[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
LARGE AND SMALL BUSINESSES: HOW PARTNERSHIPS CAN PROMOTE JOB GROWTH
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HEARING
before the
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
SECOND SESSION
__________
HEARING HELD
MARCH 28, 2012
__________
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Small Business Committee Document Number 112-061
Available via the GPO Website: www.fdsys.gov
_____
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HOUSE COMMITTEE ON SMALL BUSINESS
SAM GRAVES, Missouri, Chairman
ROSCOE BARTLETT, Maryland
STEVE CHABOT, Ohio
STEVE KING, Iowa
MIKE COFFMAN, Colorado
MICK MULVANEY, South Carolina
SCOTT TIPTON, Colorado
CHUCK FLEISCHMANN, Tennessee
JEFF LANDRY, Louisiana
JAIME HERRERA BEUTLER, Washington
ALLEN WEST, Florida
RENEE ELLMERS, North Carolina
JOE WALSH, Illinois
LOU BARLETTA, Pennsylvania
RICHARD HANNA, New York
NYDIA VELAZQUEZ, New York, Ranking Member
KURT SCHRADER, Oregon
MARK CRITZ, Pennsylvania
JASON ALTMIRE, Pennsylvania
YVETTE CLARKE, New York
JUDY CHU, California
DAVID CICILLINE, Rhode Island
CEDRIC RICHMOND, Louisiana
GARY PETERS, Michigan
BILL OWENS, New York
BILL KEATING, Massachusetts
Lori Salley, Staff Director
Paul Sass, Deputy Staff Director
Barry Pineles, General Counsel
Michael Day, Minority Staff Director
C O N T E N T S
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OPENING STATEMENTS
Page
Hon. Sam Graves.................................................. 1
Hon. Nydia Velazquez............................................ 1
WITNESSES
Matthew Slaughter, Ph.D., Associate Dean for the MBA Program,
Signal Companies Professor of Management, Tuck School of
Business, Dartmouth College, Hanover, NH....................... 3
William C. McDowell, Ph.D., Assistant Professor, Department of
Management, College of Business, East Carolina University,
Greenville, NC................................................. 5
Robert E. Bruck, Corporate Vice President, Intel Corporation,
Santa Clara, CA................................................ 7
Paul Blackborow, Chief Executive Officer, Energetiq Technology,
Inc., Woburn, MA............................................... 9
APPENDIX
Prepared Statements:
Matthew Slaughter, Ph.D., Associate Dean for the MBA Program,
Signal Companies Professor of Management, Tuck School of
Business, Dartmouth College, Hanover, NH................... 19
William C. McDowell, Ph.D., Assistant Professor, Department
of Management, College of Business, East Carolina
University, Greenville, NC................................. 26
Robert E. Bruck, Corporate Vice President, Intel Corporation,
Santa Clara, CA............................................ 30
Paul Blackborow, Chief Executive Officer, Energetiq
Technology, Inc., Woburn, MA............................... 44
Questions for the Record:
Rep. Owens Questions for the Record.......................... 49
Answers for the Record:
Answers to Rep. Owens for the Record......................... 50
Additional Materials for the Record:
Glaxo Smith Kline Statements for the Record.................. 51
LARGE AND SMALL BUSINESSES: HOW PARTNERSHIPS CAN PROMOTE JOB GROWTH
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WEDNESDAY, MARCH 28, 2012
House of Representatives,
Committee on Small Business,
Washington, DC.
The Committee met, pursuant to call, at 1 p.m., in room
2360, Rayburn House Office Building. Hon. Sam Graves (chairman
of the Committee) presiding.
Present: Representatives Graves, Mulvaney, West, Owens,
Schilling, Velazquez, Schrader.
Chairman Graves. Good afternoon, everyone. We will call
this hearing to order. And I want to thank all of you for
joining us today as we examine the practice of large and small
business partnering to create added-value jobs and economic
growth.
For many years, businesses have entered into agreements
with other companies to supply a part for a larger product or
provide a good and service. Increasingly, large companies
create alliances with small firms to access their innovative
ideas. These partnerships allow the larger companies to expand
their current market or product offerings, enter into new
markets, or simply gain a competitive advantage in a
challenging economy. Small companies also benefit from these
alliances by tapping into larger distribution networks,
financing opportunities, and mentoring programs that larger
businesses cannot supply.
It should be noted that both large and small businesses can
be very dependent on each other. A study produced for the
Business Round Table by Dr. Matthew Slaughter, one of our
panelists today, noticed that each type of company is deeply
embedded in the overall U.S. economy with extensive connections
to each other.
Last week, the Committee held a hearing on the state of
entrepreneurship. Heath Hall, co-founder of Pork Barrel BBQ
here in Washington, D.C., testified that large businesses, such
as Harris Teeter, Costco, and Safeway, took chances on stocking
their unknown BBQ sauce and rubs, helping it to be stocked
today in 3,000 stores in 40 states. This is an excellent
example of the interdependence of small and large firms.
And again, I want to thank all of our witnesses for being
here today. And before I yield to the ranking member I want to
note that it is her birthday today and I hope everybody will
join me in wishing her a happy birthday.
Ms. Velazquez. Thank you. Thank you, Mr. Chairman. That is
very kind. And good afternoon to all the witnesses.
America's nearly 30 million small businesses are central to
the economy, representing 99.7 percent of all employers and pay
nearly 50 percent of total private payroll. It is clear that as
small businesses go, so goes the country. For many, this
success is at least in part due to the symbiotic relationship
that is enjoyed with their larger counterparts. During today's
hearing we will examine this and seek to better understand the
effect firm size has on the competitive landscape. Together,
large and small businesses form a collaborative ecosystem that
enables our economy to thrive. Small firms make up the vast
supplier network that multinational companies rely on for goods
and services. In fact, these corporations buy an estimated 1.52
trillion annually from small firms which is about 12.3 percent
of their total sales.
