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[H.A.S.C. No. 107–37]









MARCH 19, 2002

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CURT WELDON, Pennsylvania, Chairman
HOWARD ''BUCK'' MCKEON, California
J.C. WATTS, JR., Oklahoma
LINDSEY GRAHAM, South Carolina, Vice Chairman
JIM RYUN, Kansas
ROB SIMMONS, Connecticut
JO ANN DAVIS, Virginia

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GENE TAYLOR, Mississippi, Ranking Member
JOHN M. SPRATT, JR., South Carolina
LANE EVANS, Illinois
ADAM SMITH, Washington
JAMES H. MALONEY, Connecticut
MIKE MCINTYRE, North Carolina
ROBERT BRADY, Pennsylvania

DOUG ROACH, Professional Staff Member
JJ GERTLER, Professional Staff Member
JESSE TOLLESON, Research Assistant



    Tuesday, March 19, 2002, United States Defense Industrial Base
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    Tuesday, March 19, 2002



    Weldon, Hon. Curt, a Representative of Pennsylvania, Chairman, Military Procurement Subcommittee

    Douglass, John W., President and CEO, Aerospace Industries Association of America
    Farrell, Lt. Gen. Lawrence D., Jr., USAF (RET), President and CEO, National Defense Industrial Association
    McCurdy, Dave, President, Electronic Industries Alliance
    Patrick, Suzanne D., Deputy Undersecretary of Defense (Industrial Policy) Department of Defense


Douglass, John W.
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Farrell, Lt. Gen. Lawrence D., Jr.
McAleese, James
McCurdy, Dave
Patrick, Suzanne D.

[There were no Documents submitted for the record.]

[There were no Questions and Answers submitted for the record.]


House of Representatives,
Committee on Armed Services,
Military Procurement Subcommittee,
Washington, DC, Tuesday, March 19, 2002.

    The subcommittee met, pursuant to call, at 3:00 p.m., in Room 2118, Rayburn House Office Building, Hon. Curt Weldon (chairman of the subcommittee) presiding.


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    Mr. WELDON. [Presiding.] The hearing will come to order. We thank our colleague, Mr. Taylor, for joining us and our witnesses. We have a couple of conflicts going on at the same time. We have a bill on the floor right now for the committee. A lot of our members are there and a lot of members have not returned yet from it. We can break, so we expect to be joined by other members.

    This afternoon, the military procurement subcommittee meets to receive testimony from Suzanne Patrick, undersecretary of defense for industrial policy, on the Department of Defense's assessment of the health of the industrial base supporting our nation's defense.

    Also with us to provide industry's views on the state of the industrial base are Dave McCurdy, president, Electronic Industries Alliance; John Douglass, president and CEO Aerospace Industries Association of America; and Larry Farrell, president and CEO of the National Defense Industrial Association.

    First, I would like to thank each of you for your prepared statements. The statements provide a great deal of insight on the state of the defense industry and a significant number of constructive suggestions for the future, which we are taking to heart.

    Having said that, it would seem that the Department of Defense's more sanguine view on the health of our industrial base is not shared by the associations that represent hundreds of industrial companies and their thousands of employees.

    In this hearing, we hope to achieve a better understanding of what is a disconcerting and conflicting picture of the state of the industrial base supporting national defense.
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    In fact, I had a defense contractor last year give me a chart, which I have had updated as of today, showing the company value comparison of our top five defense companies in America, with some other major industry groups in this country.

    You can see in billions of dollars what the current available value of the companies are. And the reason why this is significant, because if you are going to invest in stock in a company and you are going to make a comparison between Home Depot, with a total value of $113 billion, versus the entire defense industry in this country at $109 billion, it is easy to see where the investor is going to put their dollars.

    We have to understand this is critically important for where we are going as a Nation and a reason why we have to focus on the health of our industrial base. Thank you.

    The Nation has been adjusting to the end of the Cold War for over a decade. A report from the National Defense Industrial Association, General Farrell's organization, indicates that 2.5 million workers and half of the 60,000 companies in the defense industry in 1991 are no longer part of the industry. They are gone.

    In fact, General Electric (GE), the number one company of value on here, sold off all their defense business because they did not think, I guess, it was a profitable line for them to be involved in.

    This adjustment has been difficult and all indications are the remaining excess capacity in the defense industry dictates that significant industry consolidation is still ahead of us.
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    As the industrial base continues to adjust, there are at least three groups of stakeholders in this process: the war fighter, our government and private industry companies and employees; and the taxpayer.

    There is no question that we have the finest military in the world today. The war fighter, in most cases, is being well provided for. With the reinvestment that has taken place in national defense, the health of the companies providing military hardware and services has shown renewed strength. But concerns remain as to the sustainability of these trends.

    It is the American taxpayer that has reason to be concerned. We have yet to demonstrate that we have a viable plan that will give us the capable, yet affordable military that we must have. Our current military capability is based mostly on legacy systems—decades old B–52s, B–1s, tactical aircraft, armored vehicles, aircraft carriers and other ships. Yes, upgraded with modern avionics but fundamentally older, expensive to maintain legacy systems.

    When we look at the follow on systems, we see many of our flagship programs in disarray. We address the fiscal year 2003 request with a shipbuilding budget that has over $2 billion in prior year bills to be paid and with projected new ship procurement that will not sustain the stated Quadrennial Defense Review (QDR) requirement of 310 ships.

    The joint strike fighter program cost estimate has increased 50 percent since 1996 and over 20 percent in the past year alone. The Comanche helicopter program has now slipped for the sixth time, requiring another $1.5 billion to complete engineering and manufacturing development.
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    Two major helicopter upgrade development programs, the H–1 and the MH/CH–47 recently reported cost growth of 80 to 90 percent. Unacceptable. And the missile defense programs Navy area was terminated in December 2001 because of a more than doubling in the estimated cost to complete the program.

    So, we take pride in the way our military is performing in the war against terrorism and the defense industry has improved economic situation. But we look forward with concern to the future.

    The Department of Defense (DOD) view of the state of the industrial base is schizophrenic. The secretary of defense said last year that the defense industrial base is, and I quote, a very serious problem, end quote, and that we, quote, we are in a sense disarming by our failure to reform the acquisition process end quote.

    Yet, DOD 2001 and 2002 industrial capabilities report describes the defense industrial base as strong. In fact, it is only 10 pages, so we do not measure reports by the size, but it is 10 pages, versus the previous report, which was in excess of 100, I believe.

    All other views of the industrial base are decidedly negative. At a time when the Defense Department states a need for more non-traditional defense companies competing for defense programs, we have a defense department that as Mr. McCurdy states, ''Maintains a bureaucratic acquisition system that the commercial sector finds extremely difficult to work with and which many companies have decided it is not worth the effort''.

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    DOD talks about those business practices, but while the commercial world is shortening cycle times between products, DOD is not. So, the gap between commercial and government practices continues to widen.

    Further, DOD's administrative costs are reportedly twice that of commercial industry. There are successes in reforming the Pentagon's acquisition practices, but far too few.

    In reviewing where we are in the reform process, compared to where we need to be, one gets the impression that we are in the opening minutes of the first quarter, down 30 points and are starting five have fouled out.

    The situation is not hopeless, but we all better play the game of our lives. We have our starting four here to testify. They bring us a wealth of experience in acquisition policy. We look forward to their remarks.

    Before proceeding with the testimony today, I would like to recognize my colleague and friend from Mississippi Gene Taylor, the ranking member of the subcommittee for any remarks he would like to make.

    [The prepared statement of Mr. Weldon can be found in the Appendix on page ?.]

    Mr. TAYLOR. Mr. Chairman, I want to thank you very much for having this meeting.
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    In a book he wrote in the late 1980s, Stephen Ambrose—the book was ''A Rise to Globalism''—contrasts America in 1942 to America in 1985. In 1940, America had a very small industrial base—I am sorry, a very small army, but a huge industrial base that produced all its own steel, produced all its own fuel, produced all its own electronics and became the backbone of what saved our nation in World War II.

    You contrast that with America in the late 1980s with a large army, yet dependent at that time for 50 percent of its fuel from overseas, dependent on foreign electronics to make our airplanes work as well as other systems going all the way from the engine to the engines on some new Coast Guard patrol boats.

    So, I really do welcome this. I think it has been actually been made worse, Mr. Chairman, since we have been here with the passage of North American Free Trade Agreement (NAFTA), which has sent so much of America's industrial capacity down to Mexico and the passage of the normal trade relations with the Chinese.

    I have noted, as I am sure you have, an almost dollar for dollar increase in Chinese military spending as their trade surplus with America grows. So, I think this is very timely and I think it is very appropriate and I appreciate you calling this meeting.

    Mr. WELDON. I thank you, Mr. Taylor, for your statement and your leadership in these issues.

    Now I would like to turn to our distinguished ranking member of the full committee who makes an effort to come to all of our key subcommittee hearings, Mr. Skelton, for any comments he would like to make.
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    I thank the gentleman for appearing. It is an honor to have you sit with us on this very important topic.

    Without objection, I will enter the complete prepared testimony of each witness into the hearing record.

    Ms. Patrick, good afternoon. I understand this is your first appearance before the Congress. It will be a pleasant experience, I assure you, despite the fact that I am sitting in the chair.

