[Senate Hearing 111-186]
[From the U.S. Government Publishing Office]
2009
S. Hrg. 111-186
MANUFACTURING AND THE CREDIT CRISIS
=======================================================================
HEARING
before the
SUBCOMMITTEE ON
ECONOMIC POLICY
of the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
ON
EXAMINING THE POLICY OPTIONS CONGRESS SHOULD CONSIDER TO HELP
MANUFACTURERS WHO PLAY A PIVOTAL ROLE IN OUR
NATION'S ECONOMY
__________
MAY 13, 2009
__________
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
CHRISTOPHER J. DODD, Connecticut, Chairman
TIM JOHNSON, South Dakota RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York JIM BUNNING, Kentucky
EVAN BAYH, Indiana MIKE CRAPO, Idaho
ROBERT MENENDEZ, New Jersey MEL MARTINEZ, Florida
DANIEL K. AKAKA, Hawaii BOB CORKER, Tennessee
SHERROD BROWN, Ohio JIM DeMINT, South Carolina
JON TESTER, Montana DAVID VITTER, Louisiana
HERB KOHL, Wisconsin MIKE JOHANNS, Nebraska
MARK R. WARNER, Virginia KAY BAILEY HUTCHISON, Texas
JEFF MERKLEY, Oregon
MICHAEL F. BENNET, Colorado
Edward Silverman, Staff Director
William D. Duhnke, Republican Staff Director
Dawn Ratliff, Chief Clerk
Devin Hartley, Hearing Clerk
Shelvin Simmons, IT Director
Jim Crowell, Editor
______
Subcommittee on Economic Policy
SHERROD BROWN, Ohio, Chairman
JIM DeMINT, South Carolina, Ranking Republican Member
JON TESTER, Montana
JEFF MERKLEY, Oregon
CHRISTOPHER J. DODD, Connecticut
Chris J. Slevin, Subcommittee Staff Director
Hap Rigby, Republican Subcommittee Staff Director
Neal Orringer, Professional Staff Member
(ii)
?
C O N T E N T S
----------
WEDNESDAY, MAY 13, 2009
Page
Opening statement of Senator Brown............................... 1
WITNESSES
Holly Hart, Legislative Director, on behalf of Leo W. Gerard,
President, United Steel, Paper and Forestry, Rubber,
Manufacturing, Energy, Allied Industrial and Service Workers
International Union............................................ 2
Leo W. Gerard, President, United Steel, Paper and Forestry,
Rubber, Manufacturing, Energy, Allied Industrial and Service
Workers International Union
Prepared statement........................................... 30
David Marchick, Managing Director, The Carlyle Group............. 5
Prepared statement........................................... 33
William Gaskin, President, Precision Metalforming Association, on
behalf of the Precision Metalforming Association and National
Tooling and
Machining Association.......................................... 16
Prepared statement........................................... 38
Eugene R. Haffely, Jr., Chief Operating Officer, Assembly & Test
Worldwide, Inc., on behalf of the Association of Maunufacturing
Technology..................................................... 18
Prepared statement........................................... 41
Response to written questions of:
Senator Brown............................................ 48
Lieutenant General Lawrence P. Farrell, Jr., (USAF Ret.),
President and Chief Executive Officer, National Defense
Industrial Association......................................... 20
Prepared statement........................................... 45
Response to written questions of:
Senator Brown............................................ 50
(iii)
MANUFACTURING AND THE CREDIT CRISIS
----------
WEDNESDAY, MAY 13, 2009
U.S. Senate,
Subcommittee on Economic Policy,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Subcommittee met at 10:56 a.m., in room SD-538, Dirksen
Senate Office Building, Senator Sherrod Brown (Chairman of the
Subcommittee) presiding.
OPENING STATEMENT OF SENATOR SHERROD BROWN
Senator Brown. The Subcommittee on Economic Policy of the
Senate Banking Committee will come to order. Thank you for
joining us today, the two panels, and I will introduce each in
a moment. I will make a brief opening statement, and then we
will begin. I apologize for starting late. We had a vote on the
Senate floor at about a quarter to.
Manufacturing, as we know, is integrally tied to U.S.
prosperity. It accounts for 12 percent, that is, $1.6 trillion,
of U.S. gross domestic product. It accounts for nearly three-
fourths of the Nation's research and development, yet today we
are facing an economic challenge few among us have witnessed,
and our manufacturing sector clearly is in crisis.
On Friday, the Labor Department reported the loss of
539,000 jobs in April, including 149,000 in manufacturing. We
hear the unemployment statistics overall; we hear what that
means especially to manufacturing.
