factory online rather than compromising on
what a dealer happens to have on the lot. The next stage is expected to
be ``additive manufacturing,'' which enables end-users to participate
in the design of more sophisticated products like hearing aids, dental
restorations, eye glasses, and joint replacements. Additive
manufacturing holds potential to embody an entire manufacturing system
within a single, small machine. That has led some to predict that
additive manufacturing machines for certain purposes will be introduced
for use in the home within the next decade or two.
Even as manufacturing machines become smaller, so will the scale on
which manufacturing takes place. Already the United States has seen a
significant drop in machine tool production, which paralleled a
significant decline in R&D spending in this area, as attention has
shifted to microscale tools and machining. Nano-manufacturing is the
place where nanotechnology will transform from an exotic research field
to something that reaches out to touch all human civilization. Nano-
manufacturing addresses not only work on the nano-scale, which is one-
billionth of a meter, but also the engineering of new materials at the
atomic and molecular level that have novel, unique, and improved
physical, chemical, and biological properties. Nanoscale engineering
can greatly expand the range of performance of materials and chemicals,
as well as creating microscopic machines and systems.
Nano-manufacturing has the potential to impact virtually every
human-made object, from automobiles to electronics, from advanced
medicine to energy production. Three specific areas where we are
working at Georgia Tech are nano-computers that utilize nanotubes as
interconnections instead of transistors; disease diagnosis and
controlled drug delivery; and optoelectronic materials. But successful
implementation of nano-manufacturing will require standard measurements
at the atomic level, special manufacturing environments, and micro-
scale technologies and quality control mechanisms. It will also require
the involvement of experts in a much wider range of disciplines than
traditional manufacturing--including electrical engineers, physicists,
chemists, biologists, and biomedical engineers.
Even as the leading edge of American manufacturing moves to
unprecedented levels of sophistication, there are segments of the
industry that cannot and should not be left behind. America's
traditional manufacturing industries still have a relatively strong
presence in our Nation's economy, and attention must be given to their
competitiveness. The U.S. pulp and paper industry, for example,
generates $100 billion of shipments a year--30 percent of the world's
production. Technological innovation is important to keep such
traditional industries competitive.
The growing need for the rapid development and deployment of very
sophisticated manufacturing technology and techniques is particularly
challenging for the Nation's 350,000 small and mid-sized manufacturers,
who employ more than seven million people and comprise nearly half of
the U.S. manufacturing base. These companies often lack the
information, expertise, time, and money required to engage in the
constant innovation and upgrading required to do well in today's
competitive marketplace. However, with some timely assistance, they can
also succeed. For the past 40 years, Georgia Tech has operated a state-
supported network of industrial extension offices that serve Georgia's
small and mid-sized manufacturers, and as part of our surveys of
Georgia manufacturers we have tried to assess the benefits of that
service. What the 2002 survey showed was that companies assisted by
Georgia Tech had comparatively higher productivity--an average value-
added increase of $3,000 per employee.
Finally, changes in manufacturing processes have significant
logistics implications. The U.S. trucking industry transports more than
three-quarters of the freight in the country, and changes in the
manufacturing process have major consequences for the logistics of
moving those loads. The trucking industry has already had to make
significant adjustments to facilitate the implementation of just-in-
time manufacturing, which requires greater load and time precision and
more recently just-in-case policies designed to prevent and address
unexpected disruptions in the increasingly tightly engineered supply
chain. Future changes will require even more logistical sophistication.
The competition for manufacturing jobs and new applications and
technology is going to grow in the future. We have to adjust to a
changed landscape, and re-commit ourselves if we are to compete with
nations that will have larger technological workforces and wage
advantages for some time to come. Fortunately, the U.S. still has an
edge and our society supports entrepreneurism and risk taking. However,
the window of opportunity will be open only so long and we need to take
action now if we are to succeed.
Senator Ensign. Thank you.
Mr. Murray?
STATEMENT OF SEBASTIAN MURRAY, PRESIDENT/CEO,
FPI THERMOPLASTIC TECHNOLOGIES
Mr. Murray. Thank you for the opportunity to speak, Mr.
Chairman and Senators.
A quick background on FPI Thermoplastic Technologies. We're
a plastic injection molding company. We serve three primary
markets: fire, safety, and security--our major account is
Siemens; point-of-purchase display--our major account is
Revlon; and food service--our major account is McDonald's. We
have 120 employees, presently, and we are now adding 40 more
jobs, to increase our employee count to 160. Our sales volume
is $15 million in sales, and our sales are increasing to $25
million in 2006, which is a 66 percent increase. Our major
competition is Asia, primarily. We also have competitors in
Canada and the United States. FPI's competitive advantages are
low-cost production, presently, superior design capabilities,
and time to market.
A critical threat to U.S. manufacturing is low-cost
competition from Asia, as we all know. Solutions for
strengthening U.S. manufacturing are the MEP program, number
one, and low-cost loans, through the SBA, for example, to help
companies like ``myselve's'' invest in technology.
FPI faced dire financial circumstances in the year 2000. We
lost a third of our sales with a major U.S. retailer to Chinese
competitors. FPI was introduced to the MEP program regional
office, NJ, New Jersey, MEP, and to Robert Loderstedt, its
President, in the year 2000. The MEP program helped us develop
a multi-pronged turnaround strategy. MEP implemented an
acquisition strategy, which helped us add $3 million in annual
sales volume, with two acquisitions. MEP helped us implement
inventory management and control methods, which saved our
company $480,000 per year in distribution expenses, and freed a
million dollars in cash-flow. MEP implemented a lean
manufacturing program, where we invested in automation and
robots. We now have a robot at each of our 30 machines, with
three- to six-months paybacks, and yielding dramatic gross
margin increases. And MEP, last, helped us refinance our debt,
and we reduced our annual interest expenses by about $100,000
per year.
In terms of the future of U.S. manufacturing, the future of
FPI. Today, FPI is profitable and growing. We are securing new
business through Internet auctions that include global
competitors. Consequently, we are a low-cost global competitor
successfully competing with Asian sources. We owe our survival
and our success directly and completely to MEP. And we believe
it is critically important that the U.S. Senate continue its
support of MEP.
Thank you very much.
[The prepared statement of Mr. Murray follows:]
Prepared Statement of Sebastian Murray, President/CEO,
FPI Thermoplastic Technologies
Samuel Murray and I are 50/50 owners of a plastic manufacturing
business located in Morristown, NJ. We employ 120 people and we have
sales revenue of approximately $15,000,000.
Five years ago our business was on the verge of bankruptcy. A major
U.S. retailer that accounted for a third of our sales changed its
source of supply from FPI to a Chinese supplier. Since our sales had
plummeted literally overnight and without warning we were in dire
financial circumstances. We began to lose money and our cash-flow was
hemorrhaging. Shortly thereafter our bank placed us in the work out
group and we were heading down a path to liquidation.
We are a successful enterprise today primarily due to NJMEP, the
New Jersey unit of the Manufacturing Extension Partnership (MEP) of
NIST. In our hour of need we were introduced to NJMEP by the Morris
County Chamber of Commerce.
Together with Robert Loderstedt, President of NJMEP, we implemented
a multi pronged turnaround strategy to revitalize FPI including;
1. Acquisitions--NJMEP worked with us to roll up and acquire 2
smaller plastic injection molding companies to replace lost
sales and to diversify our customer base.
2. Inventory Management and Control--NJMEP suggested we close
an outside warehouse, which we did that saved us the $40,000
dollar monthly operating costs which resulted in a $480,000
annual savings which we used to implement the other phases of
the turnaround strategy. Additionally, we sold excess inventory
totaling approximately $1,000,000 improving cash-flow. Plus we
implemented an MRP/MPS system and cycle counts to improve
inventory management and control.
3. Lean Manufacturing--We engaged NJMEP to implement lean
manufacturing techniques which lower our costs of production
and increased our manufacturing efficiencies through the use
process changes and automation, using robotics. Consequently we
have raised our sales per employee from $80,000 in 2000 to
$125,000 in 2005. Our goal for 2006 is $150,000 per employee.
4. Banking Relationship--NJMEP worked with us to refinance our
debt by changing banks and lowering our interest expense with
reduced rates and an extended term.
Today FPI is profitable and growing. Our sales volume is over 30
percent ahead of last year. In 2006 we expect our sales to exceed
$25,000,000 an increase of 60 percent over 2005.
We are no longer intimidated by Asian competition. We have used
this threat to spur FPI to become a global low-cost producer. None of
this would have been attainable without MEP.
MEP is an essential asset and lifeline for American manufacturing.
It is vitally important that the U.S. Senate continues its support of
programs such as MEP that aid and strengthen American manufacturing
companies.
Thank you for your time.
Senator Ensign. Thank you.
Mr. Howell?
STATEMENT OF THOMAS R. HOWELL, PARTNER,
DEWEY BALLANTINE LLP
Mr. Howell. Thank you, Mr. Chairman and Senators.