    We offer you a warm welcome and look forward to your testimony. We appreciate your service to the Nation and for the expertise you bring to your position. We know the challenges are great, but we know that you are up to the task. We want to work with you and so, hopefully, you can give us your own thoughts and your ideas today as you proceed with your testimony. Again, your full statement will be entered into the record.

    The floor is yours for whatever time you may need.


    Ms. PATRICK. Thank you very much, Mr. Chairman and members of the subcommittee.
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    As anybody who knows me would be happy to tell people, this is the game of my life I am playing. And so, I am very interested in your comments and also interested in working with you.

    Thank you for inviting me here today to talk to you about the current and the future ability of the U.S. defense industrial base to meet our national security requirements.

    I am particularly happy to be with this committee. Congresswoman Davis was the first Member of Congress I met upon assuming my present duties and of course, it was Congressman Schrock that I saw on election day, 2000, at All Saints Episcopal Church in Virginia Beach as we were both trying to do our part to get out the vote.

    And I know another member of your committee. Lieutenant Commander Kirk was a fellow Naval Reserve officer where we both worked at the Office of Naval Intelligence.

    So, I would be remiss if I did not pay tribute to the many fine members of our defense industrial base who live and work in your state and in your district. As I have visited much of our industrial base since joining the Administration, I am again and again reminded of how lucky we are as a Nation to have these citizens and this work force who are the lifeblood of our defense industrial base.

    My staff and I are also proud to help shape the structure of the industry to meet current and future war fighter needs as well as to influence major tenets of the Administration's policy on the industrial base.
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    But some of our government industries' finest moments have been in the immediate aftermath of 9–11, when we and our industrial partners responded with speed and agility to the demand of homeland defense and Operation Enduring Freedom.

    Over the long term, we are also confident that our ongoing studies will help inform the future acquisition and budgetary decisions, which will determine tomorrow's defense industrial base.

    But now for the facts. In 2001, we reviewed 28 merger and acquisition cases. We and the regulators had little issue with the majority of them, but two were withdrawn by the parties involved and in one case, the Department of Justice, on our recommendation, blocked the acquisition of Newport News Shipbuilding by General Dynamics.

    We reviewed 55 Committee on Foreign Investment in the United States (CFIUS) cases last year. Those are the cases that involve foreign acquisitions of companies in the United States, and we reviewed 11 CFIUS cases this year. While none of the 55 cases reviewed in 2001 were denied, three were withdrawn by the merging parties based on concerns we raised. Further, one required a presidential investigation, after which the inquiring party agreed to a targeted divestiture to address our concerns.

    As I alluded to earlier, during crises, our staff has special responsibilities related to the readiness of the defense industrial base. This was never more apparent than after the events of 9–11.

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    Let me spend a moment discussing our staff involvement in homeland defense and in Operation Enduring Freedom. The events of 9–11 and all of us remember them very well, posed the immediate challenge to reinforce the physical security of our defense industrial base. On September 11, September 12, September 13, the days that we were busy trying to assess the physical security of our defense industrial base, we could not know from where the next attack would come.

    And so, we got to work immediately. We immediately identified and prioritized key assets of our defense industrial base and this was accomplished within days of the strikes on the Twin Towers and the Pentagon.
    This information that my staff developed is now an integral part of homeland defense and contingency operation plans. We also stood up the task force for the priority allocation of industrial resources to ensure maximum responsiveness to the war fighter in Operation Enduring Freedom.

    We redirected and accelerated key sensor packages for Global Hawk and Predator, from U.S. suppliers and from allied assets. Critical components for the joint direct attack munitions; Joint Direct Attack Munition (JDAM) and the joint stand off weapons were identified and funded as a result of our efforts. We are now in the process of increasing threefold the future production of selected precision guided munitions, (PGMs).

    In each of the last several contingency operations, we have learned the hard way that to serve effectively, the maximum capacity of prime and subtier contractors must be better synchronized. As a consequence, we have considered, where appropriate, facilities expansion for selected suppliers or the establishment of second sources.
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    The President's fiscal year 2003 budget for defense provides important reinforcements in the defense industrial base. This $379 billion budget increases defense spending by about 14 percent over fiscal year 2002, with Research and Development (R&D) and procurement accounts each increasing on the order of 12 percent over fiscal year 2002.

    The procurement budget will go to fund many of the production systems that have been on the drawing boards for some time and also to fund final production loss of legacy systems.

    But these systems will be just as essential to the warriors of tomorrow as the B–1s and B–52s have proven to our soldiers in Afghanistan, for the next generation tools of warfare will not be produced overnight. They will be forged in the next several years of research and development spending, as well as spending allocated for transformational capabilities.

    Here it must be remembered the dollars spent in production typically are several multiples of what is spend in R&D. So, it is the procurement budget of tomorrow that we are seeing foreshadowed in today's R&D budget.

    Against this backdrop of robust funding and epic challenges, it is our responsibility to shape an industrial base that will supply 21st century warriors as effectively as it has prior generations of men and women in uniform. Many of our studies of industrial sectors, such as those on space, Unmanned Aerial Vehicles (UAVs), missiles and the helicopter industrial base will help with this process.
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    A study is also underway to survey the sources of less traditional defense solutions and the supplier base that will support these new technologies. Financial incentives must be provided to attract high margin pharmaceutical, telecom and network based suppliers.

    The financial return potential of transformational technologies must be communicated to the investment community to induce investments in less traditional suppliers and technologies by institutional investors and defense firms alike.

    On an ongoing basis are internal financial assessments of American defense companies and global suppliers allow us to continue to take the temperature of the defense industrial base almost on a daily basis. We use these assessments in all of our programmatic decisions and in our examinations of financial restructuring initiatives within the industry.

    We also meet on a quarterly basis with Wall Street analysts who incorporate their views on the health of our industry.

    I have been delighted to be here today to share our views and to initiate the dialogue with you on the myriad defense industry issues that we will work together in the months and years to come.

    But as we set our course together towards this industry shaped for new age warfare, there is one time-honored principle, which should inform the planning of our financial and of our industrial resources—the requirements of our men and women in uniform. They will be the first judges of our success.
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    Thank you very much.

    [The prepared statement of Ms. Patrick can be found in the Appendix on page ?.]

    Mr. WELDON. Thank you, Ms. Patrick, for your statement and for your service to the country.

    Next, we are very pleased and honored to have Dave McCurdy, former member of Congress and former member of this committee, who is currently the president of the Electronic Industries Alliance. Dave had also, when he served in the Congress, was chairman of the U.S. defense industrial base panel of this committee in the 102nd Congress.

    So, Mr. McCurdy, welcome back and proceed with your remarks.


    Mr. MCCURDY. Thank you, Mr. Chairman.

    It is a pleasure for me to be back in this room. It has been 14 years of my life and it is good to see my old friends again.

    Thank you for this opportunity to testify regarding the future of the U.S. defense industrial base. The debate over the proper role and structure of the U.S. industry in meeting our national security requirements is certainly not a new debate. But we do face a new paradigm.
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    Just as U.S. industry has undergone wholesale transformation to confront the challenges and opportunities of the information age, the U.S. military is struggling to incorporate the benefits of technology remain relevant as a technology market.

    More than ever before, our military forces depend on complex information networks to analyze threats and manage the battlefield. Electronics and software are the key enablers of this transformation, as the chart to my left demonstrates. It is included in your copies of the formal testimony.

    The primary focus of the relationship between the technology industry and the U.S. military must be promoting innovation. Consider the landscape that we are confronting. We have a booming commercial market where the quality of non-defense systems is increasing rapidly, with a shrinking gap between high-end commercial systems and military systems.

    Commercial R&D is the driving force of innovation, rather than military-focused R&D. Meanwhile, the Defense Department maintains a bureaucratic acquisition system that the commercial sector finds extremely difficult to work with, and which many companies have decided is not worth the effort.

    There are at least four notable barriers to innovation in the defense industrial sector. First, DOD procurement strategy is more budget driven than strategy driven. This approach has sought to maintain a force structure by purchasing relatively few major systems but in large numbers. The net effect is to ''lock in'' a few system solutions to emerging military challenges.
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    The second barrier to innovation is an acquisition structure that results in long procurement cycle times that are especially worrisome during a period of rapid technological change. While introducing greater process efficiency in the acquisition system is certainly desirable, it addresses only a part of the innovation challenge.

    The result of efficiency innovations in this case yields an increased number of the same system, rather than liberating funds that might be productively invested to create new capabilities that will increase future war fighting. The third barrier to innovation is a competitive landscape dominated by a handful of large firms, as I indicated, and a myriad of smaller contractors and subcontractors. The decline of prospective bidders for DOD initiatives also works against innovation.

    The story of the defense industrial sector during the 1990s is not just one of consolidation, but rather abandonment. Many of the big commercial firms that had a defense division just got out of the business. For the firms that remain active in the defense business, it is more difficult to find suppliers for mil spec parts, particularly replacement parts for aging systems. Fewer firms ultimately mean fewer bidders, and reduced innovation.

    And fourth, the department places a low priority on experimentation as a means of stimulating competition and innovation. There is too little tolerance for failure and experimentation with technology. Current practices do not reward companies for independent research and development, or for reducing procurement costs. Capped profit percentages prevent corporations from being able to reinvest savings into their companies. With so many barriers erected against innovation, there is too little incentive for industry to take the initiative.
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    There are solutions out there to address these innovation challenges, but will require a meaningful government-industry partnership to identify and implement them. We must identify new ways to make industry R&D profitable.