Perhaps nowhere is this interdependence more evident than
in the federal procurement marketplace. Total subcontracting
dollars now eclipse $200 billion with small businesses
receiving more than one-third of these dollars. Over the last
15 years, several initiatives have supported this, including
mentor prodigy programs. As a result, large companies are able
to develop their supplier base, while small businesses obtain
key experience that will enable them to grow stronger in the
future.
While there are real benefits to this cooperation, the
truth is that large companies often enjoy many advantages that
small businesses do not. This is due to the many structural
benefits that come with having greater market power, including
more influence over pricing and advantages in the capital and
labor markets. Larger companies are often able to control the
relationship with small firms, leaving small suppliers to
provide accommodations. This absence of negotiating influence
makes it more expensive for small companies to purchase the
goods and services they need to remain competitive.
Beyond their lack of equal bargaining power, small
businesses face other obstacles in their quest for success.
Even as the economy recovers, insufficient access to capital
remains the number one challenge. Since peaking at $712 billion
in the second quarter of 2008, small business lending has
declined by $113 billion. Conversely, large businesses have
actually seen an expansion in lending since the middle of 2010.
It is clear that small businesses have been disproportionately
affected by credit tightening, while large firms have emerged
relatively unscathed.
Tax policy is another area creating disparity between small
and large businesses as corporations often have dedicated tax
teams for this purpose. Small firms, on the other hand, spend
more time and money simply preparing tax returns. According to
a report issued by the SBA Office of Advocacy, the cost of tax
compliance is 67 percent higher in small firms than in large
firms. Finally, it is also important to note that large
companies are illegally taking federal contracting
opportunities away from their smaller counterparts. In several
cases, large businesses have used a small business front to win
contracts through small business set asides. Such abuses not
only impair the integrity of the procurement system overall,
but divert money away from true small companies.
All of these issues, from tax treatment to access to
capital to government contracts are critical to the
relationship between large and small businesses. While there is
little doubt that these companies can and do work in a
collaborative manner, the reality is that it is often due to
the costly concessions made by small businesses. During today's
hearing we will explore this complex relationship and the many
benefits and challenges that come with it. Ensuring that small
businesses can continue to flourish without the seemingly
inescapable exploitation that comes with it is critical. Doing
so will not only result in a more robust small business sector,
but a brighter economic recovery for the nation.
Thank you, Mr. Chairman. And I yield back.
STATEMENTS OF MATTHEW SLAUGHTER, PH.D., ASSOCIATE DEAN FOR THE
MBA PROGRAM, SIGNAL COMPANIES PROFESSOR OF MANAGEMENT, TUCK
SCHOOL OF BUSINESS, DARTMOUTH COLLEGE; WILLIAM C. McDOWELL,
PH.D., ASSISTANT PROFESSOR, DEPARTMENT OF MANAGEMENT, COLLEGE
OF BUSINESS, EAST CAROLINA UNIVERSITY; ROBERT E. BRUCK,
CORPORATE VICE PRESIDENT, INTEL CORPORATION; PAUL BLACKBOROW,
CHIEF EXECUTIVE OFFICER, ENERGETIQ TECHNOLOGY, INC.
Chairman Graves. Our first witness today is Professor
Matthew Slaughter, who is the associate dean for the MBA
program and the Signal Companies Professor of Management at
Tuck School of Business at Dartmouth College. In 2010,
Professor Slaughter authored a key study for the Business Round
Table on small and large businesses working together, and we
look forward to hearing more about your study today. And
welcome, Professor.
STATEMENT OF MATTHEW SLAUGHTER
Mr. Slaughter. Committee Chairman Graves, Ranking Member
Velazquez, and fellow members, thank you very much for inviting
me to testify.
The topic of today's hearing is extremely important.
Although the news for American workers has improved somewhat in
recent months, America's labor market remains quite damaged.
Today America has 110.7 million private sector payroll jobs.
The first time the U.S. economy reached that number was in
March of 2000. America has created no new private sector jobs
in 12 years, during which time its civilian labor force has
expanded by about 15 million people.
In my remarks I will stress that to address this jobs
challenge one of the most effective ways to support job growth
in small businesses is to support job growth in big businesses.
This is because of extensive connections between large and
small businesses, especially through the supply change, selling
to each other the goods and services used as inputs in product.
Small and big businesses have long helped strengthen the
U.S. economy and each other. Let me here emphasize the rule of
multinational companies which, like Intel, tend to be among
America's biggest. Both the U.S. parents of U.S.-based
multinationals and also the U.S. subsidiaries of foreign-based
multinationals enhance the American economy by the capital
investment, exports, research and development, and good paying
jobs. Though far less than one percent of all American
businesses, multinationals in 2009 accounted for in the U.S.
private sector 24 percent of jobs, 41 percent of investment, 71
percent of goods exports, and a remarkable 84 percent of
research and development.
Neither small business nor large business operates in a
vacuum; rather, each is deeply connected to the other in
product markets, capital markets, and labor markets. One
important connection is time. Small businesses of today can
grow to become the big businesses of tomorrow. Many of
America's largest and most successful companies started small.
Indeed, as the quintessential person pursuing a dream from a
garage or a dorm room. And many of those small start-ups were
born and thrived because of having a big business as a major,
if not the only customer.
Another important connection is the supply chain
partnership. Companies selling to others the goods and services
used as inputs in production. To make their own goods and
services, large companies buy many important inputs from small
companies and vice versa. Input suppliers and their customers
strengthen each other, not just by generating sales but through
many other channels, such as sharing information and
performance standards. Of particular note here are small
companies selling inputs to U.S.-based multinational companies.
In 2008, the U.S. parent operations of U.S.-based
multinationals purchased over $6 trillion in inputs, of which
almost 89 percent was bought from other companies in the United
States, not from companies abroad. But of these trillions of
dollars in domestic input purchases by U.S. multinationals, how
much is bought from small businesses in America? Surprisingly,
this question cannot be answered by any data collected by the
various statistical agencies of the U.S. government.
