[Congressional Record Volume 143, Number 144 (Thursday, October 23, 1997)]
[Extensions of Remarks]
[Pages E2060-E2062]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                ADDRESS DELIVERED BY BERNARD L. SCHWARTZ

                                 ______
                                 

                         HON. HOWARD L. BERMAN

                             of california

                    in the house of representatives

                      Wednesday, October 22, 1997

  Mr. BERMAN. Mr. Speaker, I rise today to direct the attention of my 
colleagues to an important address delivered recently at the Johns 
Hopkins School of Advanced International Studies by Mr. Bernard L. 
Schwartz.
  Bernard Schwartz is one of America's premier industrialists. For at 
least the past quarter of a century, he has been a trusted, 
confidential advisor to Presidents, Cabinet members and Members of 
Congress. He is currently Chairman and Chief Executive Officer of Loral 
Space and Communications Ltd, a global high technology firm that 
primarily concentrates on satellite manufacturing and satellite-based 
services.
  During the first Clinton administration, Mr. Schwartz served on the 
Defense Science Board Task Force on Antitrust, which issued the 
guidelines that govern current mergers in the defense industry. Through 
his private sector efforts and his public sector service, Bernard 
Schwartz is a true expert on a range of issues affecting America's 
continuing technological prowess and economic well-being.
  In his address--``Defense Industry Consolidation: Where Do We Go From 
Here?''--Mr. Schwartz astutely describes the state of our Nation's 
defense industrial base. He provides some excellent suggestions for 
steps we can take to maintain healthy competition in the defense 
industry even as that industry undergoes unprecedented consolidation.
  As those of us on the House Judiciary Committee know, the importance 
of competition in this vital industry cannot be understated: it is 
absolutely essential to ensure that American taxpayers receive a fair 
return on their investment and that we don't send our men and women in 
uniform into harm's way with inferior equipment.
  Mr. Schwartz also touches on two other issues that are of great 
interest to me and many of my colleagues: trade with the People's 
Republic of China and fast track trade negotiating authority.
  As the ranking member on the Asia and the Pacific Subcommittee of the 
House International Relations Committee, I have spent countless hours 
debating our policy toward China. I believe that negotiating China's 
integration into the international community is one of the most 
critical foreign policy challenges we now face. No one can doubt 
China's emergence as a global power with nuclear weapons and a 
permanent seat on the U.N. Security Council. Becoming a world, power, 
however, entails bearing the responsibility of acting like one, and 
abiding by international treaties and law.
  Prior to 1997, I consistently voted to continue MFN for China because 
I believed that ending that status would not bring about the change we 
week to encourage. This year I changed my position because China has 
continued to proliferate technologies associated with weapons of mass 
destruction to Iran and Pakistan. Such behavior runs counter to all 
international norms. But I, like Bernard Schwartz, remain very hopeful 
that we can improve our relations with China and build on our existing 
economic ties with the people of that country.
  I strongly agree with Mr. Schwartz that we should support President 
Clinton's request for fast track. This authority--held by every 
President since Gerald Ford--is necessary to ensure that our trade 
negotiators have the leverage they need to pry open overseas markets.
  It is clear that our economic prosperity at home is closely tied to 
our active participation--and indeed, leadership--in the global 
economy. Since 1992, almost 40 percent of our domestic economic growth 
is directly related to international trade. The United States cannot 
afford to sit on the sidelines while the rest of the world hammers out 
new trade pacts.
  Following is the text of Mr. Schwartz's address:

       Defense Industry Consolidation: Where Do We Go From Here?