    To promote innovation, the Defense Department must create more opportunities for competitive bidding, and change the limitations for profit percentage, particularly with respect to R&D. Now, I do note, and I commend Secretary Aldridge for his statements and initiative to try to improve that particular situation.

    Reasonable failure and experimentation must not only be tolerated, but encouraged.

    Along these same lines, it is important to identify which technologies have matured and are at the point where large investments tend to yield only small improvements in system performance, and distinguish those from technologies with major growth potential. We need to think about how the defense industry is investing along these various technological development curves and whether we are over-investing in mature technologies.

    Just as sophisticated electronics are one subset of the core of complex military systems, software is another core component that must not be overlooked. And quite frankly, Mr. Chairman, the two areas of focus today, on electronics as an enabler and software, are also the areas where you see the greatest risk in their early development.

    For a commercial firm conducting R&D for future military systems, electronics and software represent a sizable financial risk but also promise the greatest return both in terms of profit and functionality. As we consider the health of the defense industrial base, it is important to keep in mind that the basic military platforms are not at risk. What we do need to watch for is the future availability of the subsystems—particularly the electronics and software-based subsystems—that keep our military the most advanced in the world.
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    Unfortunately, software products are too often riddled with defects that are created during the software's design and development. These defects are the primary vulnerabilities that cyber-attackers exploit. The interesting phenomena is that there are only a small number of root causes that underlie the massive number of software vulnerabilities. These defects, and hence most cyber attacks, could be avoided if vendors used proven engineering design techniques as opposed to building software, line by line. We need a system of fabrication from reusable components and that results in zero defects. There is already very interesting and important work going on this regard, known as Predictable Assembly from Certifiable Components (PACC). These efforts need greater attention and support from government and commercial buyers alike.

    In my prepared text, Mr. Chairman, please note my concern about the degree of outsourcing of software to overseas facilities. If there is a legitimate fear of losing industrial capacity, I believe it is actually in software, where India, Ireland and other countries are becoming the software producers of choice. The federal government has a critical role to play.

    The government can require use of accredited organizations and personally accredited software engineers on every federal procurement involving software. We can require government CIOs to report on software cost, software successes and failures, and accreditation in annual reports to the Congress.

    If an organization is selected that does not satisfy these criteria, then there must be a risk management plan to show how they will become accredited.
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    Clearly, electronics and software are two critical areas that will require increased attention from Congress and the Defense Department over the coming years. We certainly look forward to working with you to maintain the U.S. industry's competitive advantage in the future.

    [The prepared statement of Mr. McCurdy can be found in the Appendix on page ?.]

    Mr. WELDON. Thank you, Mr. McCurdy.

    We are very pleased to have John Douglass, president and CEO of Aerospace Industries Association of America and former assistant secretary of the Navy for R&D and acquisition.

    John, thank you for joining us.


    Mr. DOUGLASS. Thank you, Mr. Chairman. I would like to join my colleagues in thanking you for your leadership in calling this hearing. This is clearly a topic that does not get that much visibility and your leadership in this regard is greatly appreciated by the industry.

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    I have a lengthy statement which we have tried to answer the questions in your letter, sir, and you have already indicated you would put that into the record and I want to thank you for that as well.

    What I would like to do is cover a few charts here which will set the context for several main points that I would like to make.

    The first one that you see up there on the screen is a comparison of the major segments of the industry, 10 years ago and today. What is interesting about this chart is today is a mirror image of where we were 10 years ago in respect to the juxtaposition of exports versus the defense part of our industrial base. We used to be driven much more by our defense sales than we are today. Today our future market is really the global economy. Next chart, please.

    This is another way of looking at that 10-year's slice. This shows you the breakdown between civil military missile space and other products. What is important to note for the military part, which is the purview of the armed service committee, that over one fourth of those military airplane sales you see on that chart on the right, which is quite a bit smaller than the one on the left, are exported outside the United States and a considerable portion of the other products on that chart are exported, sir.

    Next is a breakdown of our sales into those same categories since 1998. What happened to our industry was that at the end of the Cold War, we went into a very steep decline in the early 1990s, followed by rampant growth in the mid-1990s and since 1998, you can see that we have stayed constant at right around $150 billion in sales per year. These are in then year dollars. If you put them in constant dollars, it would actually be a reasonable decline in sales.
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    What is particularly important right now is the contraction of the blue at the top. Since 9–11, the civil aircraft market globally has contracted by a very severe amount and this is going to have implications for the defense procurements in the department, sir.

    The next chart is a compilation of our exports versus our imports since 1983. And as you can see, we hit a peak in 1998 with a $41 billion trade surplus. That year, this sector of the economy was equal to the positive trade balance of the rest of the entire American economy put together.

    But unfortunately, in the last three years, we have declined each year until we are down to the point now where we are down to $26 billion surplus. This is a serious decline over these three years and should be of concern to the Department of Defense.

    Let me pause before I go on in my charts to make a couple of key points that are critical, I think, to the hearing we are having today. The first point, sir, is that you cannot look at the defense industrial base in isolation. It has to be looked at in the context of the overall American economy, and today the defense part of this industrial base is about a third of our sales and about a third of it is commercial airplanes, which is contracting right now. The other third are space and other products manufactured by the industry.

    As you know, defense used to be a—I mean, aerospace used to be a sort of subsector of defense. Now it is the other way around. Since the late 1980s, the aerospace companies have purchased all of the entire defense industrial base, including the armor in the shipyards and so on.
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    The second key point is 40 percent of everything we produced is exported outside the United States. This raises some very, very important issues for the department to pay attention to.

    One of them is our trade balance. If we are not able to sell our products on the global economy, especially our commercial products on the global economy, it is going to have an effect on the cost of our defense products here at home.

    Second, issues in the commercial market that are constraining the commercial market are beginning to have more and more influence on DOD's prices. As the commercial airplane market shrinks due to crises like the 9-11, this is going to inevitably ripple over into the price of products. You mentioned a number of them that have gone up in price in recent years. This is partly the result of a long period of neglect from the previous administration and funding modernization, but it is also, sir, partly due to a contraction on the civil side.

    I am particularly concerned about the status of our nation's air traffic control system, which is limiting the growth of commercial aviation in the United States. As you know, I sit on a congressionally mandated commission on the future of the industry and tomorrow we will be issuing an interim report from that commission which calls upon the president and the Congress to look at the way we organize to do air traffic control so that that part of our economy can begin to grow again.

    Export controls is a critical issue for us. Right now, sir, we have an antiquated system that has its roots in the Cold War and we are trying to control far too many things. We need to focus our control on fewer things and do a better job of controlling those things that really do make an impact on our national security.
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    Finally, sir, there is a concern that I have about certain relationships between the commercial and the military industrial base, especially in the area of large aircrafts. And as you know, one of the issues that we are trying to deal with now in the industry and the Congress is working with is the issue of the need to modernize the tanker force for the Air Force.

    It is critical that this be an American project. I hope that the Congress will look at this project with some concern. There are those who are trying to put a part of this project offshore to foreign companies that have never built tankers and we are, sir, implacably opposed to that.

    Let me call up the next chart here, because I think this speaks to a point that was in your opening statement, sir, and is critical to any look at this issue over the longer term.

    This is where we tend to not look in depth. This is the kind of notional chart. It is build around real program, but on the left, it shows you the division of work on a modern aerospace program among the first tier contractors, but what really underlies that is about 52 percent of the parts are built by the suppliers.

    If you go on to the next chart you will see that in the production of a program like this, over 70 percent of the parts that go into a modern weapon system are built by the suppliers. So, any analysis of the defense industrial base has got to take into account the supplier base, which underlies the larger companies. This is an area where we have not seen a lot of study, either by the Department of Defense or by the government in general.
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    Finally, sir, let me wrap up real quickly. There are three serious problems that we see looming on the horizon. The commission is looking at these and we will deal with this in its May report. The first one is the period after the end of joint strike fighter development. It is not clear at all what the department's intention is in regards to the maintenance of the military aircraft design base in the latter part of this decade. Right now, there appears to be a program in depth.

    The second part of the industrial base that gives us real cause for concern is in large, solid boosters. For the first time since large, solid boosters were invented back in the 1950s, there is no research and development or production money after 2008 in the current five-year defense plan for large solid boosters. Unless we decide to do something about that, our country will go out of that business around that time.

    Finally, there is a lot of concern in the industry about aerostructures and the migration of that work outside the United States. It is something we clearly need to look at in both its military and commercial aspects.

    With that brief summary of my statement, sir, I will be glad to answer any questions you have.

    [The prepared statement of Mr. Douglass can be found in the Appendix on page ?.]

    Mr. WELDON. Thank you, Mr. Douglass.
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    Our final witness is Larry Farrell. General Farrell recently assumed his position as president and CEO of the National Defense Industrial Association. We welcome you and you can proceed with your statement.


    General FARRELL. Thank you, Mr. Chairman.

    Chairman Weldon, Mr. Taylor and members of the subcommittee, it is a pleasure to appear here today. It is also an honor. You have already taken my detailed written testimony for the record, so today, what I will do is limit my comments to the highlights of some issues which I wish to emphasize and which also will provide context for the more detailed comments that have already been submitted.