Given the statistical gap, in 2010, I worked with the
Business Roundtable, an association of chief executive officers
of leading U.S. companies to conduct an original survey of its
members to learn about the role of small businesses and their
supplier base. Taking these survey results as representative of
all U.S. multinationals, I found that the U.S. parent
operations of the typical U.S. multinational buys goods and
services from over 6,000 American small businesses, buys a
total of over $3 billion in inputs from these small business
suppliers, and relies on these small business suppliers for
over 24 percent of its total input purchases. Extrapolating
from these surveys, I further calculated that U.S.
multinationals collectively purchase about $1.5 trillion in
inputs from U.S. small businesses, which is about 12 percent of
the total sales of these small businesses. The bottom-line of
this survey is that the supply chain partnership between U.S.
small and big business is deep and essential to each other's
economic success.
Let me close by offering three policy implications of the
supply chain partnership. One important implication is that
government efforts targeted at just small businesses or just
big business affect all firms, not just firms of a particular
size. Think of exporting. Because of the supply chain
partnership, there are lots of small U.S. businesses engaged in
the global economy by supplying large U.S. exporters, even if
these small businesses themselves do no exporting on their own.
A second important policy implication is that the supply chain
partnership between large and small businesses will almost
surely become more important in the future. Large companies
increasingly operate in large global networks in which final
products are made in many stages that span many countries. As
the global economy continues to grow in size and diversity, so
too will the supply chain partnership between large and small
businesses. And a final important policy implication is that to
better support the partnerships between large and small
businesses, U.S. government data need improving in various
ways.
Let me thank you again for your time and interest in my
testimony and I look forward to answering any questions that
you may have.
Ms. Velazquez. Mr. Chairman, it is my pleasure to introduce
our next witness, Dr. William McDowell. He is a Management
Professor of Entrepreneurship and Family Business at East
Carolina University. He received his Ph.D. from the University
of North Texas in Management in 2006, and his research
specializes in the area of small and medium-size enterprises
and their relationship within larger organizations within the
supply chain. Dr. McDowell is also vice president of the
National Small Business Institute, an organization dedicated to
field-based student consulting and outreach to small
businesses. As a co-editor of the Institute Journal, Dr.
McDowell has written scholarly research articles in the fields
of small business management, entrepreneurship, and field-based
learning. Welcome.
STATEMENT OF WILLIAM C. McDOWELL
Mr. McDowell. Good afternoon, Chairman Graves, Ranking
Member Velazquez, and members of the Committee. Thank you for
the opportunity to appear before you today to discuss this very
important topic. The views and research that I will present
today are my own and not necessarily those of East Carolina
University or its Small Business Institute.
Examining the potential benefits for large and small
business collaboration is a very great thing but there are four
key hurdles that small businesses face when trying to do
business, especially with a large business. To be an effective
partner, small businesses must be able to overcome these
hurdles and obstacles in order to be effective.
Access to capital compared to large businesses is the first
area. Small business basically means fewer assets, which does
translate into less capital and less money for operations for
equipment and expansion. In addition, because of being a small
business, oftentimes they have a smaller product and market
scope which does translate to fewer revenue streams from which
to be able to access capital. And of course in this rough
economy that we have just come through, many of these small
firms have completely depleted their cash and inventory levels
creating much more difficulties. Thus, the difficulty in
obtaining capital, especially for women, minority, and socially
disadvantaged businesses can be a very serious issue when they
are trying to work with larger businesses.
In addition, small businesses, because of their size, are
usually at the dependent stage when we look at the power
dependency levels. Small businesses are often a niche supplier,
sometimes supplying to only one business, and research shows
that being a niche supplier actually works against these small
businesses in retaining contracts with larger businesses and
especially in retaining contracts with the federal government.
These smaller businesses, because of their niche status, can be
simply eliminated when the larger businesses find cheaper
alternatives or other ways of reducing margins, and so in this
case being a niche-market producer does create a problem for
them. However, research does show that information quality,
continued quality improvement programs, trust, communication,
these all do aid the small business in being able to be
effective in these supply chain relationships; however, most of
these organizations, because of their size, do not take
advantage of things such as continuous quality improvement
programs. Flexibility, because of their size, can be a very key
competitive advantage, but again, oftentimes they do not
realize that that is their advantage and they do not go out and
try to seek ways to emphasize that.
Another disadvantage that they have is tax disadvantages.
It is not necessarily the tax rate that is the problem but the
difficulty in computing taxes for these small businesses. One
major issue that has come up in a recent conference was that
many small businesses do not have the experts on staff to find
or take advantage of the tax credits that are available to
them; therefore, they are missing out on those advantages.
Large firms have large staff, large groups of individuals who
are working to help them find these advantages and build on
those, so that can be a problem. Recently, the National
Federation of Independent Businesses indicated that the number
one problem for small businesses is sales; however, this has
come down to almost equal with taxes within the past few years.
And right now the percentage point is only one percent between
those two. But historically, taxes have been cited as the
number one problem for small businesses over the last 25 years.
And the final area is basically the access to qualified
business experts for advice and direction. Large businesses
have experts on staff to help maximize profits, reduce the
cost, and streamline their processes, whereas, small businesses
often do not have these resources on staff to be able to do
these for them. Unfortunately, too many small businesses, and
this is from experience, are not familiar with programs by the
SBA from local SBDCs, which is literally to their detriment
because these can be excellent programs for them to help. Thus,
they begin to narrow their focus because of not being able to
take an outsider's view of the situation. And this is often to
their detriment. Really, the crisis of today that they are
facing prevents them from positioning for tomorrow. A problem
with this is that they can overestimate sales. Again, if we
look at the NFIB's recent paper it shows that small businesses
continually overestimate what their sales are going to be only
to be disappointed when they have their actual sales numbers
come in. Larger firms, they are amenable to stakeholders;
therefore, they are able to have individuals to help them
estimate those sales.
So what are my recommendations? I think we need to continue
to create a favorable lending environment for small businesses.
We need to give better information for small firms to broaden
their scope. We need to streamline the tax system so that all
firms can take advantage of all the advantages that are
available to them, but most importantly, we need to give small
firms access to information and experts through the SBA, the
SBDCs, SBCs, and even the organization I am familiar with, the
SBI.
