SPEAKERS       CONTENTS       INSERTS    Tables

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73–330PS
2001
THE AEROSPACE INDUSTRIAL BASE

HEARING

BEFORE THE

SUBCOMMITTEE ON SPACE AND AERONAUTICS
COMMITTEE ON SCIENCE
HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

FIRST SESSION

MAY 15, 2001

Serial No. 107–10

Printed for the use of the Committee on Science

Available via the World Wide Web: http://www.house.gov/science

For sale by the Superintendent of Documents, U.S. Government Printing Office
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Internet: bookstore.gpo.gov  Phone: (202) 512–1800  Fax: (202) 512–2250
Mail: Stop SSOP, Washington, DC 20402–0001

COMMITTEE ON SCIENCE

HON. SHERWOOD L. BOEHLERT, New York, Chairman

LAMAR S. SMITH, Texas
CONSTANCE A. MORELLA, Maryland
CHRISTOPHER SHAYS, Connecticut
CURT WELDON, Pennsylvania
DANA ROHRABACHER, California
JOE BARTON, Texas
KEN CALVERT, California
NICK SMITH, Michigan
ROSCOE G. BARTLETT, Maryland
VERNON J. EHLERS, Michigan
DAVE WELDON, Florida
GIL GUTKNECHT, Minnesota
CHRIS CANNON, Utah
GEORGE R. NETHERCUTT, JR., Washington
FRANK D. LUCAS, Oklahoma
GARY G. MILLER, California
JUDY BIGGERT, Illinois
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WAYNE T. GILCHREST, Maryland
W. TODD AKIN, Missouri
TIMOTHY V. JOHNSON, Illinois
MIKE PENCE, Indiana
FELIX J. GRUCCI, JR., New York
MELISSA A. HART, Pennsylvania
J. RANDY FORBES, Virginia

RALPH M. HALL, Texas
BART GORDON, Tennessee
JERRY F. COSTELLO, Illinois
JAMES A. BARCIA, Michigan
EDDIE BERNICE JOHNSON, Texas
LYNN C. WOOLSEY, California
LYNN N. RIVERS, Michigan
ZOE LOFGREN, California
SHEILA JACKSON LEE, Texas
BOB ETHERIDGE, North Carolina
NICK LAMPSON, Texas
JOHN B. LARSON, Connecticut
MARK UDALL, Colorado
DAVID WU, Oregon
ANTHONY D. WEINER, New York
BRIAN BAIRD, Washington
JOSEPH M. HOEFFEL, Pennsylvania
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JOE BACA, California
JIM MATHESON, Utah
STEVE ISRAEL, New York
DENNIS MOORE, Kansas
MICHAEL M. HONDA, California

Subcommittee on Space and Aeronautics
DANA ROHRABACHER, California, Chairman
LAMAR S. SMITH, Texas
JOE BARTON, Texas
KEN CALVERT, California
ROSCOE G. BARTLETT, Maryland
DAVE WELDON, Florida
CHRIS CANNON, Utah
GEORGE R. NETHERCUTT, JR., Washington
FRANK D. LUCAS, Oklahoma
GARY G. MILLER, California
MIKE PENCE, Indiana
J. RANDY FORBES, Virginia
SHERWOOD L. BOEHLERT, New York

BART GORDON, Tennessee
NICK LAMPSON, Texas
JOHN B. LARSON, Connecticut
DENNIS MOORE, Kansas
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ZOE LOFGREN, California
SHEILA JACKSON LEE, Texas
BOB ETHERIDGE, North Carolina
MARK UDALL, Colorado
DAVID WU, Oregon
ANTHONY D. WEINER, New York
RALPH M. HALL, Texas

ERIC STERNER Subcommittee Staff Director
BILL ADKINS Professional Staff Member
ED FEDDEMAN Professional Staff Member
RUBEN VAN MITCHELL Professional Staff Member
CHRIS SHANK Professional Staff Member
RICHARD OBERMANN Democratic Professional Staff Member
MICHAEL BEAVIN Legislative Assistant

C O N T E N T S

May 15, 2001
    Opening Statement by Dana Rohrabacher, Chairman, Subcommittee on Space and Aeronautics, U.S. House of Representatives

    Opening Statement by the Honorable Bart Gordon, a Representative in Congress from the State of Tennessee

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    Hearing Charter

    Statement by John W. Douglass, Brigadier General, USAF (ret.); President and Chief Executive Officer, Aerospace Industries Association of America, Inc.

    Statement by Thomas S. Moorman, Jr., General, USAF (ret.); Vice President, BoozAllen & Hamilton Inc.

    Statement by Gayle C. White, Chairman, Space Committee, National Defense Industrial Association

    Statement by Heidi Wood, Vice President, Morgan Stanley; Aerospace/Defense Analyst

    Discussion

Global Aerospace Sales Trends
Aerospace Research & Development
Space Industrial Base
Aerospace Workforce Issues
Investment Trends in Aerospace Industry
Chairman's Questions
Aerospace Workforce Pay Incentives
Ranking Member Questions & Answers
Boeing/Airbus Competition
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Mr. Weldon Questions & Answers
Foreign Competition in Aerospace
Export Controls for Aerospace Technology
Foreign Aerospace Subsidies
Aerospace Workforce
Chairman's Closing Remarks

    APPENDIX 1: Biography/Funding Disclosure

John W. Douglass, Brigadier General, USAF (ret.); President and Chief Executive Officer, Aerospace Industries Association of America, Inc.
Biography
Funding Disclosure
Thomas S. Moorman, Jr., General, USAF (ret.); Vice President, BoozAllen & Hamilton Inc.
Biography
Gayle C. White, Chairman, Space Committee, National Defense Industrial Association
Biography
Heidi Wood, Vice President, Morgan Stanley; Aerospace/Defense Analyst
Biography

    APPENDIX 2: Material for the Record

John W. Douglass, Brigadier General, USAF (ret.); President and Chief Executive Officer, Aerospace Industries Association of America, Inc.
Questions Submitted by Chairman Dana Rohrabacher and Congressman Bart Gordon
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Thomas S. Moorman, Jr., General, USAF (ret.); Vice President, BoozAllen & Hamilton Inc.
Questions Submitted by Chairman Dana Rohrabacher and Congressman Bart Gordon

Gayle C. White, Chairman, Space Committee, National Defense Industrial Association
Questions Submitted by Chairman Dana Rohrabacher

Heidi Wood, Vice President, Morgan Stanley; Aerospace/Defense Analyst
Questions Submitted by Chairman Dana Rohrabacher and Congressman Bart Gordon

THE AEROSPACE INDUSTRIAL BASE

TUESDAY, MAY 15, 2001

House of Representatives,

Subcommittee on Space and Aeronautics,

Committee on Science,

Washington, DC.

    The Subcommittee met, pursuant to call, at 4:08 p.m., in Room 2318 of the Rayburn House Office Building, Hon. Dana Rohrabacher [Chairman of the Subcommittee] presiding.

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    Chairman ROHRABACHER. I hereby call this meeting of the Space & Aeronautics subcommittee to order. Without objection, the chair will be granted authority to recess the committee.

    [The prepared statement of Chairman Rohrabacher follows:]

PREPARED STATEMENT OF CHAIRMAN DANA ROHRABACHER

    Today's hearing will focus on threats to industry's ability to maintain its global leadership role. Over the last decade, dramatic changes to the U.S. aerospace industry have raised concerns regarding its long-term ability to compete in international markets and meet the defense and security needs of the nation. Unfortunately, the post-Cold War era has also meant greater foreign competition in aerospace markets, readjustments in U.S. defense spending priorities, and consolidation of the U.S. industrial base. Industry analysts point to these and other areas, such as a declining skilled workforce and loss of market share, as the basis for industry losing its competitive edge. The fact that 40 countries now compete for aerospace business makes the global aerospace market a fiercely competitive area. Given these challenges, industry must find ways to become more cost-driven and ''first-to-market'' focused.

    That said, analysts are already studying the future of the aerospace industry in the global economy, as well as assessments of the critical role industry plays for the future economic and national security of the country.

    I plan to work with others in framing our nation's priorities for space and aeronautics. How do we bridge the gap between the traditional industrial aerospace complex and the new information age? Can we turn the tide in preparing a 21st Century workforce to take the place of the retiring ''Apollo generation?'' Examining the issue of government investment is also needed, but more government money is not the only answer in maintaining a first-rate aerospace industry. Rather, greater cooperative military, civil, and commercial technology development planning and investment schemes must be achieved.
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    Chairman ROHRABACHER. All right. Over the last decade dramatic changes to the United States Aerospace Industry have raised concerns regarding its long-term ability to compete in international markets and to meet the defense and security needs of our nation. That's what this hearing is all about. Unfortunately, the post Cold war era has also meant greater foreign competition in aerospace markets, readjustments of the United States defense spending priorities ,and a consolidation of the United States Industrial Base.

    Industry analysts point to these and other areas such as a declining skilled work force and loss of market share as the basis for our industry losing its competitive edge. That fact and the fact that 40 countries now compete for aerospace business makes the global aerospace market a fiercely competitive arena. Given these challenges, industry must find ways to become more cost-driven and first-to-market focused.

    That said, analysts are already studying the future of the aerospace industry in the global economic context, as well as making assessments of the crucial role this industry will play in the future economic and national security interests of our own country.

    I plan to work with others in framing our nation's priorities for space and aeronautics. How do we bridge the gap between the traditional industrial aerospace complex and the new information age? And can we turn the tide in preparing for a 21st Century workforce which will then take the place of the retiring Apollo generation? Examining the issue of government investment is certainly needed. But more government money isn't the only answer, although it may be the easiest answer.

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    In maintaining the first-rate aerospace industry we have got to look for more than just easy answers. But it might not even—but more money might not even be the primary answer. Rather, we need greater cooperation among military, civil and commercial endeavors to make sure that we are getting the most bang for our buck rather than just spending more bucks.

    Innovative technology development, planning, and investment schemes must be achieved and not just relying on government guarantees and old types of thinking. We have got to find new ways of thinking for a modern age in a global economy. We have assembled a distinguished panel today with people who have studied these issues extensively. And I look forward to hearing their testimony. I would now like to recognize my ranking member, the minority member, Bart Gordon, from Tennessee, for his opening statement.

STATEMENT OF HON. BART GORDON, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF TENNESSEE

    Mr. GORDON. Thank you, Mr. Chairman. Good afternoon. I want to welcome our witnesses to today's hearing.

    We have an important topic before us today, the health of the nation's Aerospace Industrial Base. And we have a good set of witnesses, so I will make my opening remarks brief.

    The health of the U.S. Aerospace Industry Base is important for a variety of reasons. First, it provides the underpinning of America's defense capabilities through the technologies and products that it delivers. Second, it is an important component of our international economic competitiveness, with aerospace industry making a major contribution to our trade surplus. And third, the partnership of industry, the universities and Federal Government over the past 80 years has made the U.S. Aeronautics Enterprise and, more recently, the U.S. Civil Space Program the envy of the world.
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    However, the Aerospace Industry Base has been under stress in recent years. Some of the stress was an inevitable result of the end of the Cold War. And some was a result of competition for resources, both capital and human from other sectors of the economy. I would like to hear what our witnesses think about the state of the U.S. Aerospace Industry Base. Is it going through a normal transition brought about by the end of the Cold War? Or is it suffering from the underinvestment of R&D and inadequate attention to the skilled workers that are critical to its success? Or is something else going on?

    In addition, it is clear that there are two components to the Aerospace Industrial Base. One set of components or companies gets the vast majority of its revenues from the Federal Government. Another set of companies gets the bulk of its revenues from commercial customers. The potential remedies for the Industrial Base issue may be very different for these two types of companies. I hope our witnesses might offer their insights into this dichotomy.

    Well, again, thanks and welcome to our witnesses. I look forward to hearing your testimony.

    Chairman ROHRABACHER. Thank you very much. And without objection, the opening statements of other members will be put into the written record so we can get right to the testimony. And hearing no objections, so ordered.

    I also ask a unanimous consent to insert at the appropriate place in the record the background memorandum prepared by the majority staff for this hearing. Hearing no objections, so ordered.
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HEARING CHARTER

SUBCOMMITTEE ON SPACE AND AERONAUTICS

U.S. HOUSE OF REPRESENTATIVES

COMMITTEE ON SCIENCE

B–374 RAYBURN HOUSE OFFICE BUILDING

WASHINGTON, DC 20515

(202) 225–7858

(202) 225–6415 FAX

''The Aerospace Industrial Base''

2318 RAYBURN HOUSE OFFICE BUILDING

TUESDAY, MAY 15, 2001

4:00 P.M. TO 6:00 P.M.

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Table 1

1. Purpose of the Hearing

    On Tuesday, May 15, 2001 at 4:00 pm in 2318 Rayburn, the Subcommittee on Space & Aeronautics will hold a hearing on current trends in the aerospace industry and the ability of the industry to competitively maintain U.S. leadership in aerospace. The U.S. aerospace industry is in danger of losing its leadership role due to a combination of factors—a shrinking workforce, loss of market share to European competition, declining government and commercial investment in aerospace research and development, unfair foreign trade practices, and strict U.S. export controls. The National Defense Authorization Act of 2001 establishes a Presidential Commission on the Future of the U.S. Aerospace Industry in order to address these issues. The hearing will consist of the following panel of witnesses.

2. Panel

    John Douglass, President and Chief Executive Officer of the Aerospace Industries Association, will testify on the trends in aerospace trade and U.S. market share as well as investment in aerospace research and development.

    Tom Moorman, Partner, Booz, Allen and Hamilton, will testify on trends in the space industrial base to support current and emerging military and civil space programs and tools at the government's disposal to influence the commercial space market.

    Gayle White, Committee Chair for the National Defense Industrial Association, will testify on aerospace industry consolidation and workforce recruiting and education issues.
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    Heidi Wood, Vice-President of Morgan Stanley, will represent the Wall Street perspective on trends and market forces that influence private investment in the aerospace industry.

3. Background

    Long-term and cyclic trends in the aerospace industry jeopardize the ability for the United States to competitively retain leadership in the world economy, maintain national security, and achieve our nation's scientific goals through space exploration. The aerospace industry includes manufacturers of civil, commercial, and military aircraft, helicopters, aircraft engines, missiles, spacelift, spacecraft, space services, and related components and equipment. A combination of factors affects the outlook for the industry and is undermining the U.S. leadership position. Some of these major factors include: shifts in government and commercial investment in aerospace research and development; changes in the composition of the science and engineering workforce; post-Cold War industry consolidation and concerns of aerospace technology transfer; and foreign trade practices and competition which result in a loss of global market share.

    In the post-Cold War era, defense and aerospace industry consolidation has significantly reduced the number of competing companies in the aerospace market. The U.S. aerospace industry has become highly competitive with tighter cost and profit margins due to leaner business management practices. This defense and aerospace consolidation has created higher debt/equity ratios and lower credit ratings for these companies, which hinder their ability to raise capital. These management influences have shifted corporate R&D to more short-term, low risk ventures as a result of uncertainties associated with program funding and fewer new programs. The loss of a large, key program could cause some companies to exit the industry altogether. This situation leaves the government with only one supplier for certain aerospace technologies or reliant on a foreign supplier for certain components.
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    Several factors are affecting the aerospace workforce and hindering a crossflow of innovation between the government and commercial aerospace sectors. First, the workforce is graying with the retirement of ''Apollo generation,'' and undergraduate and graduate degree programs have declining enrollment for aerospace science and engineering as compared to other academic studies. In addition, defense aerospace technology development requires security clearances, but more of these new graduates are not U.S. citizens and not able to obtain the necessary security clearances. Thus, government and industry find it difficult to attract the experience level needed for aerospace programs. Further, certain companies have divested from government aerospace programs altogether in order to focus on higher return commercial industries, which results in no crossflow of managers and engineers with both government and commercial experience within these companies. Thus, a combination of forces influencing the U.S. aerospace workforce are making it increasingly difficult to find and apply aerospace science and engineering talent to high-risk aerospace endeavors like the International Space Station, National Missile Defense, and other government programs.

    The prospect of relatively flat government aerospace budgets, decreasing returns, increased infrastructure costs and risk, increased debt load, and comparatively poor performance of aerospace stocks have made it difficult for U.S. aerospace firms to justify further investments in government space programs. Several companies have simply divested their companies from the government programs due to below-average return (only 6–8% return on sales) on their investments.

Facts & Figures

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Workforce—A Shrinking Talent Pool:

 U.S. aerospace industry employs approx. 780,000 Americans in highly skilled positions.

 Over 37% of undergraduate technical graduates from U.S. colleges are not U.S. citizens (up from 21% in 1987), leaving them largely ineligible as defense aerospace contractors.

 Retirement of the ''Apollo generation'' expected in next five years may result in a shortage of qualified and experienced aerospace scientists and engineers.

 Today over 54% of current S&T workforce is over 45 years old and nearing retirement and 19% is between 30–34 years old, leaving a large workforce gap between 35–44 years of age (typical age for program managers) and even fewer people in their twenties entering the aerospace workforce.

Losing Market Share to Europeans:

 Aerospace industry contributes $145 billion annually to the Gross Domestic Product.

 Aerospace sales as a percentage of the GDP fell from 3.5% in 1960 to 1.5% in 2000.

 The aerospace industry produced a $26.7 billion trade surplus in 2000 compared with $37.4 billion in 1999 and $41 billion in 1998 (1998 was the peak year).

 Aerospace exports are the largest trade surplus of any industry in the United States economy, despite declines since 1998. The declines have primarily been due to foreign sales to customers for aircraft and engines.
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 Civil air transport accounted for the largest trade surplus decline as exports fell $6 billion in 2000 and imports rose $2 billion due to increased competition from Europe's Airbus.

 In the first fiscal quarter of 2001, Boeing has 100 orders for civil air transport while Airbus has 117 orders.

 While the market for commercial mobile satellite systems for telephony did not emerge as expected, geosynchronous satellite operations and space services primarily for television are expected to rise globally from $30 billion in 2000 to $115 billion by 2007.

Declining Government and Commercial Investments in Aerospace R&D:

 Post-Cold War defense spending has declined 40% in real spending compared to its peak in the mid-1980s ($400 billion in 1987 vice $250 billion in 2000 for Constant Year 2000 dollars).

 Aerospace company-sponsored R&D spending as a percentage of total sales declined from 4.1% in 1994 to only 2.9% in 1999.

 >60% of cost growth in several major government aerospace programs is due to program and budget adjustments rather than technical reasons.

Unfair Foreign Trade Practices & Export Control:

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 The European Union banned U.S. aircraft even with U.S. engine hush-kits from European skies after 2002 due to environmental noise restrictions.

 Boeing executives have expressed concern that declining relations between the U.S. and China will jeopardize current negotiations on a $3 billion 70-aircraft order, just as in 1996 when declining U.S.-China relations were linked to Airbus winning a $1.6 billion order to China.

 Satellite export license authority shifted from the Commerce Department to the State Department in 1999, and several government officials and analysts have said that that the export controls for commercial satellites may be too strict and may hinder foreign sales.

Presidential Commission on the Future of the U.S. Aerospace Industry

    Several studies on the aerospace industrial base have been conducted in recent years on the alarming trends which may place U.S. leadership in danger. For this reason, the National Defense Authorization Act of 2001 established a bipartisan Presidential Commission to study and provide recommendations to the President and Congress on the future of the U.S. aerospace industry. The Commission is to be comprised of persons with extensive experience and national reputations in the aerospace industry, and the report is to be completed by March 1, 2002. Some members to the Commission have been appointed, but the Commission is not yet fully established. This Commission is to study the issues associated with the future of the aerospace industry in the global economy and assess the future importance of the domestic aerospace industry for the economic and national security of the United States.

    The report shall include the Commission's findings and conclusions; recommendations for actions by Federal Government agencies to support the maintenance of a robust aerospace industry in the United States in the 21st century; and a discussion of the appropriate means for implementing the recommendations.
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    The Commission shall study the budget, acquisition process, and programs of the Federal Government for aerospace research, development and procurement. The Commission shall study the policies, procedures, and methods for the financing and payment of government contracts as well as the statutes and regulations governing international trade, taxation, and the export of technology. The Commission will also assess the adequacy of the space launch infrastructure as well as science and engineering education programs.

4. Questions & Issues

    What are the trends in aerospace trade and U.S. market share?

    What are the trends in government and industry investment in aerospace research and development?

    Will trends in the space industrial base support current and emerging military and civil space programs?

    What tools at the government's disposal should be used to influence trends in the commercial space market?

    What are the impacts of the consolidation of aerospace industry?

    What are the trends confronting the aerospace workforce with respect to education in math, science, and engineering as well as the ability of U.S. industry to recruit qualified personnel?
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    What are the private investment trends in the aerospace industry?

    What market factors and indicators influence private investment in aerospace industries?

5. Bibliography

Aerospace Facts and Figures, Aerospace Industries Association, Washington, DC, 2000.

