[Senate Hearing 111-186]
[From the U.S. Government Publishing Office]


2009

                                                        S. Hrg. 111-186

 
                  MANUFACTURING AND THE CREDIT CRISIS

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

                                HEARING

                               before the

                            SUBCOMMITTEE ON
                            ECONOMIC POLICY

                                 of the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                                   ON

     EXAMINING THE POLICY OPTIONS CONGRESS SHOULD CONSIDER TO HELP 
              MANUFACTURERS WHO PLAY A PIVOTAL ROLE IN OUR
                            NATION'S ECONOMY

                               __________

                              MAY 13, 2009

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs


      Available at: http: //www.access.gpo.gov /congress /senate/
                            senate05sh.html


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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

               CHRISTOPHER J. DODD, Connecticut, Chairman

TIM JOHNSON, South Dakota            RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island              ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York         JIM BUNNING, Kentucky
EVAN BAYH, Indiana                   MIKE CRAPO, Idaho
ROBERT MENENDEZ, New Jersey          MEL MARTINEZ, Florida
DANIEL K. AKAKA, Hawaii              BOB CORKER, Tennessee
SHERROD BROWN, Ohio                  JIM DeMINT, South Carolina
JON TESTER, Montana                  DAVID VITTER, Louisiana
HERB KOHL, Wisconsin                 MIKE JOHANNS, Nebraska
MARK R. WARNER, Virginia             KAY BAILEY HUTCHISON, Texas
JEFF MERKLEY, Oregon
MICHAEL F. BENNET, Colorado

                    Edward Silverman, Staff Director

              William D. Duhnke, Republican Staff Director

                       Dawn Ratliff, Chief Clerk

                      Devin Hartley, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                 ______

                    Subcommittee on Economic Policy

                     SHERROD BROWN, Ohio, Chairman

         JIM DeMINT, South Carolina, Ranking Republican Member

JON TESTER, Montana
JEFF MERKLEY, Oregon
CHRISTOPHER J. DODD, Connecticut

              Chris J. Slevin, Subcommittee Staff Director

           Hap Rigby, Republican Subcommittee Staff Director

                Neal Orringer, Professional Staff Member

                                  (ii)
?

                            C O N T E N T S

                              ----------                              

                        WEDNESDAY, MAY 13, 2009

                                                                   Page

Opening statement of Senator Brown...............................     1

                               WITNESSES

Holly Hart, Legislative Director, on behalf of Leo W. Gerard, 
  President, United Steel, Paper and Forestry, Rubber, 
  Manufacturing, Energy, Allied Industrial and Service Workers 
  International Union............................................     2
Leo W. Gerard, President, United Steel, Paper and Forestry, 
  Rubber, Manufacturing, Energy, Allied Industrial and Service 
  Workers International Union
    Prepared statement...........................................    30
David Marchick, Managing Director, The Carlyle Group.............     5
    Prepared statement...........................................    33
William Gaskin, President, Precision Metalforming Association, on 
  behalf of the Precision Metalforming Association and National 
  Tooling and
  Machining Association..........................................    16
    Prepared statement...........................................    38
Eugene R. Haffely, Jr., Chief Operating Officer, Assembly & Test
  Worldwide, Inc., on behalf of the Association of Maunufacturing
  Technology.....................................................    18
    Prepared statement...........................................    41
    Response to written questions of:
        Senator Brown............................................    48
Lieutenant General Lawrence P. Farrell, Jr., (USAF Ret.), 
  President and Chief Executive Officer, National Defense 
  Industrial Association.........................................    20
    Prepared statement...........................................    45
    Response to written questions of:
        Senator Brown............................................    50

                                 (iii)


                  MANUFACTURING AND THE CREDIT CRISIS

                              ----------                              


                        WEDNESDAY, MAY 13, 2009

                                       U.S. Senate,
                           Subcommittee on Economic Policy,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Subcommittee met at 10:56 a.m., in room SD-538, Dirksen 
Senate Office Building, Senator Sherrod Brown (Chairman of the 
Subcommittee) presiding.

           OPENING STATEMENT OF SENATOR SHERROD BROWN

    Senator Brown. The Subcommittee on Economic Policy of the 
Senate Banking Committee will come to order. Thank you for 
joining us today, the two panels, and I will introduce each in 
a moment. I will make a brief opening statement, and then we 
will begin. I apologize for starting late. We had a vote on the 
Senate floor at about a quarter to.
    Manufacturing, as we know, is integrally tied to U.S. 
prosperity. It accounts for 12 percent, that is, $1.6 trillion, 
of U.S. gross domestic product. It accounts for nearly three-
fourths of the Nation's research and development, yet today we 
are facing an economic challenge few among us have witnessed, 
and our manufacturing sector clearly is in crisis.
    On Friday, the Labor Department reported the loss of 
539,000 jobs in April, including 149,000 in manufacturing. We 
hear the unemployment statistics overall; we hear what that 
means especially to manufacturing.
    U.S. manufacturing has contracted for 15 consecutive 
months. According to the Federal Reserve Board, manufacturing 
output fell 2.7 percent this past January to a level 13 percent 
below that of only 1 year ago. These numbers only tell part of 
the story. Today, there are manufacturers in Ohio, in every 
State in the country, trying to figure out how to remain 
viable. For these business owners, working families, and 
communities, the economic situation could not be more urgent.
    Today, we are fortunate to have witnesses with us who can 
better inform us on both the short- and longer-term challenges 
that American manufacturers are facing and how the financial 
markets are compounding this crisis. Like other States, Ohio 
has collateral damage from both manufacturing and the subprime 
crisis. When banks have addressed declining values in 
mortgages, there is evidence that they limit credit to other 
sectors, like manufacturing. I hope today we can learn more 
about these trends and discuss some of the policy options 
Congress should consider to help manufacturers who play such a 
pivotal role in our economy.
    I will close with a story, a personal story, from just a 
few days ago. Chrysler announced the likely closing--not quite 
certain; we are not accepting that it is certain--of the 
stamping plant in Twinsburg, Ohio, a community halfway between 
Cleveland and Akron. Chrysler has three stamping plants in 
Warren, Michigan; Sterling, Michigan; and Twinsburg, Ohio. I 
went to meet with some of the 1,500 employees who will lose 
their jobs if this plant, in fact, closes. Probably 500 of them 
showed up for a discussion of what to do next, how we fight 
back, what we do if we lose these jobs, how we help the workers 
retrain. It was mostly people in their 40s and 50s. One person 
said, ``I have been here 32 years,'' the next person 28 years, 
the next person 35 years, the next person 19 years--people who 
understand that manufacturing is a ticket to the middle class 
in this country. And if you had sat there for the hour and a 
half that I sat there--and I wish every American would, and I 
particularly wish every Member of the Senate and House would--
and listened to what manufacturing means to middle-class 
families in this State, one would understand why we are doing 
this hearing today.
    So we will begin the testimony. We will start with Holly 
Hart. Holly is the Legislative Director for the United 
Steelworkers. Holly took this job fairly recently--has been on 
the job 3 years, maybe?
    Ms. Hart. About 3 years, yes.
    Senator Brown. About 3 years, and she took it at perhaps 
the most difficult time to be Legislative Director of the 
Steelworkers. But she and Leo Gerard, who was going to join us 
today but his flight was delayed and then canceled out of 
Pittsburgh this morning--he called me at 8 o'clock this morning 
to tell me that he was still hoping. The Steelworkers have done 
very interesting work on everything from manufacturing to 
climate change.
    David Marchick, who is Managing Director of the Carlyle 
Group, is also on the first panel, the Managing Director for 
Global Government and Regulatory Affairs. He coordinates 
Carlyle's policy and regulatory issues on a global basis, 
provides support to Carlyle's funds and portfolio companies 
based in Washington. He was a partner prior to joining Carlyle 
at the law firm of Covington & Burling in Washington. He served 
for 7 years in the Clinton administration, including positions 
at the White House, U.S. Trade Representative, and the 
Department of State. He is co-author of the book U.S. National 
Security and Foreign Direct Investment.
    Ms. Hart, thanks.

STATEMENT OF HOLLY HART, LEGISLATIVE DIRECTOR, ON BEHALF OF LEO 
W. GERARD, PRESIDENT, UNITED STEEL, PAPER AND FORESTRY, RUBBER, 
 MANUFACTURING, ENERGY, ALLIED INDUSTRIAL AND SERVICE WORKERS 
                      INTERNATIONAL UNION

    Ms. Hart. Thank you, Mr. Chairman. My name is Holly Hart, 
and I am the Legislative Director of the Steelworkers, for the 
record.
    President Gerard, as you said, is very sorry he cannot be 
here. This topic is of vital concern to the Steelworkers, and 
he--oh, I am sorry. Thank you. And he really wanted to be here 
to advocate for the needs of our 1.2 million active and retired 
members of the union.
    Members of our union make products ranging from steel to 
aluminum to cement to tires to glass to many, many other 
products. They work in mines, they work in smelters, in oil 
refineries, and other industrial operations, even in the 
service industry--nurses, bus drivers, bank workers, and 
university professors who in no small measure are supported in 
some way, shape, or form by manufacturing.
    Well over 100,000 of our members have either been laid off 
or face reduced hours as a result of this current economic 
crisis. Too many of them to count have also been hit by the 
subprime crisis not only in terms of their mortgages, but also 
by the cascading effect of the problems that have blown the lid 
off our economy.
    Mr. Chairman, the first question that you raised in your 
letter of invitation--Why should Congress care about 
manufacturing?--is really the most important. Regrettably, we 
may be the only industrial nation on Earth that actually has to 
ask that question.
    Manufacturing is a source of strength--economic strength, 
community strength, and, indeed, military strength. 
Manufacturing provides, as you know, millions of jobs in our 
economy, or did. Prior to the downturn, it directly employed 
over 14 million people and accounts for 8 million additional 
jobs in other sectors. Our manufacturing sector is responsible 
for two-thirds of the investment in research and development in 
the U.S., and almost 80 percent of all patents that have been 
filed come from the sector.
    Manufacturing is a tremendous engine of growth, and it is 
also key to community strength. It has created millions of jobs 
and family- and community-supporting jobs. Manufacturing jobs 
pay about 40 percent or more, on average, in wages than other 
jobs in our economy.
    Manufacturing is also key to military strength. In the 
first and second world wars, our ability to supply our troops--
and, often, our allies--with the weapons and equipment were the 
deciding factor in the wars.
    All too often, though, our market has been flooded with 
products resulting from unfair and predatory trade practices. 
Factory after factory have either downsized or shut completely. 
The steel crisis of the 1990s and the early part of this decade 
left the steel sector devastated. And today's auto crisis will 
potentially lead to dozens of assembly plants and suppliers 
shutting down.
    The Steelworkers have calculated that approximately 
7,250,000 jobs depend on domestic automobile production. In 
addition, more and more companies are setting up R&D facilities 
overseas, closer to the production operations they have set up 
abroad. As that happens, the next generation of products and 
production may never be developed or produced here.
    And on top of that, our national strength, our military, is 
increasingly at risk. We no longer have the domestic capacity 
to make all the ammunition for our troops or our law 
enforcement officers. And replacement parts for the military 
are getting harder and harder to find, as are the skill sets 
for people to repair older and older equipment.
    The military has testified as to the risk of the loss of 
our industrial base by--we cannot supply the propellant for 
Hellfire missiles from China. We have to buy our propellant 
from China because it is no longer available from a domestic 
supplier.
    So manufacturing matters, and it is time we look at the 
policies to address those challenges confronting this vital 
sector.
    Credit is the lifeblood of manufacturing, and its impact 
can be felt throughout the economy. Manufacturers face stricter 
credit terms and have had to tighten their belts. Suppliers 
then feel the impact.
    Remember that auto parts suppliers were looking to 
guarantee $15 billion in receivables they had with the Big 
Three to protect their operations. So there is a clear 
correlation between credit availability and terms and the 
growth of manufacturing and its employment levels.
    There are more steelworkers whose jobs are affected, as I 
said earlier, by the crisis in the auto industry than the 
United Auto Workers themselves. Virtually every car has six 
pieces of glass, five tires, hundreds of pounds of steel.
    So some companies, when they cannot find credit, are paying 
double-digit rates for credit, with some approaching 18 to 20 
percent. Thirty of our companies have filed for bankruptcy 
protection since January; seven have gone directly into Chapter 
7; and the dramatic freeze in credit markets has meant that 
those companies that went directly to Chapter 7 could not find 
debtor in possession financing.
    I have more but I see my time is running short, and I did 
want to get to some of the policy options that I think we need 
to look at quickly.
    The needs of the manufacturing sector are broad and deep. 
There is no one silver bullet, and there are few issues 
confronting you and Congress whose resolutions do not have an 
important impact on our Nation's manufacturing sector.
    Some of the things that need to be done quickly: stabilize 
the sector and see it begin to grow again; by restoring the 
growth in manufacturing--yes, I am reading too fast. I 
apologize. But, basically, I wanted to point out that credit is 
the oxygen of our manufacturing sector. We have got to provide 
more reasonable credit--more credit at reasonable rates if we 
are going to succeed.
    We need to restore demand in this country. The stimulus 
package was a good start. But as you know, this money has not 
trickled down to the manufacturing sector as yet. You were an 
author or a supporter of the Buy America provision. There are 
efforts underway currently that are set to weaken through the 
regulatory process of how we adequately define manufactured 
goods as well as procurement transparency.
    We also need to make sure that credit is available to more 
companies and so they do not go straight to liquidation.
    We also need a trade policy that works for working 
Americans. Too many companies and workers have lost faith in 
their Government's willingness to enforce the laws we have on 
our books. Imports flood our markets, and the cost of credit is 
one thing, indeed. It is a function of our trade policies. But 
without substantial changes in the direction of our Nation's 
trade policies, we are going to continue to see devastation in 
our manufacturing sector.
    We also need to get our auto policy right. We must not 
pursue a policy of trying to downsize and outsource the auto 
industry to prosperity. That is a recipe for disaster. It will 
only result in the downsizing of the American dream.
    Thank you, Mr. Chairman.
    Senator Brown. Thank you, Ms. Hart.
    Mr. Marchick.