U.S. manufacturing has contracted for 15 consecutive
months. According to the Federal Reserve Board, manufacturing
output fell 2.7 percent this past January to a level 13 percent
below that of only 1 year ago. These numbers only tell part of
the story. Today, there are manufacturers in Ohio, in every
State in the country, trying to figure out how to remain
viable. For these business owners, working families, and
communities, the economic situation could not be more urgent.
Today, we are fortunate to have witnesses with us who can
better inform us on both the short- and longer-term challenges
that American manufacturers are facing and how the financial
markets are compounding this crisis. Like other States, Ohio
has collateral damage from both manufacturing and the subprime
crisis. When banks have addressed declining values in
mortgages, there is evidence that they limit credit to other
sectors, like manufacturing. I hope today we can learn more
about these trends and discuss some of the policy options
Congress should consider to help manufacturers who play such a
pivotal role in our economy.
I will close with a story, a personal story, from just a
few days ago. Chrysler announced the likely closing--not quite
certain; we are not accepting that it is certain--of the
stamping plant in Twinsburg, Ohio, a community halfway between
Cleveland and Akron. Chrysler has three stamping plants in
Warren, Michigan; Sterling, Michigan; and Twinsburg, Ohio. I
went to meet with some of the 1,500 employees who will lose
their jobs if this plant, in fact, closes. Probably 500 of them
showed up for a discussion of what to do next, how we fight
back, what we do if we lose these jobs, how we help the workers
retrain. It was mostly people in their 40s and 50s. One person
said, ``I have been here 32 years,'' the next person 28 years,
the next person 35 years, the next person 19 years--people who
understand that manufacturing is a ticket to the middle class
in this country. And if you had sat there for the hour and a
half that I sat there--and I wish every American would, and I
particularly wish every Member of the Senate and House would--
and listened to what manufacturing means to middle-class
families in this State, one would understand why we are doing
this hearing today.
So we will begin the testimony. We will start with Holly
Hart. Holly is the Legislative Director for the United
Steelworkers. Holly took this job fairly recently--has been on
the job 3 years, maybe?
Ms. Hart. About 3 years, yes.
Senator Brown. About 3 years, and she took it at perhaps
the most difficult time to be Legislative Director of the
Steelworkers. But she and Leo Gerard, who was going to join us
today but his flight was delayed and then canceled out of
Pittsburgh this morning--he called me at 8 o'clock this morning
to tell me that he was still hoping. The Steelworkers have done
very interesting work on everything from manufacturing to
climate change.
David Marchick, who is Managing Director of the Carlyle
Group, is also on the first panel, the Managing Director for
Global Government and Regulatory Affairs. He coordinates
Carlyle's policy and regulatory issues on a global basis,
provides support to Carlyle's funds and portfolio companies
based in Washington. He was a partner prior to joining Carlyle
at the law firm of Covington & Burling in Washington. He served
for 7 years in the Clinton administration, including positions
at the White House, U.S. Trade Representative, and the
Department of State. He is co-author of the book U.S. National
Security and Foreign Direct Investment.
Ms. Hart, thanks.
STATEMENT OF HOLLY HART, LEGISLATIVE DIRECTOR, ON BEHALF OF LEO
W. GERARD, PRESIDENT, UNITED STEEL, PAPER AND FORESTRY, RUBBER,
MANUFACTURING, ENERGY, ALLIED INDUSTRIAL AND SERVICE WORKERS
INTERNATIONAL UNION
Ms. Hart. Thank you, Mr. Chairman. My name is Holly Hart,
and I am the Legislative Director of the Steelworkers, for the
record.
President Gerard, as you said, is very sorry he cannot be
here. This topic is of vital concern to the Steelworkers, and
he--oh, I am sorry. Thank you. And he really wanted to be here
to advocate for the needs of our 1.2 million active and retired
members of the union.
Members of our union make products ranging from steel to
aluminum to cement to tires to glass to many, many other
products. They work in mines, they work in smelters, in oil
refineries, and other industrial operations, even in the
service industry--nurses, bus drivers, bank workers, and
university professors who in no small measure are supported in
some way, shape, or form by manufacturing.
Well over 100,000 of our members have either been laid off
or face reduced hours as a result of this current economic
crisis. Too many of them to count have also been hit by the
subprime crisis not only in terms of their mortgages, but also
by the cascading effect of the problems that have blown the lid
off our economy.