Annual Industrial Capabilities Report to Congress, Department of Defense, Washington, DC, January 2001.

A Blueprint for Action: Setting the Stage, DFI International, AIAA Defense Reform 2001, Washington, DC, 2001.

Mission Aerospace—Crisis in the Aerospace Industry, Executive Summary, California Engineering Foundation, Rancho Cordova, CA, January 25, 2000.

Recent Trends in U.S. Aeronautics Research and Technology, National Academy of Sciences, National Research Council, Aeronautics and Space Engineering Board, Committee on Strategic Assessment of U.S. Aeronautics, Washington, DC, 1999.

Report of the Commission to Assess United States National Security Space Management and Organization, Washington, DC, January 11, 2001.
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U.S. Defense Industry Under Siege—An Agenda for Change, John R. Harbison, General Thomas S. Moorman, Jr., Michael W. Jones, Jikun Kim, Booz-Allen & Hamilton, Los Angeles, CA, 2000.

U.S. Space Industrial Base Study, McLean, VA, February 16, 2000.

http://www.businessweek.com/bwdaily/dnflash/apr2001/nf20010420–584.htm

    And lastly, I request unanimous consent that the record of this hearing remain open until May 22, 2001 so that additional testimony may be inserted in the record. Without objection, so ordered.

    And we have today with us a group of distinguished witnesses, and people who are able to explain to us the current trends in the aerospace industry and perhaps predict some future trends and some policy changes we need to meet those future trends. We have asked them to summarize their written statements. And if you could do so within about a 5 minute timeframe, we would be very, very grateful. And it is better to have a dialogue rather than just having long presentations.

    So our first witness is John Douglass, a retired Air Force Brigadier General who is now president and CEO of Aerospace Industries Association. And, Mr. Douglass, thank you very much and thank you for being with us again today. You may proceed.

    [The prepared statement of John Douglass follows:]
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PREPARED STATEMENT OF JOHN W. DOUGLASS

    On behalf of the member companies of the Aerospace Industries Association, I thank Chairman Rohrabacher and the Members of the House Science Subcommittee on Space and Aeronautics for the opportunity to present testimony this afternoon on some of the challenges facing the U.S. aerospace industrial base. The Members of this Subcommittee have been among the most active in working on issues affecting the future of our industry, and we are grateful for your efforts.

    The Aerospace Industries Association or AIA is a trade association representing small, medium and large manufacturers of aerospace products. AIA currently has 63 full member and 150 associate member companies involved in the design and manufacture of air and spacecraft as well as related systems and subsystems. Our industry employs nearly 800,000 highly skilled workers in jobs that pay well above the average for the U.S. workforce. Aerospace technologies and products are fundamental to maintaining our national security.

    The Subcommittee has asked AIA to address two specific issues with regard to the future of the U.S. aerospace industry: the current trends in global aerospace trade including the U.S. share of the global market; and the trends in government and industry investment in aerospace research and development. These issues are important, and with other related issues will be the subject of serious study by the Commission on the Future of the U.S. Aerospace Industry, which was sponsored by Representative Dave Weldon and enacted by Congress last year. I will address each in turn.

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Trends in Aerospace Trade

    The aerospace industry has grown increasingly dependent on export sales for its growth and ability to develop new technologies. From 1985 to 1999, exports grew from 29.1 percent to 41 percent of total U.S. aerospace sales. But the global marketplace is also becoming increasingly competitive. During the same period, the U.S. share of the global aerospace market dropped from 72 percent to 52.4 percent.

    Mr. Chairman, the trade surplus generated by aerospace manufacturing remains the largest by far of any sector in the U.S. economy. The most recent trends are very troubling, however. In 2000, the aerospace trade surplus was $26.7 billion, down $14.2 billion—or 34.7 percent—from the 1998 record high of $41 billion. Exports in 2000 dropped $7.8 billion from the previous year to a total of $55 billion. Imports of manufactured aerospace products rose $2.9 billion to $28 billion, a record high. Exports of civil transports accounted for the majority of the drop—$6 billion—and imports of civil transports increased by $2.2 billion. The decline in exports can, in part, be attributed to the cyclical nature of civil transport sales. But the rise in sales of foreign-built commercial aircraft to U.S. air carriers was responsible for the growth in imports. In 1999, there was a similar pattern of increasing imports and decreasing exports of aerospace products.

    Our industry is clearly facing a challenge from Europe for leadership in aerospace. In January, the Europeans laid out an impressive blueprint for displacing the United States as leader in the global aeronautics marketplace. The report entitled European Aeronautics: a Vision for 2020 includes the goal of ensuring that European producers achieve over 50 percent of global market share in aircraft, engines, and equipment. A key component for achieving this goal is a very close partnership between government and industry.
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    We believe that our industry and government must work more closely together if we are to reverse these recent global trends and maintain our leadership into the 21st Century. There are a number of government policies, laws and regulations that need to be reconsidered in light of the challenges we face. The first I would like to touch on is our export licensing process.

    During the Cold War, the U.S. was willing to sacrifice economic interests for the sake of limiting the ability of the Soviet Union and its allies to improve their military capabilities and to discourage other countries from joining the Soviet Bloc. This willingness was also true of other industrial democracies who recognized the Soviet threat and the importance of the U.S. nuclear and conventional umbrella. We were able to obtain relative consensus on the importance of keeping a variety of technologies from the Soviet Bloc that would directly help those countries build their weapon systems, or improve their economies to support larger military forces.

    In the years since the collapse of the Soviet Empire, we have become more and more aware that both the economic welfare and security of countries in the future will increasingly depend on their ability to compete in the global marketplace. There is far less consensus among our fellow industrial democracies as to how to deal with countries such as Russia and China; those countries themselves have become both purchasers and suppliers of advanced technology. The tradeoff between security and economic interest has become harder to define.

    At the same time, the distinction between military and commercial products has become less clear. The military is expanding the share of its budget devoted to communications, data processing, imaging and simulation—all areas of accelerated commercial activity. Furthermore, in order to hold costs down, the military must increasingly turn to standard or near standard commercial products to meet many of its mission needs. But lower costs and rapid technological innovation in the commercial sector are only possible for companies producing for a global marketplace, with the flexibility to rapidly penetrate new markets.
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    These changes are reflected in the aerospace industry. Ten years ago, 45 percent of our business base involved supplying products to the Department of Defense. The U.S. government, as a whole, accounted for 53 percent of our sales. Today, the government accounts for about 41 percent of our sales, and of the remainder, foreign sales account for 69 percent.

    Finally, the pace of high technology business has increased enormously. Designers work on common electronic bases in real time, often in several companies and several countries. Improved production techniques have reduced significantly the time needed from order to delivery. Commercial companies, and increasingly the military, expect contractors to hold inventories and deliver parts anywhere in the world within 48 hours. Information is no longer transmitted on paper but through nearly instantaneous electronic communications.

    The philosophical underpinnings, legal structure, and administrative framework for U.S. export controls, which are intended to deal with such technologies, have not changed at a comparable pace. As a result, there are too many export licenses required and too many agencies involved in the review and administration of such licenses, and the process takes far too long.

    Given the importance of exports, it is not surprising that industry concerns with the administration of the export control system have been expressed with increasing insistence in recent years. Our industry is not asking for any reduction in controls that could negatively affect national security. What industry is asking is for the system to be administered efficiently and that it control truly military products to countries of concern. When we complain that it has taken three months to obtain a license for 200 radiator hoses for Swiss M–113s, we are hardly seeking to undermine national security. Under your leadership, Mr. Chairman, industry has pursued a sustained effort to earmark adequate resources for staff and equipment at the State Department. But we want to be certain that we are controlling the right things, and in ways which do not make U.S. suppliers unattractive to allied defense industries or military establishments. We also don't want a system that is so burdensome and complex that we discourage U.S. and foreign companies that primarily produce commercial products from even dealing with the U.S. aerospace industry or government agencies. We firmly believe that we can devise an export control system that is more efficient in this regard and better protects U.S. security interests than the current system.
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    Industry is often characterized as stating that if we won't sell a weapon system to country X, some other country will, so we should be allowed to. That is too simplistic a statement of our view. Our position is that one should ask whether in the event a specific U.S. sale is prohibited, would another country step in? If the answer to that question is almost certainly yes, then the real policy question is not whether to deny a country a specific capability, but rather whether we would prefer to have the country obtain the capability from outside the U.S. If the licensing agency's answer is yes, that is fine, but at least the agency has asked the right question in making its decision. But we also need to recognize that unilateral imposition of export controls outside of an agreed multilateral framework provides an excuse for our trading partners to reduce or eliminate U.S. content from their products.

    One final point I want to make on export controls. We have two systems to control exports—one geared to military products, and one to dual use products. We fully recognize that weapons are not refrigerators. The control laws for military products are consequently more complex than for dual use items. For example, major military sales require congressional notification while dual use sales do not. It is therefore important that products are controlled by the appropriate legal and administrative framework. I would therefore like to commend you and Congressman Berman for offering legislation to return commercial satellites and components to the legal framework of the Export Administration Act, with appropriate safeguards to assure that there is no inadvertent leakage of rocket technology when such satellites are launched on foreign rockets. That legislation will further both our national security and economic interests in a balanced manner.

    Another trade issue of concern to our industry is the future of support for the U.S. Export-Import Bank. The proposal to cut the Ex-Im Bank's budget in FY 2002 by 25 percent is particularly ill timed in light of the current trend in exports and will further erode U.S. aerospace exports. The Ex-Im Bank is the only facility available to counter the well-funded foreign export credit agencies used by our competitors. Historically, the loans from the Bank have actually added money to the U.S. Treasury significantly above the amounts appropriated by Congress. We ask that the members of the Subcommittee look carefully at the administration funding proposal in light of your interest in the future of the aerospace industry.
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    Finally, Mr. Chairman, our approach to trade policy with the European Union (EU) will be a major factor in our industry's ability to compete in the global marketplace. We and the Europeans have fundamentally different views on the proper role of government in assisting our respective industries. In the United States, the government pays for some of our nation's basic research and technology development. It absorbs a large share, often the entire amount of weapon system development costs. But the U.S. government seldom contributes to research and development that is oriented toward specific commercial products nor does it subsidize the development of the products themselves. By contrast, our European allies commonly provide funding of their aerospace industry from basic research all the way up through product development and production.

    The European governments are now providing direct subsidies to help Airbus with its biggest project ever—developing the mammoth A380 two-deck jetliner capable of carrying 550 passengers in three classes of service. Airbus estimates that it will cost $10.7 billion to develop the A380, which translates into more than $3.5 billion in low interest, conditionally repayable government loans. With the possible exception of one Airbus program, the principal on these development loans is usually not repaid. Certainly, none has been repaid on the kind of ''commercial'' terms, including a market rate of interest, that our own industry would be required to pay. In fact, the Commerce Department estimates that the commercial value of these unpaid loans for the Airbus programs exceeds $30 billion.

    Subsidies on this scale distort markets. They enable Airbus to develop products it could not afford on its own and offer them at prices that do not reflect their true cost. In this situation, Boeing, its suppliers and ultimately the U.S. economy are at a disadvantage. Similar government support characterizes Arianespace, which now leads the world in share of the market for commercial satellite launches. We applaud recent efforts by the administration to challenge the EU on this issue and support any actions the President and Congress can take to begin to level the playing field. Clearly, one such action is supporting a robust program in aerospace research and development.
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Trends in Aerospace Research and Development

    A measure of the future competitiveness of any high technology industry such as aerospace is the degree of investment in research and development. AIA has been examining the issue of trends in aerospace research and development for the last several years. We have documented a significant decline in investment by both the government and industry since the mid 1980's, which has already undercut the U.S. aerospace industry's future contribution to national security and national economic prosperity. As the charts at the back of this statement indicate, Federal and non-federal funding for aerospace R&D peaked in year 2000 dollars at a level of about $35 billion in 1987. By 1998, the number was less than half that amount at around $15 billion. The aerospace share of national R&D funding dropped from 19.4 percent in 1987 to between 6.4 percent in 1998.

    The major source of decline in aerospace R&D investment has come from the Federal side. Federal R&D investment in the aerospace industry has dropped from $27 billion in 1987 to $10 billion in 1998. Of special concern to our industry is the dramatic decline in Federal spending on aeronautics research over time. Spending in this category, which includes funding not only to industry but also funding spent within universities and Federal laboratories, is down from $12.7 billion in 1990 to $10.6 billion in 1998 using constant dollars. Aeronautics research and development in NASA has dropped 40 percent in the last six years.

    The people follow the dollars. The decline in the numbers of R&D scientists and engineers in aerospace has tracked roughly the trends in R&D spending. This has been true in terms of absolute numbers of scientists and engineers as well as in terms of aerospace scientists and engineers as a percentage of all scientists and engineers engaged in U.S. industry. We have gone from a peak of 144,800 aerospace scientists and engineers in 1987 to less than 77,000 in 1999. Aerospace scientists and engineers as percentage of all U.S. industrial scientists and engineers dropped from 21.6 percent to 8 percent during the same period.
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    Appropriate Federal investment in aerospace is critical to the future of our industry. The European Aerospace study to which I referred earlier in my testimony projects an investment level of $90 billion from public and private sources over the next twenty years for aeronautics research and development. Industry in this country will also make significant investments but most of this investment will be product focused with a relatively small percentage spent on longer-term research. But even such long-term investments will have to satisfy certain business constraints. It is therefore critical that government, and particularly NASA, continue its historical role of supporting breakthrough, pre-competitive research that has a longer time horizon than industry can support—ten years or more—before it is mature enough to be considered for transition to product development.

    Electronic business is another area of growing importance to our industry in which the Federal government can play an appropriate role. In that light, I want to commend to the attention of the Subcommittee a bipartisan legislative proposal to be sponsored by Representative Barcia to expand R&D funding for the program at the National Institute of Standards and Technology for improving manufacturing interoperability through the development of product exchange standards independent of proprietary formats. Broad deployment of these enterprise integration standards could dramatically reduce costs within supply chains and help U.S. aerospace and other manufacturing firms remain competitive in the global marketplace.

    We at AIA have developed a proposal for broad aerospace R&D investment that would involve increasing Federal and industry funding over five years by $70 billion above the 1996 baseline. Of that amount, industry would absorb $20 billion of the increase, and the Federal agencies would absorb $50 billion. We propose allocating the increases to the aeronautics and space infrastructure; safety and environmental improvements; basic research and advanced development; and logistics improvements. We propose that the increases be distributed across the Federal agencies in a way that reflects the growing importance of the commercial and space capabilities.
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    We are facing a number of fundamental technological challenges in aerospace. Our air traffic control system is approaching gridlock. Environmental and safety standards are becoming increasingly demanding. The military is putting greater focus on unmanned and remotely piloted vehicles for its future mission needs. Exo-atmospheric vehicles are similarly appearing in future commercial and military planning, which will bring further challenges to air traffic management. Without a renewed focus on R&D investment in aerospace, these challenges will be unmet. The impact on future national economic growth could be significant.

The Commission on the Future of the U.S. Aerospace Industry

    The Commission on the Future of the U.S. Aerospace Industry is the ideal forum to study and make recommendations on the role and impact of the Federal government on our industry. We are hopeful that the President, Speaker Hastert and Minority Leader Gephardt will soon make their appointments and that the Commission can soon begin its work. The Commission charter encompasses all the issues we are discussing today and will allow the issues to be considered in a comprehensive and integrated manner across the boundaries of the Federal agencies. We at AIA are committed to providing whatever support we can to the Commission to ensure that the report recommendations are well balanced and capable of being implemented with all deliberate speed. We hope that this Subcommittee will also work closely with the Commission as it prepares its final report.

    In closing, let me commend the Members of the Subcommittee for convening this hearing this afternoon and for the thoughtful manner in which they have dealt with the complex issues affecting the future of the U.S. aerospace industry.
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    Mr. DOUGLASS. Thank you, Mr. Chairman and Mr. Gordon. You know, this is a difficult problem as both of you have said in your summary statements. And I will do the best I can to run through some slides here in about 5 minutes and then open it up for questions. And, sir, if I may, I would like to submit my entire written statement for the record.

    Chairman ROHRABACHER. And without objection, so ordered. And that will be true for any of the other witnesses.
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    Mr. DOUGLASS. Sir, the committee asked me to talk about two things: The current trends in global aerospace trade, including the U.S. share of the global market. And trends in government and industry investment in aerospace research and development. And that is what I will——

    Chairman ROHRABACHER. If I could ask if you could maybe get a little closer to the——

    Mr. DOUGLASS. Yes, sir.

    Chairman ROHRABACHER [continuing]. Microphone. I think with this——

    Mr. DOUGLASS. Right.

    Chairman ROHRABACHER [continuing]. The fan it makes it a little bit hard.

GLOBAL AEROSPACE SALES TRENDS

    Mr. DOUGLASS. Okay. How is that. All right, great. I can't see behind me, but I assume you all can see that first slide. That is our overall aerospace industry sales from 1987 through 2001. And as you can see, it is cyclic. And that cycle that both of you mentioned in your opening statements is really the end of the Cold War plus a small slow-down in the economy as we went through that same period of time.
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    You might be interested to know, and you did ask me to report on our overall global market share during that period, it went from somewhere around 70 percent of the global market down to 50 percent of the global market over that period of time. And I will show you some of——

    Chairman ROHRABACHER. Is this including military sales——

    Mr. DOUGLASS. Yes, sir.

    Chairman ROHRABACHER. Okay.

    Mr. DOUGLASS. Yes, sir. That is total global sales. Here is a 10-year snapshot of where our sales went both in 1990 and in 2000. You can see, by 1990 the Defense Department's portion of the sales had declined down to 45 percent. At one point it was as high as 60 percent. But and that trend continued throughout the 1990's until we get down to 2000, where defense is less than g of the total sales.

    What this tells you is that over 40 percent of everything we produce in this country is exported outside the United States. So the major transition that we have seen as we have gone from the Cold War to the Cold—Post Cold War period is that our primary customer for American aerospace products has become the global economy.

    This is our trade balance. The blue is the exports from the American Aerospace Industry. The red are imports into the United States of foreign aerospace products. And as you can see, that has been cyclic. It has pretty much gone with the same cycle as the overall sales. What is troubling about this chart over the last couple of years, as you can see, our trade surplus was increasing dramatically through 1998. But then in 1999 and 2000 it declined dramatically. And the reason for that is the exports dropped off dramatically and imports continued to increase.
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    This is the trade balance in 1999 of several sectors of our economy, both negative and positive. And as you can see at the top, transportation equipment, that is largely aerospace. As a matter of fact, if you had one that had pure aerospace it would be slightly larger than that top blue bar. That is about equal to half of the rest of the economy put together, sir. And at one point we were equal to all the rest of the economy together. But as our exports have declined so has our ability to contribute positively to the trade balance issue.

AEROSPACE RESEARCH & DEVELOPMENT

    This is really where we are headed in the future. There are two major corporations that produce large commercial airplanes for the global economy. One has decided that is going to try to build a super-jumbo to carry between 550 and 600 people. What is interesting about that development project is approximately g of the cost that development is being paid for by low-cost government loans that do not have to be repaid if the airplane doesn't make money.

    The other one is the sonic cruiser that is being developed here in the United States, that is going to go somewhere between mach .95 and mach .98. It is more designed to capture the point-to-point market and get you there quicker. Now the cost of that is being born 100 percent by the company that is developing it. And the different ways of developing new products are what is stressing the market today, sir. And I will be glad to answer further questions on that as we go along.

    This is the total national research and development funding that goes into aerospace. The blue is Federal funding, the yellow is private funding. And as you can see, over the years since the end of the Cold War, the Federal funding has declined dramatically.
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    And the next chart here is the engineers and scientists that are working in our industry. General Moorman and I were just comparing notes a few minutes ago. We both came into the Air Force in the early 1960's. When we came on active duty as young Air Force engineers, g of all the engineers and scientists in America were working in the Aerospace Industry. If you follow that red line down to 1999 you can see now we are down to only 6 percent of the engineers and scientists in the United States working in this industry.

    There is a significant long-range problem here that needs attention. And I will be glad to answer questions about that as we forward, sir.

    This is the—our share of the national R&D funding, the Aerospace Industry's share. And as you can see, again, since the end of the Cold War it has been declining significantly. We decided to do a study to see what—how much money would be needed just to get us back to where we were when Jimmy Carter was president, back in the late 1970's. And that would be the red line you see on that chart. We went and did a parametric study of what would be involved in that. And this is what we came up with. If you look at the yellow, that is the amount of money that was being put into the industry by industry sources in 1967. The light blue is how much the Federal Government was contributing in 1967.

    Our industry has said that if the Federal Government will increase its funding in this industry, we will be able to increase ours. So the dark blue is a contribution of about $20 billion dollars over 5 years we feel we could contribute. The multi-colors on the top are money that we think should be invested by the Defense Department, NASA and the FAA to deal with both the civil and military issues that face our industry today.
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    The red figure, just to put it in some perspective, is the same number that President Bush used during his campaign as his pledge to increase Department of Defense research and development. Now ours is aerospace. President Bush's was all of defense. But what has happened in the aerospace and defense industrial sector is that they are roughly the same today.