  STATEMENT OF DAVID MARCHICK, MANAGING DIRECTOR, THE CARLYLE 
                             GROUP

    Mr. Marchick. Thank you very much, Mr. Chairman, and I 
applaud you for holding this hearing. It is an issue which is 
absolutely critical to the future of our economy, and I have 
been pleased to work with the Steelworkers and Holly and Mr. 
Gerard on this issue. So I really appreciate and applaud you 
for holding this hearing and your leadership on it.
    The Carlyle Group is one of the largest private equity 
firms in the world. We manage about $85.5 billion of assets 
under management, and for our 22-year history, we have been a 
very significant investor in the manufacturing sector. 
Virtually every subcomponent of it, from autos to chemicals to 
aerospace to general industrial, we have a couple of very good 
companies that operate in general industrial manufacturing in 
Ohio, and we have been very pleased to be a significant 
investor in Ohio, and thank you for your leadership and the 
work you have done to strengthen manufacturing in Ohio.
    Today we have about $9 billion of equity invested in more 
than two dozen companies with manufacturing operations in the 
United States.
    As you highlighted and as Holly highlighted, manufacturing 
is the bedrock of the U.S. economy. It supports high-wage jobs, 
high-skill jobs, and there has been incredible productivity 
growth in the manufacturing sector for the last dozen years.
    Going into the recession, the manufacturing sector was very 
lean and efficient, which has made the pain in the sector even 
greater than one would have anticipated. And as Holly said, 
credit is really the lifeblood to the manufacturing sector. I 
will give you just one example.
    We bought Allison Transmissions from General Motors several 
years ago. They are a large transmission manufacturer in 
Indiana that manufactures transmissions for heavy trucks and 
buses. When they buy parts to make transmissions, they use 
credit to buy those parts. When they sell a transmission to an 
original equipment manufacturer, a truck manufacturer, that 
truck manufacturer uses credit to buy the transmissions for 
their inventory.
    When the OEM sells to a dealer or distributor, that dealer 
or distributor requires credit to buy the transmission. I am 
talking about Allison Transmissions, Senator Bayh. And when the 
ultimate buyer acquires a truck--either a trucker or truck 
company buys a truck, they require credit.
    So credit is critical to the entire life cycle of the 
manufacturing process, and literally when the credit crisis hit 
in the fourth quarter of last year, the manufacturing sector 
fell in free fall. The numbers are actually quite scary. They 
are Depression-like, not recession-like.
    If you look at the steel industry, which is critical in 
Ohio, steel production between August of last year and January 
of this year fell by more than 50 percent. Steel production in 
the United States today is operating at levels not seen since 
1939.
    The residential construction market, which drives a lot of 
manufacturing activity, purchases have dropped by 44 percent. 
And the data is just staggering. Auto suppliers across the 
country are seeing sales drops of more than 50 percent.
    There have been a lot of discussions of glimmers of hope. 
When you look at the chart I have on page 6, it shows the 
direct correlation between sales and manufacturing production 
and unemployment. They are directly correlated. And at the 
bottom here, you see a slight uptick, which are the glimmers 
that people are pointing to. But I would point out that that 
uptick is something that we should be very cautious about and 
not too sanguine, because the uptick only shows a reduction in 
rate of contraction, not actual growth. And the rates of 
contraction are still more than 15 percent year over year.
    In other recessions, you saw reductions in sales of 6, 7, 
maybe 10 percent. Now you have seen reductions of 20, 30, 40, 
and in the auto sector, 50 percent. These are devastating 
changes.
    Now, what are the policy implications? Well, the actions 
the Federal Reserve and Treasury have taken to breathe some 
life into the credit markets have been very important, and I 
applaud Secretary Geithner and Chairman Bernanke. And I applaud 
the work that you have done, Mr. Chairman, Senator Bayh, and 
others, to get the stimulus package through. That is very 
important for the manufacturing sector. The money has not 
started to show up yet, and it is critical that money get out 
quickly and also be targeted toward manufacturing activity that 
will have the greatest multiplier effect.
    The TALF program, which is intended to create 
securitization--restart the securitization market, which has 
been moribund, is also an important program. But also that 
program has not moved as quickly as we would have hoped, and it 
is limited to AAA-rated securities. And in this economy, it is 
very hard for companies and securities to get the AAA rating. 
It is just very difficult. There are only six publicly traded 
companies that have AAA today.
    The corporate loan market is an area where I would 
encourage you to focus some time. Manufacturing companies, 
particularly small and medium companies, require loans from 
banks to operate, and that loan market has contracted, which 
has caused distress in the manufacturing sector, and there is a 
huge amount of refinancing risk in 2010, 2011, and 2012, which 
will cause large bankruptcies unless that market is revived.
    And, finally, let me just make a comment on General Motors. 
If the GM bankruptcy--if, indeed, it goes into bankruptcy--is 
not handled well, it could be the Lehman Brothers equivalent 
for the manufacturing sector. It is hard to overestimate the 
impact of General Motors on the general manufacturing sector. 
It touches virtually every subsector in the economy.
    Usually companies go into bankruptcy to break contracts. 
But if General Motors goes into bankruptcy and then breaks its 
contracts with suppliers and its partners, you could see a 
cascading impact in the supply chain throughout the economy, 
which would just have a devastating impact on an already 
devastated sector. And so it is critical, if GM does file, that 
it uphold its commitments to its suppliers and partners and 
keep the money flowing to support those companies, because they 
are already under stress and already at risk.
    So I will stop there, and I would be happy to answer any 
questions.
    Senator Brown. Thank you, Mr. Marchick.
    Senator Bayh, would you like to make an opening statement?
    Senator Bayh. I will save my comments for questions 
following you, Mr. Chairman.
    Senator Brown. OK, thanks.
    I appreciate Senator Bayh's involvement. While not a Member 
of the Subcommittee, he is a Member of the full Committee, and 
he has been a real leader in the Defense Production Act and 
what we have done and need to do.
    Let me start with you, Ms. Hart. There is a story in the 
L.A. Times today about a California businessman, Steve Rachman, 
who manages an outsourcing company. He says that when 
manufacturing jobs head elsewhere, increased demand for cheap 
goods creates a need for more salespeople in the U.S. He said 
to the L.A. Times, in response to U.S. manufacturers who get 
driven out of business by cheap Chinese imports, he said, 
``Yes, but now Walmart is selling more socks. They will need 
people to sell them.''
    This is a little too easy, but what is your response to 
that sort of economic strategy, if you will?
    Ms. Hart. Well, other than laughter, I would say anger. It 
is clear, I mean, manufacturing provides family supportive 
jobs. The majority of our members have been able to buy cars, 
send their children to college, you know, be part of the 
American middle class because of their jobs in the 
manufacturing sector. They have health care benefits. They have 
pension plans and have had family supportive jobs that ripple 
out throughout the community. They support restaurants, movies, 
a whole range of products in the service sector. And that is 
not going to be fulfilled by people selling socks or ringing up 
socks at a cash register.
    You know, frankly it is incredibly frustrating that this 
is--you know, after the devastation in our manufacturing 
sector, the loss of all our jobs, the fact that we are 
teetering on the brink of losing the ability to supply our 
military and various other economic indicators that should 
provide a canary in the coal mine, if you would, a response--
you know, we are still trying to get people to listen to why 
manufacturing is important in this country and that it must be 
saved. It is just unfathomable to me that people----
    Senator Brown. What do we do about that? That brings me to 
the issue of, you know, why--commentators so often dismiss the 
importance of manufacturing. In this institution, both in the 
Senate and in the House, lots of people elected to office, 
particularly if they do not come from the Midwest, seem 
sometimes dismissive of manufacturing. Senator Bayh has been a 
leader, particularly in intellectual property, in manufacturing 
issues and has that frustration as coming from a manufacturing 
State, as I do.
    Ms. Hart. Right.
    Senator Brown. And plenty of States have more manufacturing 
than House and Senate Members even seem to acknowledge 
sometimes. But how do we do better at sort of preaching this, 
singing this tune, preaching this message that manufacturing 
really matters, as you said, not just to the security of a 
family but the security of a community and the national 
security of our country? And as Mr. Marchick talked GM, how it 
touches--that company touches so much of American industry and 
America beyond. How do we sell that better to people?
    Ms. Hart. Well, I am not sure how. I know what the 
steelworkers are trying to do to sell it. Leo actually was on 
the road, and part of the reason he is not here, Senator Bayh, 
is because he had problems with his airplane getting here--not 
his airplane. USAir's airplane. And the----
    Senator Brown. He is not flying in a private plane.
    Ms. Hart. No, he is not flying in a private plane. In fact, 
he was on----
    Senator Brown. We have heard of that in this Committee 
before.
    Ms. Hart. Yes, I think you have.
    [Laughter.]
    Ms. Hart. But he has been on a bus for the past 3 days 
going through the heartland of our country trying to raise the 
issue of what will happen to manufacturing if we do not make 
sure that the GM restructuring plan is focused less on the 
bottom line and more on making sure production is kept here. 
That has been his focus, our focus. We have been partnering 
with groups like Carlyle. We have established the Alliance for 
American Manufacturing to help raise the issue.
    As far as policy solutions--I see my time is running out; I 
guess we can get into that later--that your Committee has 
jurisdiction over, the Defense Procurement Act, there could be 
a thorough review of that.
    Anyway, I am sort of getting a little off subject, but I 
think the general theme is that we have to really raise the 
volume on it, and we are trying all we can, and hopefully 
giving an opportunity for Members of Congress to show their 
support as well.
    Senator Brown. Thank you.
    Mr. Marchick, before I turn it over to Senator Bayh, let me 
talk about credit for a moment. You talked about the difficulty 
for so many companies to access credit at any reasonable 
interest rate. And I guess lenders' reluctance in large part is 
manufacturing is--the condition of manufacturing is not--it is 
not the best we have ever seen, of course. But with defense 
contracting, there seems to be, particularly defense 
production, sort of the protection, if you will, of the Defense 
Production Act, it seems that defense manufacturing should be 
more stable compared to other manufacturing.
    Is that one way that we sort of deal with the credit issue? 
Because, obviously, these companies that do defense work also 
do a lot of other--they do a lot of work. They do aerospace 
work. They do others. Is that sort of a door in, in part, with 
the Defense Production Act? And how do we use that better so 
that we can get credit for manufacturing beyond just the DPA 
companies, but companies generally in our economy?
    Mr. Marchick. Sure. It is a great question. I am glad you 
highlighted it. If you look at the defense sector, the top-tier 
companies are in great shape, the prime contractors. They have 
a stable supply of work. They have great credit. They do not 
have a significant amount of debt.
    Senator Brown. And they are having no problems getting 
credit at reasonable rates.
    Mr. Marchick. Very little. The top tier, the prime 
contractors--the Boeings, the General Dynamics, and others, the 
ones that have direct contracts with the Pentagon.
    The problems beneath the surface are great, though, 
particularly in the Tier 1, Tier 2, and Tier 3 suppliers, 
particularly where those suppliers are primarily, for example, 
in the auto supply chain, but they may have 10 percent of their 
production go toward some defense product or component. And so 
those companies may have seen a 30-, 40-, 50-percent drop in 
sales; their banks have pulled their credit lines, and they are 
in severe distress; but they have one or two critical 
components of the supply chain that are critical for our 
national defense.
    And that is an area where the Defense Production Act may be 
able to help. There are authorities in the Defense Production 
Act which have not been used in years to provide credit 
guarantees for small and medium-size manufacturers, and that is 
something I would encourage you and the Committee to take a 
hard look at and work with DoD to see if they can get a little 
more flexibility.
    Senator Brown. OK. That is very helpful. Let me ask one 
other question. You mentioned 2005, 2007 loans coming--facing a 
tough period in 2010, 2014, when they come due.
    Mr. Marchick. Yes.
    Senator Brown. What should the Fed do? What should Treasury 
do? What should we in this Committee do to prepare for that?
    Mr. Marchick. Well, if you look at the credit markets 
today, outside of the top companies--the IBMs, the other first-
tier companies--those companies have access to credit. But 
below those companies it is very hard for small, medium, and 
large companies that are not the names of the U.S. economy to 
get credit.
    The programs of the Federal Reserve and the Treasury have 
provided some oxygen to the credit markets by basically 
guaranteeing credit markets or supplying Federal backstops, and 
that has helped create liquidity. But I would encourage you to 
work with the Fed and the Treasury to see if they can expand 
the coverage to other markets, including the corporate loan 
market, if the corporate loan market does not revive in the 
intermediate term, because basically most corporate loans have 
a 5-, 6-, or 7-year cycle, they become due, which means that 
the large number of loans that were taken out in 2005, 2006, 
2007 come due in 2010, 2011, 2012. If they cannot refinance, 
they file for bankruptcy, it is not a good situation for the 
economy, particularly in the manufacturing sector.
    So I think that some of the Fed and Treasury programs could 
be expanded to the corporate loan sector, which would be 
something that the Committee could work on.
    Senator Brown. OK. Thank you.
    Senator Bayh.
    Senator Bayh. Thank you, Chairman Brown, for your 
leadership. Our States have in common a substantial 
manufacturing sector, and you have been out on point on many 
issues relating to this, fighting for working men and women and 
manufacturing, manufacturers in Ohio for many years. I have 
been pleased to collaborate with you on some of these things, 
and do so again today.
    Ms. Hart, please give my best to Leo. We make more steel in 
the State of Indiana than any State in the United States of 
America, and we still employ thousands of people in our State 
in your industry. As was noted, they are good jobs, with good 
benefits, and you can raise a middle class family around steel 
production in our State. So we would like to be as competitive 
as we possibly can. I appreciate your presence here today on 
behalf of your members.
    I have known--Mr. Chairman, I have known Mr. Marchick for 
many years. He is a very insightful and thoughtful individual 
and I am delighted that he is here to offer his perspective 
today.
    David, it is good to see you again.
    We have already covered a fair amount of territory here, 
and this is focused upon credit and manufacturing. Senator 
Brown already asked one of the questions I was going to ask, 
which is what should we be doing that we are not currently 
doing? I think you were touching on that.
    There are some other issues that are going to be addressed 
here over the course of the next several months that will have 
a significant impact on manufacturing, and I know this is 
something that has been on Senator Brown's mind, as well. I 
would like to raise the issue of climate change, global 
warming, the proposals on cap and trade.
    By the way, just one aside, I was very pleased about your 
comments about the automotive sector because I have said from 
the beginning that the need to help the automotive sector 
really is not the auto companies. It is the other 
manufacturers. It is the suppliers. It is the broader economy 
and the broader--it is the ripple effect, the collateral damage 
to the economy that would result from just sort of allowing 
these large enterprises to collapse and all the other harm that 
would go with it.
    So I thought you put it in perspective, I thought, very 
well.
    My question is this: do you have any thoughts--and I know 
it is not exactly on topic here today, so if you do not, that 
is acceptable, too. But it has been on my mind. This could, if 
not done appropriately, have a significant impact on 
manufacturing. I have heard Senator Brown say, I think very 
eloquently, on several occasions if, in our attempts--our good 
attempts--to try and solve the problem of climate change, we 
basically create a system that incents jobs being relocated to 
other countries that have lower environmental standards than we 
do, well the net effect will be we will have fewer 
manufacturing jobs and there will be more carbon being admitted 
into the atmosphere. This is not an optimal solution.
    So do either of you have any thoughts about this? It is a 
little bit off-topic today but it is on my mind. I am going to 
be having to leave as soon as my questioning time is done, 
Senator Brown, to go to a meeting of the Environmental 
Committee, where we are dealing on some aspects of these things 
even today.
    So I just wanted to raise it because since manufacturers 
seem to be a little more CO2 intensive type 
activities, this could have a real impact on the manufacturing 
sector and accelerate some of the longer term trends we have 
seen--I want to emphasize--if not done appropriately.
    Ms. Hart. I am glad you brought that up, Senator Bayh. I 
know, I think yours and Senator Brown's leadership on this 
issue is going to be key for us in the Senate.
    Right now we have been working with the Energy and Commerce 
Committee on their solution to try to mitigate the effects for 
energy intensive manufacturers because they, too, understand 
that if we do not make sure that we control--without a global 
solution, if we only can put controls on our own industries 
without looking at ways to mitigate that, we are going to 
suffer a leakage of carbon, as well as jobs.
    The policy options that they looked at is an interesting 
one. It is an output-based rebate for the manufacturing sector. 
So a certain pool of allowances are being--15 percent, I 
believe, on the House side--are being allotted to energy 
intensive industries based on a sector average rebate.
    Senator Bayh. Is that sufficient, in your view?
    Ms. Hart. Well, it is not. It has got to be in concert with 
a border mechanism to make sure that products that are imported 
into our countries that do not have that same cost associated 
with their production pay for the carbon in their products.
    Senator Bayh. You should know, Ms. Hart, that one of our 
colleagues came up to me all excited at the caucus lunch 
yesterday informing me very happily that the steelworkers had 
endorsed the latest proposal. So perhaps that was a bit 
premature, I do not know.
    Ms. Hart. Well, we do believe the Committee is moving in 
the right direction, but they have left the crafting of the 
border mechanism to the Ways and Means Committee, and that is 
going to be key to our support in the future.
    Senator Bayh. So progress, but still work to be done to get 
it
    Ms. Hart. Correct.
    Senator Bayh. ----done correctly.
    Again, I think all of us want to address climate change. We 
just want to do it in a way that actually solves the problem.
    Ms. Hart. Yes, we certainly do.
    Senator Bayh. And does not just harm our economy without 
solving the problem.
    Ms. Hart. That is true.
    Senator Bayh. Mr. Marchick, feel free to say this is off 
topic, or do you have some thoughts on this?
    Mr. Marchick. A couple of comments. First, I want to 
compliment you for the great work you have done over the years 
using your perch on the Banking Committee to focus on credit 
and the manufacturing sector. So I really applaud you for that.
    I would share the comments that you made and Holly made. I 
remember I was in the State Department, in the Clinton 
Administration, at the time of the Kyoto Agreement. We 
negotiated that agreement, brought it back, and then had a 98-0 
resolution in the Senate basically saying it was not a good 
agreement. Not exactly a great endorsement of our work.
    I would agree with everything you have said. I think it 
needs to be----
    Senator Bayh. It may be an example of the perfect being the 
enemy of the good, I do not know.
    Mr. Marchick. It has to be carefully balanced. There have 
to be mechanisms to enable the manufacturing sector to adjust 
and survive. And there needs to be a broad level of commitment 
around the world, from both developed and developing countries, 
so that everybody has a fair stake and similar obligations.
    Senator Bayh. My time has expired. If I could just follow 
up with one question.
    The hardest part of all of this, I think at the end of the 
day we have to make some internal decisions within our country. 
They will not be easy, but I think we can probably get there 
with a thoughtful approach.
    My guess is, for a variety of reasons, we may even get most 
of the rest of the world to agree to some sort of framework. 
The issue is how do you verify whether they are complying or 
not? And most importantly, what do you do if they are not?
    I have not yet heard a good answer to that. Do you have any 
thoughts along those--basically, just so you know, Mr. 
Marchick, I attended a conference on this. They had a euphemism 
they called border adjustments, which was basically a fancy 
word, a euphemism for tariffs, that you would basically slap 
tariffs on high CO2 products coming from countries 
that were not abiding. Which struck me as being--it might 
inaugurate the mother of all trade wars.
    And I, frankly, was a little skeptical about whether our 
Government, even if we legislated such a thing, would ever 
implement it.
    So I mean, if that is the only enforcement mechanism, I 
kind of wonder whether that is going to work or not. Do you 
have any thoughts about that?
    Mr. Marchick. I do not have a good answer, unfortunately. 
That is good, tough question.
    Ms. Hart. And I do not either, but certainly global 
sectoral agreements are going to be key to making sure that our 
trading partners and other countries are able to reduce their 
emissions as well and mitigate those effects. But until that 
time, we are going to have to step up and make sure that how 
our industries are regulated has a component part of a border 
adjustment because without that, we can compensate our energy 
intensive industries all we want and they can--I mean, the 
steel industry is incredibly efficient right now. We produce 
steel with three times less carbon than the Chinese do. And 
they are the most efficient in the world.
    So they have done pretty much everything they can. I'm not 
saying there is not more they can do in the future with better 
R&D and technology. But at this point, they are--most of our 
producers are as good as they can get.
    So my point is that there is very little efficiency that 
may be able to be gained by certain industry sectors. In that 
regard, it is going to be very important to have sectoral 
agreements. But it is more than just the steel industry. The 
energy-intensive sector is very large. That includes chemicals. 
It includes rubber. It includes glass. It includes a whole 
range of industries. Those all have to be looked at. And there 
are not talks underway right now in those sectors.
    So encouraging that is going to be paramount. But until 
that happens, there has to be more than just carrots for the 
world to come to us. There has got to be a few sticks at our 
border. I am sorry, I believe that.
    Senator Bayh. Well, I thank you both for your perspective. 
I would leave for your consideration, to be continued another 
time, Ms. Hart, this is the hardest issue, I think, to resolve. 
I leave for your consideration the likelihood that our 
Government would ever impose such consequences on countries 
from either whom we are borrowing large sums of money or we are 
importing large amounts of oil. Either of those strike me as 
being unlikely.
    It is one of the reasons I tend to be more of a deficit 
hawk. Can we get our finances in order? It gives us a little 
more latitude to do other things. But as long as we are so 
dependent on foreign borrowing, it restricts our field of 
action a little bit.
    But that being said, thank you very much. Mr. Marchick, 
great to be with you again.
    Holly, thank you. I wish Leo the best.
    And Mr. Chairman, thank you for your leadership on this.
    Senator Brown. Thank you for your interest.
    Senator Bayh. The State of Indiana and the State of Ohio 
will make common cause in this area. If not on the Big Ten 
athletic field, at least in the area of manufacturing 
economics.
    Senator Brown. Thank you, Senator Bayh, for your insight.
    A couple of comments on his thoughts, Senator Bayh's 
thoughts--thank you, if you need to go, that is fine--Mr. 
Marchick and Ms. Hart, about climate change. It is pretty clear 
that Ohio really is a State that has every one of the major 
energy-intensive industries: steel, glass, aluminum, cement, 
paper, chemicals, and all of them. That is why this needs to 
work.
    And ultimately, I spoke with Carol Browner, the President's 
environmental advisor, about this, that ultimately we need some 
multilateral agreement to come to an agreed to carbon price 
among the nation's which have these manufacturing sectors. That 
is something we obviously need to get to at some point. That is 
not going to happen quickly, but it is what we need to strive 
for, Senator Bayh suggests, too.
    Let me ask one more question of each and then we will bring 
the second panel in. Mr. Marchick, you talk in your testimony 
about the TALF program. How do we get--how do we enable 
manufacturers to take part in it?
    Mr. Marchick. The first thing I would say is that it is 
important to understand the role of securitization in the 
banking system. Thirty years ago, when a company needed money, 
they would go to a bank and say we need some money, can I 
borrow it? They would say yes or no.
    Today, banks are as much distributors as loaners. So they 
often will underwrite a loan but then sell pieces of that loan 
out to parts of the so-called shadow banking system. And that 
system provided about half the credit in the United States up 
until the credit crisis hit. That part of the banking system is 
basically moribund today. And so the TALF helps, hopefully, 
revive that part.
    I think the way that the Federal Reserve has done it, to 
expand the asset classes which are eligible for TALF funding, 
is helpful. Commercial mortgages, which drives development, 
which drives sales of steel rods and other products used in 
construction; expanding it to dealers which helps them buy cars 
to be able to sell cars to consumers. And we have an investment 
in Hertz, for example. The Fed has expanded TALF to cover auto 
fleet financing, which is critical to be able to allow them to 
buy cars from the Big Three.
    The problem is this AAA limitation is that with falling 
asset values, particularly of large physical assets like autos, 
it is very hard for companies to qualify for AAA rating. And 
therefore, the benefits of the TALF are, by definition, limited 
because it does not cover enough products.
    So the Fed, I understand, is trying to limit the credit 
risk of the Government, which is a very legitimate and 
important policy objective. But in order to make it work, I 
think there will need to be additional flexibility and broader 
coverage area. They have expanded it, for example, from the 
residential mortgage sector to the commercial sector to auto 
fleet financing, to dealer floor plan financing. If they could 
continue to expand it to other markets, including the corporate 
loan sector, it would help manufacturing companies access 
loans.
    Senator Brown. Good answer. Thank you.
    Ms. Hart, I have been a little intrigued lately that I seen 
an op-ed co-written by Leo Gerard and David Rubenstein, one of 
the founders of the Carlyle Group. And now I see this 
testimony. Explain this to me, the Carlyle Group and the 
steelworkers, what does this exactly mean? That you have been 
working in tandem, as you did today? I know you suggested this, 
that the op-ed piece.
    Why this alliance that some people would find a bit 
peculiar?
    Ms. Hart. Or perhaps unholy, but we think it is going to 
produce great results.
    Our union has been trying--we have been a voice in the 
wilderness for years on manufacturing. And we are trying every 
way we can think of to raise that profile and utilize tools 
that might not be available to us if we just stayed to 
ourselves. So we are forming partnerships in perhaps unlikely 
places to bring the message and to try to help forge policy 
solutions.
    One of the things I would like--we have a history of it. We 
started the Alliance for American Manufacturing with some of 
our largest steel producers. It has now expanded to include 
Goodyear, as well. They have become a fairly outspoken--in 
fact, very outspoken--defender of American manufacturing and a 
good resource for many, as well, who choose to make those 
arguments.
    We have published studies and done a whole lot of 
interesting events, as well, including the auto tour that is 
going on around the country and is going to culminate in a 
teach-in on May 19th that I am hoping you will be able to 
participate in at the Capitol Visitors Center to highlight just 
how important the auto sector is to our country.
    So I think we have an innovative and dynamic leadership 
that does not believe we can just be protective. We have got to 
go on the offensive and we have got to find partners who are 
willing to work with us to do so.
    We, of course, are happy to work with you, as well, in any 
way you see fit, to help address the problems as well.
    Senator Brown. Well, done. Thank you.
    Mr. Marchick, do you want to say something?
    Mr. Marchick. Let me just add one thing on that, because I 
really want to give credit to Leo Gerard and Tom Conway and 
Holly and the rest of their team.
    We are major investors in the steel sector and other 
sectors that the USW supports. And we found them to be--well, 
they are very tough negotiators. Some of our folks still have 
scars to show for some of that.
    But they have also been very progressive, in terms of the 
need for attracting capital into hardcore nonsexy manufacturing 
in the United States. And we have been able to work with the 
USW very closely to increase productivity to align incentives 
for the various parts of the capital structure: investors, 
management, and workers. And really, this collaboration is a 
tribute to Leo's very good work, and creative work, in leading 
this union into the 21st century.
    Senator Brown. Good, thank you. Mr. Marchick, thank you. 
Ms. Hart, thank you very much, both for joining us.
    We will take a 60 second break while the second panel gets 
in place. So thanks very, very much. I apologize again that you 
had to wait today.
    [Pause.]
    Senator Brown. Thank you for joining us, the second panel.
    I will introduce William Gaskin, whom I have known for some 
time, President of Precision Metalforming Association, 
representing the $91 billion metalforming industry in North 
America, the industry that produces precision sheet metal 
components and assemblies used in autos, appliances, computers, 
and thousands of other applications. He's also President and 
Secretary of the PMA Educational Foundation; President and 
Secretary of PMA Services, which publishes Metalforming 
Magazine, a monthly circulation of 60,000.
    He previously served as the Director of Community 
Development in Cuyahoga County, Cleveland, Ohio. A graduate of 
Heidelberg, Mr. Gaskin received his MS in Public Administration 
from Cleveland State. He earned his Certified Association 
Executive designation in 1995. Welcome, Mr. Gaskin.
    Gene Haffely, whom I met yesterday, was a cofounder, 
Advanced Assembly Automation in 1984 and served as Vice 
President of Operations until 1996. Mr. Haffely then served as 
President of Hansford Manufacturing, a division of DT 
Industries; and is the Corporate Vice President of Operations 
for DT Industries from 1997 through 1999, when he returned to 
AAA as President.
    He is a Vietnam vet, a graduate of the University of 
Wisconsin with a BS in Computer and Electrical Engineering. 
Welcome, Mr. Haffely. Thank you for joining us.
    General Larry Farrell, U.S. Air Force, Retired, became the 
President and CEO of the National Defense Industrial 
Association in September 2001. Interesting timing.
    Prior to his retirement from the Air Force in 1998, General 
Farrell served as the Deputy Chief of Staff for plans and 
programs at the Headquarters, U.S. Air Force in Washington. He 
was responsible for planning, programming, manpower activities 
within the corporate Air Force and for integrating the Air 
Force's future plans and requirements to support national 
security objectives and military strategy.
    Previous positions include Vice Commander, Air Force 
Materiel Command, Wright-Patterson Air Force Base in Fairborn, 
Ohio; and Deputy Director, Defense Logistics Agency in 
Arlington. He served as Deputy Chief of Staff for Plans and 
Programs, headquarters U.S. Air Forces in Europe.
    And thank you, particularly, for your service to our 
country, too.
    Mr. Gaskin, you can begin, if you would. Welcome.