I would like to thank you, Committee, for the opportunity
to present my views of the current struggle of small business,
and I welcome your questions.
Chairman Graves. Thank you very much. Our next witness is
Robert Bruck, who is Intel Corporation's corporate vice
president and general manager of its Technology Manufacturing
Engineering Division. Mr. Bruck is responsible for managing
Intel's global capital expenditures, as well as government and
industry relations related to technology and manufacturing.
Intel, which is the world's leader in silicon innovation, was
founded in 1968 to build semiconductor memory products. Intel
introduced the world's first microprocessor in 1971. Welcome.
Thanks for being here.
STATEMENT OF ROBERT E. BRUCK
Mr. Bruck. Chairman Graves, members of the Committee, I
appreciate this opportunity to discuss with you the significant
mutual benefits that result from collaborations between large
and small businesses in our industry. Like nearly all large
firms, Intel began as a very small entity. We were founded in
1968 by two scientists with only $2.5 million in venture
capital to manufacture semiconductor memory products. Our
growth began to accelerate in the early '80s when a large firm,
IBM, adopted Intel's microprocessor for its personal computers.
IBM helped provide additional investment and enabled Intel to
expand our capital and R&D investments. Today, Intel is a
Fortune 50 company with 100,000 employees and annual revenues
in 2011 of $54 billion. In the last decade we spent $68 billion
on our U.S. operations, research and development, and
manufacturing capacity.
A 2008 study found between 2001 and 2007, Intel contributed
$758 billion to the U.S. GDP with $458 billion from direct
operations and about $300 billion from companies that used our
products. Intel has over 5,000 suppliers in the U.S. with more
than 2,200 of them classified as small businesses. In 2011,
Intel spent more than $3 billion on goods and services
purchased from small businesses in sectors that range from the
supply of chemicals and gases to construction services. All of
these economic benefits are dependent upon the continuous
development and innovation of semiconductor technology.
I would like to make three points to illustrate how Intel
partners with small businesses to meet competitive challenges
in the global marketplace. First, small businesses play a
critical role and benefit from basic university research as
well as participating in Intel's own research and development
programs. Due to the technical challenges involved in
semiconductor product design, materials research, and
development of advanced process technologies, upstream research
must begin as much as 10 or more years before products enter
the market. Semiconductor companies have a rich history of
pooling their resources to form research consortia to address
long-term technical challenges in a pretty competitive
environment. These consortia, such as the Semiconductor
Research Corporation are partially funded by various federal
agencies, including NIST, DARPA, and NSF.
Continued and expanded federal support for what Intel CEO
emeritus Craig Barrett calls ``the greatest wealth creation
machine in the world,'' the U.S. university research system, is
critical to the U.S. maintaining our global lead in science and
technology and gaining the related job creation benefits for
both large and small businesses. Intel builds on the results of
pretty competitive research with its own proprietary research
in the technology development phase. Intel spends between 13
and 15 percent of annual revenue on research and development,
which in 2011 alone exceeded $8.3 billion, making Intel the
third largest company in the world for R&D expenditures.
Small businesses play a critical role in the research and
development stage through their willingness to collaborate at
the frontier of technology development to help commercialize
new technologies. For example, Energetic Technologies, whom you
will hear from next, receives significant technical assistance
from Intel to develop specific light sources necessary for EUV
lithography, a critical technology enabler. Energetic also
received research grants from NSF, which were used to explore
the potential for commercializing laser-driven light source
technology in the life sciences areas. That same technology is
also used to detect defects in semiconductor chip fabrication.
My second point is that large companies like Intel can
assist small businesses through direct investment. Intel's
venture arm, Intel Capital, invests in small businesses to fill
technology and supply chain gaps. In 2011, Intel Capital
invested over $500 million in more than 80 small businesses to
cover a broad range of industry from consumer Internet to clean
tech to health sciences. As an example, between 2005 and 2008,
Intel Capital and Tallwood Ventures invested $15 million into
small business crossing automation. In 2009, another of our
suppliers, Assist Technologies, went into bankruptcy. Intel and
Tallwood invested another $7 million for crossing to finance
the purchase of certain assets from Assist, saving crucial
U.S.-based capability. The result was a very successful new
product and about 180 high-tech jobs in California were saved.
The last point I would like to make is Intel helps small
businesses with educational, training, and quality programs
that help make them stronger businesses with increased
potential for job creation. For example, the president of a
woman-owned, 19-employee visual communications company recently
noted the following: ``We have worked for Intel for more than
25 years. When the Intel supplier diversity and small business
program took shape over a decade ago, we immediately
experienced the value of its initiatives. Since then, we have
significantly expanded our services and capabilities, made new
business connections, and more importantly, have learned how to
build a better company.''
Our written submission contains more detail on the three
points I have made. Thank you.
Chairman Graves. Thank you, Mr. Bruck.
Our next witness is Paul Blackborow, who is the chief
executive officer of Energetiq Technology, Inc. Founded in
March of 2004, the company is a developer and manufacturer of
advanced light sources that enable the manufacture of nanoscale
structures. These light sources are used in application for
life science instruments and leading edge semiconductor
manufacturing. Thanks for being here.
STATEMENT OF PAUL BLACKBOROW
Mr. Blackborow. Chairman Graves and members of the
Committee, I appreciate the opportunity to appear before you
today to discuss various ways Energetiq technology, a small
Massachusetts-based company and Intel, a large multinational
corporation, collaborate. Our vibrant partnership has resulted
in job creation and financial growth at Energetiq and technical
solutions to pressing manufacturing challenges at Intel.
Energetiq is a small, high-tech company based in Woburn,
Massachusetts. We employ 20 people full-time, most of whom are
engineers and scientists with advanced degrees. Energetiq
specializes in developing advanced light sources for scientific
and technical applications in the semiconductor, life sciences,
and material science markets. Our staff focuses on research and
development related to these technologies and to the assembly,
testing, and marketing and sale of the products. The
subassemblies of our products are manufactured by specialized
companies primarily in Massachusetts and in New England. In
2002 [sic], we expected a majority of our manufactured products
to be exported from the United States.