Mr. Chairman, the first question that you raised in your
letter of invitation--Why should Congress care about
manufacturing?--is really the most important. Regrettably, we
may be the only industrial nation on Earth that actually has to
ask that question.
Manufacturing is a source of strength--economic strength,
community strength, and, indeed, military strength.
Manufacturing provides, as you know, millions of jobs in our
economy, or did. Prior to the downturn, it directly employed
over 14 million people and accounts for 8 million additional
jobs in other sectors. Our manufacturing sector is responsible
for two-thirds of the investment in research and development in
the U.S., and almost 80 percent of all patents that have been
filed come from the sector.
Manufacturing is a tremendous engine of growth, and it is
also key to community strength. It has created millions of jobs
and family- and community-supporting jobs. Manufacturing jobs
pay about 40 percent or more, on average, in wages than other
jobs in our economy.
Manufacturing is also key to military strength. In the
first and second world wars, our ability to supply our troops--
and, often, our allies--with the weapons and equipment were the
deciding factor in the wars.
All too often, though, our market has been flooded with
products resulting from unfair and predatory trade practices.
Factory after factory have either downsized or shut completely.
The steel crisis of the 1990s and the early part of this decade
left the steel sector devastated. And today's auto crisis will
potentially lead to dozens of assembly plants and suppliers
shutting down.
The Steelworkers have calculated that approximately
7,250,000 jobs depend on domestic automobile production. In
addition, more and more companies are setting up R&D facilities
overseas, closer to the production operations they have set up
abroad. As that happens, the next generation of products and
production may never be developed or produced here.
And on top of that, our national strength, our military, is
increasingly at risk. We no longer have the domestic capacity
to make all the ammunition for our troops or our law
enforcement officers. And replacement parts for the military
are getting harder and harder to find, as are the skill sets
for people to repair older and older equipment.
The military has testified as to the risk of the loss of
our industrial base by--we cannot supply the propellant for
Hellfire missiles from China. We have to buy our propellant
from China because it is no longer available from a domestic
supplier.
So manufacturing matters, and it is time we look at the
policies to address those challenges confronting this vital
sector.
Credit is the lifeblood of manufacturing, and its impact
can be felt throughout the economy. Manufacturers face stricter
credit terms and have had to tighten their belts. Suppliers
then feel the impact.
Remember that auto parts suppliers were looking to
guarantee $15 billion in receivables they had with the Big
Three to protect their operations. So there is a clear
correlation between credit availability and terms and the
growth of manufacturing and its employment levels.
There are more steelworkers whose jobs are affected, as I
said earlier, by the crisis in the auto industry than the
United Auto Workers themselves. Virtually every car has six
pieces of glass, five tires, hundreds of pounds of steel.
So some companies, when they cannot find credit, are paying
double-digit rates for credit, with some approaching 18 to 20
percent. Thirty of our companies have filed for bankruptcy
protection since January; seven have gone directly into Chapter
7; and the dramatic freeze in credit markets has meant that
those companies that went directly to Chapter 7 could not find
debtor in possession financing.
I have more but I see my time is running short, and I did
want to get to some of the policy options that I think we need
to look at quickly.
The needs of the manufacturing sector are broad and deep.
There is no one silver bullet, and there are few issues
confronting you and Congress whose resolutions do not have an
important impact on our Nation's manufacturing sector.
Some of the things that need to be done quickly: stabilize
the sector and see it begin to grow again; by restoring the
growth in manufacturing--yes, I am reading too fast. I
apologize. But, basically, I wanted to point out that credit is
the oxygen of our manufacturing sector. We have got to provide
more reasonable credit--more credit at reasonable rates if we
are going to succeed.
We need to restore demand in this country. The stimulus
package was a good start. But as you know, this money has not
trickled down to the manufacturing sector as yet. You were an
author or a supporter of the Buy America provision. There are
efforts underway currently that are set to weaken through the
regulatory process of how we adequately define manufactured
goods as well as procurement transparency.
We also need to make sure that credit is available to more
companies and so they do not go straight to liquidation.
We also need a trade policy that works for working
Americans. Too many companies and workers have lost faith in
their Government's willingness to enforce the laws we have on
our books. Imports flood our markets, and the cost of credit is
one thing, indeed. It is a function of our trade policies. But
without substantial changes in the direction of our Nation's
trade policies, we are going to continue to see devastation in
our manufacturing sector.
We also need to get our auto policy right. We must not
pursue a policy of trying to downsize and outsource the auto
industry to prosperity. That is a recipe for disaster. It will
only result in the downsizing of the American dream.