I'd like to devote my remarks to one topic I've raised in
my testimony, which is the factors that are driving the
offshore movement of the semiconductor industry from the United
States.
From where we stand now, the U.S. semiconductor industry is
the world leader. We have about 50 percent of total global
sales. Technologically, we lead in most areas. And we're in a
very strong position. And at the moment, about 77 percent of
all the manufacturing in the industry is still here in the
United States.
The thing is that most of those wafer fabrication
facilities, or fabs, as they're called, are current generation,
which will become obsolete in the next 5 to 7 years, and that
with respect to the next generation that's planned, the ratios
are much different. We heard recently from an executive at
Applied Materials, which is one of the companies that supplies
the equipment for fabs, that forecast that there will be 30
fabs built in China in the next 3 years. During the same time
frame, 6 new fabs will be started in the United States. So,
there's an enormous proportional shift in the direction of
investment that's underway right now.
That's often seen as just a reflection of the fact that the
market is growing for semiconductors in Asia, that the devices
are being consumed in increasing proportion there. That doesn't
explain the entire shift. There is a need to locate some
production near a market, but, in fact, a country like Taiwan
can serve markets all over the world with fabs built in Taiwan.
So, just the fact that the market is moving to Asia to some
extent does not explain the shift.
The most common explanation is, there's a cost advantage in
Asia. And, in fact, if you take the effective government
measures away and set that aside and look at just the cost of
building a fab and operating a fab, the fact is, there isn't
much cost difference between the United States, on the one
hand, and Taiwan/China, on the other hand. Most of the costs
are associated with equipment. It's an automated process. The
equipment is the same equipment used in every area. It's
produced by the same companies, and it costs the same. The
input cost differentials--there are some, but there are not
that many--are not that great. The labor costs are
substantially lower in China and Taiwan, but they don't make up
a very large portion of the total manufacturing costs. With a
300 millimeter fab--that is the current state-of-the-art--if
the United States' costs were seen as a factor of a hundred,
Taiwan might be 93; China, 90--which is really not enough to
warrant a shift of all your production base from one region to
another.
When you factor in the effect of government measures,
however, the picture changes. And consider that we're talking
about investments now that are $3 billion for a single fab, and
moving to $6-to-$10 billion in the next generation. A company
has to think very carefully about making those kinds of
investments, and where they're going to make them, and where
they're going to pay off the best.
One differential between China, Taiwan, and the United
States is that a fab built in those areas will not pay any
taxes. A company that operates a fab there is operating in,
essentially, a tax-free environment--a permanent tax-free
environment.
Another factor is that the land and structures are located,
typically, in high-tech industrial parks that have been built
there. We have them here, too, but the fact is, the incentives
in the parks over there are more dramatic. A company building a
fab in China right now, many of them are reportedly getting
their land and structures provided for free. There are also the
utilities, which are things like high-purity water, specialty
gases, electricity, that sort of thing, are provided at
concessional rates. And all that has a downward effect on
operating costs.
Then you look at--there are also tax incentives for
individuals. An individual who is a very talented engineer or
production worker can get rich very quickly working in one of
these countries, based on the tax structures. And I could
explain that more in detail, maybe, if there's an interest in
it.
Then, finally, there's the phenomenon of the foundry, which
has developed, really, in East Asia. And the notion there is,
given the rising costs and risks associated with building a
fab, countries, beginning with Taiwan and now moving to
Singapore and China, have said, essentially, ``Don't bother.
We'll build the fab here. We'll take the risk. We'll absorb all
the costs and risks of building that. Send us your designs,
American companies. We'll make them here for a service fee, and
you can sell them under your own label.'' And that's turned out
to be a very dramatically successful business model. A lot of
U.S. companies have become fabless and essentially have gotten
out of the business of making semiconductors. They just design
them. The designs go to Asia, where they're manufactured in
foundries that are located there.
The upside of that is that the U.S. producer no longer has
the cost or risks and all the other messy stuff that's
associated with manufacturing. The downside is, the
manufacturing, the skills, and the jobs are not in the United
States anymore, they're on the other side of the world.
The first foundry was built with a large investment from
the Government of Taiwan. It was considered too risky for the
private sector to undertake that. Most foundries, if not all
foundries operating in Asia, that I'm aware of, receive
substantial government support. Essentially, the risk has been
socialized in Asia. And so, what we see is a long-term trend
toward more and more foundries. Most of these 30 fabs that I
referred to that are being built in China will be foundries,
and they will essentially be looking to take over the
manufacturing functions of semiconductor companies outside the
United States.
Senator Allen referenced the VAT tax, which China used very
successfully to capture inward investment from other countries,
particularly Taiwan. That was, essentially a violation of
international trade rules used very successfully to capture
inward investment from other countries that would have occurred
elsewhere, but for the tax. The Administration has successfully
challenged that tax. It has been revoked, as of, I think, this
April. And it's a good model for dealing with other kinds of
distortions like that, that distort investment patterns.
However, we have to recognize that many of the measures that I
have described are not clearly inconsistent with international
trade rules; and so, those rules have got to be strengthened if
we're going to get a handle on this problem.
Two other recommendations I would make: One is that there's
a need to study differentials in tax policy between various
markets and how they affect investment patterns. That issue is
not well understood, and it is driving a lot of these
investments.
Finally, there is a need for greater Federal spending on
R&D. Senator Kerry referenced the large programs that are
underway in Japan and the EU, in terms of spending. They dwarf
anything that's underway here. And we're cutting back, and some
of our programs, like the advanced technology program, are
being zeroed out.
So, I think all those things would be excellent points of
departure if we're going to try to address this problem.
[The prepared statement of Mr. Howell follows:]
Prepared Statement of Thomas R. Howell, Partner, Dewey Ballantine LLP
Mr. Chairman and members of the Subcommittee, my name is Thomas R.
Howell. I am a Partner in the Washington D.C. law office of Dewey
Ballantine LLP, where I specialize in international trade matters. Over
the past 20 years I have represented a number of organizations
representing U.S. semiconductor manufacturers, and in the course of
that work I have prepared a series of studies of foreign industrial and
R&D policies and their effects on international competition in
microelectronics. The most recent of these, which I have provided to
the Subcommittee, addresses China's emerging semiconductor industry. I
am also a contributing author to a study recently published by the
National Academy of Sciences, Securing the Future: Regional and
National Programs to Support the Semiconductor Industry. My testimony
today is my own and not presented on behalf of any client or
organization. I appreciate the opportunity to appear before you today.
The semiconductor industry plays a vital role in the U.S. economy
and national defense. In terms of value-added it may be the largest
U.S. manufacturing industry, and semiconductors are a key enabling
technology for a broad range of other industries, including computers,
consumer electronics, motor vehicles, telecommunications, and aviation.
The U.S. semiconductor industry is currently the world leader both in
terms of level of technology and market share, with about 50 percent of
world sales. However, it faces significant challenges to its leadership
which arise out of foreign government policies that are designed to
alter the terms of competition. These policies represent promotional
strategies that fall into two broad categories, ``leadership'' and
``close followership.''
Leadership strategies. Japan and the European Union, the
longstanding rivals of the U.S. in microelectronics, are pursuing
promotional strategies designed to capture the leadership position from
the United States with respect to market share and level of technology.
Japan and the EU are implementing large scale, long range,
industry-government R&D projects aimed at developing leading
edge commercial technologies and state-of-the-art manufacturing
facilities. Commonly these projects involve hundreds of
millions of dollars in government funding, more than anything
we currently see in the United States.
The strategy in both Japan and Europe is to build on a
perceived leadership position in cell-phone technologies and
develop leading edge semiconductors with cell phone
applications, as opposed to PC-based chips in which the U.S.
holds the lead. The Japanese and European strategy is based on
the belief that in the 21st century, most people, particularly
in the developing world, will access the Internet through cell
phones and similar hand-held devices, not desktop PCs.
It is unclear that these foreign efforts will result in a loss of
U.S. market or technological leadership--in the past many large-scale
government-funded R&D projects in microelectronics have fallen short of
their goals or failed completely. But others have significantly
affected the competitive balance. The EU's JESSI project, for example
(1988-1996), is widely credited with contributing substantially to
Europe's current strong position in cell phone technology. Japan's
joint R&D projects have played a major role in establishing the
Japanese industry's strong competitive position in microelectronics.
And while Japan and the EU have substantially increased the level of
government spending on microelectronics R&D, in pursuit of this
strategy, the U.S. is moving in the opposite direction. U.S. Government
funding of microelectronics R&D has been declining for a number of
years and is projected to decline further in the coming decade. But the
most complex challenge confronting the U.S. in microelectronics is not
coming from Japan or the EU, but from China/Taiwan, who are pursuing a
``close followership'' strategy.