    The black would be a substantial increase to NASA's budget. And the green, a reasonable increase to FAA. And we think that amount of money is going to be needed to deal with the congestion and safety problems that are arising as demand increases for commercial traffic.

    And that is my little presentation, sir. I didn't mean to go over my 5 minutes. But I will be glad to answer any questions because there is a lot of information in those charts.

    Chairman ROHRABACHER. Yes, sir. There is a lot of information in those charts. And we will be asking you some questions about it. Our next witness is Tom Moorman, who is currently a vice-president with Booz, Allen & Hamilton where he led a space industrial space study for the Pentagon and for the National Reconnaissance Office. Previously, a vice-chief of staff for the Air Force. General, you may proceed. And thank you very much for being with us today.

    [The prepared statement of Thomas S. Moorman, Jr. follows:]

PREPARED STATEMENT OF THOMAS S. MOORMAN, JR.

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I. INTRODUCTION

    I am pleased to be here and discuss the state of the U.S. Space Industrial Base and present a few thoughts on how to sustain and foster the U.S. space industrial base over the next two decades.

    National space policy directs that the United States maintain its leadership by supporting a strong, stable and balanced national program that serves our goals in national security, foreign policy, economic growth, environmental stewardship and scientific and technical excellence.

    To these ends, the policy directs the Department of Defense and Intelligence Community to assure that critical capabilities for executing national security space missions are maintained. This requirement includes all stages of research, development and acquisition.

    Since the dawn of space age, senior policy makers across the federal government have recognized that a strong U.S. space industrial base is a critical strategic asset. Our government has also understood the importance of the people and companies that design, develop and manufacture satellites and launch vehicles for defense and intelligence missions.

    The past decade has seen significant changes to the people and companies that comprise our space industry. New requirements, industrial acquisitions and mergers and recent space system contract awards have altered the industrial landscape. Major manufacturers of space hardware—General Dynamics, General Electric, McDonnell Douglas, Rockwell and Hughes—have exited the business or merged into other firms. As this consolidation has occurred, satellite and rocket lines in New Jersey, Pennsylvania, California have been closed and many of the engineers and technicians have moved on to other industries.
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    This transition is somewhat ironic, since users at all levels of the U.S. national security establishment are increasingly dependent on space-enabled data to achieve information superiority. The reduction in players also occurs as the U.S. prepares to replace virtually all of its current constellations of national security satellites over the next 10 to 12 years.

    Another significant evolution of the past decade has been the changing environment in the commercial space sector. Despite some setbacks, the commercial space sector is still likely to grow over the next decade. However, the bankruptcy of Iridium and well-publicized struggles of other new space ventures have tempered some of the more exuberant projections of commercial space advocates. The most recent announcement of ORBCOMM's filing for Chapter 11 is just another example in this litany. While I am convinced that commercial space solutions will become an increasingly important element of national security space activities, this evolution will be slower than many of us expected a few years ago.

    There also will be increased international competition. Therefore, commercial ventures must offer world-class capabilities which are technologically advanced and priced right to compete in global markets.

    In this changing environment, two fundamental questions arise:

1. Is the current and projected U.S. space industrial base sufficient to meet national security requirements for the next 15 years?

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2. Will there be adequate competition and innovation within the industry?

    To help understand these questions, Dr. Jacques Gansler, the Under Secretary of Defense for Acquisition, Technology and Logistics, and Mr. Keith Hall, the Director of the National Reconnaissance Office, tasked my firm, BoozAllen & Hamilton to conduct an independent assessment of the U.S. Space Industrial Base. I was privileged to lead this study along with Jimmie Hill, the former Deputy Director of the NRO, who I am sure many of you know.

    When we began our study, Jimmie Hill and I expected that most of our efforts would focus on choke points for critical subsystems and components—such as radiation-hardened parts, travelling wave tube amplifiers, solar cells, and space qualified atomic clocks. While we did identify and address several component areas of concern, as the study progressed, we came to realize that the space, manufacturing sector—along with the broader defense and aerospace industrial base—faced far deeper and more profound challenges.

    I believe that the results of study I led answer a significant portion of the two questions that you posed in the official letter of invitation.

1. Will trends in the space industrial base support current and emerging national security and civil space programs?

2. What tool at the government's disposal should be used to influence trends in the commercial marketplace?

II. THE CHALLENGES
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    Our study concluded that U.S. firms still hold technical and market leadership in spacecraft production and satellite system integration. Some indicators remain positive but the U.S. space industry faces challenge on a number of fronts. I want to concentrate on these challenges for the first part of my talk.

    I think there are four challenges that warrant your attention. The four challenges are: uncertain financial performance, production over-capacity, a loss of independence in corporate research and development, and an impending crisis in that most precious of economic assets, human capital.

(a) Uncertain financial performance

    For the next few minutes, I want to discuss some financial indicators that individually are disconcerting, but when taken as a whole are quite troubling. Let me apologize up front by saying there is a lot of statistical data here, which after a good lunch may try your powers of concentration. I am always mindful that sleep in a legitimate form of feedback. But I hope I can keep your attention, especially the government folks, because you rarely hear about business metrics.

    In a ''macro'' sense, the industrial base for national security space programs clearly exists within a larger defense and aerospace industrial base. Over the past two decades, the defense industrial base has responded to dramatic shifts in U.S. Government spending on national defense. With the end of the Cold War, defense spending has declined in real terms to levels that are approximately 40 percent lower than peak spending during the mid-1980s.
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    The negative trend has been even more dramatic in spending for force modernization. Funding for modernization—which I would define as the total of spending on procurement and research, development, test and evaluation—rose dramatically in the early 1980s and then entered a long and steady decline. With the beginning of the new millennium, the modernization budget has begun to show more positive signs. In real terms, the investment budget in 2005 is projected to be 19 percent higher than the post Cold War low, which occurred in 1998. I hope these numbers are realized.

    An even more meaningful macroeconomic indicator for U.S. space manufacturers is the Return on Sales (RoS) performance during the last two decades. RoS is a measure of operating income divided by revenues. During the last 20 years, the performance of defense and aerospace firms declined slightly when measured in terms of pre-tax RoS. Within this larger segment, the RoS for ''space'' segments initially tracked with the RoS for the total aerospace and defense sector. The trend lines diverge in the mid 1980s and the space sectors show a decrease in Return on Sales from a typical return of approximately 8.5 percent in the early 1980s to an average value of approximately 6.5 to 7.0 percent in the last seven years.

    1999 was not a good year for space sales due to factors such as launch vehicle accidents, write-offs caused by the bankruptcies of two mobile satellite service ventures and cancellation and delays in the construction of satellites for two Asian customers to name a few. These events have driven the RoS figures down to new lows. 2000 should show a rebound, nevertheless the figures for this year should be around 6.5 percent. (This is being updated with end of the year figures that we do not yet have.)

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    The most recent drop in RoS comes in the wake of long-term erosion in asset turnover (the measure of sales divided by average identifiable assets) in the space industry. This decline began in the late 1970s when the industrial base began to transition manufacturing from government-owned contractor operated facilities and equipment to contractor-owned production assets. With this transition, the business risk for new and unique facilities was transferred from the government to the contractor. Thus, the space sector became more like the broader aerospace and defense sector. Like the aerospace firms, the space enterprises sustained their asset turnover in the early 1990s through consolidation of facilities.

    The combination of gradually decreasing return on sales coupled with a decreasing asset turnover has led to a steadily decreasing ''space'' Return on Assets (RoA). RoA is defined as operating income divided by average assets. The team's analysis revealed that RoA for the space industry is currently approaching the rates of return for U.S. Treasury securities, which obviously carry far less investment risk. Additionally, some space manufacturers currently carry a BBB-bond rating, indicating that these companies must pay 11 percent interest rates on new loans.

    The summary from a business perspective is the difference between ''space'' RoA and the cost of new money means that the corporate boards, in representing the interests of stockholders, are having an increasingly difficult time in justifying investment in space ventures.

    In addition to declining returns on assets, several companies who include key segments of the space industrial base are carrying substantial debt. Much of this debt was incurred during the mid-1990s, as these companies participated in a number of acquisitions and mergers. The good news is that while the debt is large the companies are working to reduce their total debt. The need to service this debt, combined with lower cash flow resulting from decreasing returns on sales, has reduced interest coverage ratios (a measure of the firm's cash flow after debt service) for several leading aerospace firms.
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    This increased financial stress due to declining RoS, RoA and interest coverage ratio is reflected in the comparatively poor performance of aerospace and defense stocks. Over the past four years, the performance of diversified aerospace and defense stocks have been relatively flat while the NASDAQ stocks have increased five-fold. To be sure, the prices for defense stocks have improved in the last several months due to a variety of factors not the least of which is the flight of money from the ''dot.coms'' to more mature companies; nevertheless, the fundamental financial issues remain.

    So, What are the bottom lines for space industry financials? There are two:

1. The prospect of flat aerospace budgets, decreasing returns, increased risk, and increased debt load make it difficult for U.S. aerospace and defense firms to justify investments in new space design and manufacturing capabilities.

2. The low rates of return also help explain the recent decisions of some firms to divest segments of their companies in favor of other business opportunities.

(b) Production Overcapacity

    The space industry has significant production overcapacity. There are a string of factors which have produced in this overcapacity. To name a few:

 Divestitures and consolidations of the 90's—coupled with the outcomes of several government source selections
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 Expansion of capabilities to accommodate the projected explosive growth of commercial satellites

 Decreasing cycle times for design and production

    The result is an excess capacity today of approximately 50 percent. This excess satellite production capacity increases the overhead rates in our spacecraft manufacturing as well as depresses the net profitability of U.S. satellite manufacturers.

    In launch, the global market for launch vehicles currently operates at approximately 35 percent excess capacity. Excess capacity will grow over the next three years as Europe continues the transition to a new generation of larger Ariane launch vehicles and the U.S. introduces the Evolved Expendable Launch Vehicle. By the middle of the decade, worldwide launch capacity could be more than twice projected demand under a conservative scenario. Using an unadjusted projected launch demand, it is estimated that overcapacity will be approximately 41 percent. When demand is adjusted downward based on the historical actual versus projected launch percentage,—we launch an average of 75 percent of the manifest on an annual basis—excess capacity increases to 56 percent.

    So, we have a difficult business case and overcapacity. A good next question is: What is the prognosis for improved products and market expansion? Or reworded: How are we doing on R&D?

(c) Loss of Independence in Corporate R&D
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    Throughout the Cold War, the national security community made extensive investments in government contracted research and development. However, spending on space related, government contracted R&D began to decrease as the government was recognizing the peace dividend.

    To compensate for the long-term decline in government funding and to improve their chances to win near term contracts, space prime contractors have spent an increasing share of their own Independent Research and Development (IRAD) funds on near-term satellite development. Hoping to score against a dwindling array of program opportunities, companies agreed to align or formally ''warrant'' their corporate IRAD against specific projects. According to our survey, truly independent IRAD decreased in the years from 1996 to 2000 from 75 percent of the total IRAD to approximately 23 percent of the total. Today, IRAD—the acronym for independent research and development, could be spelled with a small i, a little bigger r and a capital D.

    While this switch from independent to more program specific IRAD helps individual program mangers stay within tight budgets, the diversion of funds away from longer-term projects reduces the technical capabilities of firms over the longer term—our seed corn. This problem could become particularly acute as the stock of innovations resulting from past research is exhausted and program managers must either rely on incremental advances or fund dedicated technology development programs. Additionally we found that research and development funding levels have a direct effect on our fourth macro-challenge ''attracting and maintaining the best and brightest.''

(d) The Impending Crisis in Human Capital

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    Our discussions with the leadership of 21 space companies underscore the fact that human resources issues are the largest long-term problem the industry faces. Even as companies continue to consolidate, the stock of human capital has been declining sharply. The industry faces significant operating risks resulting from the lack of key program management skills at the middle management level as well as lack of interest from college recruits because of the increasing perception of aerospace as a slow-moving industry.

    Our study concluded that the space industry is observing the leading edge indicators of a major problem in the next decade. The ''graying of aerospace'' is suggested by several statistics:

 The average space engineer is now five years older than he or she was in 1990;

 The mean age for space engineers is now eight years higher than for engineers in other technical fields; and

 Over half (54 percent) of the current workforce is over 45 years old.

    Departure of key talent could be especially worrisome in 10 years, as scientists and engineers now in the 45 to 49 year-old group begin to retire from the workforce and are replaced by a smaller pool of less experienced personnel. If present trends continue, many space primes may lack the critical mass of talent required to design and integrate complex national security spacecraft.

    The redirection of corporate R&D away from longer-term research also affects this industry's ability to attract and retain ''the best and the brightest''. The negative perception of a ''boom and bust'' space industry is exacerbated by the relative lack of cutting edge information technology. Engineering students in the ''next generation'' still dream of missions to Mars and starships. However, Sputnik and Apollo—galvanizing experiences for many of us—are now subjects rushed through at the end of the course on American history.
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    The increasing perception of space as a ''smokestack industry'' is supported by the following facts:

 In 1990, aerospace was the third most desirable career field for science and engineering graduates. In 1999, it had dropped to No. 7.

 Despite the fact that there are only two-thirds as many folks in the space industry as there were in the 1980s, companies make twice as many offers to fill vacancies.

    Furthermore, there is a large increase in foreign-born US science and technology degree seekers. Today, approximately 45 percent of advanced technical degrees go to foreign nationals. While high rates of foreign diploma holders at the graduate level have been the norm for some time, what's more unsettling is the fact that 37 percent of undergraduate technical degrees go to foreign students.

    In citing these statistics, I don't wish to sound xenophobic. Our nation draws much of its greatness from the contributions of immigrants. However, those women and men who elect to become Americans often cannot immediately work on many national security space programs. Moreover, foreign born scientists and engineers are returning to their native countries in numbers greater than in the past.

    Additionally, even the talented American students who are attracted to the industry become difficult to retain due to high demand in other sectors. This problem is most acute in computer science and software engineering disciplines.
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    While other manufacturing industries also face the challenge of competing against high technology ''dot.coms'' for talent, space firms also face the more unique problem of a bimodal distribution of scientific and engineering talent. According to company human resource managers, the relatively small number of people with ages between 35 and 44 years reflects the departure of many mid-level engineers to other industries. This is partly due to the fact allowable compensation on space contracts is often tied (or even government-mandated) to the calculation of an average within the aerospace sector. The trends are not limited to the scientific and engineering workforce but are similar across all functions.

III. THE WAY AHEAD

    I believe the health of the industry needs people's attention. Fortunately, there is progress and I am glad to say that several actions are already underway within the U.S. Government. However, there are also opportunities for both industry and government to further improve the situation.

    Changes to internal DOD management practices can help stabilize funding and improve cash flow. Earlier this year, the Defense Contract Management Agency eliminated the ''paid cost'' rule removing the requirement for large prime contractors to pay their subcontractors before including the payment in their billings to the Government. This change is a very significant and useful first step. Other areas being examined such as automation of payments and increased progress payments—would further improve the business case in the boardroom.

    Changes at the accounting level are also being paralleled by changes in higher-level acquisition policy. The new versions of these ''5000 series'' documents call for ''full consideration'' of industrial base impacts and guidance to ensure ''reasonable rewards'' without ''undue risk'' for contractors. The revisions also instruct service and agency acquisition executives to consider the effects of specific acquisition and budget decisions on future industrial competition.
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    Perhaps most importantly, the guidelines would allow firms to recover the cost of bonuses to attract and retain staff with critical technical skills. Contractor ''bench strength'' could also be enhanced if allowable labor rates in government contracts were calculated to consider prevailing salaries paid to engineers in the information technology sector. This would help aerospace firms in efforts to keep staff with software and systems integration expertise.

    I have talked about some things that have been set in motion. What are some additional things that government and industry can do to further address the macro challenges?

    First and foremost, there is a need for a closer partnership between the government and industry—a partnership which recognizes different perspectives. By and large, the national security community is budget driven and organizations manage their programs by monitoring industry's performance against cost, schedule and capability specifications in a contract. Industry, by contrast, is price driven and uses a variety of metrics to evaluate financial performance, including return on assets, return on equity and share price appreciation.

    With the advent of the ''New Economy'' based on advanced computing and telecommunications technologies, managers of defense and aerospace firms must first show their shareholders and directors that they can offer equal or superior value in terms of return on investment and assets. While such bottom line considerations are now more critical than ever in shaping firm's decisions on bids and program management, the DOD and the Intelligence Community do not generally consider the aggregate financial health and performance of the industrial base in shaping its acquisition policies.
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    Let me illustrate the gap between these two cultures with a personal example. In the 13 years I had the privilege of serving as a general officer in the Air Force, much in space acquisition and acquisition oversight roles, I received only one briefing on general financial metrics—the language of the boardroom and Wall Street.

    Of course, program managers should continue to focus primarily on contract performance, however, the acquisition executives and legislators who oversee defense programs must be cognizant of important corporate financial metrics. In addition to considering publicly disclosed financial information on the overall health of firms, DOD should assess the financial health of specific defense manufacturing sectors.

    I believe that the financial health of the industry mandates a closer partnership between the customer and supplier. This partnership must be based upon improved communications, and a mutual appreciation of the challenges facing both sides. On the government side, this means developing an understanding of the Defense marketplace and a sensitivity to market demands and pressures. I think industrial base issues must be a part of the strategy for new acquisitions. I also think that financial or business metrics must be a more integral part of the training of our acquisition people at the Defense Systems Management College. Government as well as industry must share in the responsibility for failure and success.

    I think we also need to be mindful of the trends in IRAD. Policy changes should reverse the trend of using IRAD to buy down risk on individual programs. While this won't make life easier for some program managers, it would ensure that the national security space program isn't ''eating its seed corn.'' Keith Hall's steadfast advocacy at NRO of more R&D funding is a good example of the type of leadership that's needed throughout the federal government.
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    However, we need to acknowledge that the competition for top-notch human resource talent will not let up in the near-term and could well worsen as demand increases for computer science, systems integration and web-development skills from both dot.com startups and larger IT companies. Both government and industry need to develop a better understanding of the dynamics of the human resources (HR) marketplace. Efforts in this area could include programs to involve staff in cutting-edge technology research, greater use of internships and scholarships, and more attractive compensation mechanisms.

    I'd say that if people is your No. 1 problem, then you must include your HR executives in strategic planning and strategic decision making. You also must demand that your HR team not be just folks who recruit and develop or just folks who can only measure their performance in terms of equal employment opportunity goals. Those are important functions, but HR departments also must be able to describe the broad trends in qualitative terms. It's not enough to know that attrition with the 35–44 age group is X percent; you also need to understand the impact of this attrition in terms of staff quality productivity and, ultimately, mission success. Our study group found significant shortcomings in these areas. Simply put, many aerospace firms are not using best practices to become ''Employees of Choice.''

    This hearing is about raising consciousness. The health of the space industrial base is important to the nation. The answers aren't simple, but it deserves all our attention. Thank you.

73330r.eps

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73330s.eps

SPACE INDUSTRIAL BASE

    Mr. MOORMAN. Let me try that again. Thank you, Mr. Chairman. All righty. How is that? You have introduced me so I will not go through my bona fides and background. I too have a written statement that I would like to submit to the record, and then just offer some introductory comments, if I could.

    To put the space industrial space into context, I was privileged to lead that activity. And it began in September 1999 and it was a 6-month's study. But—and it emphasized the Space Industrial Base. But a lot of the conclusions I think are applicable across aerospace industry at large. And although the study is about a year-and-a-half old, my sense is that the information that is inherent in the study are still very relevant for your deliberations today.

    And in the financial side, we did a lot of work in the financial health of the industry. And in preparation for this hearing we have updated that data from the Spring of the year 2000.

    I have a couple of charts to try to describe the rationale for performing the study and then some results. One chart on the results. And I, like General Douglass, will—am ready to expand upon that. This briefing that I used to give was alternatively—the short version was an hour. And we briefed Jacques Gansler for 12 hours on this particular topic when he was USD (A&T). So it is—there is a lot of substance here.
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    Can I have the first chart, please. It was there for a minute. Okay. There we go. Oops. Let's go back to the first one, please. There we go. The 2 sponsors for this study were the Defense Department, Office of Secretary of Defense, and the Director of the National Reconnaissance Office.

    Sir, I think the genesis of the report is pretty interesting because the issues that the Defense Department and Intelligence Community were dealing with are exactly the ones you are dealing with today. And that is what John Hamre, who was the Deputy Secretary of Defense, thought when he took a briefing on the broad area review on launch about a week after the decision on the future imagery architecture, and in the context where there were several pending mergers. And he asked the question that led to the study is we seem to be doing all this thing—all these things in isolation. Is someone looking at the overall impact on the Industrial Base. That is what led to the study. We were asked to review the U.S. Industrial Base and to assess the impact of these mergers, the acquisitions, the program awards and the acquisition policies. Our tasking statement is the third bullet there, Mr. Chairman.