STATEMENT OF WILLIAM GASKIN, PRESIDENT, PRECISION METALFORMING 
                          ASSOCIATION

    Mr. Gaskin. Thank you, Mr. Chairman. It is a pleasure to be 
here today.
    For the record, my name is Bill Gaskin, President of 
Precision Metalforming Association in Independence, Ohio.
    We have partnered with the National Tooling and Machining 
Association today to speak with one voice on behalf of the 
small middle-market manufacturers who produced stampings, 
fabrications, machine products, tooling, plastic injection 
molds, and other items. Together, we have a combined membership 
of more than 2,500 companies located in every State and 
employing more than 500,000 people.
    Small middle-market manufacturers are being clobbered by 
the credit crisis and are in serious trouble, especially if 
they manufacture parts, components, and assemblies for the 
automotive, residential, or commercial construction, appliance, 
truck, and aerospace industries. This impacts hundreds of 
thousands of jobs, weakens our manufacturing base, and limits 
our ability to innovate, allocate funds to R&D, and provide 
growth opportunities for the future.
    These are by far the most dire times that I have seen for 
metal stamping, roll forming, machining, tooling, and mold 
building companies. Today our typical metalforming company has 
annualized sales 35 percent lower than 1 year ago. They have 
had to eliminate nearly 38 percent of their employees.
    In our May business conditions survey, some 80 percent 
reported that they had either laid off employees or that their 
facilities were working on short time, compared with roughly 
only 20 percent a year ago.
    And it is going to get worse. Forty-nine percent report 
that shipping levels will be down over the next 3 months, and 
39 percent report that new orders for products will decline 
over the next 3 months, as well. Only 17 percent of our members 
think that shipments will rise in the next quarter.
    It is likely that more than 20 percent of these privately 
held or family owned businesses will not exist 1 year from now 
unless business conditions improve substantially or until 
additional steps are taken to free up lines of credit.
    To quote one metalworking company with 60 employees, ``No 
bank currently wants to deal with manufacturing. They are 
solely about mitigating their risk with their manufacturing 
clients. This is the reality that we face.''
    Metalforming companies across all industries report credit 
challenges. Of respondents to our survey, 36 percent noted 
serious problems in their credit situation and 30 percent 
reported moderate problems. More than half are having 
difficulty accessing credit for day-to-day operations, while 
over 70 percent have difficulty obtaining credit to finance 
capital investments they need to upgrade their domestic 
production facilities. Our greatest concern is that 72 percent 
anticipate difficulty securing the credit they will need when 
business starts to recover to buy raw materials and rehire 
people. Seven percent, 72 percent do not know if they can do 
that.
    So while the Federal Government is investing billions of 
dollars to the Economic Stimulus Package for construction 
projects and other activity, through TARP to support banking, 
automotive OEM and tier one suppliers, small middle-market 
companies integral to our recovery lack the financing they need 
to supply the stampings, fasteners, tooling and molds to 
assemble the bridges, acquire new equipment, and manufacture 
fuel efficient vehicles.
    The Automotive Supplier Support Program is helpful to tier 
one suppliers of General Motors and Chrysler but the economic 
benefits of these expenditures have yet to trickle down to the 
small middle-market tier two and three suppliers. Of course, 
help for the OEMs and tier ones help us, as well, but we cannot 
continue to provide components, tooling, and services without 
some guarantees of future payment.
    This would also provide assurance to our creditors that we 
remain viable. Credit lines in our industry, which are 
currently averaging about 14 percent of annual sales, are 
largely based on a formula that values 80 percent of current 
trade receivables and 50 percent of the value of raw material 
and finished goods. In today's environment, receivables are 
discounted even more severely or they have almost no value at 
all. Most lenders are severely restricting lines of credit from 
manufacturing companies, especially automotive suppliers.
    Recently, the Small Business Administration announced 
changes in their 7(a) and 504 loan programs. Yesterday I heard 
from one company, a member in Southern California, who had 
applied for an SBA loan from three banks in the last 3 weeks, 
including Omni National and Wells Fargo. Unfortunately, the 
company was unable to secure any help from the SBA program, as 
the banks' underwriting standards, which rule, were too strict 
to approve the loan.
    The personal guarantees required by SBA on 100 percent of 
their loans are also a problem. In the non-SBA market, our 
members report that personal guarantees are required only about 
40 percent of the time. Understandably, in today's environment, 
many business owners are too concerned about losing their 
family home to meet their personal guarantee requirements of 
the 7(a) program.
    Last Thursday, at an auto parts suppliers conference in 
Michigan, a representative of the SBA briefed us about the new 
requirements, the new program. But in response to a question 
about whether he was aware of any SBA loans having been made to 
auto suppliers in the Detroit answer, he answered no, he 
wasn't. He then asked the audience, 75 people, do any of you 
know of a bank that has given a loan, and they said no, as 
well. So it is a problem that just is not working.
    Mr. Chairman, we hope that the SBA program could be 
changed. We appreciate your efforts to find solutions to the 
credit crisis in manufacturing. This is not just an Ohio 
problem or an automotive problem. It is a global problem that 
requires an American solution here in the U.S.
    Thank you.
    Senator Brown. Thank you very much, Mr. Gaskin.
    Mr. Haffely.

   STATEMENT OF EUGENE R. HAFFELY, CHIEF OPERATING OFFICER, 
 ASSEMBLY & TEST WORLDWIDE, INC., ON BEHALF OF THE ASSOCIATION 
                  OF MAUNUFACTURING TECHNOLOGY

    Mr. Haffely. Thank you for holding this hearing today and 
giving me the opportunity to be here and participate.
    I am here today to speak on behalf of the Association of 
Manufacturing Technology, the AMT, founded in 1902 as the 
National Machine Tool Builders Association. My company, 
Assembly & Test Worldwide, Inc., is headquartered in Dayton, 
Ohio, and is a member of the AMT and I currently serve on the 
Board of Directors of the AMT, which represents more than 400 
manufacturing technology providers located throughout the 
United States, including almost the entire universe of machine 
tool builders who manufacture in America.
    I would like to make three points today. Our industry, as 
everyone has already said, is vital to American manufacturing, 
competitiveness, and national security; is critically weakened 
by the economic crisis; and this weakness makes it even harder 
to obtain the credit we need to survive the economic downturn.
    The manufacturing technology providers I represent here 
today supply the innovative tools that enable production of all 
manufactured goods. These technological tools of industry--and 
I am talking about capital equipment and the technology that is 
a part of that capital equipment. These technological tools of 
industry magnify the productivity of each individual worker in 
our country and give an industrial nation the power to be 
competitive in the global marketplace. Our products also create 
the means to provide a strong and technologically sophisticated 
national defense.
    Mr. Chairman, as critical and necessary a part of our 
American manufacturing sector as we are, our industry is in 
danger of not surviving the current economic crisis. And the 
major reason for that is because the lack of credit is 
endangering the continued existence of virtually all of our 
companies.
    My company, as an example, is an American-owned business 
that designs and manufactures assembly and test equipment for 
global manufacturers, of which 60 percent is in the automotive 
and heavy truck industries. We are a critical supplier of 
custom designed automation for the production of fuel efficient 
engines, transmissions, and drive modules and are one of the 
many AMT companies that provides production tools and systems 
to a wide range of industries, including the producers of 
medical devices, pharmaceuticals, hybrid vehicles, solar 
panels, and various defense industry related products.
    In 2008, my business was profitable with $150 million in 
revenues. During the banking crisis this past fall, in just a 
3-month period, we lost over $20 million of our orders. They 
were canceled. This is totally unprecedented in the history of 
our company.
    Due to this decline, mainly in our automotive business, we 
have been forced over the last 5 months to reduce our work 
force by 25 percent to 530 U.S. employees. In addition, my 
company's revenues are projected to decline 40 percent in 2009 
primarily due to the weakness in the automotive sector and the 
deferral of capital spending in other markets.
    In the bigger picture, AMT members are reporting a 
reduction in backlogs from 40 to 70 percent.
    The overall uncertainty in our economy has caused our 
customers to take defensive measures, delaying existing 
production improvements, canceling new term orders, and 
delaying payments until 2010. The meltdown of the financial 
services sector has frozen credit to companies like mine.
    But even with this revenue reduction I spoke of, my company 
can operate with minimal losses in this difficult environment 
and can remain a viable company, but only if we can get 
reasonable credit. In my 30 years in this industry, I have 
never seen a more difficult time for companies in our industry 
to obtain credit. The future holds promise, but our hands are 
tied if the banks refuse to lend to automotive manufacturing 
companies because their revenues are dismal for the next few 
quarters as we work our way through this economic chaos.
    I do not mean to tell you that I am an expert on the 
solutions to this, but a couple of programs that have been 
brought up already I would like to comment on. I read recently 
that there is a 25 percent increase in SBA loans. To our 
companies in the AMT, no one is lending in this environment. We 
do not see it. Not even the SBA Preferred lenders, who must 
rely on a level of credit scrutiny for many companies that they 
cannot pass due to the recent events.
    Small businesses are particularly hit hard. These companies 
cannot qualify for the programs that were designed to help 
them. We must reprioritize the metrics by which the SBA makes 
decisions away from cash flow. The AMT companies' cash flow 
position is weakened so they cannot qualify. We need to move to 
other relevant criteria. In my written statement, there are 
some suggestions about what that other criteria could be.
    Moving toward the Defense Product Act. As I am sure you 
would agree, Mr. Chairman, our national security depends on a 
strong manufacturing technology base. I am here to tell you 
that if nothing is done to start credit flowing again to 
America's manufacturers, we lose more than the ability to 
manufacture automobiles and washing machines. We lose our 
ability to provide innovative manufacturing systems for the 
defense industry. Without a strong American manufacturing 
technology base, we also risk dependence on foreign sources for 
our defense needs, foreign sources who may not be there when we 
need them.
    Mr. Chairman, my industry is absolutely essential to 
national security. Title III of the Defense Production Act 
provides for Federal loan guarantees to companies that play an 
important role in our national defense industrial base, 
companies that would be important to mobilize efforts if it 
were necessary to move from a peacetime economy to a wartime 
economy.
    Mr. Chairman, I suggest the Banking Committee consider 
increasing this loan guarantee authority as it considers the 
DPA's reauthorization in September. With Government guarantees 
under Title III, I believe banks in Ohio and elsewhere around 
the country will have confidence to get credit flowing to 
manufacturing technology companies and the many other 
manufacturing companies who make up the backbone of the defense 
industrial base.
    In conclusion, the United States is perilously close to 
losing a critical industry, one that it continues to depend 
upon for both economic stability and national security. I hope 
that you will be able to provide the legislative vehicles that 
can get us through this threat to our existence, building upon 
the SBA and the DPA programs I have mentioned and implementing 
other new loan guarantee programs targeted at manufacturing 
technology companies and our customers, the manufacturers in 
this country.
    We must get credit flowing again. The only way to break 
this cycle of job loss and bankruptcy is to provide the 
manufacturing sector the cash flow we need to continue doing 
business and securing American jobs.
    Thank you.
    Senator Brown. Thank you, Mr. Haffely.
    General Farrell, thank you for joining us.

STATEMENT OF LIEUTENANT GENERAL LAWRENCE P. FARRELL, JR., (USAF 
                   RET.), PRESIDENT AND CHIEF
         EXECUTIVE OFFICER, NATIONAL DEFENSE INDUSTRIAL
                          ASSOCIATION