    So, National Defense Industrial Association (NDIA's) 900 corporate and 24,000 individual members thank you for the opportunity to present our views and concerns here today. We also would like to acknowledge and state our appreciation for what Congress has done to support and bolster defense spending.

    We note that in the last three Congresses, the House Armed Services committee and particularly this subcommittee has been at the forefront of arguing for more funds for the Department of Defense and we thank you for your unwavering commitment to our nation's security.
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    I would state at the outset that war and conflict are ''come as you are'' events. The trained troops and the weapons systems which are employed in war are always the product of previous investments. Whether the troops and the weapons are up to the task or woefully unprepared, as we have been in both cases in the past, depends on the level and commitment, over time, previous time to defense spending and whether the defense industrial base is healthy or not depends upon the same two factors—level and consistency of funding commitment over time.

    And though our industrial base remains second to none, as has been mentioned here by some of the previous speakers, we believed that its health is threatened by smaller production runs, fewer new starts and increasing international competition, plus there are a large number of issues overhanging us to include acquisition laws, regulations and procedures which have not yet been adequately addressed, but we have had programs in the past to address.

    These new realities have resulted in a smaller, less diverse industrial base, with many former suppliers having left the market. And I would point out at this time, just as footnote to Mr. Douglass' testimony that it may not be recognized by many people, but DOD competition policy, which is what we use to derive the industrial base, really is limited and pointed toward the primes only. It does not apply to the suppliers in the second tier.

    We see, also, because of episodic funding and inadequate profit margins, we tend to be faced—we are talking about these suppliers again, large numbers of single-source suppliers who have, in some cases, marginal capability to perform the industrial function or in other cases, failure to perform.

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    The proposed budget which you see for 2003 of $379 billion sounds large, but when you compare it with the needs, which is homeland security, emergency requirements, past unpaid bills, increased bills for the current emergency and food, fuel, transportation and personnel call-ups, plus the increased ops-tempo, you see only about $10 billion available for new requirements and increased procurement. That is not enough.

    A healthy industrial base requires skills and personnel which are in being and in practice, that is, they are online doing their job to cover the needs of all of the functions of defense: science and technology, development and program management and production engineering. In order to keep them employed, they have to have funding to do that.

    So, how do you address some of these issues? First, and in general terms, the procurement accounts are underfunded and there is a lot of tired, old iron out there in the services, old vehicles, ships and aircraft. Inadequate recapitalization program for these assets would benefit both defense and the defense industrial base.

    Let me move on now to some specifics. First off and to save time, I would associate NDIA with two issues already raised by Mr. Douglass in his prepared statement. The first issue is tactical propulsion—the science, technology and development funding is not adequate for this key industrial segment. By the way, it is a key to DOD transformation. You need about $20 million a year for science and technology in the tactical propulsion area.

    The second issue on which Aerospace Industries Association (AIA) and NDIA are aligned is the need for an updated export administration act and we support the recently passed Senate version.
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    A recent Defense Science Board (DSB) study entitled ''Preserving healthy and competitive U.S. defense industry to ensure future national security'', pointed out that some companies have sold their defense segments, effectively severing the technology bridge between commercial and defense technology basis and as Mr. McCurdy has pointed out, commercial technology is something we want to tap into.

    So, we have to be able to lower the barriers to commercial firms doing business to the government, not only to encourage those who have left to return, but to bring new commercial firms in. And we have to look to using commercial practices to make it easy for them to do this.

    As an example, we urge the Congress to consider revising Section 8002 of Federal Acquisition Streamlining Act, (FASA), of 1994 to specifically permit the flexibility to use contract types common in commercial practice—for example, labor hour and timely material contracts.

    We also advocate more competitive sourcing. We believe that the increased outsourcing will make DOD more efficient as well as a more commercially oriented buyer. Increased outsourcing to industry also provides more financial robustness to the industrial base.

    We therefore advocate lowering barriers to competitive sourcing of non-governmental functions, and we stand opposed to any barriers that would artificially constrain, limit or halt the process of competitive sourcing. We ask this committee for your strong support on this position.
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    Mr. Douglass has also described in some detail the issues facing the aerospace industry and we agree with and applaud his description of those issues. There is one issue, however, that NDIA wishes to raise, which was not in his pot of things to discuss and that is the ammo industrial base.

    Despite all of our best efforts, all of the services, but most particularly the Army, is short of state of the art ammunition. The Army assesses that quote, DOD may not be able to acquire within the desired time frame sufficient quantities of critical ammunition, end items and components in an emergency, being able to produce components to meet about 10 percent of DOD's go to war shortfalls. And to make matters even worse, fully 60 percent of the Army's munitions are substitute munitions rather than preferred.

    I was talking to General Kern the other day, commander of the Army material command and he was telling me that his ammunition industrial base has 56 single point failures, that is, single sources, half of which are overseas. For example, the only U.S. source for combustible cartridge cases, which is what we are using for some of the new munitions in the Army, that guy recently went out of business, so we are depending upon a single source overseas for that right now.

    Another example where we only have a single source and is unable to produce is linked ammunition. As mentioned earlier, we believe that one of the problems has been underfunding. What you see is underfunded and unpredictable budgets, accounts like ammunition, tends to be the bill payer for other must pays in other parts of the Army budget.

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    Industry has been and is working hard to craft specific proposals to fix individual pieces of the problems, which I described and along these lines, I commend to you and your staff the outputs of two multiassociation coalitions recommendation studies, the acquisition reform working group and the industry logistics coalition. They have both recently reported out legislative proposals and your committee has received these reports. We, NDIA and AIA and EIA are working actively with your staffs to explain and vet the recommendations contained therein.

    One final specific has to do with time lines in completing legislation. We see that late bills reported out of Congress, notwithstanding continuing resolutions has a disruptive effect on industry planning, program stability, industrial health and in some cases, even interrupts programs, especially those that have O&M funding contained in them.

    We continue to hope, as we sure you do, for a smooth financial transition from September 30 to October 1 each year.

    In summary, we have opted in this country for the best-trained, best-equipped military in the world. The industrial base that delivers the high tech systems needs adequate and stable funding that is consistent commitments over time. We see the need for an increased top line budget with adequate provisions within it for necessary S&T development and production. Otherwise, we forego continued development of things like battle space communications, precision weaponry and night operations, which are the very things we see being used so effectively today.

    We would urge you to take a look at expanded use of multiyear procurements, not only for production but also for development, so we that could make better use of existing funding. As we continue to streamline burdensome regulations and laws that impede efficient acquisition—and this seems like a lifelong project—we can and we certainly must do more to increase our defense industry's access to foreign markets.
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    Mr. Chairman and members of the subcommittee, I thank you for the opportunity to represent the views of NDIA here today.

    [The prepared statement of General Farrell can be found in the Appendix on page ?.]

    Mr. WELDON. Thank you very much for your testimony, Mr. Farrell.

    Without objection, the statement prepared by the American Institute of Aeronautics and Astronautics (AIAA) for this hearing will be entered into the record at this time.

    [The information can be found in the Appendix on page ?.]

    Mr. WELDON. We thank each of you for appearing before us today and again, and again, thank you for your commitment to helping us provide the best military that this country can have.

    I want to comment briefly on—to each of you. I know you expressed concerns about the export administration act and the House version opposed to the Senate version.

    I want to assure you—I have had conversations with Mr. Douglass about this at his corporate CEO event. It is my personal opinion that we should not have the kind of backlog that has existed in terms of granting export licenses. That is a process problem that we have to get corrected.
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    I think no one should misread the actions of this full committee just last week when it passed an amendment relative to the license in process. It is not that the members are not unaware of the need to expedite that process so that American companies can sell their products overseas. In fact, Secretary Aldridge testified that he is shortening that list dramatically and wants to reduce it so that the more mundane and routine dual use items can, in fact, be sold.

    The concern of this committee is that the Department of Defense and the secretary be at the table and have a role in the most sensitive technology. It is not that we want the process slowed down. It is that we want the secretary to have a place at the table.

    I know there may be some disagreement and I understand that, but I want you to understand the intent of this member and I believe, the bulk of my colleagues, is to work with industry, because we understand that 99 percent of the companies in this country abide by the rules and regulations and do not want to harm our defense posture.

    But unfortunately, there are those that would, in fact, attempt to sell the most sensitive technology and that is why many of us feel, as indicated by our amendment, that there should be a role for the secretary to play in that process of issuing those licenses.

    Madam Secretary, in your statement, I want to point to a specific sentence which I do not disagree with, but I think there needs to be a word added, because I heard it coming from two of our other witnesses. You quote—you say, and I quote, We believe that companies are sufficiently motivated by their commitment to defense in their shareholder base to deliver innovation and cost effectiveness without excessive government intervention.
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    Now, I agree with that, but I think there is one word missing and that is ''competitiveness''. I happen to agree with a couple of comments that were made here and I obviously work and support the big players in this business. But I think the pendulum has swung way too far toward the big players for basically shutting out the small entrepreneurs where often times you get better value, in some cases, better quality and better innovation.