    And that is the thing I want to emphasize there, is that we looked out 15 years. And that was about as far as we felt we could predict. And the question was: Is the Industrial Base sufficient? And sufficiency was defined in three contexts. Producibility, sustainability, mindful that we did not want to be dependent on—a sole dependency on a foreign provider for major acquisitions or major components. Then, will there be adequate competition during that timeframe.

    And competition we looked at in two kinds of contexts. Obviously, to lower cost. But secondly, competition leads to innovation. And, therefore, it is extremely important to the Industrial Base.
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    Now to understand the Industrial Base we did a major line of inquiry that had us look at both the suppliers and the demanders. The supplies in this case is the Government. And we looked at 26 different government agencies, to include NASA, the purview of this committee for sure. And to include NOAA.

    On the supply side, we interviewed and visited 21 different firms. These 21 different firms constitute 95 percent of the total space revenues of the country.

    Can I have the next chart, please. Here is the conclusion. There is more than sufficient capacity and competition. But the thing that was the most disturbing was the financial health of the industry and the threat that that posed to the sufficiency in competition. I can talk about that at great length. But we looked at such metrics as return on sales, return on assets, debt ratios, the debt ratings, interest coverage, et cetera.

    More specifically, excess capacity in launch vehicles. And the excess capacity in launch vehicles is approximately—in 1999 it was approximately 35 percent. It is approximately 50 percent today. In satellites there is 50 percent excess capacity.

    Point two is, there is with this excess capacity there is a growing reluctance for companies to invest in restructuring. And one of the reasons for that is that we don't have an incentivization structure for companies to do that. In fact, in many cases the metrics are the other way.

    Number three, the foot-stomper for number three, and you alluded to it in your opening statement, sir, is in speaking to the CEO's of these 21 companies, unanimously, their number one requirement and number one problem was the human dimension in the Aerospace Industry, without a question.
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    Now finally, there are, and General Douglass touched on this, there are a lack of innovation incentives. And what we saw was that a significant reduction in the percentage of dollars going to independent research and development. Companies were using IRAD dollars to buy down risk, to be competitive in the constraint physical environment, and not investing in enabling technologies.

    We believe that the current industry status will lead to further consolidation—probably some people leaving the industry. And thus diminishing future competition and the associated impacts to national security.

    Sir, that completes my statement. Thank you.

    Chairman ROHRABACHER. Thank you very much, general. Next witness is Gayle White from the National Defense Industrial Association, who will be discussing aerospace science and engineering education workforce issues, as well as aerospace industry consolidation since the end of the Cold War. And, Mr. White, you may proceed.

    [The prepared statement of Gayle C. White follows:]

PREPARED STATEMENT OF GAYLE C. WHITE

INTRODUCTION

    Mr. Chairman and distinguished Subcommittee members, I am Gayle White, Chairman of the Space Committee of the National Defense Industrial Association. NDIA represents 24,000 members and nearly 900 corporate members, which employ the preponderance of the two million men and women in the defense industry. On their behalf, I would like to express our appreciation for affording me the opportunity to testify before the House Science Subcommittee on Space and Aeronautics in conjunction with your hearing on the status of the aerospace industry. We in NDIA are grateful for the efforts of the subcommittee to maintain a strong and viable aerospace industrial base.
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SUMMARY

    The Subcommittee has asked that we discuss issues facing the defense and aerospace workforce as well as the impact mergers and acquisitions have had on the viability of the defense aerospace industry. My comments will predominately focus on these two issues.

    First, there is a clear need for more qualified well-educated employees to keep the aerospace industry strong in the face of growing technological change. The workforce shortage has had, and will continue to have, a profound impact on the cost of doing business in our industry. When costs rise in an environment of constrained budgets, the nation's defense capabilities may ultimately suffer. Our association and its members find unusual rising costs and the potential for reduced defense capabilities unacceptable impacts of personnel shortages. We support steps being taken by this committee and other organizations to address the issue.

    Second, we view the recent round of mergers and acquisitions as having the potential to significantly affect our industry's support for national defense. We are pleased to report that our industry remains strong and committed to the defense of the United States. This is not to say that there are no issues that need to be addressed. We are prepared to offer today some thoughts on factors that have made the corporate consolidations successful and areas that remain a concern.

WORKFORCE

    In my testimony today, I hope to share with you how unfulfilled workforce resource demands span the entire technology industry. Impacts are felt among defense, civil and private business sectors alike. They also extend to technology-Based government entities.
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    I also hope to show how workforce shortages are exacerbated for the defense industry where we operate in a constrained budget environment. I'll then share some thoughts on what might be done to provide relief.

THERE ARE NATIONAL SYMPTOMS OF TECHNOLOGY RESOURCE SHORTAGES

    Personnel skilled in math, sciences and engineering are in short supply in all technology-based industries. In February 2000, the National Science Foundation released a report detailing changes in the number of students graduating with degrees in science and engineering. While the number of Bachelor's degrees awarded between 1966 and 1997 increased by 226 percent, the number of science and engineering degrees increased by 210 percent. The report also found that the number of science and engineering Master's degrees decreased relative to the overall number of degrees obtained; a 227 percent increase versus a total increase in degrees of 299 percent. Thus, the problem facing the defense aerospace industry is a symptom of a larger issue confronting the United States. Today's ''new'' economy is dependent on highly skilled and well-educated individuals. Increasingly this dependence has focused on information, systems, both space-based and terrestrial. Mathematics, science and engineering are crucial skills in the development, sustainment and operation of these systems.

    The defense aerospace industry is no exception to this rule. Much of our research and development requires the same skilled engineers and scientists as the commercial information system developers. The industry's ability to grow is inhibited because of the increased demand and competition from other sectors of the economy.

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    Shortages are also experienced in the civil business sector. As an example, in testimony before the Senate Subcommittee on Science, Technology, and Space of the Committee on Commerce, Science and Transportation, the General Accounting Office (GAO) identified workforce shortages within the Space Shuttle program operated by National Aeronautics and Space Administration (NASA). GAO indicated that NASA had identified 30 areas at the Kennedy Space Center that do not have enough staff to meet required backup coverage. This workforce shortage has forced NASA to use personnel lacking in experience level and training to perform required safety inspections. Furthermore, the testimony noted that ''throughout the Office of Space Flight. . .there are more than twice the number of workers over 60 years of age than under 30 years of age. This jeopardizes the program's ability to 'hand off leadership roles to the next generation.''

NATIONAL WORKFORCE SHORTAGES ARE EXACERBATED IN THE DEFENSE BUSINESS SECTOR

    Workforce shortages for scientists and engineers are felt intensely in the defense industry. An analysis of three separate Internet-based job search firms confirms this point. All three job search firms target the private defense and aerospace workforce. A total of 863 job openings were posted between January 30, 2001 and May 5, 2001. Of these, 524 were math or science related, i.e., the positions advertised were' engineers, computer software developers, physicist, chemists, etc. Sixty percent of all jobs advertised required a degree in math or science. To confirm this statistic, a search was performed for job openings on the web page of one of the top ten defense contractors. Out of 2,441 positions advertised 1,558 were for engineers, or 64 percent.

    National technical workforce shortages are felt more intensely in the defense industry for a variety of reasons beginning with budget constraints that limit near-term competition with the private sector. In effect, technical labor is a function of supply and demand. In periods of shortage, costs rise outside the normal and expected range of escalation. In the commercial market, all competitor's costs rise in similar fashion and they are reflected in the product price. However, the total budget for the defense industry is constrained. These constraints flow down to programs where increased labor costs are not easily absorbed. If they are absorbed, other programs may be canceled (with associated loss in defense capability) to accommodate the increased labor costs.
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    Constrained budget impacts are most evident in the information technology and Internet sectors of our economy where private companies have generated robust salaries and benefit packages in response to workforce demands. Salary competition from the dot.com world has been intense, with starting salaries for software engineers 1.5 to 1.75 times more than defense firms are able to pay and remain competitive. (Recently we have seen a decrease in the profitability of these sectors. However, this change has not resulted in a major reversal of the competition for resources.)

    A declining Department of Defense budget does not help to attract new entries into the defense workforce. While we have seen some return of workers from the private sector, the promise of career growth is deemed by many new (and younger) job applicants to be related to industry growth versus stability. This view that we have an aging workforce is substantiated by the current imbalance of older employees in the defense sector. Multiple GAO reports, dating back to 1999, have highlighted this fact as a major management challenge for industry as well as the Department of Defense, Department of State, Department of Energy and the National Aeronautics and Space Agency. Independent studies undertaken by the Defense Science Board and individual aerospace companies have produced the same findings.

    The absence of significant growth in the defense budget does not provide many opportunities for new accessions into the workforce. Without accessions, the workforce effectively ages and a bow wave of retirements can be predicted without an experienced workforce ready to replace the senior staff. By the year 2006, an estimated 236,000 federal employees will retire. Included in that total number is an estimated 20 percent of currently employed physicists. A recent Booz, Allen & Hamilton study indicates that one-third of the technical workforce in the space industry will reach retirement eligibility within five years.
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    Like the relatively flat budgets, reductions in the independent investment and research (IR&D) budgets and congressionally funded research and development (R&D) budgets take away the ''leading edge'' attractiveness of the defense aerospace industry. The Defense Science Board noted that IR&D is down 50 percent from its level in the mid-1980s. In today's workforce, bright young graduates frequently seek positions where personal growth is available over jobs where stability is offered.

    The need for a modernized technology infrastructure limits attractiveness of defense-related positions. In effect a large number of employees in the defense industry direct their efforts to sustainment of existing infrastructure. As that technological infrastructure ages, it becomes increasingly difficult to attract a new workforce to maintain it. An excellent example of unfulfilled demand for infrastructure sustainment relates to current job opportunities for JOVIAL programmers. This outdated language still operates on many DOD systems but few programmers are interested in tying their future to its support at any price.

    Defense contractors also face the twin challenges of a limited workforce pool frequently needing security clearances. While clearances are not needed for every position, it is clear that career growth will eventually require most employees to be cleared at some level. This requirement limits the available workforce in that many applicants are not awarded clearances for a variety of reasons.

    A minor but related impact on the defense industry occurs when clearances are delayed for any reason. In some cases, employers have been waiting over two years for an employee to be cleared. In many cases, employers are reluctant to employ a previously non-cleared employee on a contract requiring a security clearance because uncleared personnel are paid at their full salary but are unable to perform work on the contracted project. A recent study of the Defense Security Services (DSS), the body responsible for releasing security clearances, between August and December of 2000 found on average, an employer must wait 341–381 days before an employee receives his or her clearance. The effect of delayed clearances may be a smaller available workforce pool; resignation by the employee as they become discouraged, or minimal effective performance by the employee while awaiting award of the clearance. In all cases, these situations result in lost productivity and an effective workforce shortage.
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    This problem was recently addressed by the Assistant Secretary of Defense. In a memorandum dated April 30, 2001, the Secretary authorized the Office of Personnel Management (OPM) to begin assisting the DSS in an effort to reduce the backlog. Although this will provide short-term relief, more fundamental changes must be undertaken to ensure timely completion of proper background investigations.

NDIA SUPPORTS AN AGGRESSIVE PROGRAM TO INCREASE THE TECHNICAL WORKFORCE OF THE UNITED STATES

    As noted earlier, NDIA is pleased that the Subcommittee on Space and Aeronautics is examining ways of maintaining a viable technical workforce to support both our commercial industries and those associated with defense of our nation.

    We believe the primary thrust of the federal government should be to increase the base of math, science and engineering talent graduating from our educational institutions. This focus will reduce the competitive environment that currently exists between the commercial, civil and defense sectors of our economy. NDIA, through its local chapters, is committed to these same goals and awards scholarships annually to students seeking technical degrees. The NDIA Rocky Mountain Chapter is exemplary as it awards $13,000 per year in these scholarship programs and has endowed a program to ensure continued student support. Other chapters have similar programs.

    Additionally, NDIA's Space Committee is initiating a study to recommend ways in which industry and government can work together to alleviate the workforce resource problem. The results of this study will be available in the Fall of 2001. NDIA will be pleased to present the findings of this report to the Subcommittee.
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    As a national organization, we also offer our encouragement for the government to continue many of the programs aimed at increasing the workforce or minimizing the impacts of workforce shortages. The programs include:

 The Future of Aerospace Commission. As the Subcommittee is aware, section 1092 of the National Defense Authorization, Fiscal Year 2001 (Public Law 106–398) authorized the establishment of The Future of Aerospace Commission. The Commission will focus on aerospace and defense issues, including tax, trade, contract financing, science and engineering education. We believe that this Commission is an excellent forum to discuss and recommend ways to enhance the viability of the defense aerospace industry. NDIA member companies are participating in the Commission's efforts, along with our colleagues from the Aerospace Industries Association (AIA).

 The Federal Career Intern program. In July 2000, the Office of Personnel Management (OPM) unveiled the Federal Career Intern Program, which focuses on making the federal government a more attractive employer among ''exceptional'' candidates. This program, established by presidential executive order, offers participants unrivaled professional experiences and training opportunities that are tailored to meet their professional goals.

 National Defense Authorization Act Pilot Programs. NDIA believes that the pilot programs established in sections 1151–1153 of the FY 2001 National Defense Authorization Act (Public Law 160–398), offer opportunities to reshape the public sector workforce for the future. Further, because the pilot program authorizations are limited in duration, we believe a defense science board should be established to examine the potential efficacy of the pilot programs with a view toward making recommendations for their extension and, if necessary, expanded authority.
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    Beyond existing programs, NDIA strongly endorses other activities aimed at resolving workforce issues. For example, the findings and recommendations of the recent Defense Science Board Task Force on preserving a healthy and competitive U.S. industry to ensure our future national security are fully supported. The defense aerospace industry needs to see additional and stable funding for research, development, and procurement. Improved business practices must be implemented. Favorable contract financing, tax policy reform, and export control revisions are essential to the future vitality of the defense industry. If met, these needs will enhance the ability of the industry to attract qualified individuals.

    One of the challenges in government is the antiquated personnel policy in today's dynamic business environment. Current government-civilian workforce policies must be reformed to enable agencies to fill shortages in their workforce and eliminate overages in other areas. As the focus of the government evolves to new business processes and technology the current personnel policies encumber the redistribution of talent between government agencies and within agency programs and functions. Although this is beyond the scope of this hearing, it is necessary to point out as it remains an obstacle.

    Finally, we believe our federal programs should treat our technological workforce as ''intellectual capital''. As such, it should be managed just as other capital assets are managed. There needs to be clear intellectual capital planning, investment, reporting, transportability, etc. The workforce shortage and the demographic makeup of the current workforce are cost drivers for the defense aerospace industry. Adequate investment in human capital can, in the long term, provide direct cost savings to the federal government. This may include bidding contracts with adequate margin to afford personnel development programs and opportunity for more IR&D. With a consistent level of qualified, well-trained employees at all levels, greater productivity and cost efficiencies can be achieved, thus enabling both government and industry to meet contract and performance goals.
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Corporate Consolidation

    We are pleased to report that Corporate consolidation has not surfaced as a significant issue when compared with technical workforce shortages. Generally speaking, an equal number of our member companies have merged or been acquired as have been spun off from larger companies. In contrast to the consolidation trend started in the early 1990's, today we are seeing a full mix of acquisitions, mergers, divestitures and spin-offs. Each of these is made based on a ''business case'' unique to the companies involved. Motivations appear to be in response to a variety of situations including lower profit margins, a need to streamline business practices, desires to focus on core competencies, to gain access to product lines and to meet capacity requirements.

    The decline in defense spending resulting from the peace dividend was the major driving force of mergers and acquisitions during the mid- to late 1990's. Greater competition for fewer contracts with smaller production runs forced companies to examine opportunities in an effort to maintain what they believed to be necessary market shares. An industry that consisted of roughly 50 companies ten years ago has been transformed to an industry dominated by a handful of mega-companies.

    Our industry responded to a supportive DOD attitude toward consolidation that began at the end of the Cold War. Former Deputy Under Secretary of Defense for Industrial Affairs, Jeffrey Bialos, in a speech in April 2000 stated ''[O]ur focus is whether, in an era of industrial consolidation, we have a healthy and competitive defense industry that can provide affordable, high quality and innovative defense products to meet our national security needs in the 21st century.'' Within our association, we sensed that DOD supported mergers as long as it perceived the benefits resulting from cost savings to the DOD would outweigh the negative impact of reduced competition. In the recent past, DOD appears to have altered their stance on mergers and has adopted a more pro-competition approach.
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    Importantly, it should be noted that private sector consolidations have not resulted in a significant reduction in excess infrastructure. The continued maintenance of this over-capacity has resulted in higher costs and lower profitability. Industry has maintained these facilities because of a perceived loss of potential public support and the costs associated with closure imposed by various government levels and standards. This has translated into the dissolution of many cost-savings estimates associated with proposed consolidations.

    From an industry perspective, the real issues with mergers and acquisitions are the underlying goals of a given consolidation and the ability to transform a consolidated entity into a new way of doing business. In successful mergers/consolidations of companies, we have observed that management should focus on a few key elements in the transformation process. These include:

 Best practices should be adopted from both of the merging companies.

 Cultures of the organizations should be merged successfully. Issues relating to differences in sizes of companies and their roles in the market place, such as production oriented versus research and development must be addressed.

 Timelines for the merger process should be minimized. The longer companies maintain multiple accounting, billing and teaming systems, the smaller the projected cost savings will be and the more disruptive the merger may seem.

 Companies should strive to maximize their total product value through a full cycle of support. If a company is able to add production to a research and development program, the product as a whole will benefit from feedback and improvements can be translated from the operational market to the research and development teams.
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    As indicated earlier, we recognize that some mergers and acquisitions result in adverse impacts when they are undertaken with the goal to exploit the purchased or merged organization, or proper attention isn't given to the factors discussed above. Mergers and acquisitions can be truly positive for the industry when, for example, a national firm is able to add an international sector, thus resulting in improved marketability of its products. Other positive consolidations may occur when product providers acquire new company service elements to become full life-cycle product providers or a product producer adds technological development for broader life-cycle support.

CONCLUSION

    Mr. Chairman, as we have discussed today, the defense industrial base continues to change. Because of the shift in emphasis toward information processing, management and advanced commercial technology, the defense industry finds itself competing with the commercial sector for a scarce workforce. The best solutions will focus on increasing our national intellectual capital investment in the areas of math, science and engineering.

    Likewise, our success in the changing corporate environment resulting from mergers and acquisitions will stem from our attention to transformation of enterprises to maximize the potential of the new corporate entities.

    Mr. Chairman, this completes my statement. I will be pleased to respond to the Subcommittee's questions.

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STATEMENT OF GAYLE C. WHITE, CHAIR, SPACE COMMITTEE, NATIONAL DEFENSE INDUSTRIAL ASSOCIATION

    Mr. WHITE. Thank you, Mr. Chairman. I, too, will submit a written statement for the record. Mr. Chairman, distinguished subcommittee members, today I represent the Space Committee of the National Defense Industrial Association. NDIA represents 24,000 members and nearly 900 corporate members and employees, the preponderance of those 2 million men and women in the Defense Industry that have been talked about earlier. On their behalf, I would like to express my appreciation to this subcommittee and their interest in the issues associated with them.

    The two things I would like to talk about are the defense of the aerospace—defense and aerospace workforce and the impact of mergers and acquisitions. Let us begin with the aerospace workforce.

AEROSPACE WORKFORCE ISSUES

    In general, what we are seeing is a shortage in personnel skilled in math, sciences and engineering, and all of the technology-based industries. To characterize this shortage, in the Defense Industry a search was performed on job openings on the web page of one of our top 10 defense contractors. Out of the 2,441 positions advertised, 1,558 were for engineers, or 64 percent of their openings are for engineers. National and technical workforce shortages are felt more intensely in the Defense Industry. And that happens for a variety of reasons. Among them are competition from other sectors drive up the labor costs. In the information and technology sector of our economy, the starting salaries for software engineers are about 1.5 to 1.75 times more than defense firms. In fact, the budget for the Defense Industry is constrained. So when we have these rising labor costs, there is a constraint on what the programs can afford, and those supply shortages are not easily absorbed by the programs.
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    Third, the new entries are not easily attracted to the defense workforce. The promise of career growth when we show them an industry that—with sales that are relatively flat, it is—makes it difficult to attract job applicants.

    Fourth, there are reductions of up to 50 percent in the IR&D. And that takes away that leading-edge-sense that the applicants might have.

    And lastly, the need for modernized technology infrastructure limits their attractiveness. It is just very hard to find a Jovial programmer.

    The result of all of this—these workforce shortages and aging—is an aging aerospace workforce. General Moorman's study, which he referenced, talked about g of the technical workforce in the space industry will reach retirement eligibility within 5 years.