                        (By Bernard L. Schwartz)

       Thank you, Chairman Pitofsky, Dean Wolfowitz, and ladies 
     and gentlemen for joining us for what I hope will be a 
     provocative and useful discussion about defense industry 
     consolidation.
       It is a pleasure for me to be back speaking at the Johns 
     Hopkins School and Advanced International Studies. I have, in 
     fact, been giving talks here on subjects associated with the 
     U.S. Defense industrial base for roughly the past decade, and 
     I applaud the continuing interest of the school, under the 
     very able leadership of Paul Wolfowitz, in this subject. I 
     have felt for a long time that the health of the defense 
     industrial base is of critical importance to keeping the 
     United States strong and secure. During the years of the cold 
     war; it was critical for us to have a healthy industry to 
     deter the kinds of threats that we faced in that era, and, in 
     my

[[Page E2061]]

     view, it continues to be critical for us to maintain a vital 
     defense capability to field the most advanced military 
     systems and weaponry. Defense technology and its production 
     base will save lives and provide the foundation of an 
     effective foreign policy.
       In the late 1980s, when I first spoke here, I was concerned 
     about the threat posed by foreign companies buying, without 
     suitable constraints, American defense firms. I have always 
     favored opening American markets to foreign participation. 
     But I felt that, particularly in the defense arena, there 
     should be some guidelines governing foreign participation. So 
     I spoke here and subsequently authored a paper that Johns 
     Hopkins published, entitled; ``Foreign Ownership of U.S. 
     Defense Companies; Where Do We Draw The Line?'' Happily, in 
     my view, in the intervening years the U.S. Government has 
     helped to draw a useful balance in this area, demonstrating 
     that good government policy can work with industry to produce 
     constructive results.
       In the early 1990s, Johns Hopkins again provided me an 
     opportunity to address defense issues. On this occasion, the 
     subject was the impact of a planned, precipitous decline in 
     defense procurement. I was particularly concerned about what 
     this might mean for our industrial base and our security 
     interests. I felt then, and feel now, that this country over-
     armed in the 1980s. The industry has excess personnel and 
     excess capacity to meet the changed threat, so downsizing was 
     appropriate and inevitable. However, I felt that this needed 
     to be done purposefully, with a continuing eye on the 
     changing threats that the United States would be called on 
     to face in a post-cold war world. At that time, I stressed 
     that the DOD and industry needed to form a new covenant to 
     transform, sensibly, our defense industry into a smaller, 
     leaner, but healthier producer of the world's finest 
     weaponry for the world's finest peacekeeping force. At the 
     time, this was in conflict with the apparent Laissez-Faire 
     policy of the DOD.
       I was, therefore, delighted when I was asked in mid-1993 to 
     serve as a member of the defense science board task force on 
     antitrust. Its chairman was Bob Pitofsky, who proved to be 
     both a masterful leader and consensus-builder. It was a 
     difficult assignment, not only because the issues were 
     complex, but because they cut across a wide spectrum of 
     government, industrial, defense and social interests. One 
     challenge facing the task force's members was keeping our 
     civility while advocating strongly held convictions.
       The resulting report was constructive and balanced, and, I 
     think, unanimous. Its recommendations formed a basic 
     framework for the defense industry consolidation to the 
     overall benefit of all interests. Bob Pitofsky's wisdom, tact 
     and negotiating skills were essential to that successful 
     result.
       In the roughly 3\1/2\ years since the issuance of this 
     report, the restructuring of the U.S. defense industrial base 
     has gone forward to an unprecedented degree. During this 
     period, there have been more than a dozen major defense 
     mergers, involving roughly $60 billion. The most recent, and 
     one of the largest of these transactions, Lockheed Martin's 
     acquisition of Northrop Grumman, is still pending before the 
     antitrust authorities at the Department of Justice. In all, 
     approximately $100 billion in mergers and acquisitions have 
     already occurred since 1990.
       It is appropriate to measure how effective we were during 
     the initial phase of industry consolidation. I think we did 
     well. Recall the consternation that greeted the beginning 
     stages of the downsizing. Stories about plant closings were 
     prime time media events, emphasizing the economic impact on 
     communities, and widespread concern for the one million 
     employees whose jobs were terminated. These men and women, 
     possessed of skills and training that were once regarded as 
     national assets, were suddently rendered redundant. Southern 
     California, Long Island, and many formerly prosperous areas 
     were in serious recession.
       But then a miracle of economic recycling occurred. 
     Aggressive entrepreneurialism recycled defense resources, 
     transferring those specialized skills to commercial 
     applications. Thus liberated, this human capital, coupled 
     with huge investment capital, exploded into new businesses, 
     new technologies, new plant investments, and new markets. The 
     genius of American ingenuity, unhindered by the Government 
     bootstrapping of the European economic model, invented, 
     developed, invested and produced at higher levels of 
     efficiency than could ever have been imagined, and brought 
     forth a new paradigm of wealth and job creation, and an 
     expanding economy without inflation.
       What a success story--the result of a successful 
     collaboration between government and industry, not unique in 
     the American experience, but nonetheless, fantastic.
       My personal experience, and Loral's, is totally consistent 
     with this history. By the end of 1995, Loral Corporation grew 
     to a $7.5 billion high-tech electronics systems company. 
     Almost all of our activities were involved with defense. We 