``Close followership'' strategies. Under ``close followership''
strategies governments do not seek to achieve market or technological
leadership but rather to integrate the operations of their own
industries with those of U.S. companies, and, by so doing, not only
remain one step behind the leaders but also capture high value-added
technology-intensive industrial and research functions for their own
economies. Taiwan has been the most successful practitioner of this
strategy but it is now being emulated in countries such as Malaysia,
Singapore, Thailand, Israel, and most significantly, China.
The ``close followership'' strategy actually enhances the
competitiveness of individual U.S. companies by providing low cost,
high quality production and design services to them. But it may pose a
greater challenge to U.S. leadership over the long run because it is
drawing offshore important parts of the U.S. microelectronics
infrastructure, particularly in the area of semiconductor
manufacturing. The danger is that over the longer term other key
functions associated with semiconductor production, such as R&D and
design, will follow the manufacturing functions to East Asia. At some
point a substantial part of the education infrastructure that supports
the industry could migrate there as well.
At present, roughly 77 percent of U.S.-owned semiconductor
manufacturing is still located here in the United States. But much of
this capacity is or will become obsolete over the next several years,
and the trend is toward establishment of a larger proportion of the
next generation of fabs outside the U.S. Earlier this year an executive
at Applied Materials, one of the most important producers of
semiconductor manufacturing equipment, indicated that 30 new fabs will
be built in China in the next 3 years. During the same time frame, the
same executive stated that there will be 6 built in the United States.
In part this trend reflects the fact that China is the fastest-growing
market for semiconductors in the world, with an estimated compound
annual growth rate of 20-27 percent in 2002-2008, versus about 7
percent for the U.S. But relative regional market growth does not
explain investment trends.
Nor do comparative costs explain current investment trends. The
migration of some types of high tech manufacturing to Asia, such as
assembly of electronics products incorporating semiconductors, reflects
comparative cost advantages attainable by manufacturing in certain
Asian countries. But the movement of semiconductor manufacturing to
Asia is not being driven by comparative costs--that is, if government
measures taken to modify those costs are removed from the equation. The
same equipment and processes are used everywhere to make
semiconductors. Materials and other costs do not vary greatly from
region to region. Direct and indirect labor costs are much lower in
China and Taiwan than in the U.S., but because labor costs are such a
small proportion of manufacturing cost, the total cost differentials
are not that great. If the manufacturing costs for a 90nm, 300mm wafer
fab in the U.S. is given a factor of 100, the comparable cost in Taiwan
would be 93 and in China, 90. But the picture changes when the impact
of government policy measures is factored in.
To begin with, consider the size of the investment required to
establish a single state-of-the-art wafer fab--currently between $2 and
$3 billion for a facility that may be obsolete in 3-4 years. Only a
handful of companies are in a position to undertake such investments,
and given the volatility of the industry, an increasing number of
companies understandably have reached the conclusion that risks
associated with such large investments outweigh any potential for gain.
How do governments affect this equation? In some countries governments
have put up a substantial part of the total investment cost to
establish a state-of-the-art fab. The world's first 300mm fab, for
example, was built in Dresden, Germany with substantial funding from
regional governments. But other forms of government support are
probably more important than direct funding.
One of the most important forms of government measure has been
support for the establishment of semiconductor foundries, a phenomenon
that occurred first in Taiwan but has spread to Singapore, Malaysia,
Israel, and, most importantly, China. Under the foundry model foreign
producers, usually with substantial government backing, in effect say
``we'll assume the costs and risks of building a fab. Give us your
designs, and we'll make them for you, in return for a service fee.''
This is a very attractive proposition for a company trying to decide
whether or not it can make a $3 billion investment to manufacture its
designs. An increasing number of U.S. semiconductor firms are
``fabless'' and outsource all of their designs to foundries, while
others are ``fab-lite,'' outsourcing a significant part of their total
production. In other words, the chip is designed here in the U.S.,
manufactured in China or Taiwan, and in many cases incorporated into an
end product somewhere in Asia. The U.S. ``fabless'' company does not
take any of the risks normally associated with building a $2-$3 billion
facility. But the facilities themselves, and the skills to run them,
increasingly reside elsewhere.
The first pure play foundry in the world, TSMC, was established on
the basis of an equity investment by a special fund administered by the
government of Taiwan. The investment would not have been attempted by
the private sector because it was seen as too risky. Today I am not
aware of a foundry anywhere in Asia that does not enjoy significant
government support. In a number of cases governments have taken equity
shares in foundries. Because the number of purely private, unsubsidized
companies in the U.S. or anywhere else that are willing to invest $2-$3
billion in a fab is declining, government-supported foundries are
accounting for an increasing share of global semiconductor production.
Most of the new fabs being built in China will operate as foundries.
Tax policy is another particularly important form of government
support. The world's most successful foundries are TSMC and UMC, both
located in Taiwan. They control nearly two-thirds of world
semiconductor foundry manufacturing. The government of Taiwan has
implemented policies which ensure that these and other similar Taiwan-
based semiconductor enterprises pay no taxes, year after year. In fact,
in a number of recent years, TSMC's after-tax income has been higher
than its pre-tax income, reflecting the application of accumulated tax
credits. China has now replicated Taiwan's tax holidays. Paying taxes,
in jurisdictions like the United States, and paying no taxes in China
and Taiwan, can have an enormous bottom-line impact and may constitute
a very significant decisional factor in determining where to open a new
fab.
Then there is infrastructure. The Silicon Valley phenomenon has
been intensively studied abroad, and foreign governments have created
their own versions of the Valley in many countries. These seek to
integrate research universities, high tech manufacturing, and venture
capitalists into a dynamic relationship that promotes innovation and
entrepreneurialism. Perhaps the most successful version has been
Taiwan's Hsinchu Science-Based Industrial Park, which has become a
magnet for foreign and domestic semiconductor investment. In addition
to tax-free status, soft loans, grants and other forms of financial
support, enterprises located in the Park enjoy extensive
infrastructural support, nearby research universities, and superb
institutes of applied industrial research. China is now creating its
own versions of Hsinchu, and in some of the Chinese parks,
semiconductor producers are reportedly receiving free land and free
structures from regional and municipal governments. They also receive
preferential rates on electricity, water, and specialty gases, all of
which lower their operating costs.
Then there are government incentives to individuals. One of the key
advantages enjoyed by TSMC and UMC has been their ability to attract
and hold many of the highest quality managers and engineers in the
industry--it said that ``they get the best people.'' A key factor in
the competition for such talent is Taiwan's tax treatment of company
stock and stock options given as compensation to individuals. Shares
are taxed on their par value rather than on their actual market value
at the time received, which may be many times par value. In addition,
when the shares are sold, there is no tax on the income received (apart
from a nominal transaction tax) because Taiwan has no capital gains
tax. As a result, Taiwanese companies have been able to offer highly
talented Taiwanese and foreign engineers the prospect of rapid accrual
of substantial personal wealth. Taiwan has become a ``talent magnet.''
Chinese tax policy, while not identical, seeks to replicate such
incentives to individuals.
Finally the location of new investments can be driven by government
investment incentives such as China's preferential value-added tax
(VAT), which was revoked in April of this year after strong objections
from the U.S. Government, Japan, the EU and Mexico. In 2000, the
Chinese government established a preferential rate of value-added
taxation (VAT) for domestically based semiconductor design and
manufacture. While all imported devices are subject to a 17 percent
VAT, under the new policy domestic designers and manufacturers of
semiconductors received a rebate, resulting in an effective VAT rate of
3 percent. The preferential VAT policy effectively enabled China to
``capture'' a portion of Taiwan's semiconductor capability. Foreign
investors, predominantly Taiwanese, rushed to the mainland and
established new wafer fabs in order to benefit from the VAT preference.
A talent rush to the mainland of experienced Taiwanese managers and
engineers occurred. By 2003 roughly 20 new Taiwanese-owned fabs had
begun operations on the mainland, were under construction, or were
planned to become operational by 2008, all of them foundries.
Executives at these new foundries cited the VAT preference, which gave
them an ``unbeatable'' edge over imported devices, as the principal
factor underlying their new operations. While China's preferential VAT
has been revoked, it has arguably already achieved its objective of a
massive drawing in of capital, technology and talent, enabling China to
establish a modern semiconductor industry.
It has been suggested by some that the migration of semiconductor
manufacturing to Asia represents a natural division of labor with more
advanced countries, and that the high-end functions--R&D and design--
will remain in the United States, Europe and Japan. But over the long
term the design functions are likely to migrate to where the action is,
which is where the manufacturing is located. This is happening already
in Taiwan, in particular, which is now using its strength in
manufacturing to build a strong design industry, with extensive
government support. China, too, is following this path, although it is
at an earlier stage of development. The long run danger is that so
large a proportion of leading edge semiconductor manufacturing and
design functions come to reside outside the United States that the top
graduates from engineering schools see their future not in the U.S.,
but in China and Taiwan and other parts of the world. They will seek to
build their careers there, not here. At that point, it would be very
difficult to reestablish U.S. leadership.