Our core competence lies in plasma physics. We manufacture
two product lines based on patented technologies that we
developed. The Extreme Ultraviolet Light Source product line is
an enabling light source technology for next generation
lithographic processes in the semiconductor industry. EUV
lithography will allow the manufacture of chips with extremely
small dimensions.
The Laser-Driven Light Source, or LDLS product line, is
used for advanced measurement and inspection applications in
the semiconductor chip fabrication and a diverse array of
applications in the life sciences and material sciences. Our
EUV and LDLS products are all part of Intel's supply chain. The
EUV light source products are bought by many companies which in
turn sell EUV lithography tools and materials to Intel for its
manufacturing plants. Energetiq's LDLS technology and products
are used by Intel to detect defects on silicon wafers as they
pass through the chip manufacturing process. We have licensed
one of Intel's largest capital equipment suppliers to
incorporate the LDLS technology into its inspection and
measurement tools.
Prior to the establishment of Energetiq, our founding team
worked in high-level marketing and technical roles at a large
supplier of process control products to Intel and to other
semiconductor companies. In those roles we learned of Intel's
technology road maps along with the EUV technical challenges
that needed to be met by the supplier community. We were
impressed with Intel's vision for EUV lithography, and even
more by Intel's well publicized financial support of that
vision through research funding and equity investments in its
supplier companies. Intel made it clear that existing sources
of EUV lights were lacking in performance. We were planning to
start a new enterprise and Intel's public commitment to EUV
lithography guided in large part the choice of our first
product. Intel's lithography team leaders agreed to fund some
research at Energetiq to better prove the technology we
developed. In addition, they introduced us to Intel's venture
capital arm and provided two rounds of financing and valuable
coaching on the investment process.
Financing from our investors, including Intel, allowed the
further development of the EUV source technology and the
development and introduction of the LDLS technology. Intel
Capital has held an observer seat on our board of directors
since 2006. This person has provided significant advice and
resources to Energetiq, including assistance on resolving a
complex legal and intellectual property issue. Our Intel
Capital investment manager provides business development
suggestions to Energetiq, and each year we are invited to
attend the Intel Capital CEOs Summit. That event brings
together the CEOs of the Intel Capital portfolio companies with
senior executives from large public companies from around the
world. We have been able to make many useful connections at
that summit.
On the technical side, the senior lithography staff at
Intel have monitored our technical progress on our two
technologies and guided us toward certain business
opportunities. We have been able to showcase our technologies
to Intel's engineers and scientists at events held at Intel's
development operations in Portland, Oregon. We regularly attend
Intel Supplier Days where we can continue to learn the
technical needs and challenges of Intel's manufacturing
operations.
As a result of the technical and investment relationship in
a small company, two technologies critical to the manufacture
of Intel's present generation and future-generation
semiconductor chips have been developed and commercialized.
These particular technologies were not developed by Intel's
large capital equipment suppliers, whose focus on making
supremely reliable and productive chip manufacturing equipment
has, perhaps, made them less capable to aggressively pursue new
technology. Small companies like us can rapidly develop such
technologies if we have a technical problem clearly defined.
In summary, Intel provided the inspiration for the first
product for Energetiq followed by R&D funding and equity
financing. Our relationship with Intel provides us significant
credibility to our customers, suppliers, and our investors. We
have continued to receive valuable technical and commercial
guidance and support from Intel, and Intel's adoption of our
EUV and LDLS technologies has helped drive our revenues from
product sales. Our biggest customer is a large U.S.
semiconductor capital equipment company, a major supplier to
Intel, which represented about a quarter of our sales in 2011.
Thank you very much.
Chairman Graves. We will now start with our questions. We
will start with Mr. West from Florida.
Mr. West. Thank you, Mr. Chairman. Also, ranking member
thank you. And thanks for the panel for being here.
First question I would like to go to Dr. Slaughter and Dr.
McDowell. As I was listening to you speak and read your
testimony I was writing down what seems to be some negative
factors that you listed which are driving our small firms to go
into partnerships with larger firms, such as capital access,
sales, taxes, favorable lending environments, streamline tax
code, access to business experts on staff, and access to
research assistance. So if I could get your insights, where are
the places where legislators such as ourselves have added to
these negative factors and how can we alleviate some of these
negative factors as we move forward?
Mr. Slaughter. That is a great question, Congressman West.
Mr. West. Thank you.
Mr. Slaughter. So a couple thoughts come to mind. One is
clearly on the tax code. I mean, I think folks on both sides of
the aisle here in Washington and in the business community
acknowledge America has one of the most complex, high-burden
effectively tax codes around the world. It is a challenge for
the Intels, but as Dr. McDowell and others know from their
scholarship and others, the order of magnitude and the degree
of the complexity for the small business community is massive.
So it is not just for C corporations. I think one of the things
to keep in mind then with tax reform is a lot of these small
businesses, especially when they start, they are S
corporations, they are partnerships, they have got a lot of
different legal entities where a lot of taxable events flow
through on the personal side.
So one is mindset. When you are thinking about business tax
reform, corporate tax is important but it has to be linked up
with a lot of individual tax issues. And then again, the broad
issues that a lot of economists from all parts of the political
spectrum will acknowledge, broadening the base, reducing the
complexity, lowering the rates. That is one.
I think the other thing, I am not sure what the policy
implication is but I will just point out on the issue of
capital access, clearly in the wake of the world financial
crisis there is an issue about how the banking system is
working. Some people will look at large corporations in America
and they wonder to complain about the large amount of near-cash
assets that large corporations have on their balance sheets.
But as we just heard in the testimony, a great advantage of
that actually is as our financial system struggles to heal,
paradoxically it can be the business sector that provides a lot
of the key financing needs for small businesses.
Mr. McDowell. I would agree that when we look at the tax
issues over the past 25 years, that has been the number one
issue. So I think just the complexity of it, all the new taxes,
the green credits, different things like that, they only add to
the burden of the small business in comparison. I mean, it is a
burden to the large business as well but they have the
resources to take care of those things. Small businesses do not
have those resources. So that is one major issue that we have
to look at.