Thank you, Mr. Chairman.
Senator Brown. Thank you, Ms. Hart.
Mr. Marchick.
STATEMENT OF DAVID MARCHICK, MANAGING DIRECTOR, THE CARLYLE
GROUP
Mr. Marchick. Thank you very much, Mr. Chairman, and I
applaud you for holding this hearing. It is an issue which is
absolutely critical to the future of our economy, and I have
been pleased to work with the Steelworkers and Holly and Mr.
Gerard on this issue. So I really appreciate and applaud you
for holding this hearing and your leadership on it.
The Carlyle Group is one of the largest private equity
firms in the world. We manage about $85.5 billion of assets
under management, and for our 22-year history, we have been a
very significant investor in the manufacturing sector.
Virtually every subcomponent of it, from autos to chemicals to
aerospace to general industrial, we have a couple of very good
companies that operate in general industrial manufacturing in
Ohio, and we have been very pleased to be a significant
investor in Ohio, and thank you for your leadership and the
work you have done to strengthen manufacturing in Ohio.
Today we have about $9 billion of equity invested in more
than two dozen companies with manufacturing operations in the
United States.
As you highlighted and as Holly highlighted, manufacturing
is the bedrock of the U.S. economy. It supports high-wage jobs,
high-skill jobs, and there has been incredible productivity
growth in the manufacturing sector for the last dozen years.
Going into the recession, the manufacturing sector was very
lean and efficient, which has made the pain in the sector even
greater than one would have anticipated. And as Holly said,
credit is really the lifeblood to the manufacturing sector. I
will give you just one example.
We bought Allison Transmissions from General Motors several
years ago. They are a large transmission manufacturer in
Indiana that manufactures transmissions for heavy trucks and
buses. When they buy parts to make transmissions, they use
credit to buy those parts. When they sell a transmission to an
original equipment manufacturer, a truck manufacturer, that
truck manufacturer uses credit to buy the transmissions for
their inventory.
When the OEM sells to a dealer or distributor, that dealer
or distributor requires credit to buy the transmission. I am
talking about Allison Transmissions, Senator Bayh. And when the
ultimate buyer acquires a truck--either a trucker or truck
company buys a truck, they require credit.
So credit is critical to the entire life cycle of the
manufacturing process, and literally when the credit crisis hit
in the fourth quarter of last year, the manufacturing sector
fell in free fall. The numbers are actually quite scary. They
are Depression-like, not recession-like.
If you look at the steel industry, which is critical in
Ohio, steel production between August of last year and January
of this year fell by more than 50 percent. Steel production in
the United States today is operating at levels not seen since
1939.
The residential construction market, which drives a lot of
manufacturing activity, purchases have dropped by 44 percent.
And the data is just staggering. Auto suppliers across the
country are seeing sales drops of more than 50 percent.
There have been a lot of discussions of glimmers of hope.
When you look at the chart I have on page 6, it shows the
direct correlation between sales and manufacturing production
and unemployment. They are directly correlated. And at the
bottom here, you see a slight uptick, which are the glimmers
that people are pointing to. But I would point out that that
uptick is something that we should be very cautious about and
not too sanguine, because the uptick only shows a reduction in
rate of contraction, not actual growth. And the rates of
contraction are still more than 15 percent year over year.
In other recessions, you saw reductions in sales of 6, 7,
maybe 10 percent. Now you have seen reductions of 20, 30, 40,
and in the auto sector, 50 percent. These are devastating
changes.
Now, what are the policy implications? Well, the actions
the Federal Reserve and Treasury have taken to breathe some
life into the credit markets have been very important, and I
applaud Secretary Geithner and Chairman Bernanke. And I applaud
the work that you have done, Mr. Chairman, Senator Bayh, and
others, to get the stimulus package through. That is very
important for the manufacturing sector. The money has not
started to show up yet, and it is critical that money get out
quickly and also be targeted toward manufacturing activity that
will have the greatest multiplier effect.
The TALF program, which is intended to create
securitization--restart the securitization market, which has
been moribund, is also an important program. But also that
program has not moved as quickly as we would have hoped, and it
is limited to AAA-rated securities. And in this economy, it is
very hard for companies and securities to get the AAA rating.
It is just very difficult. There are only six publicly traded
companies that have AAA today.
The corporate loan market is an area where I would
encourage you to focus some time. Manufacturing companies,
particularly small and medium companies, require loans from
banks to operate, and that loan market has contracted, which
has caused distress in the manufacturing sector, and there is a
huge amount of refinancing risk in 2010, 2011, and 2012, which
will cause large bankruptcies unless that market is revived.