    I can tell you, as the chairman of this subcommittee, this is going to be a top priority of mine, not just now, but for the rest of this cycle, to find ways to allow those small companies that have good technology to compete, because I think in many cases, they are being shut out. They are being shut out of remanufacturing. They are being shut out of program modifications and yet, in many cases, the small to medium sized entrepreneurs, I think, have a legitimate role to play to help us reduce cost.

    If you listened to my opening statement and listened to cost overruns of major legacy systems, it is out of control. I mean, how can I sit here and justify an 80 or 90 percent increase in the H–1 helicopter program and the CH–47. It is just ridiculous. I mean, the Comanche—$1.5 billion. I have parochial interests in these programs, but I also have a fiduciary responsibility to the taxpayers of this country.

    So, I would like your comments on ideas where we can encourage more competition so that the big players do not dominate the market totally and basically—and I am looking specifically at some programs where—I had a contractor in my office just recently. We talked about a remanufacturing program where the decision was made internally in the Pentagon without even offering that up for a competition among maybe some of the smaller companies that could, in fact, play a role to help us reduce the cost of that item.
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    So, I would like any comments you have as well as the other members on ideas specifically relative to the need for additional competition.

    Ms. PATRICK. Mr. Chairman, thank you very much for that question.

    First of all, while we have a very consolidated defense industrial base as a result of a number of mergers and acquisitions over the last decade or so as well as the lack of robust funding that we had during the same period of time, we do, in fact, have a minimum of two suppliers in most of the major systems and three and four in some of the other systems that we are procuring.

    And it is also important, however, to point out that we really are in a watershed, currently, between a defense industrial base designed to produce legacy systems and platform-centric systems and the future form of warfare, where the defense industrial base, of necessity, will be very different from what we are looking at today.

    During that watershed, there will from time to time be circumstances where as technologies are less relevant as we produce out the last lots of these more platform-centric systems, we may indeed take the prudent risk of nicking down to a less robust industrial base in that particular system that we view will be part of the path of the industrial base going forward. That, of course, is a very important balancing act that those of us who are in the role of shaping the industrial base have to do very carefully.

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    We are very concerned about less traditional suppliers. We are very concerned about smaller suppliers and innovation. One of the major studies that I have initiated since becoming a member of the Administration, is a study to look into the sources of less traditional solutions for defense and some of these less traditional suppliers, to make sure that we are structuring defense industrial policies in a way that allows those kinds of suppliers to find a home in our industrial base, many of these smaller suppliers and innovative suppliers will come to us through partnerships with large corporations.

    I think, for example, of a company called Foam Matrix, that was traditionally a surfboard manufacturer, that now produces the wings on some of our Unmanned Aerial Vehicles (UAVs). They do that through a partnership with Boeing Corporation.

    I think it is important not to discriminate in terms of how we get innovation into our industrial base and if our large corporations can see fit to find it and to quarterback some of those small companies into our industrial base, I think they are worthy competitors in that regard as well,

    But we are also concerned about the very small companies or the innovative suppliers who do not team with some of the large corporations to make sure that companies like the General Atomics of tomorrow, who has brought us the Predator, will be allowed to survive and will be welcome in this defense industrial base.

    One of the things we are certain of is that the defense industrial base of 20 years from now will not be the same as the one we have today, that the players may have the same names, but their products will be different and the shape of things will be very different and the products and suppliers will be very different. That is what we are endeavoring to prepare for while still maintaining adequate competition in some of the other older systems, more, in fact, than appropriate competition as we move further and further forward.
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    Mr. WELDON. Thank you.

    Does anyone else want to make any comments on the whole idea of competition and suggestions for us in terms of what you think we should be doing?

    Mr. DOUGLASS. Yes, sir. We recently did a study for the Department of Defense and we tried to look at what are the barriers to bringing in traditional commercial suppliers into the defense industrial base because we see this industrial base becoming more and more integrated across a broad scope of products.

    Three of the things that are mentioned often by non-DOD suppliers are low profits. Traditionally the profits that they are allowed to make on defense contracts are substantially lower than what they make in the commercial market.

    The second one is, they have a great fear, some of it exaggerated, but some of it real that the Defense Department is too aggressive in trying to acquire the intellectual property associated with their designs, and so, small entrepreneurs who really live on that intellectual property greatly fear the power of local contracting officers to try to get the data.

    And third is this thing you and I were talking about before, which is the export administration act. And sir, I would comment to you that despite the well meant—and no one has ever challenged the intent of the Congress to do the right thing for the country on these export administration programs and as you know, we have two of them, one for purely military things and then one for commercial. The commercial one is the one we have been talking about here.
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    But the experience that we have seen in recent years is when you allow the bureaucracies to get too deeply involved, especially on the commercial side, is essentially the process grinds to a halt. Imagine how frustrating it is to a small company and I have plenty of them who come to me every day and say, ''Ninety-seven percent of my licenses get approved, but they get approved after the time when I have to submit my bid, so what the heck good does it do me to get a ''yeah, you can do it, but the bid time ran out two months ago.''

    And as you know, there has recently been a General Accounting Office (GAO) investigation of the way in which this process is working and that was followed up by State Department Inspector General (IG) investigation of the licensing process over there at State. And both of those two are fairly clear that the bureaucracy has taken what Congress intended to do and just put a clamp on things.

    So, that is where industry is very worried about intrusion, especially in to the commercial side. So, if you could do something about those three things, I am sure you would see that more smaller suppliers who are not in the defense market today would come in.

    Mr. WELDON. Gentlemen, I appreciate those comments. I would appreciate any recommendations you have, especially on the second item that you discussed, which is the relationship between the program officer and the big contractors.

    If you have solutions for that, I want to see them, because I would like to present them to our committee to take action, because that is a problem. I have heard that from contractors and so recommendations that you have put together in how to solve those—I mean, you have given us the recommendations that you think would best solve the export problem and that is the Senate bill. Some of us have a little disagreement there, but overall, I agree with you totally about the backlog. That is unacceptable and government should not have that kind of bureaucracy in place that prevents our companies from legitimately selling abroad.
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    But your recommendations from each of your associations, I think will be received very fairly by this subcommittee.

    Did either of you want to go ahead?

    General FARRELL. Sir, I might address the issue of competition at the lower levels of the defense spectrum in talking about some of the smaller contractors.

    Where we have single suppliers or failure to have suppliers or oversee suppliers in certain market segments are because it is a very small market. It could a fuse; it could be a link, ammo. It is got episodic funding and it is just not profitable for people to make the infrastructure and capital investments to be into a market like that.

    So, you might consider a way to introduce competition to small markets like this would be to guarantee a profit by a cross plus award fee contract with a small award fee and have the government assume the responsibility for maintaining the capital equipment and the infrastructure associated with that particular small market.

    The competition then would be anybody could enter this market, because they do not have to bring large capital resources with them and large investments with them as the government would maintain the risk for that and you could compete the contract between a large number of small companies who could enter this market.

    I will give you one example of where we do it and it looks very well. It is for a large contract, but in Tullahoma, Tennessee, the Arnold Engineering Development Center is where the Air Force and the Navy do all their turbine engine testing. They do the wind tunnel testing. The Air Force does all its ballistics testing and we do all of our rocket engine testing, or a majority of it there.
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    It takes about $200 million to $300 million to run this thing. It is run by contract. It is a cost less award fee. The award fee is only 4 percent. The Air Force and the Navy—primarily the Air Force, owns all of the equipment and they have all of the risk for the infrastructure, but when that contract comes up for competition every five to eight years, it is hotly contested and a lot of people enter the market to try and win it. It is a very well run complex.

    So, this could be an answer to those markets where you do not have a lot of competition because you have got infrastructure requirements.

    Mr. WELDON. That is an excellent suggestion. I can tell you, we are going to be looking for ideas to put into a procurement package in this year's defense authorization bill to accomplish some of the objectives that all four of you have outlined today, so those kinds of ideas are very welcome here.

    Mr. McCurdy, did you have anything else you wanted to add?

    Mr. MCCURDY. Mr. Chairman, I agree with what my colleagues have stated. I just want to emphasize one thing. In the 21 years I have been coming to this particular room, I think it is important that we start looking at the whole issue of transformation in the future. And that is what I focus on in how you spur that innovation.

    I think Ms. Patrick accurately stated, the focus has been on platform-centric systems and really what we are looking at are network-centric systems. If you look even in our alliance of the associations whereas defense or the government, as a customer, was a very large percentage. When I was a member of this committee, today it is a very small percentage of the overall growth of the industry.
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    It is no mystery why Wal-Mart has a greater capital value than all the defense industry, because that is where the market is actually driven, that is where the value is and that is where they have been able to actually bring some pretty significant innovation into the marketplace and they are being rewarded for it whereas in the defense sector it is not.

    As I tour plants and production facilities from everything from capacitors and resistors that used to have a major defense portion of business, they are down to 2 to 3 percent and say it is not worth their business—the requirements, the hassle, the bureaucracy, it is just not profitable for them and they are going to focus where the real growth is.

    Mr. WELDON. Thank you.

    Mr. Taylor?

    Mr. TAYLOR. Thank you, Mr. Chairman.

    Mr. Douglass, something you did not mention in your testimony I would like you to comment on is, as you know, when we passed North American Free Trade Agreement (NAFTA) and normalized trade relations with China, one of the arguments was, we are doing this for the sake of the aerospace manufacturers. Did I read an article recently that said that Airbus sold more airplanes in America last year than Boeing?