But also when we think about the legislation, what they
have done to help or hurt with the access to capital, you know,
recently there was just so much uncertainty out there. Banks
make their money by lending money. I mean, that is how they
want to make money. They want to do that. But yet with all the
regulations and the changes that occurred there is just a lot
of uncertainty. And some of the bankers that I work with in my
regular work with small businesses, you know, they want to
lend. They want to do things that will help them make money.
But of course, the regulations are very difficult for them and
for small businesses, of course, with the less access to
capital or assets. I mean, to utilize as collateral, more
guarantees, more things like that from the SBA can be very
helpful and beneficial in those situations.
Mr. West. Thank you. Mr. Bruck and Mr. Blackborow, you
know, as I was listening it seems like this is like the second
and third generations of a great thing about small firms
partnering with bigger firms. You talked about Intel with IBM
and now Energetiq with Intel. So if you could, just briefly
talk about what you saw as the lessons learned, the best
practices in that relationship that you all experienced over
these couple machinations.
Mr. Bruck. Well, I suppose I could begin with the alignment
on very long-term programs, and I want to commend the Committee
for looking at research and development in particular and the
partnerships between large and small companies because unlike
many short-term issues that work with intellection cycles,
these issues may take many, many years. And if you look at
NASA's investments in the '60s and they have reported many
times to Congress on the spinoff of businesses from health care
and telecommunications and energy that have come out of that
program, these things have to survive multiple administrations
and have bipartisan support. So when we see that, like we have
seen in Congressman Velazquez's state with the Center for
Nanoscale Science and Engineering, you can attract global
companies. Some of the best companies in the world have come
there now for the GE450C development and are matching the state
funds that come in and they are working to try to get some
federal matching as well. And the members that participate are
committed to small and minority-owned businesses getting a big
part of the participation there. So you can see this kind of
synchronization and cooperation is really critical to yield
long-term success.
Mr. Blackborow. I would just echo the long-term aspect of
it. I think one of the things that has helped us really with
working with Intel is Intel's long-term vision. This differs
actually from the vision of venture capitalists who are the
main source of funding for people like us. Intel can take a
much longer view partly because it is a corporation. And so the
relationship we have, we can go through peaks and troughs and
Intel will stick with us because they value the technology over
the long term. So it is really long-term investment for us,
patient investment which we perhaps we would not get from the
venture capital community, and we will not get a look from the
banking community. At this point in our company's development,
sources of loan capital are simply not available at all and
that is something, of course, that would be helpful to us as we
want to grow.
Mr. West. Thank you, Mr. Chairman. I yield back.
Chairman Graves. Ranking Member Velazquez.
Ms. Velazquez. Thank you, Mr. Chairman.
Dr. McDowell, due to the recession, demand for both
products and services dropped dramatically, and for the small
business that weathered the storm and survived, how can they
prove to lenders that they are creditworthy after a prolonged
period of below average cash flow?
Mr. McDowell. This is a major issue because, again, they
depleted their cash and inventory levels and now we are trying
to help them to work with larger businesses and that can be a
major problem and hurdle for them to overcome. One thing that
we can do is to help them to better plan for their future.
Business planning is a very difficult thing and sometimes
overlooked by small businesses. If we can have a greater
business plan in place on the part of these small businesses
then they will be able to better show where their revenue
streams are going to come from, how they are going to help pass
the cash that will enable them to be able to get credit. So
that can be a very major plus and bonus for them.
Ms. Velazquez. How can we help, you know, you mentioned
that we have technical assistance through SBA, and in putting
together a business plan or helping them prepare for the future
in terms of having a business plan in place, how can--what can
we do to get information that is available through SBA get to
small businesses? Do you have any idea?
Mr. McDowell. Well, I do believe this is a situation where
really they need to be aware of what is available. And so
therefore, the SBA and other organizations have not been doing
a good job of marketing their own services to these small
businesses. I think that the more education that we can give to
small businesses and even to small business owners starting at
the university level when they go through their training at a
university if they are at a university or college, if we have
more entrepreneurship programs such as, you know,
interdisciplinary entrepreneurship programs or small business
programs, so no matter what industry they are going into--arts,
science, anything else--the more education they can have up
front will help. But of course, at a later state we need to get
them as much help as possible, and that is where I think
universities can help if we will continue to push university
systems and other aspects like that to help create an awareness
of what is out there. Even things such as a lot of small
businesses utilize social media as a marketing tool. You know,
maybe the SBA and other resources need to look at where the
small businesses are going for marketing to market their brands
as well.
Ms. Velazquez. Thank you. Dr. Slaughter, the report that
you made reference to that you prepared was done in 2010.
Right? Since then a lot of things have happened. We have an
economy that is creating jobs and consumer spending is up.
Given those indicators would you revisit your report and will
it be different if you have those counter into your analysis
those factors?
Mr. Slaughter. I think two things come to mind. One is sort
of at the company level of the surveys, in informal
conversations with some of the companies that were involved in
the survey in the first wave a couple of years ago, their sense
is things have not changed very much. You know, I think that
speaks to a couple things. One is the size of the companies
that were involved in the survey. They were the Intels of the
world and a lot of larger corporations. And again, on average
when they have established over 6,000 small business supplier
relationships, even amidst the financial crisis and the turmoil
that created, a lot of those relationships still persist. And I
think that some of the earlier testimony we heard speaks to
that. The long-term nature of those relationships, both the
large companies and the suppliers try to maintain those. The
one thing the numbers would be different is thanks to some
modest, though still fragile economic recovery, the overall
magnitude that one would infer from the survey that we
conducted of the amount of input to purchase it, for example,
would hopefully be a bit larger today than it was two years
ago.
Ms. Velazquez. Okay. According to the Bureau of Labor
statistics, large multinational companies have cut their
workforces in the U.S. by 2.9 million since 2000, while
increasing overseas employment by 2.4 million over the same
time period. By contrast, small firms created and net 14.5
million jobs in the 15-year period from 1993 to 2008. Why do we
see such a disparity in the contributions of large and small
firms in creating jobs here in the U.S.?