It is not in our national interest to see the entire infrastructure
for the design and manufacture of semiconductors to migrate outside of
the United States. A recent report by a Defense Science Board task
force concluded that the migration of U.S. capabilities in
semiconductors outside the U.S. posed ``long term national economic
concerns.'' Given that semiconductors are at the core of virtually all
critical defense systems, the national security concerns are obvious.
The problem we confront is that the commercial realities of the
semiconductor business are leading to a relocation of design and
manufacturing functions outside of the United States.
Identifying a comprehensive set of recommendations for addressing
this problem effectively would take a sustained industry-government
dialogue of the kind we saw in the 1980s in connection with the
challenge from Japan. I would like to offer several preliminary
suggestions:
First, it should be recognized that the present offshore movement
of semiconductor production is being driven by deliberate government
measures as well as by commercial imperatives. Therefore, the U.S.
Government should continue to place a priority on the elimination of
trade and investment distorting measures like China's preferential
value added tax that violate international rules. China's use of a WTO-
inconsistent measure to attract inward investment that would not have
otherwise occurred was a serious market distortion in a strategic
industry. The U.S. acted properly in placing a priority on the
elimination of this measure. At the same time it should be recognized
that many of the incentives used by governments to attract high
technology investment do not clearly violate any WTO or other
international rules, so there is a limit to what can be achieved by
invoking existing rules. Over the longer term it will be necessary to
negotiate the establishment of international norms on the use of
government incentives for high tech investment.
Second, the U.S. Government needs to examine domestic tax polices
that affect U.S.-based manufacturing in light of foreign tax policies
that are functioning like a magnet for manufacturing investment. While
I do not recommend any particular tax measure, the fact is that U.S.
measures are needed to offset the effects of foreign tax holidays in
some way.
Finally, we must recognize that competition in this industry is
increasingly a competition for a limited pool of talented people,
whether U.S. or foreign born. The U.S. has the lead in this area, and
we shouldn't allow ourselves to lose it. This means above all
maintaining our excellent system of research universities and ensuring
that the world's leading edge R&D continues to take place here in the
United States. Specifically we should increase, not curtail Federal
spending on university-based, leading-edge R&D and other forms of
support for U.S. research universities.
Senator Ensign. Well, I thank the panel. I think this panel
of witnesses, along with our first witness, is raising some
very, very important points that we, as policymakers, need to
consider as we go forward.
I want to start my questions with Dr. Clough, especially
with your experience in education. Education was--you know,
we've heard so much about education. From your perspective at
Georgia Tech, what can we do to get more people to pursue
careers in engineering? Virtually every high-tech company tells
me that they have job openings for computer software engineers.
They just don't have enough engineers to hire out there. Should
we give more financial incentives to those who pursue careers
in engineering, math and science, to make it easier for people
to select such careers? Obviously, I mentioned in my
questioning of Assistant Secretary Frink, kind of, jokingly,
that the United States graduates a lot more lawyers than China,
but we graduate a lot fewer engineers. I mean, do we need to
create more incentives and direct those dollars that we have to
those who are becoming engineers? We're in tight budget times,
but do we need to direct the dollars more toward those types of
people and incentivize them?
Dr. Clough. Good point. I think, first, we need to
recognize we're in a different environment today. We are in an
environment where we need to recruit from all segments of our
population. And, frankly, engineering and science were probably
at fault for not being aggressive about including women and
minorities. Because that's the majority of the population. So,
we need to be able to recruit from that sector.
We need to do a better job, as was mentioned earlier, of
marketing that and letting them know--I think universities have
a stake in this. In other words, we have a role to play----
Senator Ensign. When you say ``we,'' who's ``we''?
Dr. Clough. I'm thinking of universities, for the moment.
Senator Ensign. OK.
Dr. Clough. In the sense that about--if you look at the
national statistics, 50 percent of the students who start in
engineering drop out. That's not an acceptable number. We've
worked hard at Georgia Tech, and we've gotten it now up to 75
percent now graduate, who start. We believe we can do a better
job of that.
So, I think we need to make engineering a more interesting
field. That's what this program that I described briefly at the
National Academy of Engineering was about, the Engineer 2020.
How can you make engineering an attractive field for young
people to go into, given that they have lots of alternatives?
And so, I think we need to work on that, as well.
There are financial issues, clearly. Engineering is not--or
science--is not a simple area to go into, and not a cheap area
to offer the education in that area. I think Representatives
Wolf, Boehlert, and Ehlers, for example, have offered a
program, or proposed a program, of forgivable loans to young
people who will undertake the curricula that are necessary to
get degrees in this area, both, perhaps, in high school, as
well as at the university level. And I think we should consider
that.
In my day, when we started out in engineering--and I'm a
first-generation college graduate; my parents were not able to
go to college, because of the Depression and the times in South
Georgia, where I grew up--we had the National Defense Education
Act, and it was a wonderful program that encouraged young
people, not only at the bachelor level--to take bachelors-level
studies, but also master's- and Ph.D.-level studies. That
program went away. Some of the reports that we've referenced
out of PCAST, as well as out of the National Innovation
Initiative, refer to the possibility of restoring that. It's
not a terribly expensive program, but one, I think, that would
be very crucial. I think you've got to address it all the way
from high school straight all the way through to Ph.D.
Senator Ensign. Could you repeat that?
Senator Allen. What was that one, again?
Dr. Clough. The National Defense Education Act. And you'll
find many of the people who are working in government today, or
nonprofits or at universities or in industry, had the benefit
of that kind of support. And it makes a statement about the
Federal Government's interest in this area.
I think the notion of balance in this portfolio--and our
research portfolio is very important, because support for
engineering and the physical sciences has been flat or has
declined, while other areas have gone up. Now, there are good
reasons for NIH funding to go up, so I'm not begrudging them
that increase, but the signal, very clearly, to engineering and
the physical sciences, and students who might consider those
areas, not as important. There's not many research
assistanceships in that area. And Senator Allen talked about
NASA; that's another good example where there have been some
cutbacks in the kind of basic support that we need. And, as you
may know, we participate in several of the things at Langley,
with Virginia Tech--I taught at Virginia Tech for a number of
years. So, I think we need to look at areas where we can, in
fact, balance that portfolio, and, in doing so, make a
statement, again, that these areas are important to the future
of our country.
Senator Ensign. Great.
Mr. Murray, just really quickly on the Manufacturing
Extension Partnership. I think it's great to hear how the New
Jersey Manufacturing Extension Partnership program has worked
for you. Similar programs may be working in other places around
the country. What I would ask of you--and you don't have to
answer it today--but, could you provide specifics on how it
worked for you. One of the things that we have to do up here,
as policymakers, is assess the success or failure of the
programs that we fund. The MEP may have worked for you in New
Jersey, but it may not be working in other parts of the
country. I mentioned the word ``metrics'' before, and, we need
to have good metrics to determine if we are having successes
some places, and not others. We should never legislate by
anecdote. It is a nice anecdote that we have of your company
today, but we need to have verifiable statistics to show what
it costs and what the benefits are. We do that cost-benefit
analysis, because we are the stewards of the taxpayer dollars.
So, if I could get from you, in writing, specifically how the
MEP benefited your company. You mentioned some of the benefits
of MEP, briefly today, but if we could obtain a more detailed
account of your experience, we could then ask some of the other
MEPs across the country if they are doing the same kinds of
things that actually worked in a real-life situation.
Mr. Murray. Oh, absolutely.
Senator Ensign. Thank you.
Mr. Murray. I'll be happy to put that in writing to you,
Mr. Chairman.* But, just briefly, we would be out of
business today.
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* The information referred to can be found in the Appendix of this
hearing.
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Senator Ensign. Right.
Mr. Murray. 150-160 jobs would be lost to Asia if MEP
didn't exist. And people have said to us, ``Well, why MEP? Why
not turn to a private-industry group? Why not turn to a turn-
around management group?'' And the reason is, first of all, it
would have cost us much, much more. The MEP cost to us was
about $140-$150,000. It would have cost us three or four times
that if we had turned to private industry. Plus, during our
most dire times, we--the banks and our vendors worked with us,
because they knew we were working with an agency like MEP, and
they knew that MEP is a government organization. And, plus, the
individuals that we worked with at MEP, many of them are former
business owners and have gone through the same kind of troubles
and problems that we faced.
So, our company would not exist if it weren't for MEP. MEP
forced us to change how we thought and how we ran our business.
We questioned every purchase, every cost, and we established
very, very--you mentioned ``metrics,'' Mr. Chairman--we
established very specific metrics on how to guide us and how to
help us restore our company to profitability and increase our
sales.
Senator Ensign. Great.