    General Farrell. Good morning, and thank you for the 
opportunity here. My testimony is based upon a white paper that 
NDIA produced last year----
    Senator Brown. I am not sure your microphone is on.
    General Farrell. Oh, sorry. Thank you.
    A lot of my testimony comes out of a white paper which we 
produced last year, which was prior to the present difficulty, 
but we find it still relevant. I will have copies for you.
    I also have a coalition of partners that we work with, like 
AMT, Society for Manufacturing Engineers, Aerospace Industries 
Association, the National Center for Advanced Technology, and a 
lot of them have inputs to this as well.
    You asked five questions, and I will take them on head on.
    First of all, you said, Why should Congress care about 
this? Well, in addition to a lot of the things that have 
already been said, I would add that the manufacturing sector in 
this country throws off $1.37 for every $1 in the manufacturing 
sector. That is higher than any other industrial sector in the 
country. It provides, as you said, an entry to the middle class 
for lots of people, but in addition to that, it throws off a 
lot of intellectual property--90 percent of the patents every 
year awarded in the manufacturing sector, and in the defense 
sector, our edge on the battlefield is based upon the best 
weapons systems and platforms we can bring, plus the best 
trained people. So we need a highly capable manufacturing 
sector to deliver on that. If you will note, just the aerospace 
sector itself has a $60 billion trade surplus with the rest of 
the world, so it can be very efficient.
    Second, you asked about credit. When I look at particularly 
my small business members, working capital is vital to what 
they do. Working capital basically is supplies and labor costs 
for people who get a contract who have not received their 
payment yet, and let us say you are a small businessman and you 
get a $10 million contract, a bank will loan you up to 50 
percent on the inventory. That means you have got to put $5 
million up yourself, if you can get a loan. And the invoice to 
payment is about 120 days, so credit is kind of important to 
these guys.
    We checked one of our members in Chicago, one of the 
lawyers that has manufacturing clients; 30 percent of his 
clients are either in Chapter 11 or anticipating Chapter 11 
just because of the lack of access to credit.
    You asked a question about the supply chain and demand, but 
very quickly, when demand is down, inventories go up and labor 
goes down. But a response to that, a robust response, is 
maintain diversity across business sectors and segments so 
intertwined supply chains can help, especially with small 
business, if they can do it.
    Your fourth question had to do with strategic and security 
considerations for the country and for the defense. I would say 
basically the advantage of this country has always been that we 
have been the most innovative, the most creative; we bring the 
best products to market before anybody else. And in defense, we 
do the same thing. How do we do that? We do that by being a 
leader in advanced manufacturing. So if you look at the 
manufacturing sector, the focus needs to be on the advanced 
piece of that and maintaining leadership there.
    Then you asked what policies should we be pursuing. I have 
nine.
    We think we need a higher level of representation in the 
executive level. Agriculture is 3 percent of GDP. We have the 
whole Agriculture Department. Manufacturing is 14 percent of 
GDP. We have a Deputy Assistant Secretary in the International 
Section of the Commerce Department. We need higher-level 
representation in the executive branch.
    You need to reauthorize the Defense Production Act with 
particular focus on the Interagency Task Force, raising the 
funding to $500 million, and resuming the loan guarantee 
program under Title III.
    We would like to see stable funding for Defense 
Manufacturing Technology at 1 percent of RDT&E. That is $790 
million a year.
    We would like to endorse the strategic thrust of the DoD 
ManTech Strategic Plan. I brought a copy for you here. But 
basically, there is a lot of focus in there on advanced 
manufacturing funding, which is only $10 million a year right 
now in defense.
    Fifth, we would like to use Manufacturing Readiness Levels 
prior to Milestone B in defense Acquisition.
    We need increased focus on the national workforce, 
manufacturing workforce. I have members of mine in States with 
high unemployment and manufacturing problems who have 
manufacturing jobs that cannot be accomplished because they 
cannot get a skilled workforce.
    My members tell me that a kid coming out of high school, 
the average kid is not qualified to enter the manufacturing 
workforce without 2 years of community college or a vocational 
education on top of high school.
    Then we see a bill in the Senate, S. 661, Restoring 
America's Manufacturing Leadership Through Energy Efficiency 
Act. We think that is a good bill to support because if you 
focus on reducing energy and resource consumption in the 
manufacturing process, you are going to create organic jobs 
here in the United States.
    We would like to see progress payments which the original 
equipment manufacturers get. We would like to see it flow down 
through the supply chain to the Tier 1, 2, and 3 suppliers. And 
we would like to see you lower the threshold at which that can 
occur.
    Then, finally, we would like to see more active leadership 
in the Senate. You have a Defense Depot Caucus, which is very 
effective. You have a Manufacturing Caucus in the Senate which 
is actually not active. We think if you had an active 
Manufacturing Caucus in the Senate along with increased 
representation in the executive branch, it would really help 
the manufacturing sector.
    Thank you, sir.
    Senator Brown. Well done. Thank you, all three of you.
    Former President Bush I remember appointed a manufacturing 
czar back in 2003, the Labor Day weekend. I remember the 
appointment, and it just sort of did not really work out. There 
was not much more after that. And when you say that agriculture 
is 3 percent of GDP and manufacturing is 14 percent, that is a 
pretty good contrast.
    Let me start. Several of you overlapped on several things 
you said. I thought the testimony was exceptionally good, and, 
General Farrell, I want to get to your skilled workforce issue 
in a moment. But, Mr. Gaskin and Mr. Haffely, if you would, you 
both talked about SBA and what we need to do with SBA. Would 
you each be--and I know you have some more details in your 
written statements. Starting with Mr. Gaskin, if you would talk 
more prescriptively, more precisely what we ought to--what SBA 
needs to do to inject credit into particularly mid-level 
companies.
    Mr. Gaskin. It is a topic we have heard a lot about as we 
have talk to the auto task force and other companies, even, 
about what do we do with the credit crisis in manufacturing. It 
happens that a lot of it is automotive related, and SBA keeps 
being brought up, and the plain fact is that SBA relies on the 
banks to determine their lending criteria. Their lending 
criteria are severe enough that most companies in distress do 
not qualify. Even though they have raised the guarantee level 
of a 7(a) loan to 90 percent instead of 80 percent, there is 
still 10 percent to the bank, and they are not willing to take 
that risk on manufacturing right now.
    It does not change the fundamental structure under which 
they are evaluating the bankability of the company. The Basel 
II does not change for the company, the risk rate, and so it 
simply does not work.
    Senator Brown. Mr. Haffely.
    Mr. Haffely. Yes, I would like to reemphasize that our 
companies are not qualifying for this SBA program. The 
regulation states that the ability to repay from cash flow is a 
necessary requirement, and our companies are weakened to the 
point where they cannot depend on cash flow in the near term to 
repay--or to qualify, rather. And I think instead they should 
take a look at the structure of the companies, the backlogs, 
the assets in the company, the employment level, look at some 
of the history of the company leading up to the point where the 
loan is made to evaluate if that is a solid company, looking at 
the profit history.
    So as long as they are relying on cash flow, that is a 
problem for our companies, and I also do not know of any 
companies in AMT that have qualified.
    Senator Brown. Yes?
    Mr. Gaskin. If I may, Mr. Chairman, there was a proposal 
for a direct loan program under SBA. That might be able to have 
different criteria--it was not funded--but rather than a 
reinsurance program with the banks, there might be a way to do 
it directly.
    Senator Brown. The SBA has never done that?
    Mr. Gaskin. Well, currently, no.
    Senator Brown. OK.
    Mr. Haffely. Mr. Chairman, there was a provision that did 
not make it to the final bill for the SBA 7(a), and it may be 
what Mr. Gaskin is referring to. That would allow a 
manufacturer, if he was turned down, I think three times, to go 
to the SBA and get the SBA to contact a list of preferred 
loaners, preferred suppliers of capital. And that I think was a 
very sound program, but I do not know why it did not make it to 
the bill. It was dropped.
    Senator Brown. OK. That is helpful.
    Mr. Haffely and General Farrell, you both talked about the 
Defense Production Act. Both of your associations, the AMT and 
the NDIA, sent this Committee, sent Chairman Dodd and all of us 
a letter last month urging reauthorization reform of the 
Defense Production Act.
    General Farrell, you talked about the Interagency Task 
Force. Mr. Haffely, you talked about the loan guarantee 
authority in your statements. Now, would you expand on those or 
anything specifically that you want us to do with defense 
production, particularly in light of--well, just leave it with 
that, and I will follow up.
    General Farrell, do you want to be more specific for us 
orally? And the same with you, Mr. Haffely.
    General Farrell. Well, as you know, the Interagency Task 
Force has kind of fallen away. We would like to see that 
reenergized, and we would like to see maybe the President 
appoint a Chair of that. This is really important.
    The other thing is we would like to see the funding go up. 
Funding should be about $500 million a year, we think.
    The advantage of this is that once that money is 
appropriated, it is there forever. It can be used forever. And 
what it is, it is really a guaranteed purchase. So if you have 
got a guaranteed purchase using that money, that means the 
small business can now get credit. He can get a loan to enter 
this field because now there is a guaranteed purchase 
associated with it. So this is really important.
    And one of the other things you ought to do under that, 
under Title III, is to resume the loan guarantees. That is 
going to help the small business as well.
    So there are two things in there that----
    Senator Brown. Sorry to interrupt. Do we on the loan 
guarantee--we want to limit it to Tier 1, Tier 2, Tier 3. We do 
not want it to go to the major--it is not an issue--as Mr. 
Marchick said, it is not an issue for the big contractors that 
sell directly to the Pentagon. They do not particularly need 
credit.
    General Farrell. Right, right.
    Senator Brown. So you would limit it to the Tier 1, 2, 3?
    General Farrell. I think that is fair.
    Senator Brown. Little applicants, I would assume, 
companies, is that--Mr. Haffely, is that what you would think?
    Mr. Haffely. Absolutely. If a smart bomb does not have a 
small widget from a Tier 3, it is not going to work. So it has 
got to go all the way down the food chain.
    Senator Brown. But to exclude the major defense--it is OK 
to exclude the major defense contractors because credit is 
not--I mean, we have--there is a limited amount of money. There 
is a limited amount of credit authority. So you go to--do you 
aim at the suppliers more than the major contractors?
    General Farrell. Yes. You have to aim at the suppliers. And 
if you look at defense especially, the large defense companies 
have been focusing on integration and higher valued-added 
tasks, and they have been outsourcing a lot of their 
manufacturing to the Tiers 1, 2, and 3. So there is more 
manufacturing being done there than has been done in the past. 
So those are the guys you have to focus on.
    Let me just say one more thing about the Defense Production 
Act. Even though it is just defense, but it crosses over into 
commercial. I will give you one example. The batteries for the 
FCS vehicles, lithium ion, if somebody were to get a job under 
the Defense Production Act for lithium ion, those are the same 
batteries that are being used in the Chevy Volt. So that kind 
of research and development, it really slops over into the 
commercial area as well.
    Senator Brown. I am not sure I agree with the term ``slops 
over,'' but I got the idea.
    General Farrell. Sorry for that. ``Washes over.''
    Mr. Haffely. Yes, except for that term, I would like to 
emphasize the good point that Mr. Farrell made. Our companies 
are supplying the tools to manufacture automotive vehicles, 
heavy trucks, off-road vehicles. All of those talents, all of 
those capabilities apply to the defense industry. So this--
``spilling over''? What was the term?
    General Farrell. Washing over.
    Mr. Haffely. Washing over to the commercial side is a fact 
of life. If we can get loan guarantees and we can apply that 
capital to continuing what we do in those industries I 
mentioned, it is a direct parallel to what we would need to 
provide for the defense industry if we had to mobilize in a 
time of war.
    Senator Brown. Thank you. Because my time is up, before 
turning to Senator Merkley, I wanted to follow up with one 
thing General Farrell said about skilled workforce. I have done 
around the State probably 140 roundtables where I will bring 
people--I have gone to each of Ohio's 88 counties and brought a 
group of 15, 20 people and a cross-section of the community--a 
carpenter, a school teacher, a superintendent, a hospital 
administrator, a plant manager, whatever. I hear universally 
that even in a State with higher-than-national-average 
unemployment, people cannot find--in all kinds of businesses 
and all kinds of organizations, they cannot find a skilled 
workforce. We are working on something called the SECTORS Act 
to bring together, as we reauthorize Workforce Investment 
legislation, to bring together local--to have local people to 
make it sort of homegrown organically coming from them, 
spending these WIA dollars locally, allowing community 
colleges, the local businesses, the Workforce Investment 
Boards, and labor unions when it is applicable, to make the 
determination what, in fact, they--what kinds of job skills 
they need. And, you know, in Toledo it might be food 
production. In Dayton it might be aerospace issues. And let 
local people decide that, local businesses working with others.
    So any thoughts on any of that briefly? And then I want to 
turn to Senator Merkley.
    General Farrell. Yes, the problems my members tell me with 
respect to people coming into manufacturing, there are two 
skills that they lack: the ability to read and write, and math 
skills. They say they are just lacking. And if we look at the 
statistics, you want somebody to have a technical education, if 
you want them to, in college. You see? We look at 100 ninth 
graders. Within 6 years, only 18 graduate from college. Of 
those 18, less than 50 percent enter some kind of a technical 
education program.
    So why is that? Well, if you look at the education in 
middle school, if you do not take Algebra I in middle school, 
you cannot take Algebra II in high school, and you cannot take 
AP Calculus, and you cannot enter a technical education college 
if you have not experienced Algebra I in middle school. There 
are only about six States in the Union that have a requirement 
for Algebra I.
    It is more fundamental than just that. It goes way down at 
least to middle school where this thing starts.
    Senator Brown. Thank you.
    A brief comment, Mr. Gaskin?
    Mr. Gaskin. Yes, on skills, you know, foundation skills are 
critical to the success in the future of PMA and the other 
metalworking associations, for NIMS, the National Institute for 
Metalworking Skills, which is a foundational skill. And through 
the WIA program, the key there is--and your SECTORS Act--to 
make sure that there is the bringing together of community 
leaders, but also the local industries through the WIA boards 
to make sure that we drive it the right way and make sure that 
there is integration with the community colleges and the 4-year 
schools so there is that path from the foundational skills into 
community colleges and then into the Society of Manufacturing 
Engineers type higher-level programs.
    Senator Brown. Good. Thanks.
    Mr. Haffely. I am obviously here because I love 
manufacturing. It has been my life, and I am deeply distressed 
by the opinion that our high school and college students have 
about the dirty-fingernailed manufacturing industry. Some of 
the smartest people I know are machinists who are turning 
cranks on bridge ports and lathes. These are bright people who 
are very creative and innovative. These are fantastic jobs, and 
there is not enough being done to get our high school students 
excited about coming into manufacturing. And they are excellent 
paying jobs. The skilled trades and the engineering professions 
pay very, very well.
    The AMT provides a scholarship for 2-year technical school 
students, but there are other organizations. NAM has a 
wonderful program for educating high school and college 
students. Our local NTMA association in Dayton, Ohio, has one 
of those robot programs where the college students and the high 
school students work on those robots in a competition. They 
have done a lot to educate the local schools about 
manufacturing. They have put on a lot of programs.
    There is a lot being done by the manufacturers, but I do 
not believe it is enough, because I think we still have a bad 
reputation amongst the students.
    Senator Brown. Thank you. And few communities in the 
country have the proud history of entrepreneurship that Dayton, 
Ohio, has, as you know. And that is a problem with it that is 
so serious, I think, that young people--just blue-collar jobs 
generally, whether it is manufacturing, whether it is the 
building trades--and they are good paying tickets to the middle 
class, and kids are not taking math in junior high, as General 
Farrell said, and all that. We have got to do much better with 
obviously the whole system of education.
    Senator Merkley.
    Senator Merkley. Thank you very much, Mr. Chair. I am 
listening to this conversation as the son of a mechanic and 
machinist who--I had the privilege of growing up building 
things in the garage, as I think most American kids did a 
generation ago. And as I was listening to you, I was thinking 
about the distinction between essentially the programs we lay 
out and the cultural influences. And as I watch my own 
children, they are far more interested in using software, 
playing games on the computer, and so on and so forth, than 
they are building things in the garage, which is something of a 
frustration to me, because I was looking forward to that.
    But one of the things that seems to that is the virtual 
complete disappearance of shop activities in junior high and 
high school. Have you all been tracking that? And is that a 
significant factor in the lack of preparation of our students 
for the manufacturing workforce?
    Mr. Gaskin. If I may, it is. Customers need to want to buy; 
they need to perceive that that particular training will result 
in a good career. And as Mr. Haffely said a few minutes ago, 
there is a perception that manufacturing is not where the 
future is. And the prior panel was asked what can we do about 
the perception of manufacturing. I think that the Chair hit on 
it a minute ago. We need a strong leader in the administration 
to talk about manufacturing, and we need every Senator to talk 
about manufacturing and every Congressman to talk about the 
importance of manufacturing to help create that demand.
    In the Cleveland area and in most areas where we have 
members, there are very few strong machining programs to teach 
people the skills they need, the fundamental core skills.
    There are now skill standards. There is non-time-based 
apprenticeship programs. There are new models based on 
competency that are coming online. And I think this is 
positive. I think the community colleges have bought into this 
level of training very well and will complement it was 
associated degrees in manufacturing, which will make it more 
palatable, even to the guidance counselors, who would never 
want to put somebody into a vocational education program. They 
want somebody to go to college. Well, let us get that career 
path that includes an associated degree, perhaps leading to an 
engineering degree.
    So there are some good things starting now, I think.
    Senator Merkley. Anyone else want to throw in any comments? 
Yes.
    General Farrell. What we are hearing is that manufacturing 
is perceived, you know, like Charles Dickens portrayed it in 
his novels. We do not see it in the schools; like you asked the 
question, we do not see it. Where we are most effective, at 
least in what we do, is where the community gets together some 
manufacturers and they put together a program, an after-school 
program, a mobile program. They take it to the schools, get the 
kids to go through it, and operate some of the equipment. And 
they are having a great deal of success that way, putting some 
advanced equipment in a mobile capability and taking it around 
to the schools. That is working pretty good.
    Senator Merkley. OK, thank you.
    I want to turn to the financial side of the puzzle that you 
all spent quite a bit of time talking about. Certainly the 
story you are presenting fits with the story I am hearing on 
the ground in Oregon. I wanted to get a little better sense of 
the traditional forms of financing.
    Of course, we have the bank loans at one end. We have bonds 
being issued as well. And then I am hearing from a lot of folks 
in Oregon who have revolving 7-year commercial loans, that is 
more the developers, and where they have had performing 
properties and they are just not simply able to roll over those 
loans as they have in the past.
    But do you utilize commercial 7-year loans? Are we really 
talking about primarily bonding, or are we talking about loans 
that are related to the development of new facilities? Or is it 
the whole spectrum? Where is the real heart of the challenge?
    Mr. Haffely. Well, if I could speak just from my 
experience, being an engineer and not a finance guy, our 
programs go as long as 1 year. They can be million-dollar 
programs, 5, 10, 12, 15 million dollar programs. Very often in 
the automotive industry our payment terms are 90/10--90 percent 
when we ship, 10 percent when we prove that the equipment works 
properly in production.
    So over the course of most of that year, we are spending up 
to 90 percent of the cost of that equipment, and we get our 
financing based on that work in process. Then once we ship, our 
financing is based on our receivables. So the credit problems 
that we are having, that our industry is having, are related to 
financing these large programs that last for a long period of 
time.
    Mr. Farrell mentioned progress payments. They have always 
been hard to come by. No one wants to give progress payments 
today. And as I mentioned earlier, a lot of our customers now 
are saying you can have this program, but we are not going to 
make the first payment until 2010. So they are even getting 
worse than 90/10 payments. They are deferring the first payment 
and the shipment until next year.
    So that is what we are talking about in my industry and in 
my company as far as the loan problem.
    Senator Merkley. OK. Yes?
    Mr. Gaskin. If I could, sir, the tooling side of what Mr. 
Haffely described is one thing. You are making a lot of mated 
assembly systems and such, and those are complex and take time. 
But, you know, tools and dies, molds that are used by second- 
and first-tier auto suppliers, it is even worse. The small 
business, the smallest piece of the credit, you know, market 
for the supply chain--and this is true in other markets as 
well, but primarily automotive. Billions of dollars of tools 
are off the books of the auto manufacturers and on the books of 
small businesses that are making progressive dies, molds, et 
cetera. It may take 12 to 18 months to complete it, and not 
only complete the die but then you need to go through the PPAP 
process, the Production Part Approval Process, where all the 
individual components that are made on a number of different 
dies get assembled, and then finally at the automotive plant, 
they say 18 months later, ``OK. We got an assembly that works. 
It fits the requirement.''
    Well, the tooling company, the mold-building company has 
not been paid. At PPAP approval, the 60-days terms start so now 
it has gone from WIP into receivables, and they may get 
financing on that, 80 percent typically. So it can take up to 
18 months. Progress payments do not exist within domestic auto 
manufacturers. We surveyed this recently among new domestic 
auto makers. There still are progress payments in tooling in 
some cases, although they are starting to change that. They are 
becoming more like General Motors, Chrysler, and Ford.
    So it is a huge problem. The smallest companies are 
financing tooling and assembly machines.
    Senator Merkley. That is helpful and I appreciate that. 
Actually, I have one more question, if I can.
    One of you mentioned--Mr. Haffely, I think it was you--that 
instead of looking at revenue flows, we should be looking a 
little bit more at--I thought I understood you to say backlogs, 
and I assume by that you meant backlogged orders?
    Mr. Haffely. Yes, sir. Actually, the criteria for the SBA 
is cash flow and analyzing cash flow to ensure that the loan 
can be paid back from cash flow.
    What I am suggesting is in the current economic situation, 
that is an almost impossible criteria for today's small 
companies, small manufacturers. So if we looked at--and I do 
not know the right things. But, I mean, I think it is a mix 
of--and it is like the equity companies when they are analyzing 
your company for investment. They are looking at the same 
things. They are looking at your backlogs. They are looking at 
your history of backlogs. They are looking at your assets. They 
are looking at your employment levels, what is your employment 
level doing. And they look at historical profitability and they 
compare that to the future situation for the company.
    Senator Merkley. So I would have assumed that during this 
downturn, the number of backlogged orders would have dropped 
dramatically. Am I correct about that?
    Mr. Haffely. Yes. I stated earlier for the AMT companies, 
their backlogs are running 40 to 70 percent lower, but that 30 
to 60 percent backlog they still have requires credit. And so 
that is what I am talking about them looking at.
    I mean, we would love to be at 100 percent and looking at 
the larger number, of course, but we still need--they still can 
look at those backlogs. That still requires the capitalization 
financing.
    Senator Merkley. Thank you very much. I appreciate it.
    Senator Brown. Senator Merkley, thank you. General Farrell, 
thank you; Mr. Haffely, thank you; Mr. Gaskin, thank you very 
much.
    The Subcommittee record will remain open for 7 days. If 
there is additional information or additional comments you want 
to make to the Subcommittee, certainly feel free to be in touch 
with us. Our Members, of course, also have 7 days to respond. 
If there would be written questions to you, we would ask you if 
any Members send you written questions, any Senators, we would 
like you to answer those, too.
    Thank you again for your testimony and your public service. 
The Subcommittee is adjourned.
    [Whereupon, at 12:26 p.m., the hearing was adjourned.]
    [Prepared statements and response to written questions 
supplied for the record follow:]