And, finally, let me just make a comment on General Motors.
If the GM bankruptcy--if, indeed, it goes into bankruptcy--is
not handled well, it could be the Lehman Brothers equivalent
for the manufacturing sector. It is hard to overestimate the
impact of General Motors on the general manufacturing sector.
It touches virtually every subsector in the economy.
Usually companies go into bankruptcy to break contracts.
But if General Motors goes into bankruptcy and then breaks its
contracts with suppliers and its partners, you could see a
cascading impact in the supply chain throughout the economy,
which would just have a devastating impact on an already
devastated sector. And so it is critical, if GM does file, that
it uphold its commitments to its suppliers and partners and
keep the money flowing to support those companies, because they
are already under stress and already at risk.
So I will stop there, and I would be happy to answer any
questions.
Senator Brown. Thank you, Mr. Marchick.
Senator Bayh, would you like to make an opening statement?
Senator Bayh. I will save my comments for questions
following you, Mr. Chairman.
Senator Brown. OK, thanks.
I appreciate Senator Bayh's involvement. While not a Member
of the Subcommittee, he is a Member of the full Committee, and
he has been a real leader in the Defense Production Act and
what we have done and need to do.
Let me start with you, Ms. Hart. There is a story in the
L.A. Times today about a California businessman, Steve Rachman,
who manages an outsourcing company. He says that when
manufacturing jobs head elsewhere, increased demand for cheap
goods creates a need for more salespeople in the U.S. He said
to the L.A. Times, in response to U.S. manufacturers who get
driven out of business by cheap Chinese imports, he said,
``Yes, but now Walmart is selling more socks. They will need
people to sell them.''
This is a little too easy, but what is your response to
that sort of economic strategy, if you will?
Ms. Hart. Well, other than laughter, I would say anger. It
is clear, I mean, manufacturing provides family supportive
jobs. The majority of our members have been able to buy cars,
send their children to college, you know, be part of the
American middle class because of their jobs in the
manufacturing sector. They have health care benefits. They have
pension plans and have had family supportive jobs that ripple
out throughout the community. They support restaurants, movies,
a whole range of products in the service sector. And that is
not going to be fulfilled by people selling socks or ringing up
socks at a cash register.
You know, frankly it is incredibly frustrating that this
is--you know, after the devastation in our manufacturing
sector, the loss of all our jobs, the fact that we are
teetering on the brink of losing the ability to supply our
military and various other economic indicators that should
provide a canary in the coal mine, if you would, a response--
you know, we are still trying to get people to listen to why
manufacturing is important in this country and that it must be
saved. It is just unfathomable to me that people----
Senator Brown. What do we do about that? That brings me to
the issue of, you know, why--commentators so often dismiss the
importance of manufacturing. In this institution, both in the
Senate and in the House, lots of people elected to office,
particularly if they do not come from the Midwest, seem
sometimes dismissive of manufacturing. Senator Bayh has been a
leader, particularly in intellectual property, in manufacturing
issues and has that frustration as coming from a manufacturing
State, as I do.
Ms. Hart. Right.
Senator Brown. And plenty of States have more manufacturing
than House and Senate Members even seem to acknowledge
sometimes. But how do we do better at sort of preaching this,
singing this tune, preaching this message that manufacturing
really matters, as you said, not just to the security of a
family but the security of a community and the national
security of our country? And as Mr. Marchick talked GM, how it
touches--that company touches so much of American industry and
America beyond. How do we sell that better to people?
Ms. Hart. Well, I am not sure how. I know what the
steelworkers are trying to do to sell it. Leo actually was on
the road, and part of the reason he is not here, Senator Bayh,
is because he had problems with his airplane getting here--not
his airplane. USAir's airplane. And the----
Senator Brown. He is not flying in a private plane.
Ms. Hart. No, he is not flying in a private plane. In fact,
he was on----
Senator Brown. We have heard of that in this Committee
before.
Ms. Hart. Yes, I think you have.
[Laughter.]
Ms. Hart. But he has been on a bus for the past 3 days
going through the heartland of our country trying to raise the
issue of what will happen to manufacturing if we do not make
sure that the GM restructuring plan is focused less on the
bottom line and more on making sure production is kept here.
That has been his focus, our focus. We have been partnering
with groups like Carlyle. We have established the Alliance for
American Manufacturing to help raise the issue.