Mr. Howell, I'm going to call on Senator Allen next, and
it's--I've heard the same thing from the chip manufacturers,
exactly the same kind of experiences. Texas Instruments,
because of our Invest in the USA Act last year, they're
actually going to be building a plant in Texas, simply because
of that. We always hear the difference in labor costs. Well,
with chip manufacturers, that's not the biggest determining
factor. So, we have to examine all of these other factors when
we are looking at competitiveness issues.
Senator Allen?
Senator Allen. Thank you, Mr. Chairman. You asked most of
the questions of Dr. Clough that I was going to ask, and I was
taking notes. Please stay in touch with me, because I think one
of the greatest future challenges of this country is to make
sure we have the best minds who are capable to design the
innovations and inventions of the future. And I appreciate your
comments.
Senator Ensign. Senator Allen, I'm going to have to excuse
myself. I have to attend a press conference over on the House
side. Please take over, and then just turn it over to Senator
Kerry.
Thank you.
Senator Allen. [presiding] Fine. Got it.
Let me ask you just one thing. On nanotechnology, the
Nanotechnology Initiative that I mentioned earlier, sponsored
with Senator Wyden. We have the Nanotech Caucus here--one of
the key areas of it is to work with universities--colleges and
universities, as well as the private sector and a number of
Federal agencies involved in nanotech, everyone from Energy to
Defense and others. Do you have any specific suggestions on how
we can better help? Have you seen this initiative? It's fairly
new since the President signed the bill, in 2003. Do you have
any specific recommendations----
Dr. Clough. I'll be glad to comment on it. And I was there
when the President signed the bill. And, of course, it's
essentially a $4 billion investment, significant investment--I
think, a very important one. On PCAST, Congress actually
granted PCAST the challenge, if you will, of oversight for the
expenditures to gather intelligence, so we could get the sense
that we're making a balanced investment in nanotechnology in
the many different areas. There's also an interagency group
that's looking at that, as well, and we just issued a report to
Congress on that. I think it was to the Science Committee, on
the House side. It's an excellent report. It's on their
website. I think it documents very clearly where we are
relative to our competition. And, in this field, the evidence
is that we are staying on a level playing field with the
competition in Japan, the European Union, and others. We are
making at least similar investments, if not larger investments
to those countries.
So, I feel very positive about the National Nanotechnology
Initiative. I think it was a stroke of genius to go into this
area, because it's so broad-based. We, at Georgia Tech, are
very active in this area, and it's exciting. And Senator Kerry
talked about the many ways that it can impact the world. And
you've talked about it. And it's all very true.
Senator Allen. All right. Thank you.
Now, Mr. Howell, when I was Governor of Virginia, I worked
very hard to attract semiconductor investment fabs into
Virginia. In fact, I've got a change to the name, according to
U.S. News & World Report, to the Silicon Dominion, where
Siemens and Motorola invested at White Oak, and Toshiba and
IBM, up at Manassas. They're now owned by Infineon and Micron.
And so, I really do think the semiconductor industry, just for
jobs, when you look at the indirect jobs--the suppliers, the
vendors, the contractors, the toolmakers. I always liked to see
what Applied Materials was doing, because you can determine
what the next fabs will be. Once they can develop the 300
millimeters wafers, they can then determine whether they want
to invest billions of dollars to upgrade from the 200-
millimeter wafers. And, in fact, there's probably no--other
than the automotive industry, there's no other kind of
manufacturing that creates so many additional jobs from all
those suppliers and vendors and contractors. And I'm glad the
Administration eventually got around to getting after China on
the VAT tax.
Another thing that happened was, with Hynix--and you're
talking about countries subsidizing--and to the extent we can--
and any recommendations you may have, where countries are
subsidizing in an illegal way, we need to crack down on them.
Hynix was subsidized unfairly and illegally by the South Korean
Government. They were focused on DRAMs, or dynamic random
access memory chips. And that's exactly what's fabricated in
these two facilities in Virginia. And, by doing that, they're
just dumping on the world market--and, in fact, in not just the
U.S., but the rest of the world--and countervailing duties were
imposed upon them.
As far as incentives, the way I see this country--and I see
this, again, from my days as Governor--what we did was, created
a Performance Grant Incentive Program to get those fabs--
German, Japanese, U.S.--partnerships together, and they would
get credits based upon the number--the amount of their
production. It was a good business approach, that if they did
not invest and produce the chips, they wouldn't be getting
these performance grants. And all that's legal. And it's one
way that at least Virginia became attractive and beat out
California or Texas or other states for these investments.
You're saying that what Taiwan's doing, what China's doing,
it's not--in some cases, it's not a violation of WTO rules.
Therefore, what should we do--and you did not specify this
specifically--what should we do, as the United States, as far
as our tax policies--or should it be just left to the states to
come up with these approaches so that we can compete? When you
look at the number of fabs, in your testimony, being proposed
in China, compared to this country, it's 20 to 1, almost, or
maybe it's 10 to 1. And it's not just because of those costs,
as you said, as far as labor costs; it's because of the land,
it's because of the industrial parks, tax-free for the worker
somehow, building these fabs as foundries for them. What can we
do, as a country, as far as our policies--tax policies or
otherwise--so that those fabs are built here? And I agree with
you, it's a national security issue, as well. So, I'd like to
hear your views, Counselor, on that.
Mr. Howell. Senator, first, I think that Virginia is a good
example of state programs that are actually very dynamic,
designed to attract semiconductor investment to the states. And
I think you'll find that most semiconductor fabs are located in
states that have sought them through proactive programs--
California, North Carolina, Massachusetts--probably ten states
where most of the manufacturing is. And you see the same thing
internationally, that countries that have not sought to create
the semiconductor industry within their borders don't typically
have one--Australia, Canada, those countries that have not
pursued them. Abroad, they've been essentially created by
governments.
States can do so much, in terms of providing incentives.
They can provide tax exemptions and a variety of other things
to industries. And I think most of those things do not violate
international trade rules. As subunits of a Federal system they
cannot close the border the way China did with its VAT--or they
didn't close the border, but they raised a border restriction.
A state can't do that. States can't affect Federal tax policy,
either, so there's a limit to what they can do. They can do a
lot, but they can't do everything.
The first question is a threshold question, before one
looks at solutions to the differentials in taxes. What's the
actual impact on locational decisions between, say, the U.S.
and China or Taiwan, of the various Federal-level tax
differentials? It has never really been studied. You can't
apply the tax differentials to ten companies and say, ``Here's
the impact.'' It's definitely a dramatic impact on some
companies. I think there's one U.S. company that said about a
billion dollars per fab, in terms of cost savings, is
attributable to that tax differential.
The first question, then, is, what's the real impact, and
who is impacted by it? And then, I don't think it's necessary
to say that we've got to replicate everything that's being done
in China or Taiwan. I don't think it's feasible. There are
equity issues, or fairness issues, as well, that have to be
considered. And, in fact, the tax holidays are very
controversial in Taiwan. Other industries think they're unfair.
But I think if we knew the impact a little more, or had a
better metric, as it were, on the impact of the tax
differentials, it would be possible, then, to devise measures
that would at least bring us to within a level of
competitiveness as a location with those countries that is
closer than it is now.
Senator Allen. Let me try to distill what you've said.
Granted, the states can do things. Obviously, you work with the
localities on the land, and prompt permitting, air permits
matter, to get those. In fact, the folks with--what was White
Oak, now Infineon, were very pleased that they got their air
permit in 28 days, which was a third better than in Texas, and
monumentally better than California, from their testimony, or
their speeches. And I think the states also--we created a new
engineering school, and I made sure that they had a focus in
the engineering school at VCU in microelectronics, and they
have a state-of-the-art clean room. That's important for
training. That's something, all that we did as a state.
We can analyze various things of what other governments are
doing. And I still need to--for us--I'm not at the Federal
level--I'm trying to figure out, all right, what can we do, as
a nation, to make sure that we recognize that competition? I'm
not saying the Federal Government goes and condemns land in
Georgia or Massachusetts and says, ``Here, you can have this
land free, because this is in our national interest.'' We,
obviously, have a different form of government than those
countries. But if there's any tax policy that we may have on
research and development, or investment, or, in some cases,
say, earnings stripping, which is forced on foreign investors
into this country--if a company from Great Britain or Germany
or Japan invests in this country, they get a different tax
treatment for their capital investment than does a U.S.-based
company--are any of those sort of ideas worthy of
consideration?
Mr. Howell. Well, I'd say, yes, they are. It's not just a
question of comparative tax policies. I think that there are
reasons that the United States is superior to either China or
any other Asian locations for building a semiconductor fab. And
they include better protection of intellectual property here,
less likely to lose your designs or secrets than over there,
political stability. It's also that people want to live here,
and you can attract people here now from all over the world,
still, to work in the fabs and in the research units, and so
on.