     were consistently profitable and we were the leading supplier 
     of many of the significant technologies used in defense 
     electronics.
       In fact, Loral was a principle beneficiary of defense 
     consolidation. But the merger in 1995 of Lockheed Martin rang 
     a bell. We read the merger between a leading platform company 
     and a leading electronic system supplier into a mega-sized 
     player as the beginning of a new phase in the industry 
     rationalization. This was a vertical integration that left 
     companies, even as strong as Loral, vulnerable. We determined 
     that remaining independent as a defense contractor was not a 
     good strategy for the future. We initiated discussions with 
     Lockheed Martin in a fairly unique transaction, selling the 
     defense operations for about $9.5 billion, keeping the 
     satellite and most of the space operations, and paying a $8 
     billion plus cash dividend to our shareholders. Twenty years 
     prior, Loral's aggregate shareholder value totalled $7.5 
     million. In 1996, including the value of Loral Space and 
     Communications and Globalstar, shareholder value totalled 
     about $11 billion. Today's equivalent value is about $14 
     billion.
       The reason we chose Lockheed Martin as a merger partner was 
     that our companies provided the best business and operating 
     fit. The synergies offered the best opportunities for growth 
     and the best prospects for a good integration of Loral's 
     employees. I am proud to say that these considerations were 
     extremely important. It became a win-win transaction, and 
     offered bountiful returns to our shareholders, as well.
       What is more relevant to this evening's discussion is 
     management's decision to transfer our energies to commercial 
     space and telecommunications after a long and successful 
     defense experience. Although defense will remain a good 
     business, we nevertheless felt vulnerable to the vertical 
     integration that was coming. The point here is that a merger 
     of mega-resources into a vertically integrated defense 
     supplier present a threat to second tier companies, even if 
     they are large primes. Now, Loral had an option--recycle into 
     an emerging commercial market. But, if others similarly 
     opted out also, a mass exodus of independent producers 
     from the subtier level of the industry would not serve the 
     country's vital interests.
       In my judgement, the threat of vertical integration will 
     have a chilling effect on our national capability. It is 
     commonly accepted that much of the most innovative technology 
     developments are advanced by the creative environments of the 
     smaller, independent companies. If we allow the mega-forces 
     created by industrial consolidation to vertically consume 
     these second and third tier independents, we risk losing a 
     critically important segment of industry.
       However, this development is not inevitable, and I was 
     delighted last year when the defense department decided to 
     create a task force to look at vertical integration. The task 
     force was specifically created to analyze the potential 
     effects of vertical integration on defense products and to 
     identify whether the defense department should take any new 
     initiatives. I know that the task force worked hard, held a 
     number of searching meeting and produced a useful final 
     report, but I think it should have reflected a greater 
     urgency by offering some concrete steps to help maintain a 
     healthy and competitive subtier base. At least two well-
     established procurement procedures that would serve well the 
     needs of the department and those of the industry are 
     available. One is to separate prime weapon platform 
     procurements from procurements of major subsystems, support 
     services and training. From the RFP offering through the 
     granting of contracts, if government acquisitions were to be 
     so divided, the DOD customer would have access to all 
     available technology and performance on the basis of merit. 
     This practice is more difficult to administer than awarding 
     everything to one contractor, but I believe the offsetting 
     benefits are more than worth the inconvenience and cost.
       A successful example of this procedure, and there are many, 
     is the F-15 program in which the platform was competed and 
     then secured from McDonnell Douglas, but a major avionics 
     system, the radar warning receiver, was separately supplied 
     by an electronics company, in this case Loral. The point 
     being, the platform manufacturer could not automatically 
     choose an internally provided system when, in fact, a better 
     solution was available because the DOD acquisitions divided 
     the platform procurement from its major components.
       A second initiative that would help to ensure the integrity 
     of our industrial base would be to issue the prime contract 
     for complex weapon system procurement to system integrators. 
     This would separate the hardware and software manufacturing 
     functions from the design, engineering, and integration 
     activities. In one procurement which can be successfully 
     cited, the British Ministry of Defense awarded the 
     procurement of the total helicopter system to an integrator 
     as prime. The helicopter platform supplier, as well as all 
     other subsystem suppliers, are sub-contractors to the 
     integrator prime. It is a large procurement and, thus far, is 
     quite successful. Parallel other examples could also be 
     cited.
       The effective implementation of these initiatives would 
     require a vigorous commitment from the DOD, including its 
     most senior officials. I believe that such a commitment is 
     called for at this time.
       In summary, then, it would appear to me that a pro-active 
     defense policy that seeks to maintain a healthy defense 
     industry is essential to our national interest. Further, 
     although the industry consolidation has progressed rapidly, 
     the process will continue. In this respect, our concern about 
     the cannibalistic character of vertical integration requires 
     caution as it relates to the industry sub-tier. Finally, 
     there are well-established DOD procurement practices, in 
     place, to provide the appropriate protection, but it will