    Mr. DOUGLASS. The exact amount of Airbus airplanes sold into the U.S. market last year, I would have to give you for the record, but just to give you a rough global approximation of that, about 10,12 years ago, Boeing had about 72 percent of the global market share for large airplanes. Today that market share is approximately 50 percent.
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    Mr. TAYLOR. But within our own borders. Could you get back to me, because I am fairly certain that is—

    Mr. DOUGLASS. I apologize for not having it at the tip of my fingers right now, but we do have those statistics and we could get them for you, sir.

    Mr. TAYLOR. Ms. Patrick, I am curious if within your department there is any talk of the downside of the consolidation of these defense contractors. I noticed your glowing remarks on how some things worked well, but something that troubles me is when you take a firm that is making very high profit ratios on things like electronics and then link them to something with fairly low profit ratios like shipbuilding, at what point does the talk in the boardroom say, ''We do not need this shipyard to make money. Let's shut it down''.

    I was told that the cost of recapitalizing something like Ingalls would be $500 million which leads me to believe that if Northrop or anyone were to set down Avondale or Ingalls or Newport News, which I am going to guess would be a greater recapitlization cost that it just would not happen. We could very well find ourselves in the position of having to import warships.

    When looking at these mergers, do you look at that, because it is a very real fear of mine? I noticed a little smile on your face when I said, ''import warships''. I will remind you that about 100 years ago right now, the Turks placed—the Ottoman Empire placed orders for dreadnaughts from Great Britain. By the time they were finished, the British used them to shell the Ottoman Empire during World War I.
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    And so, the idea of importing warships strikes me as an incredibly bad idea for our Nation.

    Ms. PATRICK. We explicitly look at a number of issues when we consider issues of financial restructuring mergers and acquisitions. And we explicitly look at the impact on competition. We look at the impact on the war fighter. We look at integration and conflict of interest issues within the new structures.

    With regard to the Newport News deal, which you are alluding to quite directly, our view there was that we really had to maintain competition. We could not afford to let the yard go to what would end up being a sole source for us of submarines in the future, especially in the fact that we have a Trident submarine replacement moving in 2020.

    We cannot be certain that the Virginia class is flexible enough in its design to accommodate some of the futuristic systems such as electric drives. We had to maintain the capability to compete future submarine purchases in order to do them affordably as we went forward.

    We do look at other issues as we look at some of these consolidations having to do with the ability of the company to absorb them, corporate culture issues, but those are not quantifiable issues that are as important to us, frankly, as cost savings or competition or the needs of the war fighter.

    And so, it is on those axes that typically these decisions turn. And the intention, obviously, is not to do damage to the defense industrial base as we adjudicate these decisions.
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    Mr. TAYLOR. Ms. Patrick, how many shipbuilders are there in America—major shipbuilders?

    Ms. PATRICK. Well, we have a number of consolidated companies that produce—

    Mr. TAYLOR. How many yards are there?

    Ms. PATRICK. There are six yards.

    Mr. TAYLOR. How many ships were in the President's budget this year?

    Ms. PATRICK. I am going to take the questions for the record having to do with the budgetary issues, as those are absolutely not in my purview.

    Mr. TAYLOR. I think they would be very much in your purview. The president's budget requested five ships. We have six shipyards and it is directly in your purview to say how on earth we are going to maintain six shipyards if we are ordering less than one ship per yard this year.

    I would also remind you that that is fewer ships than the Clinton administration ordered. So, for someone who said from defense industry, ''Help is on the way'', that sounds like a hollow promise to me.
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    I would like to know your thoughts on how the heck we are going to maintain six shipyards, maintain all those critical skills, maintain the industrial base, which to a large extent has but one customer and that is the United States Navy. How are we going to maintain all of that and the president's order of five ships this year?

    Ms. PATRICK. Well, I think that—

    Mr. TAYLOR. If it is not in your purview, whose is it?

    Ms. PATRICK. Let me comment a bit on the issue of the shipbuilding budget, because I know it has been the attention of a lot of the committees in this round of hearings.

    I think one of the things that I know is very important to Mr. Aldridge and to this Administration is that we contract for things in a way that makes good sense, that does not postpone to future Congresses and to future administrations the paying of bills for things that we put in now.

    I think that one of the issues with the structure of the current shipbuilding budget was in fact the fact we realized we had to more fully fund the shipbuilding backlog. In an effect, that caused adjustments to have to be made to this year's budgetary appropriation.

    I would refer any questions you might have with regard to the shipbuilding budget and how that affects the industry for the record and to my colleagues in the Navy.
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    Mr. TAYLOR. Well, again, Ms. Patrick, this is an industrial-based question. The defense budget has been increased by over $50 billion in the past two years. The shipbuilding account shrunk.

    So, I would like you to tell me how you are going to maintain that industrial base that I think is vital to this country.

    Ms. PATRICK. Let me take that question for the record. I will take the question for the record. Thank you very much.

    Mr. TAYLOR. I have no further questions.

    Mr. WELDON. I thank the gentleman.

    The gentlelady from Virginia, Mrs. Davis.

    Mrs. JO ANN DAVIS OF VIRGINIA. Thank you, Mr. Chairman, and I would like to associate myself with your remarks on the small businesses and the ability for them to compete.

    I would just like to say that I was down at Fort Eustis with Chairman Hunter and Congressman Forth and myself on Friday visiting the Aviation Applied Technology Directorate. It was quite surprising to me, this Congressman anyway, that when there was a need for electronics and technology, we saw where they could develop it and put it out in sometimes less than 90 days.
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    And I asked the question, ''How in the world could they do that'', and the response was that they did not have to go through the bureaucracy. So, that is a place I think we definitely need to attack.

    Secretary Patrick, when we met, you know what we discussed and you are liable to take my questions for the record as well, but I am going to ask them anyways.

    When we met last year, we talked about the shipbuilding work force and industrial capacity of our shipyards. It still remains a concern to me in this 2003 budget, which you know we split—there is a big concern that in the out years there will be a huge dip in their work force because of slipping that—the carrier, and as well as not going forward with the DD–21, but going to the DDX, so we do not have the multifunctional radar.

    Some big concerns that we have there is that right now, they are even having trouble with their work force because they cannot get the people. These are not people that when you need them get them that quickly. And I guess I have to align myself with Congressman Taylor. What are we going to do? Has the DOD looked at that and that industrial base and how we are going to address that situation, because it is a big problem?

    Ms. PATRICK. I understand that there is an immense amount of concern about shipbuilding issues overall, and as I have toured most of the major yards, I also understand that there is some very specific timing issues in terms of personnel requirements associated with very specific programs in ways, perhaps, that are not as smooth as the companies would desire them to be and would make more sense for the regional area.
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    I am sure that the Navy is doing their very best to smooth all of those issues as they transition to this more honest funding profile that has caused some perturbation in the out year funding of shipbuilding.

    The shipbuilding budget of the United States Navy is explicitly not my purview, so I will have to defer on that.

    Mrs. JO ANN DAVIS OF VIRGINIA. I understand the budget is not your purview, but again, I have to agree with Congressman Taylor. The industrial base is and that is what I met with you about last year and it still remains a concern. I believe it was Dov Zackheim who said that DOD was coming up with some alternatives to make sure we kept this shipbuilding base going.

    But in my talking to Northrop Grumman, they have heard nothing. So, it is a major concern. Again, I am just going to ask you, you have got to be looking at that. The industrial base is your purview.

    Now, where are we going with it?

    Ms. PATRICK. It is a concern of all of ours and as we put together the next several years of budgets, I think that shipbuilding is one of the things that we will have to address a lot of concern to.

    But as I said, it is probably premature for me to comment on any of those plans that may be in the offing in any of the out year budgets, especially since there are a lot of people much more senior than I am who do have that as their primary responsibility.
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    Mrs. JO ANN DAVIS OF VIRGINIA. Well, I would appreciate it if you could maybe speak to someone else over at DOD and get back with me, since we did meet last year and still—

    Ms. PATRICK. I would be happy to do that.

    Thank you very much.

    Mrs. JO ANN DAVIS OF VIRGINIA. Thank you.

    Thank you, Mr. Chairman.

    Mr. WELDON. Thank you, Mrs. Davis.

    The gentleman, Mr. Simmons is recognized for whatever time he needs.

    Mr. SIMMONS. Thank you, Mr. Chairman.

    Ms. Patrick, on page seven you identified John Holland who delivered the first submarine to the U.S. Navy on April 11, 1900—the first of 326 submarines delivered to the Navy by Electric Boat. And since Electric Boat is in my district and submarine construction in Connecticut is something that has taken place not only over the last 100 years, but with the construction of the Turtle during the Revolutionary War has taken place over the last 225 years or so.
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    It is an interest and a concern of mine. In the 1980s, I worked for Senator John Chafee of Rhode Island. I was his defense guy. And in the 1980s in submarine construction, you had what I would call ''competition''. Electric Boat at that time and at Newport News, you might have anywhere up to a dozen subs of various classes and various stages of contracting and completion.

    In the 1990s, in my opinion and especially now, we do not have competition in submarine production anymore. We have teaming and we team with Newport News and the teaming has gone on for half a dozen years. The teaming survives both yards because the teaming takes the skills of both yards and puts them together in a cooperative fashion and ensures that both yards will maintain its skill base to produce what limited subs we have now.