So, it's not a question of being able to match them dollar
for dollar, in terms of tax benefits. The idea, I think, would
be to narrow the differential in that area and build on our
strengths. One of the ways to do that is to make sure that the
leading-edge R&D continues to be done here, and not there. And
a way that can be promoted, both at the state and the Federal
level, is by increasing spending on basic R&D in the
universities. The smartest people want to come to where the
cutting-edge work is being done. Right now, that's here. But
that will change over time if we don't do anything about it.
Right now, we are cutting back on that kind of spending, and
it's being increased--not just in the Far East, but in Europe.
The governments are saying, ``We'd like to have that
infrastructure of learning and spinoffs of commercial
companies, building on the learning, to happen there.'' And
that's something that probably doesn't have as big of a fiscal
impact, as a tax holiday, or whatever, but has a dramatic
impact on where people want to live and work, and especially
the best people.
It is, to some extent, a zero-sum competition worldwide for
getting those best people. Those help-wanted signs exist,
certainly, in the high-tech area. There's a competition for the
best, most-talented people, and one way for us to compete with
that is by building on our excellent university system, and
spending more.
Senator Allen. Thank you, Mr. Howell. That fits right in
the beginning of my questions.
And I'll turn it over to Senator Kerry.
Senator Kerry. Thank you, Senator. Thank you very much.
Dr. Clough, a lot of people argue that trying to keep low-
wage manufacturing jobs in our country is, sort of, a losing
proposition, unless you can out-compete, which means
innovating. Would you agree with that?
Dr. Clough. Yes.
Senator Kerry. OK. I do, too. So, you've got to innovate.
The key to innovation, obviously, to staying ahead, is basic
research. Is that correct?
Dr. Clough. That's correct. That's one of the elements.
Senator Kerry. And basic research depends on a commitment
of the Federal Government, in this case, because the private-
sector has, in many cases, either refused to or pulled out of
it, isn't that accurate?
Dr. Clough. They're short-term oriented.
Senator Kerry. So, the key is the Federal Government's
commitment to NSF, to NASA, to the Department of Energy, Office
of Science, and so forth. Right?
Dr. Clough. Correct.
Senator Kerry. In your testimony, you said, ``We need to
find a balance in funding.''
Dr. Clough. Yes.
Senator Kerry. I would presume, therefore, we do not have
that balance today. Is that accurate?
Dr. Clough. Yes, that's true.
Senator Kerry. OK. And that is because the Federal
Government is making other choices.
Dr. Clough. That's correct.
Senator Kerry. And the choice is to use its revenue in
other forms, correct?
Dr. Clough. I presume so.
Senator Kerry. Well, a tax cut, a tax expenditure, is an
expenditure. We have X amount of revenue; we can put it here in
a spending or investment program, or we can put it here in a
tax expenditure, which is revenue foregone. Accurate?
Dr. Clough. I assume so. I assume Congress also could make
decisions within the existing budget to make some of these
adjustments.
Senator Kerry. Well, we could. For instance--Mr. Frink is
gone, but--I didn't get a chance to go back to him on it, but
he pointed out in his testimony--I don't have it in front of me
now. Do you have his statement? He pointed out, in his
testimony, that we've increased significantly--I think it was a
45 percent increase, if I recall--yes, here it is. ``This
represents a 45--the Federal budget is--includes a record $132
billion for Federal research and development, a 45 percent
increase, compared to 2001's $91.3 billion.'' But when you look
inside of that, that money is not going to competitiveness or
job creation research, it's going largely to weapons--defense
research, very specifically, the Defense Department research.
So, again, these are choices that we're making: Where are we
going to put our money?
If we're going to compete effectively, which we all want to
do--and, I mean, the long-term health of our country, the
national security our country, will depend on the health of our
economy.
Dr. Clough. Right.
Senator Kerry. And if we're not able to create the next
wave of jobs, and the next wave of high-value-added sector,
we're going to be in trouble.
So, let me ask you: What is the most important thing that
you think we can do, in your judgment, that will have a direct
impact on what you're struggling with at Georgia Tech, and what
they're struggling with at MIT and Carnegie Mellon, and all
these other great universities and colleges--what do we need to
do in our spending choices here to have the greatest impact on
what you're trying to do?
Dr. Clough. Well, I think we need to look at the research
portfolio as an entity. And it tends to be hard to do, because
a lot of it comes out of agencies. In other words, we know--and
you well know--that DOE, for example, funds about 40 percent of
the basic science research in the country, not the National
Science Foundation. The National Science Foundation clearly
funds a lot of science research, but DOE does, as well. The
Department of Defense--it's not well understood, I think--in
many cases, has, for many years, been the primary funder for
electrical engineering, mechanical engineering and chemical
engineering in this country. And, as they have had to cut back
on 6.1/6.2 research, that funding has gone down, and that's
where we've lost some significant funding, long-term funding
for those critical areas in engineering.
Similarly, in some of the other areas, where, again, it's
spread across a spectrum. So, that makes it a little bit more
difficult than saying, for example, ``We're going to improve
health research, and so we'll double NIH's budget,'' which was
a simpler proposition than it was. Some of the increase you
referred to did, indeed, go to NIH; and that was a positive
thing, in my personal perspective, because that's a big
economic driver, I believe, in the future.
Senator Kerry. Well, again, that was a conscious decision
that we did make.
Dr. Clough. It was. And it was a good one.
Senator Kerry. We said, ``We're going to put X amount more
into NIH,'' and so we grew that.
Dr. Clough. But I think we--I think you, in Congress, need
to get very serious about watching how the flow of these funds
comes from the different agencies, so that the portfolio is
balanced. Clearly--and this is not just PCAST, or it's not just
other--there are a number of entities that have commented on
this, with clear statistics that the funding for engineering
and the physical sciences, if not flat, has gone down at a time
when that big budget for R&D was going up. And that's not good
balance.
Senator Kerry. What's the long-term implication of, as you
said, our competitor nations out-competing us at the moment, in
terms of production of engineers and basic science?
Dr. Clough. The long-term implication is that, obviously,
we won't be competitive in that part of the economic spectrum
that actually has generated 50 percent of the economic growth
in the last decade. And that's what's frightening. We need to
be in that space. We need to give all the young people in this
country an opportunity to share in the possibilities that are
in that space.
Senator Kerry. Would you say there is both a national-
security and national-priority urgency in the fact that, in
1975, 70 percent of America's economic base was manufacturing
and 30 percent was service. Today, it is reversed--70 percent
is service, and 30 percent is manufacturing, and declining.
Dr. Clough. Right.
Senator Kerry. What are the long-term security implications
of that?
Dr. Clough. Well, there are certain areas in manufacturing,
clearly, we need to maintain in this country, regardless of all
the competitiveness issues that we have. For example,
semiconductors or nanotechnology, some of the areas are going
to underline our--underlie our ability to be secure, as a
nation, in a threatening world. In addition, it will also
affect economic competitiveness.
So, we need to decide, I think, as a country, where we
really want to maintain a capability, under any circumstance.
Senator Kerry. And you also cited the workforce training
component of this, which everybody understands is critical.
There again, we're cutting, we're not growing, correct?
Dr. Clough. Yes, that's true.
Senator Kerry. So, it's another wrong choice.
Dr. Clough. Well, I think it's a choice we need to think
very seriously about today.
Senator Kerry. Well, if we're cutting, and you think we
shouldn't be cutting, we're not doing the right thing, correct?
Dr. Clough. True.
Senator Kerry. Mr. Howell, your comments about the 90
percent, versus 93 percent and 100 percent, seem to be stating
the case that wages, per se, are not the biggest factor in the
noncompetitiveness of our playing field. Is that correct?
Mr. Howell. That's correct. At least in semiconductors.
Senator Kerry. Does that apply to other sectors, would you
say?
Mr. Howell. The higher the technology level, and the more
automated the production process, the more applicable that same
logic is.
Senator Kerry. Well, now, we all understand that other
countries are engaging in illegal trade practices, and that
puts us at a significant disadvantage, in intellectual
property. For instance, I think we're losing something like 24
billion bucks a year that we can measure, and that's obviously
unmeasurable, just as an example. So, in order to level the
playing field, you've got to enforce the WTO rules and use the
rules available to you. And yet, the Import Administration, or
the Commerce Department, International Trade Administration,
which investigates dumping and countervailing duty cases, is
going to be cut by 5 percent under the President's budget. The
U.S. Trade Representative, who is responsible for representing
the United States in cases brought to the WTO, is going to see
a 7 percent cut. How are these cuts going to affect our ability
to be able to create a fair playing field for our companies and
stand up, since we're already behind the curve in that?
Mr. Howell. Well, they're going to hurt, obviously. And let
me take USTR, for example. They are the agency that enforces
the WTO rules. They bring the dispute settlement cases to
Geneva. They are--and some former people that used to work for
me are over there now--in my opinion, they are understaffed
already. They haven't got enough lawyers, and they haven't got
enough senior lawyers to bring the number of cases that need to
be brought. And they, in most cases, are up against litigators
on the other side who have got more people, more senior people,
more expertise, and so on. And they ought to be expanding that
capability, adding funding, adding people, building, if you
will--in the same way that the antitrust division was expanded
in the 1930s to make it a really effective enforcement agency.