                  PREPARED STATEMENT OF LEO W. GERARD
                               President,
United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied 
           Industrial and Service Workers International Union
                              May 13, 2009

    Mr. Chairman. Members of the Subcommittee. It is indeed a pleasure 
to appear before you on an issue that is vital not only to the future 
of the members of my union, but to the Nation. I'm Leo Gerard, 
president of the union, commonly known as the Steelworkers Union, which 
represents more than 1.2 million active and retired members.
    While workers in the steel sector are represented by our union, 
workers we are extremely proud of, the full name of our union is the 
United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied 
Industrial and Service Workers International Union. Members of our 
union make products ranging from steel to aluminum to cement to tires 
to glass to many, many other products. They work in mines, in smelters, 
in oil refineries and many other industrial operations. But, we also 
represent nurses, bus drivers, bank workers and university professors 
who are supported in no small measure by domestic manufacturing. We are 
the largest industrial union in North America.
    Your hearing comes at a very important time. The economic meltdown 
occurring in the U.S. and the world economy has devastated our 
manufacturing sector. Capacity utilization in many of our sectors is at 
levels unseen since the Great Depression. Many of the sectors in which 
my members work are on the front lines of this economic collapse. When 
retailers start cutting back, members of the Steelworkers who work in 
box-making plants feel the cutbacks as producers buy fewer boxes to 
ship their products. When commerce slows down, the workers in my union 
who make tires see orders decline as truckers drive fewer miles and buy 
fewer tires. The list goes on.
    Well over 100,000 of the members of my union have either been laid 
off or face reduced hours as a result of the economic crisis. Their 
employers have seen orders dry up, and they've seen credit dry up as 
well. Too many of my members were hit by the subprime crisis not only 
in terms of the mortgages they took out, but also by the cascading 
problems that blew the lid off the economy. The harm to working 
families has been enormous.
    Shuttered factories and shattered dreams are what many of my 
members and, indeed, workers in the manufacturing sector all across 
this great country face. But, while these problems accelerated at warp 
speed when the subprime crisis spiraled out of control, the 
manufacturing sector has been decimated by acts of omission and 
commission by prior Administrations. There's more than enough blame to 
go around. Rather than looking backward, however, I'd like to focus my 
comments today on where we are, and where I think we need to go.
    Mr. Chairman, the first question you raised in your letter of 
invitation is the most important question: Why should Congress care 
about manufacturing? When I received your invitation, quite frankly, my 
view was that this is a question that, in past years, would never even 
need to be asked. But today, after more than 20 years of neglect and 
even adverse policy pursuits, it's clear to me that, indeed, this is a 
question that needs to be asked and answered.
    Regrettably, we may be the only nation on earth that actually has 
to ask this question.
    Over the last 20 years, or so, we have seen policy makers look to 
the information economy as the key to our future. Then the Internet 
bubble burst and they realized that not every student will be able to 
become a software programmer or Internet Web site developer. We have 
seen so-called ``experts'' say that the future is the service economy; 
that we provide the best and most competitive services in the world. 
Then, the economy came crashing down and the financial services sector 
finds itself on the wrong side of that optimism as we are going through 
fundamental questioning as to what the future of the financial sector 
should be and as the top management of our ``best and brightest'' 
financial institutions find themselves ridiculed for their excesses.
    Manufacturing is a source of strength. Economic strength. Community 
strength. And, indeed, military strength.
    Manufacturing provides millions of jobs in our economy. American 
manufacturing, prior to the downturn, directly employed 14 million 
Americans and accounts for 8 million additional jobs in other sectors. 
It is the single largest economic sector contributing to our economy. 
Our manufacturing sector is responsible for two-thirds of research and 
development investment in the U.S. and almost 80 percent of all patents 
that have been filed come from the sector. Manufacturing is a 
tremendous engine of growth.
    Manufacturing is also key to community strength. Unlike service 
sector jobs that can migrate virtually anywhere, the enormous 
investments in plant and equipment that many of manufacturers make 
ensure that these companies are the bedrock of their communities. 
Michigan is known for autos. Pennsylvania for steel. Ohio for auto 
parts, glass, and rubber. The list goes on. These industries, these 
companies, have helped shape the communities they operate in and the 
lives of the workers that are employed there. Generations of workers 
have followed previous generations in working at these great industrial 
companies. They've created millions and millions of family and 
community supporting jobs. Manufacturing jobs pay, 40 percent or more 
in wages than other jobs in our economy.
    America's standing in the world is, first and foremost, a tribute 
to our values of freedom and democracy. America is still a great beacon 
of hope.
    But, America's values and vision have been backed up by our 
military might. Our willingness to stand up to injustice. Manufacturing 
is key to our military strength. In the first and second world wars, 
our ability to supply our troops and, often, our allies, with the 
weapons and the wherewithal to defeat aggression was the deciding 
factor. On today's battlefields, our high tech weaponry has been the 
deciding factor in many battles. Aggressors know that the power of our 
military is unmatched.
    But all of this is increasingly at risk. Our economic strength has 
been eroded by those who have blindly worshiped at the altar of free 
trade and have traded away our manufacturing base. These free trade 
ideologues measure the success of our trade policies by the number of 
agreements they can negotiate, rather than the results they produce for 
our people.
    Our market has been flooded, all too often, with products resulting 
from unfair and predatory trade practices. Subsidies. Preferential 
government policies. Mercantilist development strategies.
    The result has been factory after factory that have either 
downsized, or shut completely. The steel crisis of the late '90s and 
early part of this decade left the steel sector devastated. Today's 
auto crisis will potentially lead to dozens of assembly plants and 
suppliers shutting down.
    The result has been not only a continuing decline in manufacturing 
jobs here in America, but increased off-shoring and outsourcing of 
production. While many once viewed the production of high technology 
products as a bright star on the economic horizon, we now run a trade 
deficit in advanced technology products of tens of billions of dollars. 
And, our overall trade deficit in goods has grown year-after-year and 
is a significant drag on economic growth and a sign of increasing 
economic weakness and dependence. We're buying billions more in 
products from overseas than we make here at home, driving up our trade 
deficit and our borrowing costs. China, for example, now holds hundreds 
of billions of U.S. dollar-denominated securities.
    More and more companies are setting up research and development 
facilities overseas to be closer to the production operations they've 
set up abroad. As that happens, the lifeblood of our economy 
continually drains away.
    And, if that weren't enough, our national strength, our military 
security, is increasingly at risk. We no longer have the domestic 
capacity to make all the ammunition for our troops and law enforcement 
needs. Replacement parts for the military are harder to come by as the 
skills necessary to service older equipment--the machining and other 
skills--are dwindling. The military testified that our Nation was at 
risk of having to buy propellant for the Hellfire missile from China 
because there was no longer a domestic supplier. And now, we find that 
the globalization of the supply chain for computer equipment may have 
contributed to incursions into our defense contractors and government 
computer systems.
    So, does manufacturing matter? The question, once again, shouldn't 
even have to be asked. But, yes, manufacturing matters and it's time 
that we look at policies to address the challenges confronting this 
vital sector.
    While some small manufacturers may be able to rely on self-
generated cash to be able to fund investments in existing operations as 
well as new plant and equipment, that is far from the norm. Many of the 
investments required to maintain and increase operations require credit 
to fuel the company's ongoing and future needs. Credit is the lifeblood 
of the manufacturing sector and when credit dries up or becomes 
prohibitively expensive, its impact can be felt throughout the economy.
    Look at the collateral damage that has hit the manufacturing sector 
from the subprime crisis. As banks looked to shore up their balance 
sheets to address declining asset values in the home mortgage 
portfolios, they began to limit credit to other sectors, like 
manufacturing. As credit availability and terms got worse, operations 
began to suffer. First consumers--both commercial and private--felt the 
pain, then the shockwave reverberated throughout the economy.
    Manufacturers saw credit terms get stricter and had to tighten 
their belts. Their suppliers felt the impact. The entire supply chain 
started to suffer. One only has to remember that auto parts suppliers 
were looking to guarantee $15 billion in receivables they had with the 
Big Three as a way to protect their operations.
    There is a clear correlation between credit availability and terms, 
and the growth of manufacturing and its employment levels.
    There are more members of my union whose jobs are affected by the 
current crisis in the auto industry than are in the United Auto Workers 
union. Virtually every car has six pieces of glass, five tires, 
hundreds of pounds of steel and other metal and many other parts and 
components that are produced by the members of my union.
    So, when the auto companies sneeze, my members are at risk of 
getting pneumonia. When construction slows, there is less demand for 
steel, for cement, for glass, and many other commodities which my 
members produce.
    Supply chains are intricately intertwined with the production of 
end products. So, when credit restrictions hit at any level--ordinary 
consumers or commercial entities--the impact can be devastating.
    Right now, credit is still exceptionally tight for manufacturers. 
I've talked to companies that have had to cut back dramatically on 
spending plans because they can't afford credit, and if they can find 
it, at rates approaching 18 and 20 percent for some. Some employers 
have told me that the credit markets, when they open, have been doing 
so only for very short windows. Company after company has seen their 
credit ratings downgraded thereby forcing their borrowing costs up.
    Thirty companies have filed for Chapter 11 bankruptcy protection 
since January. Seven companies have gone directly to Chapter 7. The 
economic crisis has forced these companies into bankruptcy and the 
dramatic freeze in the credit markets has meant that those companies 
that went directly to Chapter 7 couldn't find debtor-in-possession 
financing.
    Too many financial institutions that had an inflow of capital from 
the government used it to simply shore up their own balance sheets 
without helping to strengthen the economy as a whole. They sat on their 
funds, refusing to reignite economic growth by opening up their credit 
operations.
    And, let's recognize the unique problem that faces many 
manufacturers who produce globally competitive products. You don't 
simply flip a switch and bring a blast furnace back online once it has 
shut down. A company needs to know that its order book will start to 
fill again if it's going to be able to access the credit markets to 
resume operations. Our competitors--China, Russia, and many others are 
just waiting on the sidelines to dump products into our markets to gain 
market share. Their willingness to do whatever it takes--even resorting 
to subsidies and other unfair and predatory trade and pricing 
practices--means that some of our companies may not be able to increase 
production in the short-term. And, if credit doesn't begin flowing more 
freely and markets begin operating fairly, they may never come back.
    Fewer and fewer companies are now triple-A rated. Every downgrade 
increases borrowing costs, if capital is, in fact, available. Small and 
medium-sized firms are heaviest hit, but the anemic credit markets have 
hurt everyone.
Policy Options
    Mr. Chairman. The needs of the manufacturing sector are broad and 
deep. There is no one silver bullet. Just as manufacturing supply 
chains are increasingly intertwined, so are the policy issues that 
confront manufacturers. Health care policy. Pensions. Trade. Education 
and skills. Labor policy. Tax policy. Banking and credit policy. There 
are very few issues confronting you and your fellow legislators whose 
resolution does not have an impact on our Nation's manufacturing 
sector.
    But, let me start with some things that need to be done quickly if 
we are to stabilize the sector and see it begin to grow again. 
Restoring growth in the manufacturing sector is vital to reigniting 
economic growth in this country.
    Let me first make an important point. We all travel on planes 
regularly and probably no longer listen to the safety instructions the 
flight attendants give at the start of every flight. The other day, 
however, I stopped to listen for a moment. During the flight 
attendant's comments she said, ``if the cabin pressure drops, oxygen 
masks will drop. Before helping those who may need assistance, put your 
own mask on first.''
    That's what we have to do here in America. If we are able to help 
the world economy, we first have to help ourselves. A strong America 
leads to a stronger world. We can no longer be the economy of first 
resort where other countries can send their products. World demand and 
supply needs to be in better balance in the future. But, if we fail to 
provide oxygen to the U.S. economy, it's hard to see any other economy 
surviving the crisis we face.
    Credit for the manufacturing sector is oxygen to our economy. We've 
got to provide more credit at reasonable rates if we're going to 
succeed. The financial injections our government has made into the 
economy have stabilized some financial firms. But, too many of these 
firms have not restored credit operations and too many have spent more 
time worrying about how much their CEOs and senior management should be 
paid than on reviving the economy.
    This isn't just limited to the banks and financial institutions. A 
press story recently related how some firms were refusing to 
participate in government support programs because of the potential 
limits on their own pay. They were seeking other sources of credit, at 
far higher rates, so that their own pockets wouldn't be affected. The 
victims were the workers and, indeed, the shareholders. This should be 
subject to legal challenge.
    We need to restore demand in this country. The stimulus package was 
a good start. That law, as you know Mr. Chairman, since you were one of 
the leaders, included provisions to promote Buy America policies. This 
provision was vital, but it must be followed up with strong 
implementation actions at the State and local level and transparency at 
all levels. Already the Steelworkers have led efforts across the 
country that has led to hundreds of State and local resolutions 
supporting procurement policies that source domestically, whenever 
possible. We also need to urge the Administration to implement the law 
in a way that furthers Congressional intent. I'm troubled by how they 
have drafted the interim regulations, including their definition of 
manufactured good, and how they have failed to adequately ensure that 
the waiver request process is transparent, so that the public can 
determine how their tax dollars are being spent.
    Credit must be more readily available to get companies that have 
had to declare bankruptcy to resume operations and to become profitable 
again. And, we need to make sure that it's available so that more 
companies don't go straight into liquidation.
    Mr. Chairman, we also need a trade policy that works for working 
Americans. Too many companies and workers have lost faith in their 
government's willingness to enforce the laws we have on the books. 
Imports still flood our markets and, as I said before, if we're going 
to bring production back online, much less invest in growth for the 
future, companies have to have confidence that they're going to be able 
to get an adequate return on their investments. The cost of credit is 
one thing, and, indeed, it's in part, a function of our trade policies. 
But without substantial changes in the direction of our Nation's trade 
policies, we're going to continue to see devastation in our 
manufacturing sector.
    We must also recognize that our economic strength and our national 
strength are intertwined.
    We also need to get our auto policy right. We must not pursue a 
policy of trying to downsize and outsource to prosperity. That's a 
recipe for disaster. It will only result in downsizing the American 
dream.
Conclusion
    Mr. Chairman, I want to thank you and the Members of the 
Subcommittee for holding this important hearing. I know that the 
challenges our Nation faces are great, and the solutions will not 
always come easily. But, we cannot afford not to act. The members of my 
union stand ready to work with you and others to restore the American 
Dream.
                                 ______
                                 

                  PREPARED STATEMENT OF DAVID MARCHICK
                           Managing Director,
                           The Carlyle Group
                              May 13, 2009

    Mr. Chairman and Members of the Subcommittee: Thank you for the 
opportunity to testify today on the impact of the financial crisis on 
manufacturing. A healthy manufacturing base is essential for our long 
term economic position, and no sector has been hit harder in this 
downturn than the industrial and manufacturing sector. I am also 
pleased to testify alongside Leo Gerard, President of the United Steel 
Workers (USW), with whom we have worked very closely on a variety of 
investments and issues.
Carlyle and Manufacturing
    The Carlyle Group is one of the world's largest private equity 
firms, with $85.5 billion under management and current investments in 
around 260 companies around the world. Our core business is investing 
in small, medium, and large companies, improving their performance, and 
providing attractive returns to our investors, the largest group of 
which are public pension funds in the United States.
    Over Carlyle's 22-year history, we have been a significant investor 
in the U.S. manufacturing sector because of our confidence in the 
creativity, vibrancy, and dynamism of our Nation's industrial base and 
because American workers are the most productive in the world. More 
specifically, we have been a significant investor in the aerospace, 
automotive and transportation, consumer, chemicals, building products, 
metals, and technology sectors. Today, we have more than $9 billion of 
equity invested in more than two dozen companies that manufacture 
products in the United States ranging from aircraft components to 
semiconductors to auto parts. We are also proud to be a significant 
investor in Ohio, where two of our companies, Veyance Technologies and 
John Maneely Company, employ thousands of workers manufacturing 
conveyer belts for coal mines, tracks for armored tanks and steel pipe 
and tube for the construction and energy industries. Approximately 80 
percent of the employees at John Maneely and two-thirds of the 
employees at Veyance are members of industrial unions, primarily the 
USW.
    Carlyle's strategy is to invest in companies with leadership 
positions in their product areas, back management teams with vision and 
operational discipline, and invest in growth. We often will acquire 
noncore divisions of companies from large multinationals and, with a 
singular focus on their product areas, improve and expand the 
companies. And, contrary to popular belief, we often hold our 
investments for many years before we are satisfied that our work with 
management has achieved the desired results.
    For example, we acquired Veyance from Goodyear, Allison 
Transmission from General Motors, and Hertz from Ford. Allison, for 
example, is the global leader in automatic transmission for Class V and 
larger trucks, with a heavy manufacturing presence in Indiana. When we 
and Onex, another private equity firm, acquired Allison from GM in 
2007, truck transmissions were far from General Motor's top priority. 
We and Onex are working closely with Allison's management to enhance 
research and development, including with respect to hybrid 
transmissions, expand products offerings, and increase exports from 
Indiana to Asia. We are also proud that, through close collaboration 
with the United Auto Workers (UAW), Allison's management has been able 
to reduce labor grievances from 2,400 at the time of the acquisition to 
less than 60 today.
    In the last 12 months, we sold two industrial companies, both of 
which exemplify the work we pursue on a daily basis.
    Carlyle acquired a Kentucky-based company called Kuhlman Electric 
in October 1999. Kuhlman designs, manufactures, and markets a broad 
range of transformers for electric utility distribution systems that 
serve commercial, industrial, and residential customers. We acquired 
Kuhlman when the industry was strong and the company's sales and 
revenue were on the rise. Shortly after the acquisition, Kuhlman was 
hit by one of the worst-ever downturns in the utility industry caused 
by, among other things, the California energy crisis and the 
dislocation in the markets related to Enron. Revenue dropped for four 
consecutive years, including 17 percent in 2002 alone. Employment and 
sales volumes also declined. By December 2003, Carlyle had written down 
the value of this investment to zero. But rather than throw in the 
towel, we and Kuhlman's management and workers redoubled our efforts to 
make this company a success. Because the value of the investment was 
written down to zero, Carlyle did not seek additional investment from 
its investors. Instead, partners at Carlyle invested their own money to 
keep Kuhlman afloat, enabling the company to retool and restructure. By 
2007, sales had increased and employment was up 25 percent from the 
time we acquired Kuhlman. In August 2008, after a 9-year ownership 
period, global power company ABB acquired Kuhlman.
    Another example is AxleTech, a medium-sized, Michigan-based 
manufacturer of heavy axles. We acquired Axletech in September 2005 and 
sold the company in December 2008. In the more than 3 years we owned 
Axletech, the company expanded product offerings and designed stronger, 
more durable suspension systems and components for light, medium, and 
heavy tactical and combat vehicles, including the MRAPs that our 
soldiers use in Iraq. During our ownership period, revenue and 
employment more than doubled, and the number of UAW-affiliated 
employees increased by almost 50 percent. Although small, Axletech may 
be one of the only UAW-affiliated companies that has created, and not 
lost, jobs in the last 5 years.
    These are two success stories. And, according to a recent study by 
economist Robert Shapiro, they are typical of the performance of 
manufacturing firms when private equity firms take stakes in them. 
Sales and capital expenditures, on average, grow faster than the 
national average. Unfortunately, the financial crisis has had a 
devastating impact on parts of the manufacturing sector, and some of 
our companies have been negatively affected.
The State of the U.S. Manufacturing Sector
    Manufacturing is the bedrock of our Nation's gross domestic 
product, producing approximately $1.40 of additional economic activity 
for every $1 of direct spending in the sector--more than all other U.S. 
industries. The manufacturing sector has driven productivity growth in 
the United States, and manufacturing workers make on average 41 percent 
more in wages than the rest of the workforce. Unfortunately, the 
manufacturing sector, particularly in the Midwest, has been the hardest 
hit by the financial and economic crisis.
    Credit is the lifeblood of the manufacturing economy, and when the 
credit crisis hit, the industrial sector was immediately affected. 
Allison provides a good example. Free and available credit is critical 
throughout the manufacturing and distribution chain in the industrial 
truck sector. When Allison sells a transmission to an Original 
Equipment Manufacturer (OEM), the OEM typically buys Allison's products 
for inventory using credit. When the OEM sells a bus or truck to a 
dealer or distributor, and when a dealer or distributor sells a truck 
or bus to an end user, those transactions also require the use of 
credit.
    When the credit crisis hit, it negatively affected each stage in 
the manufacturing and sales process. The sector literally fell off a 
cliff. When one part of the manufacturing sector is hit, it flows 
through other parts of the economy, creating a vicious cycle. 
Ultimately, this results in lost sales, lower demand and higher 
unemployment. The chart below shows what seems to be a clear 
correlation between the drop in manufacturing orders and increase in 
unemployment. Importantly, the uptick in the bottom right of the chart 
does not indicate a return to growth but rather a reduction of the rate 
of contraction, a decline of well over 15 percent in year-over-year 
orders. 