    But my concern goes to page three—excuse me, page four, where you indicate that DOD opposed the General Dynamics proposed acquisition of Newport News in order to ensure there would be future competition.

    And I will argue that there has not been competition in submarine production for a while. And that that move actually creates some dangers, because as far as I know, there was nothing in the legal papers that were filed that preserves and protects the teaming relationship. And so, that would be my first question. In an effort to sustain this cooperative relationship, which has produced high-quality subs at a reasonable price with very low buys, what is there to protect that relationship into the future. That is my first question.

    And my second question is related to it. Back in the old days when we had competition, if a yard lost a boat, lost a competition, they would usually lay off 3,000 to 5,000 people. In the case of Electric Boat, these people have to maintain a secret clearance, because the Electric Boatyard is a controlled industrial yard. That is the standard that the Navy establishes for that yard. So, these people have to have secret clearances.
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    If they are laid off for more than two years, their clearances lapse and we all know it takes a couple of years to bring the clearances back up to date. In fact, we are so backlogged in our clearance updates today at Electric Boat, that for the last year and a half, my office, on a monthly basis, has been working with the defense investigative service and others and we are still losing people out the gate because their clearances lapse.

    So, it looks to me like in the absence of preserving and protecting the teaming relationship and in a situation where competition for a large number of boats creates problems, but certainly competition for one boat every three or four years aggravates those problems, I do not understand why the DOD's position on the merger was beneficial to the yards, to the Navy or to the American taxpayer.

    Maybe you could describe to me how it was.

    Ms. PATRICK. Let me spend a little bit of time talking about the rationale. The rationale really did not have to do with near term concerns or considerations. The rationale has to do with future competition and future requirements as we move away from current generations of systems.

    It was repostulated again in the nuclear posture document that we will indeed require some sort of a replacement to the Trident submarine in the 2020 time frame. It was very clear to us that if we were to vouchsafe a competitive environment at that point of time, the current time was the wrong time to nick down to a much narrower supplier base than we were likely to have if we have two independent yards doing submarines as the current configuration of the industry gives us.
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    The same is true for the event that there is a successor submarine to the Virginia class. There were many pundits within the Navy who talked to us about the fact that their view was that the Virginia class design was flexible enough to accommodate any future requirements in attack submarines. That, however, was a risk we were not willing to take over time and we felt that we must prepare ourselves for future submarine competitions by having two free standing yards that would, over time, beyond the tenure of this Virginia class teaming arrangement, be able to compete for future generations of submarines.

    Given the fact that you have talked about a facility that I have spent an awful lot of time in and have the highest of regard for, it is very important for all of us to understand that some of the very most exciting parts of transformational warfare are the parts of transformational warfare that are happening undersea.

    Issues having to do with the conversion of SSGN; the Jimmy Carter class; the Virginia class; unmanned Swimmer vehicles; unmanned systems of all manners; connectivity between submarines and all manner of other typically non-sub service combatants. The submarine community is really doing a terrific job in pointing the way to the future and its very likely that a lot of new concepts will come from that.

    But I think that the questions are being asked at the time when some of those concepts are not mature enough. Of course, SSGN is a very big, important first step there.

    Mr. SIMMONS. I guess my concern is that in recent years, you do not have competition between the two yards. And really, over a long period of time, Electric Boat has been responsible for the lead boat. I think Newport News has done one lead boat. I do not recall. But Electric Boat has done every lead boat with one possible exception.
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    And on that basis, the yards are not truly competitive.

    Ms. PATRICK. We will not deprive ourselves of future competition if we have the opportunity to have two sources.

    Mr. SIMMONS. But I guess what I am saying is that the production of submarines in recent years is like the production of aircraft carriers in the post-World War II period. There is essentially one yard that does it and they do a damn good job. I do not know of any country that produces better aircraft carriers than we do.

    And yet, that is done out of one yard in cooperation with the Navy with tremendous sharing of information within the yard and other subcontractors and a lot of cooperation.

    Now, again, during the period of time when submarine production was competitive, congressional delegations were competitive. There was a lot of competition for those contracts. We had problems in production. We had weld problems. We had technology problems. We had proprietary information that was not shared.

    If you really want to know, it was a mess. And I believe we have been doing better in the 1990s up to the present with a teaming arrangement for submarine production.

    I certainly support the SSGN conversion. I have been very active about that and I would like to see the Virginia class sped up and so on and so forth.
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    But if we are talking about the protection of the industrial base over the next 20 years in this country, my concern is that the DOD action or the Department of Justice (DOJ) action with regard to submarines is potentially disruptive and damaging.

    I guess you will not agree with me on that, so I will just share that with you. That is a concern I have. And I have a big concern that at some point in the future, one or the other of these yards is going to be forced out of the submarine business and I think that is going to be bad for America.

    Mr. WELDON. Are you finished?

    Mr. SIMMONS. I thank the chair.

    I guess I will finally say that to follow on from my two previous colleagues is that when I went back to Connecticut from Washington in 1985, we had 26,000 people working at Electric Boat (EB). We currently have 7,000. So, we have plenty of capacity if you want to give us a few more subs, I am sure that we will work it out with Newport News. We would be happy to build them.

    Mr. WELDON. I thank my colleague. With that lead in, I would encourage the industry associations to come out publicly as some of you have already done in support the effort of a number of our colleagues on both sides to receive that $10 billion of funding that is a part of the President's request in his State of the Union speech and instead of setting it aside for what would become a primary target to fund other programs by the budget committee and the appropriators to make sure that money, is in fact, going for modernization, R&D and the other needs that we have, we could use your industry support in making that case, as a group of us stand up to our leadership saying that that budget must include the full $48 billion that President Bush said that he would give us when he spoke to the Nation.
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    The problem is not one of opposing the president. We are prepared to give him whatever he needs to fully fund the war. The problem is that we expect that $10 billion which it already is becoming, to be the primary target to take those funds and to divert them to other places after we have done the budget which is scheduled to be voted on tomorrow.

    So, we could use your support in that effort. I will let you comment on that in a moment, but I just want to hit one additional thing that stuck out, Mr. Douglass, in your testimony, an issue that was close to me for six years when I chaired the R&D subcommittee and that is some of the extreme comparisons you have given in terms of where we are today versus where we were 10 years ago in our R&D capability. And it really is startling.

    Considering the fact that aerospace has been not only our best performer in terms of export, but has given us the best trade balance in terms of export products. In looking at where we are today, whether you compare it by R&D dollar, whether you compare it by the federal spending on aeronautics research, the declines are not just dramatic. They are absolutely scary. You talk about the need for a robust R&D infrastructure for the future, and yet, you mention that we are seeing a serious deterioration of wind tunnels, laboratories, and test ranges and the like, which I agree with.

    Then you get into the actual numbers of aerospace scientist engineers and this, to me, should be a wake up call for the country. In 1986, we had 144,800 aerospace scientists and engineers. In 2000, we have 55,300. And I am sure that decline is continuing. We really need to shake the country, I think, by the neck to look at where we are going and in terms of the shortage of talent and the capabilities, is this decrease just caused by the decline in dollars or is it also caused by a change in the focus of our academic institutions?
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    Mr. DOUGLASS. It is caused, in some degree, by both. The demand has clearly gone down because of the greatly lowering of the federal investment. And sir, I would tell you that it is not just in the Department of Defense. It is also in other parts of the economy.

    The amount of money in National Aeronautics and Space Administration (NASA) and the Federal Aviation Administration (FAA) that is devoted to aerospace research has drastically dropped and is causing a crisis today. We all know what happened in the summer of 1999 when our air traffic control system went into gridlock. It is now acting like a governor in the sense that we cannot build more airplanes until we fix that system.

    The year I graduated as a young engineer and came into the aerospace work force was 1963. That year, one third of all my colleagues went into the aerospace industry. Today, not only is the total number much smaller, but only about five out of 100 go into this industry.

    The average age of the work force is over 50 years old and there is a massive retirement coming in just a few years. Indeed, this is one of the concerns of this congressionally mandated commission on the future of the industry and we have established a human capital subpanel of that group. Tom Buffenbarger, the head of the Machinists' Union and a former Congresswoman, Tillie Fowler, are the two commissioners that are focusing on that.

    We intend to hold hearings in May on this and we expect to issue a report sometime—an interim report some time in late May or early June on what we think needs to be done.
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    Let me just give you one simple idea that would attract more scientists and engineers into the defense part of our program and that is that many young engineers today that go to college go on student loans. We could simply pass legislation that says that if you go to work for a defense contractor and the defense contractor could pay off your student loan for you and then that would be an allowable cost on their contract provided that you work there for a number of years.

    This would have the tendency of bringing some of the best and brightest from the middle classes into this industry and it would be a very simple thing to do and would be a great help, sir.

    Mr. WELDON. An excellent suggestion and we will look at that. The point is well taken.

    Again, before I go to Mr. Taylor, your suggestions specifically as to what we can be doing legislatively. You have given us a number of them today, but we want to encourage the industry groups, not just here, but those others in the country to follow through.

    I especially appreciate you mentioning the fact that you are working with at least some of the labor movement in this country. We, for too long, had the labor movement as to some extent the opponents of our military industrial base, which has really been tragic. I am a Republican and believe in free enterprise and free business, but I am also a supporter of the workingman and get along very well with the labor unions.