    We believe these problems in the Defense Industry should draw attention to the Federal Government and industry alike. And I would like to propose some actions that we think are of interest.

    First, programs that increase the base of math, science and engineering talent graduating from our educational institutions. And they would include scholarships, loan forgiveness programs, that type of thing.

    Secondly, continuation of programs aimed at increasing the workforce or minimizing the impacts of workforce shortages. These are programs like the Future of Aerospace Commission, the National Defense Authorization Act pilot programs, which allow for some reshaping of the workforce.
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    And then new thrusts to address teaching the teachers. Our colleagues at the U.S. Space Foundation have identified the need to educate the teaching workforce in the United States so that they are prepared to produce those—that workforce that we are looking for.

    And then lastly, treat our technical workforce's intellectual capital. We all are aware of capital planning that goes forward for those hard assets that we are quite familiar with. And we need to be looking at the intellectual capital and how we manage that workforce.

    Now lastly, I would like to just turn my comments quickly to the merger and acquisitions. Generally speaking, the members of NDIA, member companies have been merger-acquired and spun off in roughly equal numbers. So we have a mix of acquisitions and mergers and divestitures and spin-offs in contrast to the early 90's when most of those were acquisitions and mergers. From an industry perspective, the real issues with mergers and acquisitions are the underlying goals of giving consolidation and the ability to transform consolidated entity into a new way of doing business. The question isn't whether or not we merge or acquire, the question is how well do we merge and how well do we acquire.

    And in that area, I would like to suggest that most successful companies are those that have adopted the best practices from the two merging organizations. That they are cultures of the organizations who have merged successfully. That the timelines for the merger process is minimized and where the companies strive to make their total product value through full cycle support. We recognize that some mergers and acquisitions result in adverse impacts. And those are perhaps those that gain to exploit either the purchased organization or the employees. But when proper attention is given to those factors that I just mentioned, most of the mergers tend to be successful.
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    Mr. Chairman, I hope to share during questions today that the Defense Industry finds itself competing with the commercial sector for a scarce resource. And the best solutions will focus on an increasing our national intellectual capital investment in the areas of math, science and engineering. Likewise, our success in changing corporate environment to resulting from mergers and acquisitions that will stem from our attention to transformation of enterprises to maximize the potential of the new corporate entities.

    Mr. Chairman, that completes my statement. I will be pleased to respond to questions.

    Chairman ROHRABACHER. Thank you very much, Mr. White. Our final witness today is Heidi Wood who is a vice-president with Morgan Stanley. She will give us a Wall Street investor's perspective on the Aerospace Industry. And we are looking forward to hearing from you. You may proceed, Miss Wood.

    [The prepared statement of Heidi Wood follows:]

PREPARED STATEMENT OF HEIDI WOOD

Private Investment Trends, Market Factors Which Influence Investment

    I'm here to present, very briefly, a Wall Street perspective about the defense industry. We appreciate the privilege to present our view because it's apparent to many of us that the interests of DoD's and Wall Street's could and should be closely aligned.
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Why is it worthwhile paying attention to Wall Street's opinion about defense?

    Before we talk about what those on Wall Street think, it's perhaps first worth addressing why our perspective could be helpful. Increased market value strengthens companies financially, increases their long term viability and enhances the ability to attract and retain the 'best in breed' talent, both business managers and engineers. Improved access to key management and technical talent in turn can translate into faster program development, fewer glitches and ultimately public taxpayers will pay less for a strong, healthy national defense.

What has been the investment trend in Aerospace/Defense?

 Funds have been flowing out.—In 1980, Aerospace and defense sector had a market cap equivalent to 2.4% of the total S&P500. In 1990, the importance of the sector dropped to 1.8%. Now, a decade later in 2001, the market cap of this sector is 0.9% of the total value of the S&P500. Benjamin Graham, the grandfather of investing, wrote in 1934 that ''in the short run, the market is a voting machine but in the long run it is a weighing machine.'' Investors have been voting with their feet, away from this sector.

 And that was the right direction.—From 1995–1999, the last four years of the biggest bull market of the century, the aerospace/defense sector under-performed the S&P500. Last year, when the tech bubble burst, this sector was up 56%; however, it had fallen 52% in 1999. That's not progress. In Wall Street lingo, that's called a 'dead cat bounce'.

 By and large, companies who exited prospered; companies who've remained have seen their market caps shrink.—Many companies who have sold off properties and exited the defense business have done very well. Some of these stocks are up 400% since they exited. In contrast, those companies who have chosen to remain top defense contractors have seen their market cap shrink. Lockheed Martin, the #1 defense contractor, had a market cap of $23B in 1997 which dropped to $15B today. That's a steep 32% drop in four years.
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 Investment trends and human capital trends are related.—Some of the defense contractors' problems have stemmed from their own doing: management and engineering weakness at the program level, lack of execution, overly competitive bidding, incomplete systems and cultural integration. Yet it's fair to say, some of the policies which govern this industry makes it impossible for even the best managers to prosper and grow their companies.

 As a result, even how this sector is defined has been downgraded.—Aerospace/Defense is not recognized as being 'high technology', according to Wall Street. Instead, the Aerospace & Defense sector most often falls under the category ''Basic Industries''. This sector designs and builds satellites that can track license plates, is on the cutting edge of advances in artificial intelligence, robotics, laser optics, advanced electro-optics, missile guidance systems. The list goes on and on. But it yields very little benefits to the underlying companies, either in better sales growth, margin expansion or cash flow. So the value of such leading edge defense technologies is placed between companies who build basic machinery and farm equipment.

What attracts investment in Aerospace/Defense?
1. Improved Market Factors: Sector growth matters—When defense outlays rise, the sector has tended to outperform the rest of the market. The caveat is, that was 30 years ago and investors have a larger choice of investment sectors than they did then.

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2. Financial Metrics: Risk/reward trade-off needs improving—Wall Street examines fundamentals of a sector or a company on that basis of a risk/reward trade-off. Key metrics followed by portfolio managers and analysts are revenue growth, operating profit, profit expansion, free cash flow and returns on invested capital (ROIC) which measures how much capital was tied up in making money. By and large, investors will accept a more modest growth outlook in exchange for a greater promise of certainty, or conversely, require higher growth and accept the increased risk. You can see that defense falls under the less desirable lower right hand quadrant and needs to move either to the left of the matrix, where you increase the certainty/visibility or up on the matrix with the promise of greater growth but a less certain outcome. Investors simply will not accept low growth and low visibility for a sustained period of time.
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Concluding Remarks:

    The investment community cares about seeing weapons spending growth (procurement + RDT&E), the ability to leverage some of this leading edge technology into new markets (commercial, defense export) and improving profitability metrics which demonstrate the ability for these companies and this sector to translate sales growth into cash. That's the name of the game when fording companies whose shares rise. One can always debate how much value can be attached to a program, a technology, a management team, but cash is always be the ultimate goal of any public business. On Wall Street, ''Cash is King.''

    So to the extent this sector will always be competing with others for engineering and business talent and investor attention—human and financial capital—it is in the interests of Washington policy makers and ultimately the public taxpayers, to help this sector compete successfully. Increased attention and understanding of how policy and procedures influence the investment community is an important step to improving the health of this valuable sector.

    Thank you distinguished members, for your attention.

INVESTMENT TRENDS IN AEROSPACE INDUSTRY
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    Miss. WOOD. Thank you. Mr. Chairman and distinguished members of the Subcommittee. Thank you for the privilege to present my views on the Aerospace and Defense Industry. With your permission, I would like to submit my formal written statement for the record and give you a brief summary of my testimony.

    I would like to start out by pointing out some statistics, which hopefully highlight for you the investment trends in the aerospace and defense sector over the last few decades. In 1980 the aerospace and defense sector had a market cap of $13 billion, equivalent to 2.4 percent of S&P500. In 1990 the importance of the sector dropped to 1.8 percent. Now, a decade later in 2001, the market cap of this sector has risen from $25 billion to $91 billion, while the S&P500 has risen from $2 trillion to $11 trillion. This means this sector comprises less than 0.9 percent of the total value of the S&P500.

    From 1995 to 1999, the last 4 years of the biggest bull market of the century, the aerospace and defense sector underperformed the S&P500. Last year when the tech bubble burst this sector was up 56 percent. However, I will remind you it had fallen 52 percent in 1999. That is not progress. In fact, in Wall Street lingo, that is called a ''dead cat bounce.''

    The question for some of us now is, is this sector being rented or has it been bought. Many of the companies who sold off properties and exited the defense business has done very well. Some of these stocks are up 400 percent since they exited the defense sector. In contrast, the companies who have chosen to remain top defense contractors have seen their market cap shrink. Lockheed Martin, the number 1 defense contractor had a market cap of $23 billion in 1997, which has dropped to $15 billion today. That is a steep 32 percent drop in 4 years. Northrop's market cap in 1997 was $8 billion, which dropped to $6 billion today. And that is a 26 percent decline in 4 years. Raytheon's market cap in 1997 was $12 billion and is now $10 billion. That is an 18 percent decline.
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    Many of the problems of this sector are the consequences of management's own doing. Some of the defense contractors problems have stemmed from not putting in great management at the program level, engineering weakness, lack of execution, overly competitive bidding, incomplete information management systems, and inadequate cultural integration following these large scale consolidations.

    There are things industry can do for itself. It is not a matter of giving regulatory handouts to industry. But when it does come time to examine what Congress can do to make life a little easier for industry, here are a few suggestions. If we could go to the first slide, please.

    The first suggestion would be to continue increasing weapon spending. You can see in this chart that there is a relationship between DOD outlays and how the Aerospace and Defense stocks perform. When the defense outlays rise, the sector has tended to out perform the rest of the market. The caveat is that was 30 years ago, and investors have a larger choice of investment sectors than they did then. But one can't help but believe that it would help.

    If we could turn to the second slide, please. My second recommendation would be to take steps to improve some of the financial metrics that we in the investment community look at. You can see those on the left. Expected and actual sales growth, operating profit, operating profit growth, return on net assets, return on invested capital, free cash flow, and free cash flow growth.

    You will be able to attract investors and relieve some of the burden of industry management by making policy changes which either improve visibility or increase the projected growth rate for the metrics that we use. That is important. Because investments are regarded with the risk/reward trade-off. Investors will accept either increased uncertainty for the promise of higher reward, or they will accept the prospects for lower reward in return for lower risks. The problem is, currently investors are asked to accept low growth and also a great deal of uncertainty or cloudy visibility. And that is just not the same value equation offered by other sectors which compete for investors attentions and funds.
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    So you can see in that chart that the Defense Industry is highly uncertain under low growth. I would suggest if we moved that—the aspects of this sector to the left so that we had low growth but increased certainty, that would be a plus in investors opinions. Or in turn, if we went for higher growth and investors would accept the increased uncertainty that come with that. But simply put, increased intention by policy makers, the financial metrics, and the risk reward ratio which governs investment decisions should help re-attract investments.

    I have outlined briefly just a few suggestions such as more multi-year contracts, reduced export restrictions, higher allowances for profits on R&D to stimulate more in internal R&D investment. But the bottom line, investors need to see this sector grow in terms of sales, operating profit margins and free cash flow, as well as lower capital to garner returns.

    So to the extent that this sector competes against other commercial sectors for engineering and business talent, and investor attention and funds, it is in the interest of policy makers and ultimately the public taxpayers to help this sector compete successfully.

    This concludes my testimony, Mr. Chairman. I would be happy to respond to any questions.

CHAIRMAN'S QUESTIONS

    Mr. ROHRABACHER. Thank you very much, Miss Wood. Just write a check for those weapon systems, huh? All right. Let me ask a little bit about that. Does the panel have anything to say about that when we are talking about the decline in exports of American Aerospace, how much of that decline is commercial and how much of that decline is the fact that we are no longer in the Cold War and exporting as many weapons?
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    Mr. DOUGLASS. Sir, the bulk of it is in commercial goods. Up until 2000 the exporting of military airplanes has remained relatively constant. Now we do expect it to decline because it is kind of cyclic in itself. But it has not been the factor causing the decline. The decline has been largely due to more imports of large and medium sized civil air transports.

    Chairman ROHRABACHER. I see where the Europeans are now competing with us for commercial aircraft. They say—and that is the major factor?

    Mr. DOUGLASS. That is the major factor in the large aircraft arena. In the regional aircraft arena it is not only Europeans, it is other parts of the world.

    Chairman ROHRABACHER. I would suggest that where the world is about to just see something new as well that the—our former adversaries, the Russians, who are formerly the Soviets, are now the Russians. And the Soviets were our enemies but the Russians are not. And if the Russians are going to be part of the world economy, they are going to have to be part of the buying and selling of things, of goods that they produce. And I don't think we are going to be able to keep them out of this world aerospace with good—and in good faith suggest that we are dealing with them honestly. And there is another competitive—our competitor that is on the way, you can see them coming at us. And I don't see—by the way, I personally don't see the competition as a bad thing. And I would hope that we would work with the Russians. And they have made great strides. They have opposition parties. They have freedom of speech to some degree, not as much as we want, but much—they have made great reforms in their country. And they are no longer threatening the world as they were. And I think that should be recognized.
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    The—and I—the point about excess capacity, working against innovation, that is kind of an interesting thing. We have excess capacity here but that works against us wanting to move and try to innovate because we have got so much right available to use. Is that true, general, is that your point?

    Mr. MOORMAN. The point I was making on the innovation is that when John showed a chart that showed back in the 60's, and he and I go back to that period of time, we—there was a high incentive to do independent research and development on enabling technologies. The thing that makes us the number one aerospace country in the world.

    But we were surprised in this study that over time the independence of that activity was going away. And we weren't emphasizing enabling technology, but rather we were using IRAD money to buy down risk so that companies could be more competitive in weapon systems competitions. And the numbers are pretty striking. And our view of that is that must be reversed because that is going to have a long-term impact on our competitiveness overseas.

    Chairman ROHRABACHER. What about depreciation schedules? Nobody mentioned anything about that. Are we—when it comes to the depreciation schedules our company has on their machinery, how does that compare to the depreciation schedules whether European competitors and other countries?

    Mr. DOUGLASS. Sir, I can't answer that exactly on depreciation. But I can in general on taxes, if that is the connotation——

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    Chairman ROHRABACHER. Well, I would, number one, I will appreciate that answer. And I will get—I will let you give it to me in a moment. But if no one here can answer that particular question, I would certainly like to hear about it. Because in other industries they tell us that one of their greatest impediments is the fact that, for example, the Japanese have a depreciation schedule on equipment that permits them to totally redo their equipment every number of years. And where our companies have to wait like twice or three times as long in order to put equipment in their plants because of the depreciation schedule. And I would like to know how that works in our aerospace industry.

    Mr. DOUGLASS. We could get that for the record, sir.

    Chairman ROHRABACHER. I appreciate that. And you can go right ahead with your answer about the taxes.

    Mr. DOUGLASS. Well, in the tax arena there is in some of the nations we compete with. You know in Europe, sir, when—we have all traveled there, and you know if you buy something there and you are going to take it out of Europe, when you get to the border you can fill out a little form and you get the VAT tax back. We have had in our country for a number of years something equivalent to that and it is called foreign sales corporations. And essentially, what it says is, you don't have to pay taxes on equipment that is destined to be exported from the United States. You do it through this foreign sales corporation mechanism.

    Well, the Europeans have taken us to the WTO and won a case against us that has said that our foreign sales corporation laws here in the United States are in violation of the WTO provisions.
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    Chairman ROHRABACHER. Oh.

    Mr. DOUGLASS. And they are now—have the opportunity to bring sanctions against us. They——

    Chairman ROHRABACHER. Okay. So let us get that right. The other countries, because of the very nature of their setup have a system that provides a tax haven, you might say, for those people who are exporting. But when we try to recreate that in our current system, the WTO has cited against us and for our competitors.

    Mr. DOUGLASS. That is correct, sir.

    Chairman ROHRABACHER. All right. I would just like to note that for those on our committee that want to put their faith in all of these world bodies and the global economy. Let me note that any good judgments we get out of the WTO right now are manna from heaven as compared to what we are going to get 20 years from now when the nut cases take over all those panels. Because you can bet that the Chinese are going to be bribing everybody on those panels. And Nigeria and Columbia will probably have—and Venezuela will probably have the people on the boards who will be making the decisions like this decision, which will be life and death to an American industry. That is why I don't place my faith in those boards.

    I was a little bit—let me just say, I am a little bit concerned that quite often American Aerospace Industry relies on the Defense Department. But in the past, that has been true. We had a hearing just last week about the DP–2, which is I think a revolutionary technology that the—our private industry has not even looked at.
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    And in fact, the Navy—the Office of Naval Research sort of secretly funded it over these last few years. And it is a jet—veteran of jet thrust for vertical takeoff and vertical landing, rather than tiltrotor technology. And I see that as perhaps the greatest potential innovation in aviation that I have seen for the last 50 years.

    I would hope that private industry takes a look at it. And they are going to have their first flights in about a month.

AEROSPACE WORKFORCE PAY INCENTIVES

    One—about the pay levels, when you folks were early in the Aerospace Industry, I know my father worked for the Aerospace Industry for a short period of time, what was the pay comparison at that time, let us say 30 years ago, as compared to the pay today in comparison to other technical jobs? Do you understand what I am saying? The people then—the engineers then, how was their pay in comparison to the engineers or technical scientists who went to other arenas? Was it higher, was it about the same?

    Mr. DOUGLASS. It—I think at the time when General Moorman and I came on active duty, if you were a young engineer in this country, clearly there was an economic incentive to go into the aerospace industry. Because the industry was expanding. We were in the Cold War. We had a huge program to go to the moon. As you recall, President Kennedy established as a national goal.

    Chairman ROHRABACHER. But the actual pay——
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    Mr. DOUGLASS. So the pay was better than average I would say for a young—it is comparable to some but it has lagged far behind what you see in the DOT.COM world.

    Chairman ROHRABACHER. Okay. I think that when we are talking about the quality of people going into aerospace, that is a statistic that I think you ought to have a chart on. Because I think that if you have lagging pay as compared to good pay from before, and then you have—it is more difficult to recruit, surprise, surprise, it is more difficult to recruit quality people. I think that there is ways of explaining that.

    Mr. MOORMAN. Sir, can I touch on that a bit?

    Chairman ROHRABACHER. Yes.

    Mr. MOORMAN. We didn't—I can't give you statistics on comparative pay. But we did look at various aspects. And one of the things that we recommended to the Defense Department and Intelligence Community, the National Securities Guide can be a lot more innovative in their approaches to pay. And we have disincentives as a matter of fact. And one of the things for years you could not have bonuses as an allowable cost.

    Now fortunately, the Defense Department has moved forward on that in the last year. There——

    Chairman ROHRABACHER. You mean, if people do a good job they are not permitted to get a bonus if they are working for you, but they can get a bonus if they are working for someone else?
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    Mr. MOORMAN. No, sir. I don't mean to mislead you. You can get a bonus, it just can't be an allowable cost. That it comes out of the profit of the company as opposed to in other—in other services industry it is an allowance—bonuses are an expected thing.

    Chairman ROHRABACHER. And you can write them off as——

    Mr. MOORMAN. Yes.

    Chairman ROHRABACHER [continuing]. An actual cost.

    Mr. MOORMAN. Exactly.

    Chairman ROHRABACHER. But you can't do it for aerospace.

    Mr. MOORMAN. Now there is another aspect to that. And that is that we have in our FARS, our Federal Acquisition Regulations, caps on salaries. And those caps on salaries were determined by surveys within the industry. What we found and recommended in our study was we should be doing comparisons of comparable jobs outside of aerospace, and the most graphic example that I know this committee appreciates is the IT business. Very hard to keep IT business—people in aerospace because of DOT.COM's, other more innovative compensation packages. And so, hopefully, the Defense Department and Intelligence Community will move on that as well.

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    But that is—this capping of how much you can pay particular functional area or skill level I think is a problem.

    Chairman ROHRABACHER. It sounds like we have got some very important elements that are working against you that are built right into our tax system and into the regulatory system. That—and I would hope that this committee can in some way make a list of those items and try to work with the administration to try to correct some of the things you just talking about.

    We need to attract high quality people. And you are not going to do it if you have those type of restrictions going on. You got a bonus if you go to work for somebody else, but you don't get a bonus if you go to work for us. Great. And by the way, our pay is less than that other guy anyway.

    And the—is it true now that the many of the engineering students that graduate in the United States, who might be capable of helping us, come from foreign companies and may not be eligible for the jobs because they are foreign nationals?