As far as policy solutions--I see my time is running out; I
guess we can get into that later--that your Committee has
jurisdiction over, the Defense Procurement Act, there could be
a thorough review of that.
Anyway, I am sort of getting a little off subject, but I
think the general theme is that we have to really raise the
volume on it, and we are trying all we can, and hopefully
giving an opportunity for Members of Congress to show their
support as well.
Senator Brown. Thank you.
Mr. Marchick, before I turn it over to Senator Bayh, let me
talk about credit for a moment. You talked about the difficulty
for so many companies to access credit at any reasonable
interest rate. And I guess lenders' reluctance in large part is
manufacturing is--the condition of manufacturing is not--it is
not the best we have ever seen, of course. But with defense
contracting, there seems to be, particularly defense
production, sort of the protection, if you will, of the Defense
Production Act, it seems that defense manufacturing should be
more stable compared to other manufacturing.
Is that one way that we sort of deal with the credit issue?
Because, obviously, these companies that do defense work also
do a lot of other--they do a lot of work. They do aerospace
work. They do others. Is that sort of a door in, in part, with
the Defense Production Act? And how do we use that better so
that we can get credit for manufacturing beyond just the DPA
companies, but companies generally in our economy?
Mr. Marchick. Sure. It is a great question. I am glad you
highlighted it. If you look at the defense sector, the top-tier
companies are in great shape, the prime contractors. They have
a stable supply of work. They have great credit. They do not
have a significant amount of debt.
Senator Brown. And they are having no problems getting
credit at reasonable rates.
Mr. Marchick. Very little. The top tier, the prime
contractors--the Boeings, the General Dynamics, and others, the
ones that have direct contracts with the Pentagon.
The problems beneath the surface are great, though,
particularly in the Tier 1, Tier 2, and Tier 3 suppliers,
particularly where those suppliers are primarily, for example,
in the auto supply chain, but they may have 10 percent of their
production go toward some defense product or component. And so
those companies may have seen a 30-, 40-, 50-percent drop in
sales; their banks have pulled their credit lines, and they are
in severe distress; but they have one or two critical
components of the supply chain that are critical for our
national defense.
And that is an area where the Defense Production Act may be
able to help. There are authorities in the Defense Production
Act which have not been used in years to provide credit
guarantees for small and medium-size manufacturers, and that is
something I would encourage you and the Committee to take a
hard look at and work with DoD to see if they can get a little
more flexibility.
Senator Brown. OK. That is very helpful. Let me ask one
other question. You mentioned 2005, 2007 loans coming--facing a
tough period in 2010, 2014, when they come due.
Mr. Marchick. Yes.
Senator Brown. What should the Fed do? What should Treasury
do? What should we in this Committee do to prepare for that?
Mr. Marchick. Well, if you look at the credit markets
today, outside of the top companies--the IBMs, the other first-
tier companies--those companies have access to credit. But
below those companies it is very hard for small, medium, and
large companies that are not the names of the U.S. economy to
get credit.
The programs of the Federal Reserve and the Treasury have
provided some oxygen to the credit markets by basically
guaranteeing credit markets or supplying Federal backstops, and
that has helped create liquidity. But I would encourage you to
work with the Fed and the Treasury to see if they can expand
the coverage to other markets, including the corporate loan
market, if the corporate loan market does not revive in the
intermediate term, because basically most corporate loans have
a 5-, 6-, or 7-year cycle, they become due, which means that
the large number of loans that were taken out in 2005, 2006,
2007 come due in 2010, 2011, 2012. If they cannot refinance,
they file for bankruptcy, it is not a good situation for the
economy, particularly in the manufacturing sector.
So I think that some of the Fed and Treasury programs could
be expanded to the corporate loan sector, which would be
something that the Committee could work on.
Senator Brown. OK. Thank you.
Senator Bayh.
Senator Bayh. Thank you, Chairman Brown, for your
leadership. Our States have in common a substantial
manufacturing sector, and you have been out on point on many
issues relating to this, fighting for working men and women and
manufacturing, manufacturers in Ohio for many years. I have
been pleased to collaborate with you on some of these things,
and do so again today.
Ms. Hart, please give my best to Leo. We make more steel in
the State of Indiana than any State in the United States of
America, and we still employ thousands of people in our State
in your industry. As was noted, they are good jobs, with good
benefits, and you can raise a middle class family around steel
production in our State. So we would like to be as competitive
as we possibly can. I appreciate your presence here today on
behalf of your members.
I have known--Mr. Chairman, I have known Mr. Marchick for
many years. He is a very insightful and thoughtful individual
and I am delighted that he is here to offer his perspective
today.