[[Page E2062]]

     require aggressive leadership implementation to secure the 
     best results.
       I am confident we can accomplish this. After all, in the 
     adjustment from war to peace, America has led the way in 
     beating swords into plowshares. We have realized an enormous 
     peace dividend in the form of R&D and production resources 
     released to general economic development, and in this regard, 
     we must credit government initiatives that led the way to 
     downsizing while balancing the interests of national defense 
     and industry viability.
       Before I conclude, I should add one controversial issue 
     that is relevant to an effective defense policy. Any 
     dicussion of the future of defense should include the 
     critical role of trade in preventing military confrontation. 
     As I mentioned earlier, Loral is now totally focused on 
     commercial satellite manufacturing and satellite-based 
     services. As such, we are deeply immersed in foreign markets, 
     notably in China, which is a customer for our large 
     geostationary satellites and a partner in our globalstar 
     satellite telephone system.
       In my travels to China, and in my involvement in the policy 
     debates on global trade, as well as Loral's widespread 
     engagement in international joint ventures, I have become 
     increasingly convinced that expanding commerce is the best 
     way to promote peaceful relations between our two countries 
     and to avoid the type of isolation that can lead to military 
     miscalculation.
       In that regard, I believe it is critical that President 
     Clinton be given fast track authority to continue his highly 
     successful trade policy. Over the past five years, 13 million 
     new jobs have been created in the United States, close to two 
     million of them in new, export-related jobs that pay on 
     average 15 percent higher wages.
       Unemployment is at a 24-year low and we are now the most 
     competitive economy in the world. Exports are up by more than 
     $300 billion, notably in high-technology, and we have 
     regained world leadership in automobiles and semi-conductors. 
     This is not the time to hamstring the President and threaten 
     our unprecedented prosperity. Our startling economic progress 
     is due to the combined impact of defense recycling, new 
     technologies, improved productivity, dynamic capital markets, 
     and a global economy. I hope that our friends in the Congress 
     will keep their eyes on the ball and will approve the fast 
     track legislation to keep us on the fast track to even 
     greater prosperity.
       Thank you. I will be delighted to answer questions.

       

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