    Mr. DOUGLASS. Sir, if they are not U.S., they cannot work on classified defense department work. Now if they have a green card and they want to work here they can work in certain commercial parts of the industry. But they can't work on the sensitive——

    Chairman ROHRABACHER. Well, let me suggest that the idea may not be that we should have more foreign nationals or open the door for foreign nationals working on classified projects. Maybe the answer would be of trying to increase the percentage of how many young American citizens we have. And I understand that many foreign nationals are able to get their entire cost of their education paid for, where U.S. citizens don't have that same opportunity. Something has gone—something is haywire there. Something is really haywire where filling up our schools—engineering schools and technology schools with people from other countries and our people can't get those slots, because they can't afford to go even when our industry needs them. And then we end up talking about expanding what. H1B visas, expanding the number of foreigners who are going to come here to do technical jobs after we have created a system in which our own people can't get that type of education. Something is screwy there. And I think we need to at least draw up a list of items that we can do to make sure that the Aerospace Industry can compete for quality people and how those quality people can get an education that will permit them to work in the industry.
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    I would now turn over to—I have taken too much of my time already. I appreciate his putting up with me.

RANKING MEMBER QUESTIONS & ANSWERS

    Mr. GORDON. That is fine, Mr. Chairman. I appreciate the case you made for increasing Pell grants and scholarship programs and will be happy to support you on those. We need to—I think we need to do that.

    It seemed like there were three common denominators that I heard today as you discussed the problems. One, where there is mergers and acquisitions or whatever the—whatever you might want to say. The bottom line was poor management. We can't do much about that from the Federal level. You also mentioned additional funding necessary in R&D as well as human capital. It was particularly interesting to hear about the human capital.

    As you know, the President's recommendation both for increasing NASA and NSF is much less than inflation. And Dana doesn't want to give any more money, so we don't have much we can do there. And so let me ask you whether this might be a reasonable thought process. It seems to me that in years past, to some extent, the rest of the world has underwritten our aerospace industry here. By virtue of us having a dominant industry, we were—we dominated the rest of the world. And they were buying our products and that is why we didn't have to put, maybe, additional funding in.

    Part of that, obviously, was Cold War, which is gone. But I am concerned and want to know whether there is any merit to—have we gotten into a situation where by virtue of being held hostage to technology transfer that some other countries are requiring of us, as well as potential subsidies. I know that we are not immune to subsidies in this country, but subsidies to their aerospace industry. Are we seeing our—or could our industry better reach that dominance by breaking through some of those international problems? Or is that not a problem?
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    Mr. DOUGLASS. Sir, I would say it is a problem. We have a number of competitive issues with our European friends. You have mentioned the subsidies issue. That is clearly—they do it differently there than we do it here. And——

    Mr. GORDON. But when you put the dollar—when you add up the dollars is there a distinct difference between the two?

    Mr. DOUGLASS. Yes, sir, there is. You can imagine the reaction if I were to come down here and ask this committee or some other committee of Congress to cough up billions of dollars which would go to American industry to develop a commercial product. Just give us the money. And by the way, we won't give it back if we don't make money. We don't do it that way here in the United States.

    There is—there are other trends, sir, that are alarming. You may be familiar with what is called the hush-kit-legislation——

    Mr. GORDON. Yeah.

    Mr. DOUGLASS [continuing]. In Europe. They are banning American airplanes from coming into Europe that fully meet international civil aviation noise standards. The problem is, it has ''Made in America'' on it, and so they won't let them land there anymore. And I think we have to take a much tougher stance with the government's side on the other side of the Atlantic or we are going to see further erosion of American's share of the global economy.

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    And beyond that, sir, there are just some places in the world, because of export licensing problems and so on, where we can't sell our products. And our friends in other parts of the world can sell theirs. So you combine all of those things together and the industry is under a challenge.

    Now the good news, you mentioned some management problems. In many ways I would argue to you, sir, that the fact our industry has been able to innovate and do the kinds of things that it does—has done—shows that there are a hell of a lot better managers than a lot of people give them credit for. Given the way the deck is stacked against us, the fact that they are able to succeed and able to do some of the miraculous things that we have done, tells you, we have some pretty doggone innovative people in this industry. Now the question is not——

    Mr. GORDON. The stock market doesn't seem to appreciate it. But again, we can't do anything there. What I want to do—and I would like to hear from some of the other witnesses concerning what we can do or should be doing in terms of trying to level the playing field on an international basis. And with the premise that a level playing field would give our superior products a better entrée. And in—by using those foreign dollars to bring more capital into our industry.

    Does anyone else have any suggestions on that area?

    Mr. MOORMAN. Well, I—this committee has taken action on export controls. And I guess you all have sponsored a bill on that line. I think that is an area that we found was an area of inefficiency. An area where we were, by our regulations, were shooting ourselves in the foot. And we were losing market share as a result of that. At a very minimum to get more efficient in the way you process. And I understand the proposed bill talks about limiting the amount of days that an export license can take, which was a great boom.
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    Also, just using modern database techniques and information technology techniques. And then giving some differentiation between the country, our allies and our closest allies, versus some of our potential enemies. We had been handling these export controls almost irrespective of the requester.

    I think a lot of work has been done in that area, but I think we have got to be vigilent. And I think we have had a negative impact on our market share, certainly in the space business.

    Mr. GORDON. But that is moving in the right direction now.

    Mr. MOORMAN. I think it is moving in the right direction.

    Mr. GORDON. Any other suggestions, anything that we need to do?

    Mr. WHITE. I would like to echo that comment about treating various other countries differently based on their relationships with the United States. Because it does come to play. We have—I have observed opportunities where we had a technology that wasn't necessarily unique. But it was difficult to do business and get through the technology transfer process to work with foreign nations. And so in many of these countries that are friendly toward the United States, and we should consider them at a different level.

BOEING/AIRBUS COMPETITION

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    Mr. GORDON. And I guess, finally, Miss Wood, concerning I guess Boeing and Airbus, are you—what is the Wall Street betting, is faster or bigger better?

    MISS WOOD. Representative Gordon, I think that the Wall Street perspective is that faster is better than bigger. I think that the interesting comment that I would make as it pertains to these two products is that I was there in 1994 when Airbus unveiled its plans for the A3XX, it was named at the time. It has taken Airbus 6 years to garner something like 65 orders that have to get back in the exact number.

    Boeing has unveiled its plans for the sonic cruiser. I believe that you will probably see that plane launched in 18 months to maybe 2 years. And I would expect you would see a significantly higher launch order base. It could be 100 to 300, which tells you something about the size of the demand. I think it isn't lost on most of us that we would like to get there sooner rather than being in a big plane.

    Mr. GORDON. Is Airbus going—are they losing money? Are they going to lose money on the way they priced these early ones and gives us sustainable?

    Miss WOOD. I think that is a question that all of us are trying to figure out. I can offer my view only, not the entire Wall Street's view. But I can say that I am intensely curious as to whether they are going to be able to make money on that plane based on our best understanding of what those plane prices are going for.

    And also just quickly, I want to make sure I was very clear in my comments to you, Representative Gordon. That it is not that I am down on management on this sector at all. In fact, I think they do a tremendous job. I simply wanted to acknowledge that it has been a trade-off between some of the policies which impede their success and then in some ways management making sort of its own mistakes.
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    Mr. GORDON. I guess—and then I will try to conclude here quickly. What are the stakes with the Boeing/Airbus competition here? If Airbus bets wrong and they lose money on these planes, how does that impact their whole industry in terms of our competitiveness? Do they just pull the plug and go on and everything is fine? Or does it undermine their infrastructure there?

    Miss WOOD. Well, let us take a step back and remember, as John Douglass has pointed out, up to a third of this plane is going to be financed by low interest loans from the Government in which if they don't make money on the plane they do not—they are relieved of the burden of having to repay it. So and assuming also that a certain number of the suppliers are going to bear some of the financial burden, the consequences for Airbus may not be as grave as one might think.

    Mr. GORDON. But if the premise is that they are doing much of what they are doing because of subsidies, you can only do so much. And so, I mean, how much more is the Government going to go there? How much more will their—I mean, but whatever the Government loses here or whatever the suppliers lose, they can't put it back in another place. Maybe I am not making that clear. But I don't think you can just—I don't think they walk away from the table and say, let us crank it up again. Maybe——

    Mr. DOUGLASS. Sir, I might be——

    Mr. GORDON [continuing]. What we can—maybe they don't.

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    Mr. DOUGLASS. Your line of logic is right on track. They have announced a number of projects in the aerospace field. The A380 is one. Developing an alternative to our global positioning system, which they call Galileo, is another. There are a number of other aerospace projects that they have announced. In fact, their government has issued a paper called, Aerospace 2020, in which they set as a—as a governmental goal, taking our market share away from us. It is just printed right there in black and white.

    Now one could conjecture though that if they were to get into financial difficulty on the A380, it would limit the overall capital in the market available to do some of these other things that they want to do to challenge us.

    Mr. GORDON. I can—so when are we going to know this? When do we know whether that has been successful or not?

    Miss WOOD. I believe we are not going to know probably until the end of this decade. I mean——

    Mr. GORDON. Oh, really?

    Miss WOOD. Remember, this is a long-cycle business. Airbus will start to be delivering these planes in 2006. It may slip to 2007. Assuming Boeing delivers the sonic cruiser in 07/08. The initial launch of planes will probably be low margin so we really won't know as to whether they are going to start to break even or do better until quite a long time from now.

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    Mr. GORDON. Thank you.

    Chairman ROHRABACHER. And we have with us Dr. Weldon, who is the vice-chairman of this committee and a very active member. And, Dr. Weldon, you may proceed.

MR. WELDON QUESTIONS & ANSWERS

    Mr. WELDON. Thank you, Mr. Chairman. Miss Wood, you provided us with a lot of valuable information on the change in the financial status in many of the U.S. aerospace companies over the last decade or last two decades. Do you have any similar analysis on some of the European companies, what has been their fate? Do you track those at all? Or can you just not comment on that? Or do they, because of their relationship with their governments, do they defy the same kind of analysis that you have provided for Lockheed and Boeing and some of the others?

    Miss WOOD. Congressman Weldon, I don't follow the European stocks. I have a London-based analyst who does. However, I would be happy to supply—get that information for you and supply it both for you and the record.

    Mr. WELDON. Yeah. I would be interested. Market cap, correct me if I am wrong, you just multiply the share value or share price times the number of shares that are out there?

    Miss WOOD. Number of shares out there times the stock market price.
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    Mr. WELDON. Are these companies in Europe traded on the European markets? Can you do the same kind of analysis and follow trends on those?

    Miss WOOD. Yes, I believe you could.

FOREIGN COMPETITION IN AEROSPACE

    Mr. WELDON. Okay. General Douglass, you talked about the WTO, filing the complaint about the way we subsi—or helped foreign sales. And then we were just talking about for the development of the A380, they are going to get a third of their funding from the governments in the form of basically forgivable loans if they don't make a profit. Can we in the United States, or can our aerospace companies in the United States under the rules of the WTO file similar complaints against them in terms of their unfair competitiveness or unfair practices?

    Mr. DOUGLASS. That is a tough question.

    Mr. WELDON. I am just suggesting it.

    Mr. DOUGLASS. The—yeah. The exact provisions of the WTO and what is challengeable and what is not challengeable, sir, relate to some precursor agreements that go back into the early 1990's between the GAT principals. And, frankly, I don't think that question has ever been tested legally. So far we have not filed, to the best of my knowledge, no American company has filed a WTO protest on this funding arrangement that is going on now in the A380. Now that is not to say that one might not be filed in the future. But I think it is being looked at now by, you know, lawyers that are—whose profession is the exact construction of the WTO trading rules.
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    Mr. WELDON. I have noticed the trend that some of the European aerospace companies are buying smaller American aerospace companies. And in particular, like subcontractors are being bought up. And are we—sometimes technologies reside with those smaller companies or with those subcontractors. Are we seeing some of our technologies, therefore, going over to the other side of the pond, and then, therefore, better enabling them to capture our market share as they say they want to by the year 2020?

    Mr. DOUGLASS. There has been a substantial growth in European investment in the American Aerospace Industry over the years. Interestingly, I guess the biggest amount of investment is coming out of the United Kingdom. There has been a high degree of integration between the United Kingdom aerospace companies and American aerospace companies.

    Now we, because of for many reasons, have had a special relationship with England over the years that has worked out fine all during the Cold War and, you know, the post-Cold War years. That has not been—we—I have not seen any particular troubling hemorrhage of technology from the United States to England as a result of this.

    Now there are some other areas where other international companies have purchased American aerospace companies, and do that for various business reasons.

    Mr. WELDON. How many examples of them actually just—reigning technologies out of these businesses, just——

    Mr. DOUGLASS. I really—none really come to mind in a damaging sort of way. You know, where they would take all the technology and then kill their American subsidy. The degree of intrusion from other countries, other than the United Kingdom has been relatively modest, but is increasing. And I might say, sir, when they do acquire companies in the United States that have substantial defense business, those mergers are acquisitions have to be approved by the Department of Defense, and are looked at very closely. Tom, you may have some——
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    Mr. MOORMAN. Actually, that is a good safe way of a comment I was going to make, Congressman Weldon. When you have a circumstance of foreign ownership of U.S. companies that have defense implications, there are a series of regulatory steps that you have to go through that gets—the ownership gets reviewed very carefully in the Defense Department. And then they have something called special security agreements, wherein there is a typed security regime for how you operate. And so I am, like John, I am more familiar with the U.K. circumstance and directly familiar. And I think that process works pretty well. I am not as familiar with other countries.

    Mr. WELDON. Does it go the other way, are we buying European companies, European contractors, or is it all——

    Mr. DOUGLASS. We do have some companies in the United States that have invested relatively heavily in the European, and in other parts of the world, aerospace markets. Occasionally, you will find an international company form up through mergers and acquisitions and decide to move their corporate headquarters. We have at least one member of AIA that was formerly a European company and has decided to move to New York and become an American company, because their market is predominantly here in the United States.

    Miss WOOD. Congressman Weldon, I would like to add a couple of comments to that from a financial perspective. Your question is at it relates is a good one, because I think it raises a question that I think we watch on Wall Street, which is a growing number of these European companies buying smaller U.S. companies. And I don't have the facts at my fingertips, so it is something like this: I believe the Defense budget in all of Europe is something like $36 billion and declining. Whereas the U.S., when you look at weapon spending, is around $100 billion and expected to grow. And again, to the extent that companies are expected to find avenues of growth, it behooves the Europeans to increasingly try and get a wedge in the door into the U.S. by ownership to increasingly get a share of the defense DoD pie. It is quite a lucrative thing to defense—to European companies.
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    The problem is, is that it is not a two-way street. In my conversations with key chairmen in my sector, they indicate that the best way they can start to get into the Europeans is through joint ventures. But really not—I can't think of in this 7-year period of consolidation any meaningful acquisition on the part of the U.S. company into a European.

    Mr. DOUGLASS. One comment on that, sir, that I think is worthwhile. If you look at the technological achievements of the European Aerospace Industry today in the commercial sector, you would see that they are on roughly on par with American industry. If you fly to Europe on a Boeing 777, and if you fly back on a A340, I mean, technologically they are about the same. But the Europeans have no B1's, they have no B2's, they have no F117's, they have no F18's, no joint strike fighters, no F22's. They have no big tankers, they have no AWACS, they have no J–STARS. And the list goes on and on and on. The point being that they do have technology there, but their own governments are not buying it and using it as a part of their own defense.

    So one of the things that I have been very concerned about is, we don't want to get ourselves into a situation where they shut us out of the commercial market in Europe, but then expect to be completely open to our military market here in the United States. We have maintained a relatively large and highly technologically-modern military. And so it is a concern that we look at both the commercial and military markets as a single technology entity and try to achieve some reasonable balance in terms of trade.

EXPORT CONTROLS FOR AEROSPACE TECHNOLOGY

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    Mr. WELDON. One other quick question, if I could, Mr. Chairman. Your opinion on moving the export controls from Department of State to—back to Commerce?

    Mr. DOUGLASS. I assume you are talking about commercial——

    Mr. WELDON. Right.

    Mr. DOUGLASS [continuing]. Satellites. We feel that it should go back to Commerce. As you know, we have two systems of export licensing in the United States. The State Department system is for weapons. And it is basically designed to say, no, unless there is a national security reason to say, yes. In other words, share our military technology with our allies.

    The Commerce Department system is designed to monitor commercial technology. And that system is designed to basically say, yes, unless there is a security reason to say, no. Now the problem is that when you get dual use items which are supposed to be under the law licensed by the Commerce Department over on the side with the bombs and rockets and so on, it takes so long to get a license through the process, that by the time you get your license they have already bought the product from some other country. And that is in a nutshell, the problem. So when you are talking of commercial communication satellites, the kind of satellites that carry MTV and the news and all of that——

    Mr. WELDON. You are in favor of moving it back to Commerce?

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    Mr. DOUGLASS. Yes, sir, I would.

    Mr. WELDON. Does anybody else want to comment on that?

    Mr. MOORMAN. Although we didn't expressly look at that in the space industrial base site, my personal view is that in an industrial-based sense that it would be better served operating in Commerce.

    Mr. WELDON. Thank you very much, Mr. Chairman.

    Chairman ROHRABACHER. Thank you very much. Just a few closing remarks on my part, unless Mr. Gordon has some as well. I am very happy to hear that, general, you in particular were supportive of the two-track export control system that I insisted on out of, not this committee, but the International Relations Committee. And I want you to know that the bill that you are referring to, which is the Berman Bill, is not—did not come out of this committee. It came out—however—the chairman of this particular committee, me, happens to be co-author of the Berman Bill. And I recognized some of the complaints that were, you know, people were registering in the industry.

    I think the industry has to fully understand that the hardships that were experienced came about because people in the industry had been totally irresponsible in their dealings with the Communist Chinese about 10 years ago. And maybe 7, 8 years ago now. And what was transferred to the Communist Chinese in terms of rocket technology has put our country in great jeopardy. And I guess there is no getting, you know, no re-doing history and—but I was listening to those people who are pleading that we can't let that destroy the competitiveness of American's high-tech and satellite industry.
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    So I have supported and co-authored with Congressman Berman the bill to take this back to Commerce. But for Dr. Weldon's benefit, the bill does also provide a veto power by the Defense Department and by the State Department. They have to exercise within a given period of time, if deals are looked at as being potential security threats to the United States. And although I would have preferred just a two-track system, the industry fought me on that. And I tried to even give them a little more by agreeing to take it back to Commerce and having this veto power.

    So let us never forget that the technologies we are talking about could put at risk tens—no, hundreds-of-millions of lives. And that just can't be over-stressed.

    I saw a program on the History Channel the other night. And it detailed the collusion between American manufacturers, some of the top manufacturers, and the Japanese right up until Pearl Harbor. And the Japanese had been involved with the massacres in China. They have been involved in expansionary activities and aggression and such, and military build-up. Clearly, an adversary to the United States as we find in the Communist regime now in the mainland. But yet, some of our top aerospace firms were involved directly with providing the DC3. They had the plans for the DC3. They were negotiating privately for a co-production deal on the B17. This was outrageous. I mean, just outrageous.

    And our job, and we have to make sure that our companies make a profit. But our job—and that is important to our security that your companies exist. But more importantly, we have to watch out for our country's safety. And I don't think that we can just rely on judgment of businessmen that need to make a profit for their company for this really vital decision. So I am hoping that the bill that Mr. Berman and I finally came up with after haggling and listening to your concerns will meet that—will meet that need.
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FOREIGN AEROSPACE SUBSIDIES

    Let me—there is a couple other points I wanted to make. And that is, our NATO allies they are not getting a free ride, but they are getting a subsidized ride. You know, we have been subsidizing their defense for a long time. And the last thing I like to hear is that when we are spending about $30 billion a year in order to make sure that we have an umbrella for NATO and a protection for those European countries through NATO, that $30 billion could help our industry. But instead, you know, we are subsidizing. We can't put it into our own products now because we are spending it on tanks, and we are spending it on troop deployments, which will not improve our competitiveness at all. In fact, it will take away from our competitiveness.

AEROSPACE WORKFORCE

    So one other—and a couple other thoughts. And, Bart, if you have another couple thought I would be happy to yield to you some time. When you talk about education and some of the things that—and Bart was right to mention that we Republicans are trying to be, you know, very frugal, and even with educational dollars we are trying to be frugal. But there are ways—as I say, we can't—don't look just to government. If you look for creative ways.

    For example, I don't know, is there an apprentice system now in the Aerospace Industry? Do we have an apprentice system so we can take young people and shepherd them through, and maybe pay for their education as they are being apprentices? Is that—is that part of the system now?
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    Mr. DOUGLASS. Yes, sir. A number of the unions, organized labor organizations that support the Aerospace Industry have apprentice programs. And one of the things that we are trying to do at AIA is work hand in hand with the unions to address some of these personnel shortage issues——

    Chairman ROHRABACHER. Let us get some of these kids who can't afford to go to engineering—good engineering schools and let us let them be apprentices and pay their education that way. How about permitting, for example, the—if a young person goes to school and is an engineer and has large, you know, large loans, student loans like Ruben was just telling me how he has got some large student loans left over from the engineering degree that he received, how about permitting aerospace companies that are working on important projects to pay off student loans without having to have an employee count that on his income taxes as pay. And thus, you could attract some very high quality people in some ways like that.