Mr. Slaughter. So the broader answer is much faster
economic growth abroad. There is a lot of academic research by
me and others that have shown when U.S.-based multinationals
expand abroad, that expansion in hiring and capital investment
tends to support more hiring and more capital investment in
America. So there is sometimes a presumption that more abroad
means less in America, but when that growth abroad, as it has
been with the tremendous growth in the BRIC and beyond
countries is driven by really fast economic growth, a lot of
that tends to be down to America.
Ms. Velazquez. So you do not agree that the data for
suggests that the outsourcing of jobs contributed to a higher
unemployment in America?
Mr. Slaughter. The outsourcing played some role but the
prevailing scholarship to date shows that it is a very modest
role. And if I may, the numbers that you cited, the more
revised numbers from the BEA show U.S. employment declines that
are not quite as large in the U.S. paired operations of U.S.
multinationals. And it was entirely concentrated in a handful
of manufacturing industries. Services, for example, in the U.S.
over the 2000s, U.S. parent employment growth was several
hundred thousand in conjunction with fast employment growth in
services companies abroad.
Ms. Velazquez. Thank you. Mr. Blackborow, when small
businesses are awarded contracts through the small business
contracting programs, they are allowed to subcontract a certain
percentage of their work. However, there have been numerous
reports that have detailed the abuses with these limitations on
subcontracting. In your experience, what part of the contacting
process makes it susceptible to contracting abuse?
Mr. Blackborow. Honestly, I could not say. We have been the
recipient of SBIR grants and we have been very happy with that.
The comment I would make with regard to SBIR grants is not with
regard to any elicit practices; simply that it takes too long
to get between phases in the SBIR programs. So if you have a
phase one program, getting to phase two where there is more
money is often a big gap. And so shortening the timeline for
SBIR programs for small companies like us would make the
program much more supportive of our business goals. We have
done very little subcontracting and only to universities, and I
do not believe they are corrupt.
Ms. Velazquez. We are not implying that.
Mr. Blackborow. Okay.
Ms. Velazquez. Mr. Bruck, the semiconductor industry is
among the most capital-intensive in the world. By the way, we
have asked GAO to do investigations. Those reports have been
released right here and it shows that a lot of large companies
that do not qualify and violate the eligibility requirement to
apply for contracts that are awarded to small businesses have
been awarded to large businesses and that is my question. What
is that about?
The semiconductor industry is among the most capital-
intensive in the world, both with research and manufacturing
costs running well into the hundreds of millions of dollars. If
these costs continue to escalate, how will small and medium-
sized companies manage to secure adequate investment to allow
them to innovate and keep pace with large companies like Intel?
Mr. Bruck. Yes. It is a challenge and it is one of the
reasons that we have developed such a closely integrated
relationship with our small business partners. And this extends
not only to our direct supplier but to the suppliers of our
suppliers of our suppliers. We find that, you know, many of the
issues around innovation or quality breakthrough or cost
breakthrough happen many levels down in the supply chain, and
that is where the big opportunity is for small businesses. And
I think as the testimony here has shown, those companies are
more agile in many ways and can move to invest first before
markets are mature.
The other point I would like to make is with that
investment, it does help us keep high paying jobs here in the
U.S. The more capital intensive our industry, the more the
labor cost, which is a relative cost to the total product,
diminishes, which is why we have 75 percent of our revenue is
exported to the rest of the world. Sixty percent of our jobs
are here in the U.S. and they all average well over $100,000 at
all sites.
Ms. Velazquez. Thank you. The R&D tax credit is of great
importance to the technology and manufacturing industries. It
provides businesses of all sizes the ability to invest and
innovate research. How in your view could this credit be
simplified to make it more business friendly, and why should it
be made permanent?
Mr. Bruck. Yes. A great point. And I think our view is
making it permanent would be wise and helpful for U.S. job
creation. In terms of its usefulness, I think expanding on the
discussions we are having today to understand how R&D
investment creates a broader impact in the U.S. job market and
in U.S. GDP growth would be helpful I think to the overall
narrative of why the R&D tax credits should be made permanent.
Ms. Velazquez. Thank you. Thank you, Mr. Chairman.
Chairman Graves. Mr. Schilling.
Mr. Schilling. Thank you, Mr. Chairman. And welcome,
fellows.
One of the things that--I own a small business in Moline,
Illinois. It is just a small S corporation. One of the things
that right now we are really hurting because, of course, the
disposable cash with the high gas prices, of course, which we
are trying to get under control, but one of the questions I
have is do you believe that more regulation and higher taxes
will help hold American companies here or will that be an
incentive for them to move outside the United States?
Mr. Bruck. To me?
Mr. Schilling. Yes.
Mr. Bruck. Okay. Well, obviously it is a disincentive for
investment here. Our view, and let me contrast between large
and small companies because on both the tax issue and the
regulatory issue, but we have a global economic competition
that is going on. The main thing that we would look at as a
large company is a level playing field. So I think trying to
look for ways that, as I mentioned, 75 percent of our revenues
is exported into other markets. So our competition is coming
largely from Taiwan or Korea or Japan or places like that that
may have more favorable tax treatment. But it is even more
important for the small business. And if you look at the amount
of money they can reinvest into research and development,
reinvest into hiring and expanding operations, that really will
have a very long-term return on investment. And so providing
that assistance is critical.
The regulatory question, if you look at something like
Sarbanes-Oxley, I certainly understand why we need to protect
investors especially with companies as large as Intel. But as a
percentage of overall revenue, the administrative cost for
small business to comply with Sarbanes-Oxley is a crippling
cost and again, takes away from investment and innovation and
job creation. So looking at the regulatory framework and maybe
contrasting the difference for large versus small businesses
would be helpful.