David, it is good to see you again.
We have already covered a fair amount of territory here,
and this is focused upon credit and manufacturing. Senator
Brown already asked one of the questions I was going to ask,
which is what should we be doing that we are not currently
doing? I think you were touching on that.
There are some other issues that are going to be addressed
here over the course of the next several months that will have
a significant impact on manufacturing, and I know this is
something that has been on Senator Brown's mind, as well. I
would like to raise the issue of climate change, global
warming, the proposals on cap and trade.
By the way, just one aside, I was very pleased about your
comments about the automotive sector because I have said from
the beginning that the need to help the automotive sector
really is not the auto companies. It is the other
manufacturers. It is the suppliers. It is the broader economy
and the broader--it is the ripple effect, the collateral damage
to the economy that would result from just sort of allowing
these large enterprises to collapse and all the other harm that
would go with it.
So I thought you put it in perspective, I thought, very
well.
My question is this: do you have any thoughts--and I know
it is not exactly on topic here today, so if you do not, that
is acceptable, too. But it has been on my mind. This could, if
not done appropriately, have a significant impact on
manufacturing. I have heard Senator Brown say, I think very
eloquently, on several occasions if, in our attempts--our good
attempts--to try and solve the problem of climate change, we
basically create a system that incents jobs being relocated to
other countries that have lower environmental standards than we
do, well the net effect will be we will have fewer
manufacturing jobs and there will be more carbon being admitted
into the atmosphere. This is not an optimal solution.
So do either of you have any thoughts about this? It is a
little bit off-topic today but it is on my mind. I am going to
be having to leave as soon as my questioning time is done,
Senator Brown, to go to a meeting of the Environmental
Committee, where we are dealing on some aspects of these things
even today.
So I just wanted to raise it because since manufacturers
seem to be a little more CO2 intensive type
activities, this could have a real impact on the manufacturing
sector and accelerate some of the longer term trends we have
seen--I want to emphasize--if not done appropriately.
Ms. Hart. I am glad you brought that up, Senator Bayh. I
know, I think yours and Senator Brown's leadership on this
issue is going to be key for us in the Senate.
Right now we have been working with the Energy and Commerce
Committee on their solution to try to mitigate the effects for
energy intensive manufacturers because they, too, understand
that if we do not make sure that we control--without a global
solution, if we only can put controls on our own industries
without looking at ways to mitigate that, we are going to
suffer a leakage of carbon, as well as jobs.
The policy options that they looked at is an interesting
one. It is an output-based rebate for the manufacturing sector.
So a certain pool of allowances are being--15 percent, I
believe, on the House side--are being allotted to energy
intensive industries based on a sector average rebate.
Senator Bayh. Is that sufficient, in your view?
Ms. Hart. Well, it is not. It has got to be in concert with
a border mechanism to make sure that products that are imported
into our countries that do not have that same cost associated
with their production pay for the carbon in their products.
Senator Bayh. You should know, Ms. Hart, that one of our
colleagues came up to me all excited at the caucus lunch
yesterday informing me very happily that the steelworkers had
endorsed the latest proposal. So perhaps that was a bit
premature, I do not know.
Ms. Hart. Well, we do believe the Committee is moving in
the right direction, but they have left the crafting of the
border mechanism to the Ways and Means Committee, and that is
going to be key to our support in the future.
Senator Bayh. So progress, but still work to be done to get
it
Ms. Hart. Correct.
Senator Bayh. ----done correctly.
Again, I think all of us want to address climate change. We
just want to do it in a way that actually solves the problem.
Ms. Hart. Yes, we certainly do.
Senator Bayh. And does not just harm our economy without
solving the problem.
Ms. Hart. That is true.
Senator Bayh. Mr. Marchick, feel free to say this is off
topic, or do you have some thoughts on this?
Mr. Marchick. A couple of comments. First, I want to
compliment you for the great work you have done over the years
using your perch on the Banking Committee to focus on credit
and the manufacturing sector. So I really applaud you for that.
I would share the comments that you made and Holly made. I
remember I was in the State Department, in the Clinton
Administration, at the time of the Kyoto Agreement. We
negotiated that agreement, brought it back, and then had a 98-0
resolution in the Senate basically saying it was not a good
agreement. Not exactly a great endorsement of our work.
I would agree with everything you have said. I think it
needs to be----
Senator Bayh. It may be an example of the perfect being the
enemy of the good, I do not know.