    So there are some things that we can do that won't just immediately just, you know, result in shoveling money from the government proffers into the—into somebody else's pocket.

    Mr. DOUGLASS. Yes, sir. Did you want to comment on that?

    Mr. WHITE. I would like to comment on that. Because what we have seen in our industry is the great success with the intern programs. If we can get the engineers to join our companies while they are still students, then there is a high probability they will have a comfort factor with joining the industry after they graduate. If we don't bring them on as interns, then the Microsofts and the other IT companies who might like to outbid us in terms of dollars almost have first dibs on them.
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    And so if we can promote programs as you just mentioned, the intern programs and others that would attract them to the Aerospace Industry, I think we would have a——

    Chairman ROHRABACHER. Especially, if we find some tax incentives to get companies to do just that, I think there is some room there to work.

    One last thought. We are—America is the leader in aerospace and has been. And we are faced with this competition now. But if we are going to beat the competition we have to do it because we are more innovative and we have got better ideas. I am not sure if faster is better than bigger, or not. But I do know that just like a lot of all the other innovations that we have seen, a lot of it comes from these small companies that are subcontractors. And we got a guy down in San Diego and his DP–2 who has been doing this on a shoestring, who has come up with a dramatic new way of—new method of landing and taking off with dec—jet thrust. He has got a plane that has got a 5,000 mile range and goes 600 miles an hour that he says carries 48 armed troops or 48 customers, and can be geared up to carry 150 to 200. It seems to me that is revolutionary. And I would hope that some of the larger aerospace firms just don't get focused on the past or perhaps they have made investments in the status quo and they have to then follow through with the status quo. Let us look for innovations. That is what is going to keep us ahead.

    I want to thank all of you very much. Do you have anything else?

CHAIRMAN'S CLOSING REMARKS
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    Okay. With that, I would like again to thank our witnesses for testifying. Please be advised that subcommittee members may request additional information for the record. And then I would ask other members who are going to submit written questions to do so within 1 week of the date of this hearing. That concludes this hearing. We are now adjourned.

    [Whereupon, at 5:30 p.m., the Subcommittee was adjourned.]

         

       
       
       
       
       
       
       
       
APPENDIX 1: Biography/Funding Disclosure

BIOGRAPHY FOR JOHN W. DOUGLASS

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    John W. Douglass is president and chief executive officer of the Aerospace Industries Association, which represents the nation's manufacturers of commercial, military, and business aircraft, helicopters, aircraft engines, missiles, spacecraft, materiel, and related components and equipment. Mr. Douglass became the seventh full-time chief executive of the association in 1998. Before that he served for nearly three years as assistant secretary of the Navy for research, development and acquisition of defense systems for the U.S. Navy and U.S. Marine Corps.
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    A nationally recognized expert in systems acquisition, Mr. Douglass has extensive acquisition experience in Congress, the Defense Department, and the executive branch as a policy authority, contracting officer, engineering officer, test and evaluation officer, program control officer, and research director.

    Before being named a civilian Navy executive, Mr. Douglass was with the Senate Armed Services Committee where he was foreign policy and science and technology advisor to Senator Sam Nunn and served as lead minority staff member for defense conversion and technology reinvestment programs.

    Earlier Mr. Douglass completed 28 years of U.S. Air Force service and retired as a brigadier general in 1992. His numerous Air Force assignments included service as the deputy U.S. military representative to NATO as well as director of plans and policy and director of science and technology in the office of the secretary of the Air Force. He also served as special assistant to the under secretary of defense for acquisition.

    Within the executive branch, Mr. Douglass was director of national security programs for the White House, responsible for formulating policy on a broad range of national security issues. He served as President Reagan's personal representative to the Blue Ribbon Commission on Defense Management chaired by David Packard.

    A native of Miami, Florida, he earned a bachelor of science degree in industrial engineering from the University of Florida, a master of science degree in industrial engineering from Texas Tech University, and a master of science degree in management science from Fairleigh Dickinson University. Mr. Douglass has done postgraduate work at the Cornell University Center for International Studies where he was an Air Force Research Fellow with the Peace Studies Program.
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    Mr. Douglass is a member of the Board of Governors of the Aerospace Industries Association and is chairman of the Aerospace Technology Policy Forum. In addition, he is chairman of the Board of Trustees of the National Center for Advanced Technologies and chairman of the International Coordinating Council of Aerospace Industries Associations.

AIA Positions:

Chairman, Aerospace Technology Policy Forum

Chairman, Board of Trustees, National Center for Advanced Technologies

Chairman, International Coordinating Council of Aerospace Industries Associations

Member:

National Contract Management Association

Aerospace Industries Association of America, Inc., 1250 Eye Street, N.W., Washington, D.C. 20005–3924; 202/371–8400; www.aia-aerospace.org

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BIOGRAPHY FOR GENERAL THOMAS S. MOORMAN, JR.

(USAF RETIRED)

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    General Thomas S. Moorman, Jr. was born in 1940 in Washington D.C. and attended Dartmouth College graduating in 1962 as a Distinguished Graduate of Air Force ROTC. Married in 1965, he and his wife have two children. General Moorman is currently a Partner in the international management and consulting firm of BoozAllen and Hamilton, where he is responsible for both overseeing the Firm's government space business and managing the Firm's support to the Air Force. He also serves as a member of the Board of Trustees for the Aerospace Corporation and is an Outside Director of the Board of Smiths Industries.

    General Moorman is a member of the Defense Policy Board Advisory Committee, a Commissioner of the U.S. Commission to Assess National Security Space Management and Organization, a Trustee of the Falcon Foundation, a member of the Air Force Association's Forces Capabilities Committee, a member of the Military Advisory Board of the Business Executives for the National Security Tooth to Tail Commission, a member of the Board of Visitors of the Air University, a member of the Board of Directors of the United States Space Foundation, a member of the Air Force Science and Technology Committee of the National Research Council, a member of the Council on Foreign Relations, the Air Force Association, the Armed Forces Communications and Electronics Association and the American Institute of Aeronautics and Astronautics. He has published numerous articles and spoken widely on a variety of space-related subjects.
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    General Moorman served thirty five years in the United States Air Force. During his first eight years of service, he served in variety of intelligence and reconnaissance related positions within the United States and worldwide to include a tour in Southeast Asia. In 1970, he began an association with national security space programs which would continue for the remainder of his career. Some of his more notable assignments have been Deputy Military Assistant to the Secretary of the Air Force, Vice Commander of the 1st Space Wing, Director of Space Systems, Office of the Secretary of the Air Force, Director of Space and Strategic Defense Initiative Programs, and Vice Commander and Commander of Air Force Space Command. As Commander of the Air Force's major command for space, General Moorman was responsible for providing space support to the coalition forces during Desert Storm. In addition, he led a major study to recommend a course of action to modernize the Nation's space launch capability.

    General Moorman's last military assignment was as Vice Chief of Staff, United States Air Force. In this position, he oversaw and managed the day to day activities of the Air Staff at the Pentagon to include chairing the Air Force Council which finalizes all programming proposals. He acted as the Air Force representative to a number of joint and interagency organizations including the Joint Resources Oversight Committee, the Defense Medical Advisory Committee, the Senior Readiness Oversight Committee, and the Quadrennial Defense Review. General Moorman also chaired the Air Force Board of Directors charged with developing the Air Force strategic vision for the 21st century.

    General Moorman has received numerous awards for contributions to the Nation's and Air Force's space programs including the General Thomas D. White Space Trophy (1991), the National Defense Industrial Association James V. Hartinger Award (1992), the Eugene M. Zuckert Management Award (1993), the Dr. Robert H. Goddard Memorial Trophy (1995), the American Astronautical Society's Military Astronautics Award (1997), and the United States Space Foundation Achievement Award (1998). He has also been recognized by the Intelligence Community with the award of the National Intelligence Distinguished Service Medal with one oak leaf cluster, the Defense Intelligence Agency Director's Award and the National Reconnaissance Office (NRO) Gold Medal. The American Institute of Aeronautics and Astronautics chose General Moorman as the Von Karman lecturer for 1998. He was also selected by the National Air and Space Museum to present the Wernher Von Braun lecture for 1998.
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    Recently, he has served on a number of special study groups to include being a member of the Defense Science Board's Task Force on Space Superiority; he co-chaired the Independent Assessment Team on Discoverer II, was the Vice Chairman of the Lockheed Martin Independent Assessment Team on Mission Success; is a member of CINCSPACE's Independent Strategic Assessment Group and chaired the OSD/NRO-sponsored study of the Nation's space industrial base which was recognized for a Laurels Award by Aviation Week and Space Technology.

    General Moorman has a Master's degree in Business Administration from Western New England College (1972) and a Master's degree in Political Science from Auburn University (1975). He has also been awarded two honorary degrees—a Doctorate in Management from Colorado Tech (1994) and Doctorate in Laws from Clemson University (1995).

BIOGRAPHY FOR GAYLE C. WHITE

    Mr. Gayle C. White is Chairman of the Space Committee of the National Defense Industrial Association. In this position, he coordinates the Association's activities aimed at fostering improved relationships between its aerospace member companies and the government agencies they support.

    Mr. White was elected chairman in October 2000. Prior to his election, he held Committee positions as Vice Chairman, Central Region Vice Chairman, Studies. Subcommittee Chairman, and Studies Panel Chairman.

    Mr. White has held several aerospace industry positions over the past 14 years. He is currently a Senior Member of the Executive Staff of one of NDIA's member companies. His responsibilities include strategic business planning for major military space programs. Previously, he was a Director of Business Development for another major aerospace firm and has managed operations associated with the Global Positioning System (GPS) satellite program and the Maui Space Surveillance Site.
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    Mr. White has over 20 years of experience with government aerospace systems management as an Air Force officer. His responsibilities included missile systems software development, NATO forces database management, configuration control of NORAD's Tactical Warning and Attack Assessment System, management of Cheyenne Mountain computer operations and command of the missile warning and space surveillance site on Cape Cod.

    Beyond his role as the NDIA Space Committee Chairman, Mr. White is Vice President for Membership in the Lance Sijan Chapter of the Air Force Association, immediate past president of the NDIA Rocky Mountain Chapter, and former member of the executive committee of the Institute of Navigation Rocky Mountain Section. He was an Associate Professor of Computer Science at Regis University.

    Mr. White's biography is included in Who's Who in America. Awards include Outstanding Young Men of America and the Community Military Relations Award.

    He has a Bachelor's degree from Eastern Michigan University and Master's degrees from Utah State in business and Auburn University in public administration. He has completed all course work toward a doctorate in business. He is married to the former Sharon Wong and has two children.

BIOGRAPHY FOR HEIDI WOOD

AEROSPACE AND DEFENSE

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    Heidi Wood joined Morgan Stanley Dean Witter in August 1999 as Vice President and Senior analyst. She directs equity coverage of U.S./North/South American equity research in aerospace, defense and defense electronics companies and is a co-leader of global coverage, coordinating with London and Singapore based analyst teams. She is treasurer of the N.Y. Aerospace Analyst society.

    In her first year as Senior analyst, she was cited by 2000's Institutional Investor as a 'Rising Star' in the aerospace/defense sector. In 2001, she rose to rank 3rd in the respected Greenwich Associates polls.

    Prior to Morgan Stanley, Heidi was a junior analyst for the sector at SG Cowen, a financial consultant at Shearson Lehman Hutton and Wedbush Morgan securities. She was a top ranked U.S. woman chess player, rowed crew and graduated with a B.A. with honors in 1987 from Brown University.

       
       
       
       
       
       
       
       
APPENDIX 2: Material for the Record

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Questions and Responses

QUESTION for the record submitted by Chairman Rohrabacher:

The Defense Department is considering a request for another Base Realignment and Closure (BRAC) Commission in order to reduce infrastructure and help pay for its R&D and modernization.

What are your views as to the need to reduce infrastructure in order to pay for modernization through a new round of Base Realignment and Closure (BRAC)?

Would you recommend a similar analysis and process be conducted for NASA centers?

ANSWER from Mr. Douglass:

    The aerospace industry supports further rounds of BRAC as a means of assessing the efficiency and effectiveness of our complex of existing military bases and other facilities. However, Defense R&D and modernization is far too important to the nation to allow its funding to become dependent upon another round of BRAC.

    Although the NASA infrastructure is much less extensive than the Defense infrastructure, we would support an independent assessment of NASA's infrastructure capacity and capabilities against current and future requirements.

QUESTION for the record submitted by Cong. Gordon:
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Globalization has become a fact of life for many sectors of our economy.

Do you think there will continue to be a uniquely-U.S. aerospace industry, or will it follow the same trend towards globalization that other industries have followed?

Would such international integration be desirable, or would it pose unacceptable national security risks?

ANSWER from Mr. Douglass:

    While I believe there will always be a uniquely-U.S. aerospace industry, the trend away from domestic self-sufficiency will continue in all sectors of the economy. It is clear the U.S. must develop policies and procedures for dealing with the inevitable problems that will arise as a result of this trend. I think this would be a great issue for the pending presidential commission on the future of the U.S. aerospace industry to tackle.

    Complete international integration of the aerospace industry would pose unacceptable national security risk for the U.S. We have not reached the danger level as yet. But policy makers should be considering the impact of international integration and developing national policies that will protect our security while at the same time maximizing efficiency and innovation in the marketplace.

QUESTION for the record submitted by Cong. Gordon:

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Ms. Wood discussed Wall Street's perspectives on the attractiveness (or lack thereof) of the aerospace industry to investors. On the other hand, a number of observers have argued that aerospace corporate management's preoccupation with shareholder return has resulted in a short-term focus that has crippled innovation and risk taking.

Has the aerospace industry become too focused on Wall Street?

How do we ensure that innovation can take place while still paying adequate attention to the ''bottom line'' as defined by Wall Street?

ANSWER from Mr. Douglass:

    The aerospace industry, like all other industries, is dependent on the financial markets for their life blood—investment capital. Given the importance of ''Wall Street'' in providing necessary investment capital for industry, I don't think the aerospace industry is too focused on ''Wall Street'' and investor expectations of good financial performance. Industry management's investment decisions, short-term and long-term, should be driven by the reasonable expectations of positive return to the investing shareholders. Some aerospace companies have been through financial strain in recent years because of the slow down in defense spending. Fewer procurement dollars coupled with program stretch-outs resulted in disappointing financial performance. The aerospace industry, on the whole, appears to have adjusted to the downturn in defense spending and is currently generating positive returns to investing shareholders.

    Innovation is driven by the economics of technology investment. In a market economy, investment and the accompanying innovation it facilitates are drawn to areas with the greatest perceived profit potential. The aerospace industry has a special relationship with Government due to its historical importance to national security. On most Government contracts, profit is limited to a specified amount and procurement quantities are directed and finite, thus directly influencing the profitability of defense programs. In recognition of the need for innovation and the direct influence on the limitations to profitability, the Government often funds requisite Research & Development (R&D) dollars necessary to infuse technology and innovation into it's programs. AIA continues to be a strong advocate of increased Government R&D funding for NASA and DoD programs. Similarly, the Government recognizes the need to induce additional private capital to be invested in technology for Government programs and provides some incentives to this end by way of tax incentives. One such incentive is the R&D Tax Credit. AIA strongly supports legislation to permanently extend the R&D Tax Credit that expires in 2005. Additionally, AIA strongly supports the use of multi-year procurement contracting for mature DoD and NASA programs to stabilize program funding. Stabilizing the procurement base of mature programs through multi-year contracting allows for the leveraging of technology investment dollars into enhanced capabilities that actually get applied to fielded products.
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Questions and Responses

Questions submitted for the record by Chairman Rohrabacher:

1) With your experience in space launch development, do you think now is the time for NASA and DoD to jointly develop a reusable launch capability in pursuit of cheap access to space?

Answer from Mr. Moorman:

    Given that NASA's goals in the Space Launch Initiative are focused on replacing the Space Shuttle while DoD (the Air Force) thinking regarding reusable launch vehicles (RLV) is along the lines of space maneuvering/space operations vehicles, I would not recommend a joint development. My view is the design points are fundamentally different. On the other hand, I believe that NASA and DoD should be working closely together in joint technology efforts which would enable RLVs. There is great value and synergy in cooperative technology efforts in areas such as engines, control systems, structures and modeling and simulation.

1 A) In what areas would you recommend the Air Force and NASA develop a joint acquisition strategy?

Answer from Mr. Moorman:

    I would not recommend a joint acquisition strategy or program. As mentioned above, there would be significant payoff in joint collaboration and coordination in the technologies needed to field an RLV. My rationale is that the requirement sets and likely design points are fundamentally different so as to make joint acquisition not practical.
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2) Do you have specific recommendations for math, science and engineering education and internships to attract more skilled workers to the aerospace industry?

Answer from Mr. Moorman:

    When my company, BoozAllen, examined the space industrial base, we discovered that industry's senior leadership unanimously considered people as the #1 issue. As in many other manufacturing sectors, the aerospace workforce is aging and it is becoming increasingly difficult to recruit and retain top flight talent. Frankly, in contrast to 20–30 years ago, the aerospace industry is not necessarily attracting the top math, science and engineering talent.

    I recommend that the government should recognize that it has an important responsibility in this area. For example, the government should broaden the use of scholarship, intern, mentoring and award programs for aspiring scientists and engineers. Accordingly, I would recommend that in particular the Defense Department and Intelligence Community put a high priority on this issue. Outside of what the Federal government can do, I would suggest exploring this issue at the state level. Today, some fifteen states have space/aerospace organizations committed to furthering the advancement of space activities in their respective states. Perhaps, these efforts can be harnessed to address this issue.

2 A) If the Apollo program drew technically trained people into the aerospace industry, why is the International Space Station not attracting their interest?

Answer from Mr. Moorman:
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    There are a host of interrelated factors bearing on this question. I think the first is the timeframe. When President Kennedy initiated the Apollo program in 1961, it was in the context of a competition with the Soviet Union. This was at the height of Cold War and the ''Space Race'' was another competition—a matter of national pride. I think it is important to note that, in 1961, it was a real race, and it wasn't clear at that time that we would win the race to the moon. One could argue that the Soviets were ahead at this point. I think there is another historical factor. In 1961, the space age was just four years old—it was new and it was indisputably the most exciting technical challenge in the world. No other challenge came close.
    That was 40 years ago. What has changed? Well first of all, the geopolitical situation is fundamentally different. The Cold War is over. The once vaunted Soviets are now the Russians and their highly capable space program is in disarray and decline. There is no race and the United States has higher priorities. Moreover, with the extraordinary success of the Space Shuttle, manned space flight is now routine and commonplace. While in the sixties we were risk tolerant as we pushed the technology envelope, now we are risk adverse and our emphasis on the International Space Station is like all other routine programs—cost, schedule and performance. The headlines are as much about cost growth as space exploration. As a consequence, today's young engineers and scientists do not see space, and specifically the International Space Station, as the most exciting and challenging place to be. By and large, the talent is going to bio-technology, information systems (e-business) and telecommunications. My source here is the Space Industrial Base Study (SIBS). For example in 1990, aerospace and defense was the third most attractive career field. By 1999, aerospace and defense had fallen to #7.

Questions submitted for the record by Cong. Gordon:
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1) Young engineers gain critically important experience by working on multiple aerospace projects. However the trend in government acquisitions—particularly in defense—seems to be towards a few large development projects followed by extremely long production runs. Given that trend, what will we need to do to ensure that the young engineers will accumulate sufficient expertise to replace the current generation of aerospace engineers?

Answer from Mr. Moorman:

    The first thing that we need to do is to recognize the situation and decide to act. The NRO, NASA and DoD have acknowledged this looming problem. While it may not be possible to return to a time when engineers could work on as many programs as in the sixties and seventies, due to the fact that today there are far fewer big programs, nevertheless there are things that can be done. A significant step has been the strengthening of DoD acquisition directives regarding consideration of industrial base factors with in the acquisition strategy development for all major aerospace programs. Determining the desired level of continuing activity in the intervening time between programs for the winners as well as the losers will allow the government to directly influence the opportunities available for our existing and future engineers. DoD and the NRO can and should determine the advisability of concepts such as leader-follower or the awarding of R&D projects to one or more losers during the period between programs. A vibrant technology industrial base is an appropriate focus. The continuation of R&D between programs not only maintains a competitive industrial base, but also provides the experience our engineers need.

    I am encouraged that this Administration—especially Secretary Rumsfeld and Mr. Aldridge, the new Under Secretary of Defense for Acquisition, Technology and Logistics—have stated that maintaining a healthy industrial base is a high priority.
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2) The focus of this hearing is the aerospace industrial base. However, the Federal government need to be a ''smart customer'' if the nation's overall interests are to be served. What needs to be done to ensure that the civil servants have the skills and expertise they will need in their dealings with the aerospace industry?