    Widely available data shows the staggering hit the manufacturing 
sector has experienced. The downturn in some parts of the manufacturing 
economy has been depression-like, not recession-like. A few examples:

    Steel production dropped by more than 50 percent between 
        August 2008 and January 2009. Today, the steel sector is 
        operating at slightly more than 40 percent of capacity. Only 8 
        of the 28 blast furnaces in the United States are in 
        production.

    A staggering data point: Through the beginning of May, the 
        U.S. steel industry is producing at a rate last seen in 1939.

    After falling 34 percent between 2005 and 2007, private 
        residential construction dropped by another 33 percent in 
        2008--and is now at a run-rate 44 percent below that level. 
        This has decimated manufacturers of building products.

    Suppliers to the Big 3 have seen drops in revenues in 
        excess of 50 percent, and the impact of this decline in demand 
        has created ripple effects throughout their supply chains. 
        
        
    The combination of dramatic drops in demand with lack of 
availability of credit has placed small, medium, and large 
manufacturing companies under severe stress. In these circumstances, 
managers stop focusing on profits and instead focus on liquidity and 
survival. Restructuring under Chapter 11 is an undesirable option today 
because of the lack of debtor-in-possession (DIP) financing. In normal 
times, companies use Chapter 11 to reduce debt, restructure operations, 
and lower costs. DIP lenders gain a preferred, senior status when 
lending into a Chapter 11 process. Today, however, DIP financing is 
scarce. As a result, filing under Chapter 11 could easily result in 
Chapter 7 liquidation.
    There has been a significant amount of discussion in recent weeks 
of the ``glimmers of hope'' in the economy. On the positive side of the 
ledger, it does appear that the free fall has stopped. Consumer 
confidence is inching forward. The ISM index, a commonly used barometer 
of manufacturing activity, suggests that the rate of decline is 
slowing. And housing inventory in certain parts of the country has 
dropped. The Federal Reserve's extraordinary intervention in credit 
markets has freed credit up for the most credit worthy borrowers.
    Although there have been some positive signs, the economy is still 
contracting. Whereas some parts of the economy may be at or near 
bottom, other parts of the economy are just beginning their downward 
cycle. The aerospace industry, for example, typically lags the rest of 
the economy both going into downward cycles and coming out of them. The 
foreclosure crisis shows no signs of abatement. The Wall Street Journal 
reported on May 6 that the downturn in home prices has left nearly 30 
percent of U.S. homeowners owing more on a mortgage than their homes 
are worth. Until Americans across the country feel secure in their jobs 
and their homes, they won't begin spending again.
    We would caution against reading one or 2 months of data and 
creating too much optimism. We hope that we will turn to growth again 
soon, but it is too early to tell, in our view. Credit markets remain 
severely compromised. Bank lending remains anemic, particularly to 
small- and medium-sized companies. The nonbank credit system is 
moribund. Unemployment will likely increase as consumers continue to be 
very cautious in their spending patterns. Finally, even if we are at 
the bottom, it will take years to climb out of the hole.
Policy Options
    I would encourage Congress to avoid a sense of complacency and 
continue to support aggressive policy efforts by the Administration and 
the Federal Reserve.
    The Administration, Federal Reserve, FDIC, and the Congress have 
been active, creative, and aggressive in their policy responses to the 
crisis. Secretary Geithner and his team deserve credit for not only 
being designing strong policy responses, but also articulating a 
conceptual framework to attack the problems with the economy: 
increasing aggregate demand; restoring credit markets; and mitigating 
problems in the housing sector. Without these actions, it is hard to 
imagine the carnage in the U.S. economy. A strong policy response is 
essential for the resumption of market confidence. And strong policy 
actions to strengthen credit markets are essential for the resumption 
of growth in the manufacturing sector.
    Congress should be commended for increasing spending on 
infrastructure projects as part of the stimulus package earlier this 
year. But now the real work begins: deploying the $311 billion in 
Federal, State, and local spending in a way that jump-starts the 
economy and creates jobs. The key to success of the stimulus is 
maximizing the economic activity generated by each tax dollar spent. 
The more money spent in the manufacturing sector, the greater the 
economic benefit. That's why it's so important to concentrate the 
expenditures on products with significant domestic value added, which 
will more quickly generate more jobs and economic benefits.
    One other point on the stimulus: unless the credit markets are 
repaired, the benefits of the stimulus package could be blunted. 
Unfortunately, in some cases, suppliers that want to fill orders 
related to stimulus demand don't have access to working capital 
necessary to buy parts and equipment to fill those orders.
    The Administration and Federal Reserve's efforts to jumpstart 
credit markets have been important and well designed. For example, the 
Term Asset-Backed Securities Loan Facility (TALF) seeks to bring 
liquidity to the securitization market, the once large but now largely 
closed source of funding for residential mortgages, commercial real 
estate, small businesses, and large corporations. Year to date Asset 
Back Securities (ABS) financings are way down, and this financing 
source is critical for credit for consumers, businesses, and 
manufacturers.
    Treasury and the Federal Reserve should be applauded for expanding 
the asset classes eligible for TALF funding to include commercial real 
estate, auto fleets, and dealer floor plans. At the same time, while it 
is critical that the Federal Reserve limit its risk exposure, potential 
beneficiaries, including auto dealers, may not be able to benefit from 
these securitizations because they may not be in a position to qualify 
for or support a AAA rating, especially because monoline insurance 
enhancement is no longer available in this market. Policymakers should 
consider expanding the credit criteria for securities that qualify for 
TALF support.
    One important area of future focus for Treasury and the Federal 
Reserve will be to ensure that the corporate loan market remains 
vibrant. Today, only six large publicly traded companies are rated AAA, 
showing how difficult it is to achieve AAA rating. Small, medium, and 
large manufacturing companies, for example, lack access to term loans, 
working capital facilities and the bond market. This means that they do 
not have financing to undertake capital improvements, to fund research 
and development projects, or to fund new inventories. Moreover, given 
the staggering amount of new loans that were issued in the 2005-2007 
that will come due in 2010-2014, it will be essential that credit 
markets can facilitate refinancing of this debt. Hopefully, credit 
markets will rebound in time, but if not, the Federal Reserve and 
Treasury will need to find ways to support the corporate loan market to 
avoid massive bankruptcies.
    Allow me to flag three other areas of potential policy actions by 
the Treasury and Federal Reserve, which hopefully this Subcommittee 
will support.
    First, once the economy starts to grow, businesses will need to 
increase inventory. To do so, they will need access to working capital. 
Today, companies' access to working capital loan facilities is very 
limited. I would encourage this Subcommittee to explore ways to 
invigorate this part of the credit market, which will be essential for 
recovery. The program recently launched by the Administration to insure 
receivables to the auto makers provides a good starting point.
    Second, I would encourage the Committee to explore ways for Federal 
Reserve and Treasury programs to facilitate franchisee financing. Small 
business is a powerful and important driver of economic expansion. The 
relationship between lending, small business jobs and economic output 
can be summed up by the following: For every million dollars of lending 
obtained by small businesses, 34.1 jobs are created and $3.6 million in 
annual total economic output is realized. We know this through our 
investment in Dunkin Brands, which last year created 762 new Dunkin 
Donut and 124 Baskin Robbins stores in the U.S, resulting in more than 
20,000 new jobs. A new franchise creates construction jobs, demand for 
new equipment and material, and employs dozens of workers. The loan 
market for franchisees, unfortunately, is very weak, and many 
franchisees are either not eligible for SBA loans or find the process 
too bureaucratic and slow. As a result of the credit crisis, many of 
the traditional lenders have pulled out of the market. Making capital 
available to small businesses and franchisees is critical to growing 
local economies.
    Third, the number of bankruptcies will inevitably increase this 
year. The absence of an active debtor-in-possession financing market 
will cause companies that otherwise would be strong candidates for 
restructuring to instead liquidate. Without an active DIP financing 
market, unemployment will continue to soar and companies that should be 
restructured will cease to exist. I would encourage the Subcommittee to 
work with the Treasury and Federal Reserve to explore whether policy 
actions could help bring liquidity to the DIP financing market.
    Finally, a few words on General Motors. It is hard to overestimate 
the importance of the auto sector to the U.S. economy. Virtually every 
manufacturer touches the auto sector in one way or another. Auto 
suppliers are already under distress, and the lack of orders and lack 
of credit has virtually eliminated any cushion. If not handled 
properly, a GM bankruptcy could be the ``Lehman Brothers'' of the 
manufacturing sector given the sensitivity of the automotive supply 
chain. It could affect suppliers outside the auto sector, including 
commercial vehicle, heavy equipment, and even military suppliers. If GM 
is indeed required to file under Chapter 11 reorganization, it will be 
critical that the process be efficient, quick, and transparent. It will 
be essential that GM honor its commitments to suppliers and business 
partners. A GM filing with any type of meaningful trade payment delays 
or impairments could push the next group of troubled suppliers into the 
abyss. And, as Leo Gerard has said, it is important that GM maintain as 
much manufacturing as possible in North America. I also want to 
compliment you, Mr. Chairman, on your work with Senator Stabenow on the 
``cash for clunkers'' legislation, which I encourage the Senate to 
adopt.
Conclusion
    Thank you once again for calling this hearing on the impact of the 
financial crisis on the manufacturing sector. Unfortunately, as 
mentioned above, the manufacturing sector has been hit harder than 
virtually any other sector, and no other sector is more important to 
the vitality and vibrancy of the U.S. economy. The Congress, Treasury, 
and Federal Reserve's policy actions have been helpful and important in 
reducing the impact of the crisis, but additional and broader policy 
actions will be needed.
    One of the hallmarks of the U.S. economy is its resilience. The 
U.S. economy is more flexible, more diverse, and more dynamic than any 
other economy in the world. We are experiencing the most difficult 
economic circumstances of most of our lifetimes, but even in the 
darkest days, we should be comforted by the fact that we will rebound, 
retool, and return to growth and prosperity.
                                 ______
                                 

                  PREPARED STATEMENT OF WILLIAM GASKIN
                               President,
                  Precision Metalforming Association,
   On Behalf of the Precision Metalforming Association and National 
                   Tooling and Machining Association
                              May 13, 2009

    Mr. Chairman, Ranking Member DeMint, Members of the Subcommittee, 
thank you for the opportunity to testify today. My name is Bill Gaskin, 
President of the Precision Metalforming Association (PMA) based in 
Independence, Ohio. We have partnered with the National Tooling and 
Machining Association (NTMA) in Washington to speak with OneVoice on 
behalf of small middle-market manufacturers including thousands of 
manufacturing companies producing stampings, fabrications, machined 
components, tooling, plastic injection molds, and other products for 
the defense, aerospace, medical, and automotive industries among many 
others critical to our national and economic security. Our combined 
membership totals more than 2,500 companies, located in every State, 
with average employment between 40 and 100 persons.
    Small middle-market manufacturers are being clobbered by the credit 
crisis and are in serious trouble, especially if they manufacture 
parts, components, and assemblies for the automotive, residential/
commercial construction, appliance, truck, and commercial aircraft 
industries. This situation impacts hundreds of thousands of jobs, 
jeopardizes our ability to respond to any military situation, and 
weakens the manufacturing base in the U.S. Importantly, it also has 
impacted our ability to innovate, allocate sufficient funds to R&D, and 
provide growth opportunities for the future. Policy implications for 
your consideration relate to the need to restore access to credit for 
middle-market companies, providing stability in the face of 
unprecedented weakness in the automotive supply chain and other 
markets. Unless solutions are found, and quickly, there is likely to be 
a cascade of company failures over the next few months among middle-
market manufacturers. The most financially precarious part of the 
business cycle is when the end of the downturn is reached and cash (or 
credit) is required to rehire workers and buy raw materials to supply 
customers with finished product.
    Small middle-market manufacturers are bearing the brunt of the 
current global economic downturn. It has impacted virtually all market 
sectors in every State. PMA and NTMA members report this is not limited 
to the automotive industry, but includes aerospace, truck, appliance, 
construction, off-highway, and most every other market as well. As an 
example, as travelers fly less, the commercial and private airline 
industry cuts back on orders and decreases the demand for components 
and tools. In addition, because our companies have undergone 
significant diversification in their customer base in the past several 
years, when one sector of the economy begins a slide, it disrupts the 
entire supply chain reverberating throughout the economy.
    In my more than 30 years in this industry, these times are by far 
the most dire times I have seen for stampers, roll formers, machining, 
tooling, and mold-building companies who comprise the thousands of 
small middle-market suppliers who employ millions of workers around the 
country. Today, the typical metalforming company has annualized sales 
which are 35 percent lower than 1 year ago and they have had to 
eliminate nearly 38 percent of their employees. And it is going to get 
worse--49 percent report that shipping levels will be down over the 
next 3 months compared to the last 90 days. Our monthly business 
conditions report for May, released yesterday, indicated that 39 
percent expect that their new orders for products will be lower over 
the next 3 months than they were over the past 3 months, and only 17 
percent think shipments will rise in the next 90 days. In the same 
survey, 80 percent of metalforming companies reported that their 
facilities are working on short time or have laid off employees, 
compared with roughly 20 percent this time last year. It is highly 
likely that somewhere near 30 percent of these privately held or family 
owned businesses will not exist 1 year from now, unless the U.S. 
government takes additional steps to support manufacturers, including 
taking steps to free up lines of credit to these industries.
    To quote a metalworking company with 60 employees that responded to 
a credit survey this weekend, ``No bank currently wants to deal with 
manufacturing--they are solely about mitigating their risk with their 
manufacturing clients.'' This is the reality we face.
    Manufacturers across all industries report challenges to their 
credit health. Of respondents to the survey conducted May 9-11, 2009, 
66 percent reported problems in their credit situation with more than 
half of them (36 percent of the total) experiencing ``serious'' 
problems. This includes companies in the medical, agriculture, and 
appliance sectors along with those supplying the automotive and truck 
sectors. In addition, more than half are having difficulty accessing 
credit for day-to-day operations. Our greatest concern is that 72 
percent anticipate difficulty securing the credit they need to purchase 
raw materials and rehire workers as business conditions improve later 
this year. And more than 70 percent of metalworking companies who need 
credit to finance capital investments to upgrade their domestic 
production facilities are unable to obtain the credit they need to do 
so.
    In the current environment, manufacturers who would invest in 
domestic production and stimulate growth are denied the lines of credit 
they need to help jump-start the economy. While the Federal government 
is investing billions of dollars through the economic stimulus package 
for construction projects, companies integral to those projects lack 
the financing they need to supply the stampings, fasteners, tooling, 
and molds to assemble the bridges, build the equipment, and manufacture 
fuel-efficient vehicles. If this situation continues, the reality is 
that our customers will increasingly simply offshore the job to a low-
cost country. And we all know that once the job is gone, it will never 
return. Preservation of our defense industrial base and our ability to 
manufacture critical supplies for national security needs is essential 
to our survival. Any disruption in the domestic supply chain can cause 
a reaction felt throughout our lives.
    The Federal government has spent hundreds of billions of dollars 
extending support to financial institutions, General Motors, Chrysler, 
and large Tier 1 companies in the automotive supply chain, but the 
benefits have yet to trickle down to smaller middle-market Tier 2 and 
Tier 3 suppliers. The Automotive Supplier Support Program is helpful to 
Tier 1 suppliers of General Motors and Chrysler, but we have seen 
little benefit to Tier 2 and 3 companies. Of course, any help to the 
OEMs and Tier 1 suppliers helps our customers and therefore helps us 
survive, but we cannot continue providing components, tooling, and 
services to Tier 1 suppliers or vehicle manufacturers if we cannot 
guarantee or insure payment. In the past, Ford, GM, Chrysler, and 
others would pay downstream suppliers directly. However, over time, 
they began to pass payment through the Tier 1 suppliers. Recognizing 
the dire situation throughout the supply chain, I have heard recent 
reports of GM again bypassing the Tier 1 and paying the Tier 2 
suppliers directly to ensure payment. That temporary Band-Aid cannot 
work for everyone and the government should play a more direct role.
    I believe the Federal government can extend relief to middle-market 
companies by insuring or guaranteeing receivables of businesses 
supplying a vehicle manufacturer which receives taxpayer funds. For 
example, a tooling company could register their purchase order with the 
government to either guarantee or insure (or reinsure) payment under 
certain terms. The government, as is the case under current U.S. and 
Canadian programs, could charge downstream suppliers a 2 or 3 percent 
fee depending on the service provided. Under this scenario, the Federal 
government would make money, Tier 2 and 3 suppliers could continue 
operations providing tooling and components with the confidence that we 
will receive payment within a reasonable amount of time. This would 
also provide a significant comfort level to our creditors who would 
have assurance that we will remain viable.
    The entire automotive supply chain tooling payment process has been 
dysfunctional for some time, and NTMA, PMA, and others are working with 
OEMs and others on long-term plans to fix the situation. However, in 
the short term, we need relief and one key element is for the 
government to provide a ``safe passage'' mechanism of our receivables 
through higher tier suppliers in the event of bankruptcy or disruption 
in the supply chain. There is no question the Federal government has 
much more leverage and resources to collect on outstanding invoices 
than the typical tool and die manufacturer with 50 to 100 employees.
    Over the years, the domestic automotive industry has adopted a 
model for tooling payment that is unsustainable over the long term. 
When credit was easy, we were willing to live with it, but in the 
current environment we cannot continue because we can no longer secure 
credit for operations. We are working with the automobile 
manufacturers, Tier 1 suppliers, the White House Automotive Task Force 
and key players on both sides of the U.S.-Canadian border to find long-
term solutions. In our meetings, we are not only focusing on the 
payment aspects of our industry but also trying to improve tooling 
design and part design to make our domestic industry more competitive. 
It is critical that we all partner together--industry, government, and 
labor--to help us emerge from the current situation more globally 
competitive and efficient.
    Credit lines in our industry, which currently average 14 percent of 
annual sales, are largely based on a formula that values 80 percent of 
current trade receivables and 50 percent of the value of raw material 
and finished goods. In today's environment, receivables are discounted 
even more severely. This limits the ability of the business to invest 
in profitable growth areas due to lack of resources. Many lenders are 
severely restricting lines of credit if a manufacturer serves a Tier 1 
automotive supplier. In addition, our members report that their ability 
to purchase credit insurance on accounts receivables is also 
drastically reduced. In some cases insurance brokers are only backing 
10 percent of a Tier 1 automotive receivable, whereas the same company 
was typically able to secure 70-80 percent in the past. The lack of a 
market for guaranteed receivables further exposes small middle-market 
manufacturers to financial strain.
    On several occasions we have reached out to our memberships and 
educated them on government support programs such as the newly modified 
Small Business Administration's 7(a) and 504 loan programs. Yesterday, 
I heard from one member in Southern California who had applied for an 
SBA loan from three banks, including Omni National and Wells Fargo. 
Unfortunately, the company was unable to secure any help from SBA, as 
the bank's underwriting standards were too strict to approve the loan.
    Personal guarantees required by SBA loans are also a problem, as 
they are required on 100 percent of the loans. Yet in the non-SBA 
market, our members report that personal guarantees are required only 
about 40 percent of the time. Understandably, in today's environment, 
many business owners are too concerned about losing their family home 
to meet the personal guarantee requirements under the 7(a) program. 
Also in today's environment, if your business is connected with the 
automotive industry, you are highly unlikely to be able to qualify for 
SBA financing despite the government providing a 90 percent backing of 
the loan. Last Thursday, at a PMA automotive parts suppliers conference 
in Novi, Michigan, a representative of the SBA briefed the audience 
about SBA financing opportunities. In response to a question about 
whether the speaker was aware of ANY automotive supplier who had been 
approved by a Detroit-area bank for an SBA loan, the speaker indicated 
that he was not aware of a single loan being approved.
    Chairman Brown, I applaud your efforts to highlight the credit 
crisis in manufacturing industries. I urge the Federal government and 
this Congress to take a ground-up approach. Rather than focusing almost 
exclusively on large financial institutions and the largest 
manufacturing companies, policymakers must support the small middle-
market companies that are the backbone of our economy. This is not an 
Ohio problem. This is not an automotive problem. Access to credit and 
preservation of our domestic manufacturing base is a global problem 
that requires an American-led solution and it starts on Main Street, 
not Wall Street.
    Thank you for the opportunity to testify before you today.
                                 ______
                                 