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    It has been my opinion that the labor movement ought to be in lock step support with the industrial base. Many of the companies that all three of you represent have locals, they have organized efforts.

    Now, some of the national AFL–CIO leaders do not necessarily see eye to eye on the defense part of the overall budget. But I can tell you those local shop stewards do and those local presidents do. And we need to build more industry coalitions.

    Last week when we announced our coalition for the $10 billion, which several of you attended, as you know, we had labor leaders there from the metal bender unions and from the building trades and from the teamsters.

    So, as we move to address these issues relative to our industrial base, I think it helps us to have the labor movement as a key part of this effort so it is not just perceived as being for industry alone, but actually the workers who are at these facilities and plants are also a part of our team.

    Dave, did you want to add something?

    Mr. MCCURDY. Mr. Chairman, I just wanted you—you asked the question earlier about the support for the $10 billion. The Electronic Industries Alliance and I think the industries we support has for a long time decried the shrinkage of the percentage of the budget with regard to modernization and the increase in the overhead within the Department of Defense. And transformation, what do you call it, the total modernization, this increase in funding is not going to do any good if it is not dedicated to the research and development and modernization.
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    This Congress is going to have to make some choices about how it is going to allocate those resources. The last time we had serious increases in modernization was in the 1980s, in 1982 and 1983 when I was sitting on this committee. Since then, it has been a declining percentage.

    So, I would submit that if you really are going to be creating demand for those engineers, if you are going to create the buzz, the excitement for people to go into this sector, then they have to be in the production, or at least in the research and development portion. Quite frankly, they have to work for profitable companies in order to do that.

    Mr. WELDON. Thank you.

    Mr. Taylor?

    Mr. TAYLOR. Thank you, Mr. Chairman.

    Ms. Patrick, I would like to ask you a follow on question. Mr. Douglass has this nice chart here showing the percentage of work that the aircraft manufacturers do for the private sector and how much they do for the Department of Defense and how much is for export.

    Of the six major shipyards in America, could you tell me those percentages?

    Ms. PATRICK. Well, they will be very large, because for our shipbuilders, most of the work that they do, they do for the Defense Department.
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    Mr. TAYLOR. That is correct. In fact, it is almost all their work. With that in mind, could you name five things that you have done in your capacity to protect the American shipbuilding industrial base?

    Ms. PATRICK. Five things that I have done. Well, let me give a more cogent statement for the record on that, because it is something that I want to spend a lot of time with, because I think I have unwittingly given the false impression that I do not care about the shipbuilding base, that I do not care about shipbuilders. That is far from the truth.

    So, let me apply myself and give you a good answer to your question, because it is something that I care about immensely.

    Mr. TAYLOR. Ms. Patrick, I would hope that is indeed the case, because just as Mr. Simmons pointed out that his yard has gone from a high of 28,000 and shipbuilding has gone from a high of 26,000, down to about, depending on the day of the week, 8,000 to 10,000. Every one of those shipyards is living day to day on the existing contracts. And I can assure you, five contracts this year is not going to maintain six yards.

    And it is your job, Ms. Patrick, your industrial policy. The Chief of Naval Operations (CNO) has got to look out for everything that happens in the fleet and everything that happens in the Navy. The secretary of the Navy, again, has not made industrial policy his highest priority. So, if it is not your priority, then it is going to be no one's priority.

    Again, I hope to be here next year, I am planning on being here sitting in the same place. My hunch is that you are going to be sitting here in the same place and I hope to see some vastly improved answers from you next year when I ask the same questions.
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    Ms. PATRICK. Thank you for the charter and thank you for the challenge.

    Mr. WELDON. Thank you, Mr. Taylor.

    Ms. Davis, do you have additional questions?

    Well, once again, we want to thank all four of you for your outstanding testimony and your outstanding statements.

    Mr. TAYLOR. Mr. Chairman, just one last thing.

    Mr. WELDON. Yes, Mr. Taylor?

    Mr. TAYLOR. And I would like to open this up to Mr. Douglass, Mr. McCurdy, and Mr. Farrell. Do you feel like the U.S. build requirements are waived too frequently?

    Mr. DOUGLASS. I did not hear the question.

    Mr. TAYLOR. Do you feel that the U.S. build requirements within the DOD budget are waived too frequently?

    WITNESSES: By America?
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    Mr. TAYLOR. By America.

    Mr. MCCURDY. I thank you, Mr. Taylor and we probably could end it on a higher note, but I personally question, I think, many in the industry question the viability of many of the American by American provisions, because if you look at the modern industrial base of the commercial sector, it is a global industry. And if you arbitrarily set the limitations, the value of our industry and if you look in electronics space, the high growth, innovation, the design, the real value add is at the upper end. A lot of the lowest cost production, the routine type of production is outsourced. They are not in critical areas; they are not in the critical systems.

    But if you arbitrarily place them by America, you capture a big portion and I am not really sure you are getting the target that you want.

    I think the best way to deal with this, as I said earlier, is make some choices. You cannot buy one or two of everything. You are going to have to decide on some systems. You are going to have to reserve a certain amount in risk management. Right now, there are no competitors with the United States in military capability, so there is some manageable risk there.

    What we need to look at are those systems that I think this secretary has referred to as transformation that is going to give an even greater capability in the future. But you cannot get the transformation if you try to do everything and you are going to have to make some choices.

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    So, my argument is, put the money where it gives the best return and the leverage. You have got some overcapacity in some areas. I use to chair the military facilities subcommittee. I will tell you as a former member that there should be another Base Realignment and Closure (BRAC) round, that there has to be a reduction in capacity and some overhead and put the money—

    Mr. TAYLOR. Congressman McCurdy. You know we cannot find one general, admiral or secretary of defense who will name one base that needs to be closed.

    Mr. MCCURDY. They will not in public, Congressman, and you know that they will not do it in public. But in private or with a commission, they will have a healthy list—Well, we will have to get together, Gene, on some of these things. But I think it is clear that there has to be some choices made. And again, if the President says you are going to make this a viable defense market, a place that industry can one—profit that produce the kinds of things that are going to give us real advantage, then make those choices.

    Mr. DOUGLASS. Sir, I would say the Buy America provisions that are embedded now in the legislation that governs defense procurements probably are in some sectors waived a little too eagerly.

    As you may know or may recall, when I was assistant secretary to the Navy, I took the Buy America very seriously in regards to the shipbuilding part of our industrial base. I agree with you that you cannot maintain at a base on five ships a year. As you may recall I was a strong advocate for the Jones Act. There were groups that were trying to repeal it during my tenure and I was very adamant against that.
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    In that sector, because of the critical nature of those six yards and our national security dependence on those yards, I took every Buy America decision very, very seriously. When you get into other sectors, you do need to that flexibility. There are parts of the defense industrial base where it is in our best interest to buy some our things we need from our allies for compatibility reasons and so on. It has to be sort of a two way street. If they are going to buy from us, we have to buy some things from them.

    But in the case of your main area of interest, shipbuilding, I strongly support a vigorous enforcement of the Buy America provisions, especially the Jones Act.

    Mr. TAYLOR. Mr. Farrell?

    General FARRELL. Yes, sir. Thank you for the opportunity. That is a complicated question. It is a complex question. Let me just give you an example. I was a deputy director of Defense Logistics Agency (DLA) at one time and the kind of buying we did there was totally different than the kind of buying you do in the aerospace industry.

    We used to buy a lot of food and clothing and as you know, the famous Barry amendment, the fabric industry in this country and the ability to fabricate clothes, not only to build the fabric itself, but to fabricate clothes is kind of a fragile industry. It is not very robust. A lot of it has moved offshore.

    And we buy a lot of clothes in DLA for the American servicemen. There were times when we were buying some of this stuff, it was easier to get the material off the shore, but we always kind of ran into the Barry amendment, because the Barry amendment said you had to have 100 percent of you know, the material had to be grown in or processed in this country.
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    Occasionally we looked away, but we kind of flinched every time we thought about that, because we knew what we had run into, not only from the Congress, but also because we knew that you had the potential to hurt kind of a fragile industry even more. We wanted to keep the business in the—but occasionally, we tried to weigh it and we did not weight it very much.

    I would say when you get to the large systems that we buy that are very critical to what we do, it is not just keeping the employment in America that you want to not waive the Buy America, because I do not think we want to be too dependent upon overseas sources for some of your very, very critical systems.

    And so, I would say there are two reasons for not waiving Buy America. One is keeping the employment here, but number two, you do not want to be too dependent upon an overseas source, because we know how quickly some of those can dry up.

    Mr. TAYLOR. Thank you, Mr. Chairman.

    Mr. WELDON. Again, I thank each of you for coming. Mr. Farrell, thank you again for NDIA sponsorship of the TechTrends conference in Baltimore coming up on April 3 and 4. We appreciate your leadership there.

    General FARRELL. It was our pleasure, sir. It will be very large.

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    Mr. WELDON. With that, we appreciate the testimony. We look forward to getting additional recommendations on procurement reform and look at ways we can help the industrial base.

    We thank each of you and the hearing now stands adjourned.

    [Whereupon, at 5:00 p.m., the subcommittee was adjourned.]