We ought to be building USTR, not cutting it. And I would say
the same applies for the Import Administration. That's a very
important part of our overall trade policy structure, the
ability to bring those cases. And if that's eroded, it's going
to affect manufacturing. There's no question about that.
Senator Kerry. Let me just summarize by making a point that
is fairly obvious. I led off with it in my early questioning,
but budgeting is a zero-sum game. And these choices are staring
us in the face, and they have been for years now. I've been
here 22 years, and I am tired of listening to the same old
arguments. It's the same-old/same-old every year. And the fact
is that we are locked into a paradigm on the budget, where 43
percent of the deficit is due to a choice Congress has made to
forego revenue, to have a tax cut. The average American is
seeing their costs go up, and their total tax burden has gone
up. I don't know anybody who has been reading, but they should
be, the New York Times and Wall Street Journal series on what's
happening in America to this have and have-not divide that's
growing. It is deadly serious, in terms of the policy choices
we're making here.
And I'd say to my friends on the other side of the aisle,
if we're going to give meaning to these words and these
hearings and these efforts by people--after all, here's a
person, Mr. Murray, who has just told us that, if it weren't
for the MEP, his company wouldn't be in existence today. We
would have lost another 160 manufacturing jobs. That's repeated
all over the country. And yet, here we are with a budget that
wants to cut it. I don't get it, just as a matter of good old
American common sense and, sort of, basic values. So, we can
cut off our nose to spite our face, and it will do a lot more
than that, the way we're heading, in terms of these budget
choices that we're making, or we can take this to heart.
So, I regret that I've got a meeting that I'm already late
for, and I would like to have drawn this record out a little
more. And, again, I hope that, as a Committee, we can try to
force some of these better choices here. And I thank each of
you for taking time to be here.
Senator Allen. The record will remain open for 7 days for
Members to submit statements, or they may ask you questions.
Let me say, in concluding this hearing, this is one I care
a great deal about. There are dynamics, there are impacts, to
the decisions we make. Tax policy matters. And having lower
taxes will help spur investment in this country. And, in fact,
a strong economy will get more revenues in. Then one needs to
determine, what are the priorities in spending? And I think
mostly in this proposed budget from the President, clearly
homeland security and national defense are important. There
will be differences, insofar as some of the other budgetary
matters. And I think that we do need to spend money. It's a
wise investment in aeronautics, in nanotechnology, in research
and development. And we can look at probably the greatest
invention, in my view, since the Gutenberg press, which is the
Internet, as an example, a real objective lesson for us all.
The Internet was developed--Federal program, DARPA--then it got
applied to the private sector. It is a great vehicle for
individual empowerment. It's an individualized empowerment
zone, so to speak. And it is the best since the Gutenberg
press. If it wasn't the Gutenberg press, Martin Luther's 95
theses on the Church of Wittenberg would have been read by very
few people. And look at how broadband has expanded
opportunities for people all across this country. The policy of
this country is to leave the Internet free of taxation. I've
worked to make sure that avaricious state and local tax
commissars don't impose 18 percent access taxes on the
Internet, to help bridge that economic digital divide and make
sure that there's investment for the Internet or broadband into
small towns and rural areas. And whether that's by cable or
telephone lines or even--now they're talking about over power
lines, and eventually on Super WiMax, as well, wireless, and
satellites, eventually.
So, you know, Ronald Reagan said there was a policy of the
Federal Government, if it moved, tax it; if it kept moving,
regulate it; and if it stopped moving, subsidize it. Well, in
the Internet, we left that free, and look at how that's
improved our lives for information and for communications,
allowing Mr. Murray to have his business communicate all over
the world. It is important for telemedicine. It is important
for education. You undoubtedly have distance learning at
Virginia Tech--or, excuse me, at Georgia Tech, as does Old
Dominion and other universities across the country. So, these
decisions, leaving investors to keep more of what they earn,
does have a positive impact, but we do have to remember to make
the right decisions in budgeting.
And from the President of Georgia Tech--and I know you're a
good ACC school--you know what--one of the things you
mentioned, as far as what we need to do in recruiting women and
minorities, more minorities, into engineering and science
technology, the analogy I give is that if you were a head coach
and a general manager looking to the NFL draft, and you said,
``We're only going to draft players from 40 percent of the
country,'' and you'd only draft them from the Ivy League and
the Big Ten, the result would be, you'd lose, and you'd get
fired. And, as a practical matter, when you see women being a
little over 10 percent of the engineering schools--Latinos, the
fastest-growing group in this country, in single digits, are
around 10 percent, 10 percent for African Americans--we really
are only recruiting or incenting or enticing 40 percent or less
of our country to get interested in engineering. So, we need to
make sure all Americans recognize the great opportunities for
jobs, good-paying jobs in this country. It's good for them, a
fulfilling life for them and their families, but it's also
important for the competitiveness of our country.
So, I want to thank all our witnesses here today for
appearing, and for your insight. Your commentary and views will
be used by many of us as bolstering our arguments. And I very
much appreciate your shared concern, not just for your own
institutions--your firm, your company, your wonderful
university--but also for your care for the future of this
country.
So, I thank you all, and this hearing is adjourned.
[Whereupon, at 11:25 a.m., the hearing was adjourned.]
A P P E N D I X
Prepared Statement of Hon. Daniel K. Inouye, U.S. Senator from Hawaii
Manufacturing is a critical component of this country's economic
security. It drives growth and accounted for over 77 percent of the
Nation's exports since 2000. However, our manufacturing base is quickly
eroding. The recession took its toll on the economy as a whole, yet
while other sectors have rebounded, manufacturing jobs have not
recovered.
Some economists cite the country's strong productivity numbers as
proof that the United States continues to maintain its manufacturing
competitiveness, but the fact of the matter is that we have lost over 2
million manufacturing jobs in the past 4 years. And these are high
paying jobs that average over $63,000 per year.
The trade situation is an even greater dilemma. The United States
experienced the largest monthly trade deficit this past February as we
imported over $161 billion worth of goods and services while exporting
$101 billion. This left us with a monthly trade deficit of over $60
billion, the highest in history. Furthermore, this year's first quarter
deficit was $174 billion, well ahead of last year's first quarter
deficit of $139 billion, which ultimately resulted in a new record
annual deficit of $617 billion. These are not the kind of dubious
records we want to be setting.
Instead we should be setting new records in innovation and
advancing the state-of-the-art with our research and development
capability. In order for this country to compete economically, we need
to make the necessary investments in basic research. Basic research is
the foundation upon which entrepreneurs build the next great products
that enrich our lives, improve our health, and provide for our
security. Given this need, I find it perplexing that the President has
provided such anemic funding for the National Science Foundation, the
Nation's pre-eminent science research agency.
Other countries understand that R&D is the fuel that propels
economic growth. Our industries are facing competition from both
shores. The aerospace industry, one of our few leading export
industries, is under attack from Airbus as market share has fallen from
over 70 percent in the mid-1980s to slightly more than half today. In
their European Aeronautics 2020 report, the European Commission is
calling for an investment of 100 billion Euros. From the other side of
the Pacific, our hi-tech industries are being enticed to build new
multi-billion dollar facilities in China, India, and Malaysia. U.S.
manufacturers are facing increasing pressure from global competitors
who are able to win business through lower operating costs and
discriminating trade practices. I know that I am not alone on this
Committee, or in the Senate, when I call for greater enforcement of our
trade agreements.
The government needs to take action and respond to the challenge to
our economic livelihood. I applaud the President for creating a new
position within the Department of Commerce to deal with some of these
issues. Mr. Al Frink, who is before us today, was confirmed as the
first Assistant Secretary for Manufacturing and Services. I look
forward to hearing about what he has been doing over the past year and
learning about what steps the Administration is taking to improve the
outlook for this country's manufacturing capability.
I also look forward to hearing more about the Hollings
Manufacturing Extension Partnership. MEP is one of the few programs
that we have to assist small and medium-sized companies to better
compete in today's global economy. In fact last year alone, MEP helped
companies retain or create fifty thousand manufacturing jobs.
However, MEP, even with its track record of success, has not seen
the Administration's support. This is particularly disturbing given
that now is when these companies need assistance the most. In Fiscal
Years 2003 and 2004, the Administration requested only $13 million each
year for a $107 million program. This fiscal year's request is $46.8
million, which is still less than half the amount required to support
the network of centers. I hope we can work to correct this imbalance.
The government can, and must, take positive action toward
addressing the concerns I have outlined thus far. Other foreign
governments are making the necessary investments in their
infrastructure and workforce. If we continue to ignore the great
capabilities that have so far been the heart of America's competitive
advantage, we risk falling behind.