              PREPARED STATEMENT OF EUGENE R. HAFFELY, JR.
                        Chief Operating Officer,
                    Assembly & Test Worldwide, Inc.,
       On Behalf of the Association of Maunufacturing Technology
                              May 13, 2009

Introduction
    Thank you for holding this hearing today and for giving me the 
opportunity to be here and participate.
    I am Chief Operating Officer of Assembly & Test Worldwide, Inc., 
(ATW) headquartered in Dayton, Ohio. ATW is an American-owned company 
that designs and manufactures assembly and test equipment for global 
manufacturers. In 2008, our customer base was 60 percent in the 
automotive and heavy truck industries. We are a critical supplier of 
engineered special equipment which enables the production of fuel 
efficient, state-of-the-art automobile engines, fuel injectors, 
transmissions, and drive modules. We also provide custom designed 
turnkey automation for the production of medical devices, 
pharmaceutical packaging, solar panels, and various defense industry 
related products. Due to the expected decline in mainly our automotive 
business, we have been forced to reduce our workforce by over 25 
percent to 550 U.S. employees.
    I serve on the Board of Directors of AMT--The Association For 
Manufacturing Technology. Pursuant to House Rule XI, I am obliged to 
report that AMT received $225,100 from the Commerce Department's Market 
Development Cooperator Program for a technical center in China--
$207,254 of which was disbursed in 2005 and $17,846 in 2006.
    AMT represents more than 400 manufacturing technology providers 
located throughout the United States--including almost the entire 
universe of machine tool builders who manufacture in America. Our 
members cover the full range of engineering and manufacturing 
capabilities--from product innovation, design, assembly, and 
installation services for a diverse range of technologies including 
automation, material cutting and forming, to workholding, cutting 
tools, assembly, inspection, and testing, and computer communications 
and control systems. Our employees include engineers, tool and die 
makers, mechanics, electricians, and of course the many professionals 
in administrative jobs. The overwhelming majority of our members are 
small businesses--more than half have revenues under $10 million--but 
what we contribute has a large impact on our country's ability to 
manufacture competitively and hence on the economy as well.
    Manufacturing technology provides the innovative tools that enable 
production of all manufactured goods. These master tools of industry 
magnify the effort of individual workers and give an industrial nation 
the power to turn raw materials into the affordable, quality goods 
essential to today's society. In short, we play a significant role in 
making modern life in an industrialized society possible.
    Manufacturing technology provides the productive tools that power a 
growing, stable economy and a rising standard of living. We represent 
an industry with a proud history that dates back to the founding of our 
country, and today we are recognized worldwide for the advanced 
manufacturing technology we produce for a wide range of industries. 
These tools make possible modern communications, affordable 
agricultural products, efficient transportation, innovative medical 
procedures, space exploration, and the everyday conveniences we take 
for granted. If we are to provide medical care to all Americans, a 
strong creative manufacturing base will assist this noble objective by 
supplying creative innovative solutions and tools that will reduce our 
medical costs. Our products also create the means to provide a strong 
and technologically sophisticated national defense.
    The manufacturing technology industry is critical to building and 
maintaining the strong and dependable defense industrial base that 
enables our military to protect our citizens and our ideals around the 
world. Mr. Chairman, I am here to tell you that if nothing is done to 
get credit flowing again to America's manufacturers, we lose more than 
our ability to manufacture automobiles or washing machines in this 
country. We lose our ability to create the new innovative defense 
systems that provide an advantage over our Nation's adversaries 
throughout the world. We also risk dependence on foreign sources for 
our defense needs. I am not talking about merely producing inexpensive 
and convenient goods for everyday life. I am talking about an industry 
that is essential to America's national security.
    Mr. Chairman, as crucial and necessary a part of our American 
manufacturing sector as we are, our industry is in danger of not 
surviving the current economic chaos, and the major reason is because 
the lack of credit is endangering the continued existence of virtually 
all of our companies. Although the Treasury Department's Troubled 
Assets Relief Program (TARP) is focused on addressing the credit crisis 
and getting money flowing through the economy again, there is still no 
evidence that this is happening in the industrial sector in any 
significant way. It certainly is not apparent to the members of the AMT 
or to the several hundred thousand small businesses that rely on their 
products to remain in business!

The Credit Crisis
    Over the past few decades, AMT members have faced significantly 
increased competition from abroad, and they have seen a decline in 
their domestic market share. But our industry has weathered every storm 
and emerged even stronger. The depth of this current economic crisis, 
however, is threatening its very survival. In ATW's case, revenues are 
projected to decline approximately 40 percent in 2009 primarily due to 
weakness in the automotive sector. During the banking crisis last fall, 
over $20 million of existing orders were cancelled by the U.S. 
automotive companies and their suppliers due to their uncertain 
futures. This has never occurred in the history of our company.
    The meltdown of the financial services sector has frozen credit to 
companies like mine. I have been involved for 30 years in the 
innovation application of manufacturing technology toward the objective 
of increasing the reliability and efficiency of manufacturing 
processes. In 2008, we were a profitable business with $150 million in 
revenue. We can operate with minimal losses in this difficult 
environment and will remain a viable company if reasonable credit is 
available. However, in all my years in business, I have never seen a 
more difficult time than the present for companies in our industry to 
obtain the credit necessary to continue to stay in business.
    Many companies in the manufacturing technology sector historically 
have been debt-financed, with some of that debt actually personally 
guaranteed by the owners themselves. For the last 3 years, however, it 
has become increasingly difficult to obtain financing for businesses 
like mine (and many of my customers) because we are small privately 
owned manufacturing companies and more importantly because of our ties 
to the automotive industry. As you can imagine, the lending environment 
has gotten worse rather than better these last months as the automakers 
struggle to survive and restructure. The overall uncertainty in our 
economy has caused our customers to take defensive measures, delaying 
existing production improvement programs and cancelling near term 
orders. AMT members are reporting a reduction in backlogs of 40-70 
percent.
    The future holds promise, but an increasing number of banks are 
reluctant to lend to automotive manufacturing companies whose revenue 
forecasts are dismal for the next few quarters. ATW has been asked to 
quote material handling and test equipment for the General Motors (GM) 
Tier 1 electric vehicle battery suppliers, but we are hesitant due to 
the exposure to GM. This equipment is critical to developing an 
electric car platform for the United States.
    An AMT survey on the credit crisis conducted earlier this year 
asked if and how our members are affected by the tightening of credit 
throughout the financial sector. An overwhelming majority of 
respondents have experienced a tightening of credit and altered the way 
they do business as a result. Additionally, most have experienced 
changes in lending terms, and some reported that banks have cut (or 
threatened to cut) their lines of credit altogether. Most telling are 
the comments given by survey respondents in the open-ended question at 
the end of the survey--comments from company owners across the country 
painting a profoundly bleak picture of what is really going on in the 
heart of American manufacturing, in case the grim statistics are not 
enough evidence that more must be done. I have included those comments 
with my written statement. (See AMT Credit Survey Comments at http://
www.amtonline.org/amt_items/031209surveycomments.pdf.)
    I appreciate that solving this problem is a hugely complex issue--
and I do not presume to give you a simple answer--but I would like to 
offer suggestions that would help get credit flowing again to companies 
like those in the manufacturing technology industry.

SBA Loan Programs
    The recent global economic collapse has resulted in a severe 
curtailment in capital spending. Many AMT members have seen a dramatic 
decrease in orders. Some have suffered through months without a single 
order. Others have reported that their new orders are off by 70 or 80 
percent. That is due not simply to a lack of demand but more 
significantly to the lack of credit up and down the manufacturing 
production chain. Although many of us have sought bank loans to stay in 
business, NO ONE is lending in this environment--NOT EVEN the SBA 
Preferred Lenders, who must rely on a level of credit scrutiny that 
many cannot pass due to the unprecedented recent events.
    I applaud the Congress for including the Small Business 
Administration (SBA) and its 7(a) loan program in The American Recovery 
and Reinvestment Act of 2009 (ARRA). However, higher guarantees and 
lower fees alone will not enable many small businesses, including many 
AMT members and customers, to obtain urgently needed funds to stay in 
business and preserve jobs. The SBA recently reported an increase in 
7(a) loan volume since the ARRA was enacted. However, even with 90 
percent guarantees and no borrower fees, our members have not seen an 
increase in SBA lending. One reason is that it is impossible for many 
AMT members to quality for an SBA 7(a) loan in this current recession. 
Companies cannot obtain an SBA loan if they do not have sufficient cash 
flow in these trying times.
    SBA loan regulations state, ``Repayment ability from the cash flow 
of the business is a primary consideration in the SBA loan decision 
process.'' Given the extreme downturn in the economy, most small 
businesses have suffered a dramatic decline in business and will not, 
in the near term, be able to meet normal credit standards. We must 
reprioritize the metrics upon which 7(a) loan decisions are made away 
from cash flow as the primary consideration. I would suggest 
alternative but equally valid criteria for judging credit worthiness of 
a prospective borrower in the current economic environment such as: 
backlogs, assets, employment levels, and historic performance.
    In addition to changing the metrics for SBA 7(a) loans, the 
Administration should move quickly to fulfill its pledge to purchase up 
to $15 billion in SBA secured assets. The secondary market for these 
SBA loans is frozen; forcing SBA preferred lenders, which include 
community banks and credit unions, to keep these loans on their books. 
This has severely restricted SBA 7(a) lending. The Administration's 
plan to purchase SBA securities should get banks lending again. 
However, a mechanism must be in place to ensure that banks increase 
their 7(a) lending.
    Lastly regarding SBA, the House version of the ARRA contained a 
provision that would allow small businesses, repeatedly turned down for 
bank credit, to apply directly to the SBA for a loan. The agency would 
be required to first forward the application to lenders within 100 
miles of the applicant's location. If none of these lenders decide to 
make the loan, the SBA would send the application to participants in 
the agency's Preferred Lenders program. If these lenders pass, the SBA 
itself could then originate, underwrite, close, and service the loan. 
Unfortunately, this provision did not make it into the final bill. I 
urge Congress to take another look at establishing this type of direct 
loan program within the SBA.

Title III of The Defense Production Act Loan Guarantees
    As I am sure you would agree, Mr. Chairman, our national security 
depends on a strong manufacturing technology industry. It is at the 
very foundation of America's defense industrial base--an industry that 
produces the high technology that America depends upon to maintain its 
military superiority over potential adversaries.
    A bit of history is in order. In 1985, President Ronald Reagan 
acknowledged our industry's importance when he declared the criticality 
of certain categories of machine tools under Section 232 of the Trade 
Act of 1962, authorizing our government to restrict the importation of 
machine tools for reasons of national security. President Reagan 
suspended that Section 232 finding after a Voluntary Restraint 
Arrangement (VRA) was successfully negotiated with Japan and Taiwan. 
That VRA limited the importation of machine tools into the United 
States for a period of 5 years so that the domestic industry could be 
rebuilt and strengthened. President Reagan's decision is one of the 
very few times in our history that our government has made the decision 
to restrict imports for national security purposes. It demonstrates how 
essential our industry is to our national defense.
    Unfortunately, the current credit crisis has left many AMT members' 
very existence extremely precarious. I would argue that it threatens to 
accomplish what low-cost foreign competition almost did in the 1980s--
with even more serious consequences.
    For the past 7 months, banks have been denying credit to even the 
most creditworthy manufacturing technology companies. This lack of bank 
credit is threatening to drive those companies out of business. America 
can ill-afford to lose our machine tool industry and other critical 
parts of the defense industrial base that are now at risk. Without 
these companies, this country would be forced to rely on foreign 
sources to provide us the innovative manufacturing solutions the 
defense industry will require in times of critical need. The Chinese 
have been a generally reliable part of our peacetime industrial supply 
chain. But do we really want to be dependent on them--or any other 
foreign country--for critical products at a time of crisis?
    ATW has a highly skilled domestic workforce that contributes to the 
technological advancement of U.S. and global manufacturing. The failure 
of our company would negatively impact this country's competitive edge 
in special equipment design to the benefit of our European and Japanese 
competitors. Not only that, if the U.S. defense required redeployment 
of our domestic manufacturing capacity, ATW's expertise as a critical 
asset would be gone.
    The Defense Production Act (DPA) confers on the President the power 
to mobilize the domestic economy in order to best supply the military 
in the event of a wartime mobilization. It authorizes the President to 
direct certain industries to produce vital military products. It also 
authorizes the President to direct those industries to place military 
production as a priority over civilian production in order to serve the 
defense needs of our Nation.
    In order to advance America's defense production needs, Title III 
of the DPA provides for Federal loan guarantees to companies that play 
an important role in our Nation's defense industrial base--companies, 
like ATW, that would be important to mobilization efforts if it were 
necessary to move from a peacetime economy to a wartime economy. The 
Banking Committee has jurisdiction over the DPA, and I understand that 
the DPA is up for reauthorization during 2009.
    Mr. Chairman, I suggest that this Subcommittee consider increasing 
the loan guarantee authority under Title III as it considers the DPA's 
reauthorization, so that credit is available to our defense industrial 
base companies that are unable to get credit elsewhere in the current 
economic environment. This program allows assistance to be quickly 
targeted and precisely applied to defense-related companies, such as 
those in the manufacturing technology industry, that are in desperate 
need of bank credit.
    I would note, however, that the current Title III guarantee program 
funding is insufficient to have an effect in this current crisis. Thus, 
if this Committee decides to authorize Title III once again, it would 
be necessary to provide significantly greater lending authority. With 
U.S. Government guarantees under the DPA's Title III, I believe banks 
in Ohio, and elsewhere around the country, would have the confidence to 
get credit flowing to manufacturing technology companies and the many 
other companies who make up the backbone of the defense industrial 
base. Reauthorization at a higher loan guarantee level would be a step 
toward protecting America's national security while at the same time 
saving jobs and small industrial companies that are so important to our 
economic health.

Conclusion
    In his February 24 address to a joint session of Congress, 
President Obama said that, ``the flow of credit is the life blood of 
our economy.'' He also noted that, ``credit has stopped flowing the way 
it should. With so much debt and so little confidence, these banks are 
now fearful of lending out any more money to households, to businesses, 
or to each other. When there is no lending, families can't afford to 
buy homes or cars. So businesses are forced to make layoffs. Our 
economy suffers even more, and credit dries up even further.''
    Mr. Chairman, every member of AMT manufactures products in the 
United States, and our products are located in factories around the 
world. Each is fiercely competitive and determined to ensure that 
American manufacturing technology remains preeminent. Our members 
continue to create jobs and spur innovation by investing time and money 
in their businesses to grow their share of the American Dream not only 
for themselves and their families, but for their employees and their 
employees' families as well. However in this economic crisis, most of 
them are struggling not for that share of the American Dream but to 
simply stay alive.
    We must get credit flowing again to America's producers of 
manufacturing technology and our customers. We are where it all begins 
and we are where it will end for ``Manufactured in America.'' The only 
way to break this cycle of job loss and bankruptcy is to provide the 
manufacturing sector the cash flow we need to continue doing business 
and securing American jobs. Building upon successful programs, such as 
the SBA's 7(a) loan program and Title III of the Defense Production 
Act, and implementing new targeted programs, such as the SBA direct 
loan program included in the House version of the ARRA, are ways to 
support companies that are unable to get access to credit, like AMT 
members, while the economy recovers. AMT would be glad to discuss 
additional suggestions for supporting America's manufacturing 
technology sector during these difficult times.
    The United States is perilously close to losing a critical 
industry--one that we depend upon for both economic stability and 
national security. The manufacturing technology industry provides 
productivity improvements that level the playing field for America's 
highly skilled workforce, helping us to compete against producers in 
low-cost labor markets. It's not an exaggeration to say that essential 
future innovations in manufacturing are simply impossible without a 
robust supply chain that includes stable and healthy factory floor 
equipment producers. We need your help. I hope that you will be able to 
provide the legislative vehicles that can get us through this threat to 
our existence.
    Thank you for allowing me to testify today.
                                 ______
                                 

  PREPARED STATEMENT OF LIEUTENANT GENERAL LAWRENCE P. FARRELL, JR., 
                              (USAF RET.)
                 President and Chief Executive Officer,
                National Defense Industrial Association
                              May 13, 2009

    Chairman Brown, I am Larry Farrell, President and CEO of the 
National Defense Industrial Association and on behalf of our 1,518 
corporate members, and just over 67,800 individual members, I'm pleased 
to appear before the Senate Subcommittee on Economic Policy today to 
emphasize the importance of manufacturing to the health of the U.S. 
economy and security of the Nation. The Manufacturing Division of NDIA 
has recently published a white paper entitled, Maintaining a Viable 
Defense Industrial Base, which I urge you to review in addition to my 
testimony today. (See http://www.ndia.org/Divisions/Divisions/
Manufacturing/Documents/MaintainingAViableDefenseIndustrialBase.pdf.)
    Based upon your request to cover topics of vital interest to 
manufacturing and in consideration of the reauthorization of the 
Defense Production Act slated for later this year, I will address five 
questions:

    Why should Congress care about manufacturing?