Answer from Mr. Moorman:

    Ensuring that the Defense Department acts as a ''smart customer'' is an important and necessary goal for the Department. Over time and for a variety of reasons, the knowledge of industry has eroded within the government and in particular the DoD and Intelligence Community. Today, there are far fewer individuals within the government who have direct knowledge of the defense industry than say 20 years ago. The net effect is a lack of industry perspective in the management and oversight of acquisition programs and, in my opinion, insufficient sensitivity to the health of the industrial base.

    As mentioned above, this Administration seems to share this concern. Initial statements, directives and testimony indicate that industrial base considerations will be important components in managing future systems acquisition. Further, the Administration seem to be placing a high priority on industry experience as it chooses the new senior leadership (e.g., all three Service Secretaries have come directly out of industry).

    I would also suggest that the formal instruction programs such as the curriculum at Defense Systems Management Course be examined to include training on industrial base, business case analysis, and industry metrics. In addition, I believe that senior acquisition officials should insist that an industry perspective be part of the acquisition decision process.
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Questions and Responses

Questions submitted for the record by Chairman Rohrabacher:

 What are your views as to the need to reduce infrastructure in order to pay for modernization through a new round of Base Realignment and Closure (BRAC)?

Answer from Mr. White:

    NDIA supports the use of a Base Realignment and Closure (BRAC) Commission to decrease excess infrastructure within the Department of Defense. BRAC has demonstrated itself to be an acceptable vehicle to reduce redundant facilities. The effectiveness, in terms of cost and military capacity, of the commission is dependent upon the criteria set by the Department of Defense for closure and the method selected for transformation or reuse of the facility. To date, it appears to be a successful tool for reducing infrastructure and realizing savings over the long run.

 Would you recommend a similar analysis and process be conducted for NASA centers?

Answer from Mr. White:

    NDIA is not familiar with any studies that identify excess capacity within NASA's infrastructure. If in fact there is such excess, NDIA would recommend that a process similar to BRAC be established. We would suggest lessons learned from previous BRAC rounds be incorporated into the format used for NASA facility realignment and closure. Specifically, NDIA agrees with the findings of the General Accounting Office (GAO) report (GAO/NSIAD–97–151: Military Bases: Lessons Learned from Prior Base Closure Rounds). If the proper criteria are established by NASA and sound reuse plans are implemented it is possible that cost savings could be achieved similar to those experienced by the Department of Defense.
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 Do you have any specific recommendations for math, science, and engineering education and internships to attract more skilled workers to the aerospace industry?

Answer from Mr. White:

    NDIA supports several programs proposed in the phase III report of the U.S. Commission on National Security/21 Century, ''Road Map for National Security: Imperative for Change'' released February 15, 2001. Specifically, NDIA agrees with and supports:

 The National Security Science and Technology Education Act (NSSTEA) proposed on page 41 for the purpose of enhancing educational opportunities, teacher training and promoting careers in math, science and engineering through incentives and low-interest loans;

 ''Loan forgiveness incentives to attract those who have graduated and scholarships for those still in school and should provide these incentives in exchange for a period of K–12 reaching in science, math, or of military or government service.'' (U.S. Commission on National Security/21st Century, ''Road Map for National Security: Imperative for Change'', February 15, 2001, pages ix-x)

    Also, NDIA supports the creation of educational programs and internships that are based on the topics listed below. In addition to these, NDIA supports the pilot programs created in section 1151–1153 of the National Defense Authorization Act, Fiscal Year 2001 (Public Law 106–398).

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 Youth Experience Centers
  During the race to the moon and again in the 1980s, programs were developed that exposed elementary and high school students to space and science. Programs such as the Challenger program and Space Camp offered many children a hands-on learning environment with emphasis on math and science education. The programs were successful because of strong leadership from our nation's capital. It has been proven that students do better in interactive environments such as these. Similar programs should be considered today. We believe that industry shares the responsibility for attracting potential employees and that tax credits should therefore be offered to companies that invest in or establish educational and public awareness facilities. These programs should be developed at the local level to enhance current curricula and should be targeted at the fifth to eighth grade levels.

 Continuing Education
  Tax credits should be provided to companies that fund tuition assistance programs for employees who matriculate in the math, science and engineering fields. Industry has many bright and talented employees who may have the desire, but not the money, to continue their education. Tuition assistance programs help decrease turnover, ensure a stable and consistent body of organizational knowledge, and ultimately enhance national security.

 Internships
  Private industry and the federal government have been successful at introducing young students to fields of employment through internship programs. Such programs should be expanded to provide multi-year opportunities that grow into full time employment. Many students studying math, science and engineering have made their choice of career fields early in their education. Providing them with early internship opportunities will give them motivation to continue in their chosen field while providing them with valuable workplace experience. Companies that offer such programs should be considered to receive tax incentives.
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    Programs such as these, as well as those pilot programs (sections 1151–1153) established in the FY 2001 National Defense Authorization Act will begin to address the workforce problems of both industry and government. They will provide consistent opportunities and exposure for students of all ages, and will reward those individuals and companies who are helping themselves and helping to ensure national security.

 If the Apollo program drew technically trained people into the aerospace industry, why is the International Space Station not attracting their interest?

Answer from Mr. White:

    The global environment during the Apollo program was much different from the current environment. A primary motivating factor was the perception of a clear and present threat to U.S. national security. The existence of a common enemy provided a rallying point around which a consensus could be formed as to the value of the U.S. space program. As a result, the Apollo program received an extraordinary amount of attention and support. There was strong leadership from our leaders in Washington that motivated and activated critical elements of the American public. Currently, there is a perceived lack of strong public support for the International Space Station (ISS) within Congress and the Executive branch. Rather, there appears to be support for the sharing of the financial burden for ISS research and production among our Allies, and therefore less support for American innovation and leadership. This attitude or the public perception of such an attitude has a chilling effect on the public's interaction and support levels.

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    Similar to the beating of the patriotic drum during times of war or periods such as the Cold War era there must be a clear message from our nation's leaders that programs such as the ISS are vital national priorities. As such, the ISS would then symbolize continued U.S. leadership in the world community. In all likelihood, the American people would focus more sharply on the program and provide greater support for it.

''Do you have any recommendations for NASA, DoD, and Congress on how to best establish a framework for government to transition certain capabilities to commercial providers for commercial profit?''

Answer from Mr. White:

    NDIA's research and review of the topic shows that while commercially provided services are well-supported in national policy and directives, issues remain in the areas of outsourcing contracting (e.g., the OMB Circular A–76 and the Federal Activities Inventory Reform ''FAIR'' Act). At the heart of any transition is the need to ensure mission accomplishment and its impact on retaining a competent and responsive federal workforce. Accordingly, NDIA recommends that:

1. NASA and the DoD should establish clear definitions and guidelines as to the characteristics of what are considered mission critical capabilities and/or services versus non-mission critical and have those capabilities justified and approved by NASA and OSD.

2. NASA and DoD should define and facilitate a process to analyze eligible capabilities and workforce in terms of Mission Accomplishment (Risk) versus the Total Cost of Ownership. The Assessment process should also weigh eligible capabilities against policy and regulatory requirements, force structure, and quality of workforce factors. Examples include an assessment of operational viability, financial planning and implementation feasibility to preserve interoperability and readiness.
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3. NASA, DoD and OMB should review current directives including OMB Circular A–76 as to its appropriate use to outsource certain space capabilities. The review should consider competitive sourcing versus federal workforce impacts as well as the obstacles that deter many companies from competing for these contracts. Recommendations or guidance on privatization versus outsourcing should also be reviewed and guidelines provided as appropriate.

4. Reporting mechanisms established and operated under the FAIR Act be retained and applied and that OMB work with NASA and DoD to review all eligible positions for the incorporation of space-related labor categories and/or positions.

5. Bid structures for commercial outsourcing contracts should be reviewed to ensure they include contractor incentives like increased profits for investments leading to long term cost-savings.

6. Acquisition approaches should permit significant interaction between the government and industry to ensure bids are accurate based on full understanding of requirements and cost factors.

    NDIA's recommendations are based on the following analyses of commercial support to space programs:

BACKGROUND: The United States is the recognized world leader in the exploration and use of space. In many ways, commercial providers have and continue to play a significant role in civil and defense space programs. Their products, services and industry expertise are crucial to achieving our national and technological goals, policies, and strategies. Historically, there are three related perspectives that apply to the development of a framework for government to transition certain capabilities to commercial providers. The following briefly summarizes each of these perspectives.
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PERSPECTIVES: The important considerations affecting the establishment of a transition framework are embedded within existing national policy, current trends in outsourcing and privatization, and accomplishment of assigned missions.

National Policy. National policies are remarkably consistent in encouraging and requiring commercially provided goods and services. From a policy perspective, the 1996 National Space Policy directed federal agencies, and specifically the National Aeronautics and Space Administration (NASA), to seek to privatize or commercialize space communications operations by 2005. A 1996 NDIA Issue Paper (www.ndia.org/advocacy/issuebriefs/104/IB–50.htm) also addressed the policy and its commercial impact. The paper cited the rapid growth in space services and, in particular, space launch services, over the past two decades. The NDIA position also asserted that the new National Space Policy should ''enable domestic commercial space companies to have greater access to the government market and boost their competitive edge internationally.'' Also in 1996, the Space Commercialization Promotion Act (www.fas.org/spp/civil/congress/1996–r/hr3936.htm) emphasized the need ''to create the most efficient conditions for promoting economic development'' using free market principles whenever possible in developing the International Space Station. In addition, NASA's Human Exploration and Development of Space (HEDS) program incorporates broad support for commercial products, services, and investments.

    It is NDIA's opinion that at the National Policy Level support for transitioning certain capabilities to commercial providers is in the best interest of the United States and that existing policy and emerging policy support transitioning. It is also NDIA's opinion that the Bush Administration and Congress should embark on National Space Policy that preserves, if not elevates, the use of commercial providers.
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Outsourcing and Privatization Trends. Regulatory directives and guidance have established avenues to enable transition of capabilities performed by governmental agencies to commercial providers. The Federal Activities Inventory Reform Act (FAIR) of 1998 (Public Law 105–270) requires all executive agencies to submit to Congress an annual listing or inventory of activities that are not inherently governmental, and to make this inventory available to the public. The FAIR Act defines an activity as inherently governmental when it is so intimately related to the public interest as to mandate performance by Federal employees. Moreover, the Bush Administration has placed increased emphasis on FAIR and outsourcing as reflected in recent OMB directives and memoranda. This stage was previously set with the issuance of the OMB Circular A–76 that remains a controversial program. (See http://www.govexec.com/outsourcing/) Meanwhile, several agencies have embarked upon major outsourcing and privatization initiatives. Examples include the recently awarded Navy Marine Corps Intranet contract that outsources IT services for over 360,000 ''seats'' at 300 Navy and Marine Corps bases. In addition, the National Security Agency (NSA) is in the midst of a major outsourcing initiative called GROUNDBREAKER. This program is a $5 billion effort to rely on private contractors to perform services currently done by NSA. This contract is a good example where the government determined that a function (computer support) is critical to mission performance but not necessarily an inherently governmental function.

    In the space-related arena, Air Force Materiel Command recently awarded a $1.5 billion contract to integrate and modernize air, missile and space command and control (C2) systems for North American Aerospace Defense Command (NORAD) and U.S. Space Command (USSPACECOM) at Cheyenne Mountain. Related operations and maintenance services were later awarded under a $76 million A–76 contract to another contractor, which included ''direct conversion'' of federal workforce into the private sector. Current plans call for ultimately merging services under a single contract. In these contracts two key framework approaches were evident. In the integration contract, AFMC provided for significant contractor review of existing operations and input to the contract structure. The result was a more accurate bid by the contractor. In the case of the operations and maintenance contract, the A–76 contract was a ''direct conversion'' which is analogous to commercial outsourcing and more attractive to bidders.
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    In 1999, the Commercial Space Opportunity Study (CSOS) was undertaken at the direction of SECAF. The task was to examine all aspects of outsourcing and/or leveraging commercial practices. In one respect, Space Command recognized that in fact much of their force structure was eligible to be outsourced. However, other factors suggested that any opportunities would very constrained. This study was a good example of assessing mission risk and potential cost benefit prior to contracting for support.

    Under the ''Outsourcing Desktop Initiative for NASA'' (ODIN), NASA has a long-term outsourcing arrangement with the commercial sector to transfer responsibility and risk for providing and managing the vast majority of NASA's desktop, server, and intra-Center communication assets and services. This is being done as the Agency downsizes and refocuses IT personnel to Agency core missions. (www.nasa-odin.com/content/overview.htm) In addition, NASA is aggressively pursuing Space Shuttle privatization opportunities that improve the Shuttle's safety and operational efficiency. (http://www.hq.nasa.gov/office/legaff/fy2002blueprint.html) The establishment of United Space Alliance (USA) as the single prime contractor for NASA's Space Shuttle operations is a significant step toward the privatization. NASA's approach will include continued implementation of planned and new privatization efforts through the Space Shuttle prime contract and further efforts to safely and effectively transfer civil service positions and responsibilities to the Space Shuttle contractor. The ODIN contract is an example framework for privatization of space program support.

    Despite this excellent trend, outsourcing and privatization efforts have suffered criticism and challenges. According to the GAO (Outsourcing: Challenges Facing DOD As It Attempts to Save Billions in Infrastructure Costs (Testimony, 03/12/97, GAO/T–NSIAD–97–110). (www.fas.org/man/gao/ns97110.htm), the GAO's past and ongoing work shows that while DOD's past outsourcing savings initiatives yielded significant savings, they often fell short of their initial goals. In addition, the American Federation of Government Employees and the National Treasury Employees Union criticized recent OMB mandates stating they encourage outsourcing at the expense of federal workers. Their review states that the unions added that OMB is pro-contractor possibly circumventing the work of a contracting practices review conducted by a General Accounting Office panel. Some governmental agencies may be using ''strategic outsourcing'' in deference to the intent of OMB Circular A–76. Meanwhile, industry sometimes views A–76 ''competitions'' as unfair and often biased toward keeping the federal workforce in place. In addition, although FAIR lists a range of occupations or positions that are eligible for non-governmental staffing, recent 2000 data shows negligible position categories that are ''space'' in character or offer no positions as being eligible for transition.
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    It is NDIA's opinion that the outsourcing trend will continue although the number and value of true space-related services including launch and range operations, on-orbit and space payload services remain embryonic. Nonetheless, the trend has proven to be advantageous in terms of Total Cost of Ownership (TCO) and contract performance where applied. DoD, NASA, and Congress should focus on specific contracting strategies while considering implications to the federal workforce and opportunities to reduce risk and TCO. Commercial providers will by virtue of profit considerations, ensure that TCO can be achieved while assuming any attendant performance or financial risk within their pricing structure and profit margins.

Mission Accomplishment. The accomplishment of assigned DoD and NASA missions remains the crucial factor in any consideration to transition space capabilities to commercial providers. On one hand, there is the ''finger on the trigger'' argument. If a potential activity or collection of positions is specifically related to the use of military offensive or defensive capabilities, then that activity is not available for transition.

    NDIA recognizes that the mission accomplishment mandate of military space forces is to ensure a competent and immediate response to warfighter needs combined with the requirement to protect our space assets. This in turn requires a trained work force that is mission-oriented and prepared to execute at a moments notice. Historically, commercially provided space services played a major role in the early development of military space capabilities, which later went through a process to transition many commercially provided capabilities to the federal workforce.

    Early in the Cold war, commercial providers played a key role in space launch and on-orbit services. This was both good and bad. On the ''good'' side, the contributions of large corporate providers, such as McDonnell Douglas, Lockheed, TRW, and Hughes, resulted in significant technical accomplishments in both our civil and defense space programs. An embryonic space launch capability of the 50's emerged into major successes in the Mercury, Gemini, and Apollo Programs leading to our placing the first man on the moon. Similar advancements were realized in military space programs as well for reconnaissance and surveillance, communication, and weather. In practice and from a National Security perspective, military satellite launch, vehicle/payload Telemetry, Tracking and Control (TT&C) were heavily integrated with commercially provided expertise. Major operations supporting our space ranges include significant amounts of outsourced work. Contractor's staff manned satellite control Mission Control Center (MCC) positions and Remote Tracking Stations (RTSs). The Air Force relied on contractor talent because of the nature of the technology and the need for a highly educated and trained workforce, which the Air Force did not possess.
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    During that period characterized as the ''Space Race,'' commercially provided support had in fact grown to be a significant part of our military space launch and TT&C operations. However, during the late 80s Air Force leadership embarked upon an is operationalization'' initiative. This initiative focused on replacing commercially provided services and manpower with organic military support. The rationale was that military personnel could now do what the contractors had been providing because of the maturity of space technology. The assistance of powerful information technology systems also simplified the user interface. Another factor was personnel recruitment and retention. ''Operationalization'' created an important opportunity to attract quality military people into the associated space career fields. It also supported a military space operations vision that recognized the increased use and importance of space in all military operations—from sensitive peacekeeping and humanitarian relief missions to regional conflicts, such as, the Persian Gulf War. The military would focus on keeping a military person on the ''trigger'' while relegating strictly support services to the commercial providers. Later, this included the formation of special space teams to support ''in theater'' and creation of a Space Warfare Center to investigate new techniques and concepts to support the warfighter.

    In addition to the above, it is NDIA's opinion that there are clearly force structure issues, some of which were addressed in the Commercial Space Opportunity Study. For the military to move back to a primary contractor work force would in fact detract from the development of career path development for its force. However, the suitability and potential to transition certain capabilities makes sense.

    Given the above, it is NDIA's opinion that services could now benefit from expanded contractor support but must clearly differentiate mission critical versus non-mission critical capabilities. Further, the integration of ''space'' with and into military missions clearly demands protecting military career development to ensure a competent space capability and force structure. In this, we believe there is sufficient opportunity to both contract significant workload while maintaining military career opportunities.
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Recommended Framework: As the above demonstrates this is a complex area that is affected by policy, contracting, and mission boundaries. Given that, we offer the recommendations outlined earlier to establish a framework to transition certain capabilities to commercial providers for commercial profit.

Questions and Responses

Question submitted for the record by Chairman Rohrabacher:

Do we have recommendations for NASA, DoD and Congress on how best to establish a framework for government to transition certain capabilities to commercial providers for commercial profit?

Answer from Ms. Wood:

    Recognize DoD/NASA benefit from business involvement—Perhaps the first recommendation is for DoD and NASA to be recognized as businesses in a way and should have business leaders involved in the process of running them. There should always be key business experience involvement. I believe what you are seeing done by Secretary of Defense Rumsfeld is exactly correct but should be policy for future administrations.

    Business leaders who are working within DoD would be best able to understand how to lay out future policies which would allow for the protection of key defense technologies which provide underpinnings to national security and yet also promote those technologies with the potential to grow in the commercial arena.
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    Create an enduring structure from within—This would need to be studied within DoD to create a structure to allow for this. Inviting top successful business leaders, both retired and active, as well as business academics and top officials from the Department of Defense and OSD, to be part of an enduring business council would probably help weave a business approach into DoD and NASA.

    Incentivize businesslike activity—There should be better business understanding and more incentives within the DoD to allow for the incubation and growth of business ideas stemming from allowable technologies within DoD and NASA.

Question submitted for the record by Cong. Gordon:

What have been the net impacts of the series of consolidations that have taken place in the aerospace industry? Have they been a net benefit to the nation or not? Are more such consolidations likely? Desirable?

Answer from Ms. Wood:

    In my opinion, the consolidation era of this sector was a somewhat inevitable byproduct of the steep budget cuts in procurement. In the 1990s there were not sufficient programs to support a broad, healthy base of companies so their number declined. Dwindling resources tend to spur actions to preserve and minimize risk; innovation by definition encourages risk taking. Downturns and innovation don't cooperatively coexist for long.

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    Net benefit to the nation—These consolidations were a necessity given the circumstances. But the long term impact of fewer companies, many whom are still striving to restore the health of the their balance sheets, raises concerns in terms of potential for reduced national security. This sector should seek to attract and retain the cream of the crop of engineers and managers. My concern is whether some are leaving or eschewing this industry to pursue more stable fields and downstream whether this threatens less innovative solutions at greater expense. This threatens a negative spiral of fewer new aerospace/defense programs and platforms.

    Future consolidation probably resigned to smaller scale deals—The bulk of the consolidation activity is now largely complete. The last two major areas yet to be fully concluded are shipbuilding and helicopters, both of which are probably likely at some point. We'd expect ongoing fine-tuning, but on a much smaller scale.

    Are further consolidations desirable?—We should probably complete consolidations given the disadvantageous effect an arbitrary cessation would have on some companies mid-stream. Government intervention at this point risks penalizing contractors who have been disciplined and price sensitive about deals.

    Further consolidation is only desirable to the extent it promotes consistency and allows that stage to be finished. Once completed, it might be healthier for the DoD to focus on ways to grow new entrants into this market, attract new capital and alter existing non-competitive policies which drive away investment.