Mr. Schilling. Very good. Mr. McDowell, this is kind of
tied into the same thing. In your written testimony you say
that lack of awareness of available tax credits rather than
high tax rates may be the problem for small firms. According to
the NFIB, high tax rates are a problem because they siphon
capital that entrepreneurs need to invest back into their
companies to create jobs. And I can relate to this firsthand
because right now our taxes in our city, in Moline, Illinois,
continue to go up and then the business is constantly dropping.
And one of the problems is we have some equipment that needs to
be replaced and instead of being able to replace the equipment
we cannot and we are having to let people go. So it is kind of
a tough situation here. Basically, how do you respond to
something like that, sir?
Mr. McDowell. I am not saying that tax rates are not high
for small business. I am saying that oftentimes, if we look at
the trends over years, the taxes, you know, whether they have
been up or down it always seems to be the number one problem
for small business. I am not trying to deviate from that. But I
am saying that what we are seeing today is that as more and
more tax credits or different ways of even organizing your
business are developed, too many small businesses are not
taking advantage of the credits that are available to them. So
I am not trying to imply that the taxes are not high and
burdensome for businesses at all; it is just oftentimes there
are too many things that are missed. And there are actually
firms now that go out and specialize and go into small
businesses such as yours and saying, look, we will do what we
can to save your business and we will charge you a percentage
of those tax savings as our fee. But again, the uncertainty for
most businesses, whether or not it is going to be beneficial to
them to explore different advantages or disadvantages can be
difficult.
Mr. Schilling. Okay. Very good. I appreciate that. I yield
back my time, sir.
Chairman Graves. Mr. Mulvaney.
Mr. Mulvaney. Very briefly. Thank you, Mr. Chairman.
Mr. Blackborow, you mentioned access to capital and you
said you are participating in the SBIR program. Have you ever
had occasion to try and get any other SBA financing, more
traditional SBA lending, that type of thing?
Mr. Blackborow. No, we have not. We have approached various
banks from time to time to sense whether they would lend money
to a company like us and they have not been very interested.
Honestly, they do not feel that we are at a point in our growth
that makes them feel comfortable enough. And thank goodness
that we have people like Intel around.
The biggest challenges we have are really not around
financing, honestly. Or taxes at this point in our growth. Our
biggest issue is access to good, talented people. And so the
things that I would point out to the Committee, our focus on
STEM education in this country needs to be really emphasized.
We have trouble finding good, qualified scientists and
engineers now that are born in this country or educated in this
country. And when we advertise for a job we often get
applicants from China, from Russia, from India, and many of
them require visas which we cannot always get. And so I would
say--and equally we have grad students at MIT down the street
from us who when they get a Ph.D. have to go home when we just
educated them in this country. This does not make any sense to
me at all. So I would say the things that we need to do is to
keep the talent here in this country and then it will fuel the
creativity of companies like ours.
Mr. Mulvaney. Thank you. I appreciate that comment. You
mentioned also about the SBIR program and shortening the time
between the phases. I am trying to keep the topic of
conversation to the jurisdiction of this Committee. Is there
anything else that the Small Business Committee, the Small
Business Administration can do to help any of you gentlemen? I
am trying to figure out what it is that we should be
specifically focusing on in this room.
Mr. Blackborow. Let me just answer as a small business to
say that I believe I am not very aware of what the Small
Business Administration does and I think that in itself is a
challenge. We have not been reached out to. I probably could go
find it if I dug into it but it has not been something that has
been obvious to me that I should go chasing after because I am
not sure what I would get when I would get there.
Mr. Mulvaney. You would be surprised, by the way, at the
number of times we hear that, which is frustrating, us serving
on the Committee. And recognizing the time, I am curious. I
seriously have a question that is just of interest to me,
probably not to the rest of the Committee, how do you all
handle intellectual property? How do you handle proprietary
information? When you do these partnerships between these big
businesses and these small businesses, are you relying heavily
on legal documents or is there something else that allows you
to function but still allows you to sort of trust each other
not to steal each other's ideas?
Mr. Bruck. Well, no, it is very carefully controlled. And
again, one of the points I would like to make about investment
in small businesses and technology fields is that we can create
high value products in this country that we can export to the
rest of the world, but you need that intellectual property
protection to be able to do that. And so what we will tend to
do in a relationship like we have with Energetiq is to find
what we want is the process technology, the technology related
to building chips. We are not in the equipment business per se
and so they should expect to own the IP around the hardware.
And we bring in what is all of our background IP so we are not
mixing that up. And then there is a very careful chain of
custody as we create new technology together. But that allows
them to go off and build products and serve an equipment market
and us to go off and serve the chip market.
Mr. Blackborow. Yes, I would say it is quite sophisticated,
the relationship we have both with Intel and our other large
customer in this business. We have very good intellectual
property lawyers on our side and theirs, and we carefully carve
it out. We both want to own what we need and we do not want to
jointly own things that we do not need because it gets
cumbersome. So it is easier if we own our intellectual
property, they own theirs, and we carefully spell it out in the
contractual arrangements that we have between the companies.
I would also say that Intel and the other companies are
very respectful of our intellectual property and they need it,
which is why they do not want to be seen to be taking it
generally.
Mr. Mulvaney. Gentleman, thank you very much. Thank you,
Mr. Chairman.
Ms. Velazquez. Mr. Chairman, I just would like to share
with the panel that SBA not only offers a series of different
economic development programs through technical assistance to
helping put a business plan together to matching borrowers with
lenders. But last year when large financial institutions were
not lending to small businesses, the SBA stepped up and we
injected--the federal government injected close to $30 billion
into the economy. Where would this economy be today if it was
not because of the role that we played in helping small
businesses access affordable capital. So you have been lucky
that you did not need their service, but a lot of businesses in
this country, small businesses depend on the kind of services
that the Small Business Administration provides.
Thank you, Mr. Chairman.
Chairman Graves. Thank you all very much for participating
today. We appreciate it.
I would ask unanimous consent that members have five
legislative days to submit statements and supporting materials
for the record. Without objection, so ordered. And we
appreciate it again.
Thank you. This hearing is adjourned.
[Whereupon, at 2:01 p.m., the Committee was adjourned.]
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