    How do manufacturers rely on credit?

    How are manufacturing supply chains intertwined and what 
        happens when demand falls off?

    What strategic and security considerations regarding 
        manufacturing should Congress know of?

    What policies should Congress consider in supporting 
        American manufacturing?

Why should Congress care about manufacturing?
    Congress MUST care about manufacturing simply because of its 
enormous impact across all aspects of our Nation, including economic, 
class, and security. While manufacturing has been declining as a 
percent of GDP since the 1950s, manufacturing still remains the largest 
productive sector in the overall U.S. economy at 13.6 percent, and the 
U.S. produces more goods than any other country--$1.6 trillion worth, 
according to the Federal Bureau of Economic Analysis. Additionally, 
manufacturing multiplies each dollar spent into an additional $1.37 of 
economic activity, higher than any other sector. However, the most 
critical benefit of manufacturing is not simply the size of the sector, 
but that manufacturing CREATES wealth by producing something of higher 
value from materials or common components. It is not a service sector 
that just transfers wealth between entities. And unlike other wealth 
creators, such as mining or agriculture, the jobs produced by 
manufacturing activities are generally higher paying and represent an 
entry into the middle class for a large portion of the workforce. For 
all these reasons and more, manufacturing is, and must continue to be, 
the foundation of a strong economy, and thus needs active support by 
Congress.

How do manufacturers rely on credit?
    Manufacturers rely extensively on credit, particularly for working 
capital. Thus, while access to credit for capital equipment or 
facilities is necessary, the lack of credit to buy supplies and meet 
payroll will more rapidly drive manufacturers out of business. 
Manufacturers are obliged to purchase materials and supplies prior to 
being paid by their customer. This problem is exacerbated by the fairly 
long period between invoice and payment in the supply base, sometimes 
up to 120 days.
    A recent comment by Roger Stelle, a lawyer for many small 
manufacturers in the Chicago area, reveals the degree of the current 
situation: ``Many of my clients are contemplating filing or have 
already filed for Chapter 11, not because their business volume has 
fallen below previously viable levels, but rather because they can no 
longer get credit to borrow for their long established working capital 
needs.''

How are manufacturing supply chains intertwined and what happens when 
        demand falls off?
    Manufacturing is most productive when company resources, such as 
capital equipment or workforce, are being fully utilized to generate 
product, or wealth. When demand falls off, and company resources are 
not used to their fullest capacity, inventories rise and revenues 
fall--initially impacting employment and if the decline is too severe 
impacting the viability of the business. Diversity is one business 
strategy that can mitigate a downturn in specific business segments. A 
company that serves more than one market sector is less likely to face 
failure from a downturn in one sector. Even in today's business climate 
there are sectors that remain healthy, and many businesses that 
participate in these markets, such as the Defense and Energy sectors, 
remain viable. Therefore, supply chains intertwined among various 
market sectors will promote more viable and robust manufacturing and 
preserve jobs.

What strategic and security considerations regarding manufacturing 
        should Congress know of?
    America relies on the development and implementation of advanced 
manufacturing technologies to maintain a globally competitive 
industrial base, which is strategically vital due to the 13 million 
jobs contained within the sector. Our industrial base provides these 
advanced manufacturing technologies through innovation and application 
of technologies that promote both performance and affordability. 
National security requires a manufacturing sector based on assured 
sources to safeguard our economy and national defense and provide 
trusted sources of supply to meet the demands of our citizens and 
warfighter.
    In today's global political environment, National Security includes 
an underlying requirement for economic strength and viability, which in 
turn requires an industrial base that generates wealth based upon 
manufacturing goods, not based upon the transfer of wealth.

What policies should Congress consider in supporting American 
        manufacturing?
    Above all else, manufacturing requires a senior leader in the 
Administration, at a level sufficient to drive a national campaign 
advocating the government's policies. Considering that agriculture is 3 
percent of GDP and is represented by a department with a cabinet 
position, a segment representing 13.6 percent of GDP such as 
manufacturing should have greater visibility than a Deputy Assistant 
Secretary within the International Trade Administration of the 
Department of Commerce. We recommend that Congress endorse an Assistant 
Secretary for Manufacturing within Commerce in a new top level 
department, responsible for coordinating policy, strategic investment, 
and workforce development.
    We strongly endorse the reauthorization of the Defense Production 
Act (DPA) with particular emphasis on:

  1.  Revitalizing the Interagency Task Force which administers the 
        DPA, with a chairman designated by the President.

  2.  Increasing the level of funding available for DPA to 
        approximately $500M across all Departments (DHS, DoE, DoD, DoC, 
        etc.) in order to significantly impact the domestic industrial 
        base.

  3.  Resuming the practice of loan guarantees under the Title III 
        Authority, in accordance with OMB guidance.

    We strongly agree with the 2006 Defense Science Board 
Recommendation that a stable funding profile should be established for 
the Department of Defense (DoD) Manufacturing Technology (ManTech) 
program, by returning the total program investment to 1 percent of the 
RDT&E budget. (This would represent a $790M program, vice the $200M in 
the Fiscal Year 2010 Budget.) Furthermore, we endorse the four 
strategic thrusts of the DoD Manufacturing Technology Strategic Plan, 
submitted to Congress in March 2009 by the Under Secretary of Defense 
for Acquisition, Technology and Logistics, which emphasizes investment 
in advanced manufacturing technology.
    We recommend the use of Manufacturing Readiness Levels early in the 
Development and Acquisition of Defense Systems as a ``Producibility 
Stress Test'' to assess manufacturing feasibility and promote 
affordability.
    The average age of the U.S. manufacturing workforce exceeds 52 
years. Policies are needed to attract, educate, and retain future 
generations of skilled workers. The Federal government must help 
encourage and promote manufacturing as a respected and desired career 
path.
    Another policy need is to incentivize Sustainable Manufacturing, 
using a cohesive policy framework to include legislation such as S. 661 
``Restoring America's Manufacturing Leadership Through Energy 
Efficiency Act,'' currently under consideration by the Senate Committee 
on Energy and Natural Resources. Timely enactment of this legislation 
would result in more local (U.S.) manufacturing as the true impact of 
global sourcing is better understood in terms of economic, 
environmental, and social costs.
    A final approach to decrease the impact of the credit crisis is to 
encourage the practice of progress payments throughout the supply chain 
by reducing required threshold value for which progress payments can be 
made.
    While considering the manner in which to pursue these 
recommendations, I must note that an active Senate Manufacturing Caucus 
could provide effective leadership for all the issues I've just 
outlined. I urge you to revitalize this organization to advocate for 
manufacturing within Congress.
    Chairman Brown and Members of Subcommittee, I'm honored to have had 
this opportunity to provide you a defense industry perspective on the 
critical nature of manufacturing to our Nation, and hope that you 
embrace the opportunity to strengthen the government's commitment to 
manufacturing in the economic and national security interests of the 
country.

         RESPONSE TO WRITTEN QUESTIONS OF SENATOR BROWN
                     FROM EUGENE R. HAFFELY

Q.1. Title III of the Defense Production Act is designed to 
help companies that are integral parts of the defense 
industrial base, so that they are capable of building the 
weapons systems and weapons system components that are 
necessary to procure in the event of a mobilization pursuant to 
national emergency requiring the use of America's armed forces.
    How would helping such companies stay viable during the 
current recession have a crossover benefit to helping the 
general manufacturing base gain access to capital to help them 
through the economic downturn?

A.1. America's manufacturing base is an integrated group of 
companies who are dependent on each other to provide services 
to virtually all U.S. industries. Take for example a typical 
production system that my company, Assembly & Test Worldwide 
(ATW), would provide. When we design and build a system we 
outsource a large amount of machining and tooling. Each of 
these tooling suppliers is a part of a tooling industry that is 
also critical to our national defense. They in turn must 
purchase machine tools and related tooling accessories, 
hopefully from U.S.-based companies, to make their machined 
products. In addition, purchased materials are usually over 50 
percent of ATW's final product and are provided by U.S.-based 
manufacturers like Allen-Bradley controls, Hoffman enclosures 
and Parker Hannifin fluid power and servo controls. They, in 
turn, must tool their production systems with products and 
services provided by other manufacturing companies. All of the 
manufacturing technology and manufacturing companies are 
customers of a vast array of service providers who rely on them 
as a major part of their customer base. These service providers 
are companies whose products range from insurances to 
landscaping, medical and legal services. If manufacturing 
technology companies have increased access to working capital 
through Title III, it would introduce cash flow into the 
manufacturing supply chain and the entire manufacturing sector 
plus many service companies would benefit.
    Many companies in my industry are at the low tiers of the 
production chain but they are no less critical to the process. 
If you don't have every single part of a wind turbine or a 
smart bomb, for example, it won't work. And you need companies 
in my industry to provide the means to make those parts and 
assemble and test the end product. We don't want to depend on 
foreign suppliers for the wind turbine or the smart bomb. An 
expanded Title III of the Defense Production Act can help 
ensure that we don't have to by making sure the companies that 
are critical to our national defense survive this economic 
crisis.
    Right now, the number one problem facing U.S. manufacturers 
is lack of credit. Looking back to just over a year ago, many 
would not have predicted this crisis in the manufacturing 
sector. Early last year, the manufacturing technology industry 
was poised for a successful 2008 with substantial backlogs on 
the books and orders on the horizon. At that time, access to 
working capital was not a problem. However, as 2008 wound down 
and the economic recession began to take hold, orders lagged, 
cancellations mounted, and negative bookings resulted in 
dramatically decreased backlogs. Now many of us are looking to 
barely break even in 3rd and 4th quarters of this year, as some 
companies have suffered through months without a single order. 
Banks are not extending credit under these circumstances, even 
to companies that they have long successful histories with. The 
crisis in Detroit has only exacerbated the problem.
    The country is at very real risk of losing an industry that 
we depend on to protect our national security because companies 
like ATW cannot access the credit we need to stay in business. 
When our companies are forced to close their doors, it affects 
the entire manufacturing production chain, in many industries, 
all important to America's competitiveness. America's 
manufacturers are natural innovators, and many of our most 
successful innovations were developed from the close working 
partnership that exists between product manufacturers and the 
manufacturing technology suppliers. That informal partnership 
between manufacturing technology suppliers and our customers 
takes us from concept to factory floor to commercial 
marketplace. Ink jet printing cartridges, electronic ignitions, 
micro valves (in everything from appliances to artificial 
hearts), are just a few examples of products whose 
manufacturing process was engineered by an American 
manufacturing technology supplier. U.S. innovators simply could 
not have been a success in these industries without companies 
like ATW that possess the engineering know-how to see a product 
from idea to commercial application.
    That is why Congress must act now to halt the decline in 
manufacturing. If nothing is done, America's competitiveness 
will continue to suffer and we, as a nation, will be forced to 
go offshore to meet our defense needs. These are precisely the 
harsh economic times that Title III is intended to protect our 
critical industries against.

Q.2. My understanding of Title III of the Defense Production 
Act, is that it assists companies that manufacture products 
with both government and commercial applications. Do you think 
that use of the Title III loan guarantee program authorities 
help manufacturers attract that private financing that is 
lacking today?

A.2. It has to improve the current situation. As I stated in my 
written testimony, credit for companies like those in my 
industry has all but dried up. By reducing risk with a loan 
guarantee backed by our Federal government, cautious lenders 
are more apt to start lending again. Once critical suppliers 
get the working capital they need to start producing again, our 
customers benefit, and our customers' customers' benefit, and 
so on throughout the production supply chain as I described in 
the previous question. As business improves and cash flow 
increases, it should become easier to attract private sector 
financing.
    Extending Title III loan guarantees to companies critical 
to national security will act as a lifeline to companies with 
no other option. It will also introduce some much needed cash 
into the entire cash-starved manufacturing sector, as the 
effects of the loan guarantees ripple through the production 
chain. This is exactly the type of program we need to help us 
survive this trying time.

         RESPONSE TO WRITTEN QUESTIONS OF SENATOR BROWN
        FROM LIEUTENANT GENERAL LAWRENCE P. FARRELL, JR.

Q.1. My understanding of Title III of the Defense Production 
Act is that it assists companies that manufacture products with 
both government and commercial applications. Do you think that 
use of the Title III loan guarantee program authorities help 
manufacturers attract that private financing that is lacking 
today?

A.1. Yes, the use of the Title III loan guarantee program 
authorities will significantly help both government and 
commercial manufacturers attract private financing, 
particularly the type of financing that is difficult to secure 
in the current economic climate.
    Title III loan guarantees and loans for working capital and 
facility expansion are effective tools to assist businesses 
that are viable, but are unable to obtain credit either on 
reasonable terms or at all. Of particular importance to 
manufacturers is the availability of working capital, which 
pays salaries, buys supplies, and services creditors. Many 
viable U.S. businesses, including small and medium sized 
manufacturers, are currently struggling to maintain the cash 
balances needed to meet these obligations, due to the credit 
crisis. The U.S. manufacturing base could benefit substantially 
from Government loan guarantees.
    The lack of private financing that is currently being 
experienced is based upon the uncertainty in the demand for 
manufactured goods. The Title III loan guarantees would 
significantly reduce the risk associated with financing 
manufacturers, particularly for working capital needs. With 
risk lowered, more financial lenders are attracted and 
reasonable terms are made available.
    Similarly, the Title III production commitments authority 
can also be used to attract private financing. By providing a 
commitment to purchase a certain level of manufactured goods or 
supplies, the uncertainty due to market conditions is 
substantially reduced, allowing access to reasonable terms for 
credit. Under this approach, the risk due to uncertain demand 
is eliminated. The use of loan guarantees leads more directly 
to the elimination of risk through credit default.
    However, it should be noted that the Title III loan/loan 
guarantee authorities have not been used since 1982 when an 
agreement was reached between the Director, Office of 
Management and Budget, and the Secretary of Defense not to use 
the authorities without OMB approval. None of the objections 
cited by OMB in 1982 still apply, leaving the 1982 agreement as 
an obsolete obstruction. Ironically, the obsolete agreement 
serves only to prevent use of Title III authorities that could, 
under certain circumstances, be the most cost-effective tools 
to meet a national defense need. At a minimum the agreement 
should be amended if not outright canceled.
    The loan/loan guarantee authorities exist as a matter of 
law within Title III of the Defense Production Act and there 
should be no prohibition on the use of these authorities by the 
President when their use is appropriate to address domestic 
manufacturing issues.
    I understand that there are proposed amendments, which I 
fully support, providing new requirements for loan guarantees. 
These requirements specify that Government loan guarantees or 
loans may only be provided if: (1) credit is not, otherwise, 
available to loan applicants on reasonable terms; (2) the 
earning power and pledged security of the applicants provide 
reasonable assurance of repayment; (3) the interest rate on 
guaranteed loans is determined to be reasonable by the 
Secretary of Treasury; (4) the terms on guaranteed loans cannot 
be changed without Government approval; and (5) borrowers are 
at risk for at least 20 percent of the guaranteed loan amounts.

Q.2. There have been media reports over the past several years 
about the threat our military faces because of counterfeit 
components, including microchips. As our military becomes more 
high tech, how equipped are we for the domestic production of 
key components? Is this an issue of concern for the National 
Defense Industrial Association?

A.2. Counterfeit parts are an issue of significant and growing 
concern to the National Defense Industrial Association. This 
has been a key element addressed in many recent member forums, 
as well as the USAF ManTech Strategic Planning session we 
participated in. Counterfeit parts have two motivations: greed 
and malice. To combat greed, Counterfeit detection tools and 
Qualified Vendors are required. To combat malice, an assured 
supply chain is required, including domestic production 
capability.
    Counterfeit parts are facilitated by component 
obsolescence, the growing sophistication of counterfeiters, the 
inherent profitability of demanding military applications, and 
the globalization of the supply base. The reliability of 
counterfeit components is suspect and the chain of ownership is 
unverifiable, which means they are dangerous if they are 
unknowingly used in U.S. weapon systems.
    Counterfeit parts is not the only issue of concern for 
NDIA. Microchip functionality must also be assured. A growing 
number of these components are coming from high-risk locations 
such as China, the Far East, and Russia. Therefore we must 
protect our supply chain from any possibility of malicious 
alterations of microchip functionality, which are then embedded 
in defense systems. In particular, there is great concern that 
the number of ``trusted'' foundries for ASIC chips is rapidly 
shrinking as companies outsource foundry services to the Far 
East. Only IBM and several small suppliers remain in the U.S. 
to fabricate classified, national security or ITAR devices. 
Also, the potential for subtle sabotage is very high in high 
function COTS devices, especially if an offshore supplier knows 
that a specific lot is destined for delivery to a defense 
contractor.
    A domestic microchip supply is therefore crucial for 
national security. A recent Department of Commerce study 
entitled Defense Industrial Base Assessment: U.S. Integrated 
Circuit Design and Fabrication Capability \1\ implies the U.S. 
does indeed have sufficient capacity and resources to design 
and produce microchips for military use. The report relies upon 
the relatively small production numbers of microcircuits 
required for defense use to conclude that the U.S. Industrial 
Base has enough production capacity. However, our members tend 
to disagree with this position. Although assured capacity does 
exist, primarily in large firms for design and production of 
specialized circuits, there has been and will continue to be a 
growing trend to implement Commercial Off The Shelf (COTS) 
components for cost reduction and maintainability. These COTS 
components are part of a global supply chain, and are outside 
the control of the defense industrial base due to the small 
market share.
---------------------------------------------------------------------------
     \1\ www.bis.doc.gov/defenseindustrialbaseprograms/osies/
defmarketresearchrpts/bis_ote_ic_report_051209.pdf.
---------------------------------------------------------------------------
    Unfortunately the COTS electronics supply chain is moving 
and now manufacturing in the U.S., Japan, and Western Europe 
account for less than 50 percent of global electronics output. 
Between 1995 and 2006, the Asia Pacific area's share increased 
from 20 percent to 42 percent, with China seeing the largest 
share of that increase, from 3 percent to 20.5 percent. \2\ 
Further there are some critical components for our high tech 
weapon systems, such as LCD flat panel displays, that have no 
domestic source. All these components are imported from foreign 
suppliers, some from the high-risk countries mentioned above.
---------------------------------------------------------------------------
     \2\  Source: Printed Circuit Design and Fab, 6/6/08.
---------------------------------------------------------------------------
    A longer term risk lies in the historical fact that 
leading-edge R&D tends to follow production. The most 
attractive positions for talented process scientists and 
engineers moves with advanced production. For this reason and 
others, the 2005 DSB Study on High Performance Microchip Supply 
concluded that ``The Department of Defense and its suppliers 
face a major integrated circuit supply dilemma that threatens 
the security and integrity of classified and sensitive circuit 
design information, the superiority and correct functioning of 
electronic systems, system reliability, continued supply of 
long system-life and special technology components.'' \3\
---------------------------------------------------------------------------
     \3\  Defense Science Board Task Force on High Performance 
Microchip Supply, February, 2005.
---------------------------------------------------------------------------
    In summary the NDIA is concerned that the U.S. is not 
currently equipped for domestic production of some of the key 
components, particularly microcircuits, in our high tech 
defense systems. This highlights the importance of the Defense 
Production Act Title III program, which is able to monitor gaps 
between the defense requirements and the domestic capabilities 
and then invest in the U.S. Industrial Base to assure the 
required capability.