______
FPI Thermoplastic Technologies
Morristown, NJ
Hon. John Ensign,
Chairman,
Senate Subcommittee on Technology, Innovation, and Competitiveness,
Committee on Commerce, Science, and Transportation,
Washington, DC.
Dear Senator:
Thank you for the opportunity to testify before the U.S. Senate
Committee on Science, Commerce, and Transportation, Subcommittee on
Technology Innovation and Competitiveness at the recent hearing on
Manufacturing Competitiveness in the High-Tech Era. Not only did I
enjoy sharing my experience with the Committee, I welcomed your
comments and questions on the Manufacturing Extension Partnership (MEP)
which I spoke so highly about.
As you know, the NIST Manufacturing Extension Partnership is a
nationwide network of resources helping small manufacturers become more
competitive. At the heart of the MEP are manufacturing extension
centers locally positioned throughout the U.S. to address the critical
and often unique needs of small manufacturers. Although my experience
has only been with my local center, the New Jersey MEP, all MEP centers
create significant impact for their local small manufacturers. In my
testimony, I stated the incredible impact my local center has had on
the manufacturers of New Jersey and more specifically, FPI. In your
comments and questions, you had requested more information on the
impact that other MEP Centers have had on their local manufacturers. I
have since contacted NIST MEP and obtained the enclosed information
regarding the impact of their services on their clients. As you will
see, the program is not only a success in New Jersey, but is creating
significant impact on the manufacturers nationwide.
Please let me know if you have any additional questions regarding
the program or its impact following your review of the enclosed
materials. Thank you again for the opportunity to testify and for your
continued support of the American manufacturing industrial base.
Manufacturers such as myself, would not be in existence if not for your
support of programs such as MEP.
Respectfully,
Sebastian Murray,
President and CEO.
______
Manufacturing Extension Partnership--Making a Difference For America's
Manufacturers
Manufacturing Extension Partnership
``. . . an important resource for helping small manufacturers
achieve the kinds of world-class gains formerly limited to
larger companies. Their focus on value-adding activity on the
shop floor is exactly right. The MEP network gets results--
quickly and affordably.''--Richard Schonberger, author, World
Class Manufacturing: The Next Decade.
Small Manufacturers: The Foundation of American Industry
Manufacturing creates wealth for our Nation: wealth in the form of
economic growth, increased jobs and robust trade in world markets.
Productivity improvements by U.S. manufacturers are leading the Nation.
Between 1992 and 2001, manufacturing productivity grew at double the
rate of the entire economy: manufacturing productivity rose by nearly
36 percent compared to a 18 percent increase for the non-farm business
sector. Approximately 350,000, small manufacturers account for over
half the total value of U.S. production and represent 98.6 percent of
all manufacturing establishments. They employ nearly 11 million people
and account for two-thirds of all U.S. manufacturing employment. These
jobs are high-skilled and high-wage, with production employees earning
50 percent more than retail employees per hour.
The Challenge for Small Manufacturers: Bridging the Productivity Gap
As critical as small manufacturers are to the economy, the
productivity gap between large and small firms is widening. Between
1992 and 1997, productivity for large manufacturers grew by 22.6
percent versus 15.5 percent for small manufacturers. And as large
manufacturers increase their dependence on suppliers for parts and
services, the performance and capabilities of small manufacturers
become even more critical to the competitiveness of all manufacturers
and to the health of the U.S. economy. Yet, according to a National
Research Council report, ``Many of these smaller firms, however, are
operating far below their potential. Their use of modern manufacturing
equipment, methodologies and management practices is inadequate to
ensure that American manufacturing will be globally competitive.''
Limited budgets, lack of in-house expertise, and lack of access to
the newest technologies are but a few of the significant barriers faced
by small manufacturers--barriers that MEP aims to help them overcome.
How MEP Is Making a Difference
Manufacturing Extension Centers
MEP is a national network of affiliated manufacturing extension
centers and field offices located throughout all 50 states and Puerto
Rico. Created in 1988, today's network delivers services to firms
across the country and in Puerto Rico. Centers are funded by Federal,
state, local and private resources to serve small manufacturers.
Each center works directly with area manufacturers to provide
expertise and services tailored to their most critical needs, which
range from process improvements and worker training to business
practices and information technology applications. Solutions are
offered through a combination of direct assistance from center staff
and assistance from outside consultants. Centers often help small firms
overcome barriers in locating and obtaining private-sector resources.
Partnerships
MEP provides small and mid-sized manufacturers with access to a
wealth of tools, techniques and other resources through thousands of
public and private affiliations. Initiatives with the U.S. Departments
of Labor, EPA, National Association of State Development Agencies, the
State Science and Technology Institute, the National Association of
Manufacturers, state and local employment training organizations and
hundreds of universities and community colleges are a few examples of
how MEP leverages public and private resources to make a comprehensive
range of technical services and assistance available to small
manufacturers.
Each year, MEP helps thousands of manufacturers solve problems,
increase productivity and achieve higher profits. Through continuous
assessment and improvement of our products, services and service-
delivery approaches, MEP is committed to meeting the strategic needs of
small and mid-sized manufacturers as they negotiate the New Economy of
the 21st century.
For More Information
For a list of centers and other information about MEP, contact:
Manufacturing Extension Partnership
100 Bureau Drive, Stop 4800
Building 301, Suite C100
National Institute of Standards and Technology
Gaithersburg, MD 20899-4800
E-mail: [email protected] visit our website at
www.mep.nist.gov
Results: What the Data Shows
FY 2004 MEP Activities
Impact: Independent Studies
``Systematic evaluation studies have confirmed that the MEP is
having a positive effect on businesses and the economy . . .
has achieved national coverage and established local service
partnerships . . . and most important . . . MEP services are
leading to desired business and economic goals . . . ''--Philip
Shapira, Ph.D., Issues in Science and Technology, Spring, 1998,
``Extending Manufacturing Extension''
Benefits to GA Manufacturers
Georgia MEP clients surveyed reported manufacturing benefits in the
following areas:
improvements to an existing process
improvements in management skills
improvements in employee skills
improvements in an existing product or service
Furthermore, comparing Georgia MEP clients with nonclients found
that assistance from the Georgia MEP increased the value-added of the
average client plant by up to $443,000 between 1999 and 2001. \1\
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\1\ Georgia Tech Policy Project on Industrial Modernization.
December 2002.
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PA Manufacturers Post Positive Productivity Gains
A study of Pennsylvania's Industrial Resource Centers (IRC) found
that the program boosted the labor productivity of IRC clients by an
average of between 3.6 and 5.0 percentage points per year. The study
found that these productivity gains raised gross state product by about
$1.9 billion. Finally, the study found that for every state dollar
invested in the program, the program generated almost $22 of additional
income to the state economy. \2\
---------------------------------------------------------------------------
\2\ ``The Pennsylvania Industrial Resource Center: Assessing The
Record and Charting the Future,'' By Nexus Association for the Ben
Franklin/IRC Partnership Board. October 1999.
---------------------------------------------------------------------------
Higher Productivity Growth for MEP Clients
Researchers at The Center for Economic Studies, U.S. Census Bureau,
found that manufacturing extension clients experienced between 3.4 and
16 percent more growth in labor productivity over a five-year period
than similar non-client firms. The productivity growth of the 1,559
firms studied translates into $484 million in additional value-added at
client firms. \3\
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\3\ Journal of Policy Analysis and Management, ``Evaluating the
Impact of Manufacturing Extension on Productivity Growth,'' by Ronald
S. Jarmin, Winter 1999.
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Based on these results, a second study estimated that this value-
added increase translates into $1.3 billion in additional economic
output over 5 years, leading to $213 million in additional Federal
revenues and a $4.47 increase in real disposable income per capita. \4\
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\4\ ``Estimating Economic Impacts of Government Technology
Programs: Manufacturing Studies Using the REMI Model,'' by M.A. Ehlen
and S.F. Weber, economists for the National Institute of Standards and
Technology, 1997.
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Value-Added Income and Jobs for NY
A New York Manufacturing Extension Partnership study found that the
state's $5.3 million investment in the program between July 1995 and
March 1997, combined with the Federal investment, generated an
additional $227 million of value-added income in New York State. This
growth, in turn, led to the creation of 2,600 jobs. \5\
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\5\ ``Evaluation of the New York Manufacturing Extension
Partnership,'' by Nexus Associates for New York State Science and
Technology Foundation/Empire State Development, 1997.
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GAO Survey Positive
An independent survey of MEP clients by the General Accounting
Office found MEP had a positive effect on a firms performance in the
areas of: \6\
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\6\ ``Manufacturing Extension Programs: Manufacturers' Views of
Services,'' U.S. General Accounting Office, Report GAO/GGK-95-216BR,
August, 1995.
profits
sales
product quality
workplace technology
worker productivity
customer satisfaction