Mr. Marchick. It has to be carefully balanced. There have
to be mechanisms to enable the manufacturing sector to adjust
and survive. And there needs to be a broad level of commitment
around the world, from both developed and developing countries,
so that everybody has a fair stake and similar obligations.
Senator Bayh. My time has expired. If I could just follow
up with one question.
The hardest part of all of this, I think at the end of the
day we have to make some internal decisions within our country.
They will not be easy, but I think we can probably get there
with a thoughtful approach.
My guess is, for a variety of reasons, we may even get most
of the rest of the world to agree to some sort of framework.
The issue is how do you verify whether they are complying or
not? And most importantly, what do you do if they are not?
I have not yet heard a good answer to that. Do you have any
thoughts along those--basically, just so you know, Mr.
Marchick, I attended a conference on this. They had a euphemism
they called border adjustments, which was basically a fancy
word, a euphemism for tariffs, that you would basically slap
tariffs on high CO2 products coming from countries
that were not abiding. Which struck me as being--it might
inaugurate the mother of all trade wars.
And I, frankly, was a little skeptical about whether our
Government, even if we legislated such a thing, would ever
implement it.
So I mean, if that is the only enforcement mechanism, I
kind of wonder whether that is going to work or not. Do you
have any thoughts about that?
Mr. Marchick. I do not have a good answer, unfortunately.
That is good, tough question.
Ms. Hart. And I do not either, but certainly global
sectoral agreements are going to be key to making sure that our
trading partners and other countries are able to reduce their
emissions as well and mitigate those effects. But until that
time, we are going to have to step up and make sure that how
our industries are regulated has a component part of a border
adjustment because without that, we can compensate our energy
intensive industries all we want and they can--I mean, the
steel industry is incredibly efficient right now. We produce
steel with three times less carbon than the Chinese do. And
they are the most efficient in the world.
So they have done pretty much everything they can. I'm not
saying there is not more they can do in the future with better
R&D and technology. But at this point, they are--most of our
producers are as good as they can get.
So my point is that there is very little efficiency that
may be able to be gained by certain industry sectors. In that
regard, it is going to be very important to have sectoral
agreements. But it is more than just the steel industry. The
energy-intensive sector is very large. That includes chemicals.
It includes rubber. It includes glass. It includes a whole
range of industries. Those all have to be looked at. And there
are not talks underway right now in those sectors.
So encouraging that is going to be paramount. But until
that happens, there has to be more than just carrots for the
world to come to us. There has got to be a few sticks at our
border. I am sorry, I believe that.
Senator Bayh. Well, I thank you both for your perspective.
I would leave for your consideration, to be continued another
time, Ms. Hart, this is the hardest issue, I think, to resolve.
I leave for your consideration the likelihood that our
Government would ever impose such consequences on countries
from either whom we are borrowing large sums of money or we are
importing large amounts of oil. Either of those strike me as
being unlikely.
It is one of the reasons I tend to be more of a deficit
hawk. Can we get our finances in order? It gives us a little
more latitude to do other things. But as long as we are so
dependent on foreign borrowing, it restricts our field of
action a little bit.
But that being said, thank you very much. Mr. Marchick,
great to be with you again.
Holly, thank you. I wish Leo the best.
And Mr. Chairman, thank you for your leadership on this.
Senator Brown. Thank you for your interest.
Senator Bayh. The State of Indiana and the State of Ohio
will make common cause in this area. If not on the Big Ten
athletic field, at least in the area of manufacturing
economics.
Senator Brown. Thank you, Senator Bayh, for your insight.
A couple of comments on his thoughts, Senator Bayh's
thoughts--thank you, if you need to go, that is fine--Mr.
Marchick and Ms. Hart, about climate change. It is pretty clear
that Ohio really is a State that has every one of the major
energy-intensive industries: steel, glass, aluminum, cement,
paper, chemicals, and all of them. That is why this needs to
work.
And ultimately, I spoke with Carol Browner, the President's
environmental advisor, about this, that ultimately we need some
multilateral agreement to come to an agreed to carbon price
among the nation's which have these manufacturing sectors. That
is something we obviously need to get to at some point. That is
not going to happen quickly, but it is what we need to strive
for, Senator Bayh suggests, too.
Let me ask one more question of each and then we will bring
the second panel in. Mr. Marchick, you talk in your testimony
about the TALF program. How do we get--how do we enable
manufacturers to take part in it?
Mr. Marchick. The first thing I would say is that it is
important to understand the role of securitization in the
banking system. Thirty years ago, when a company needed money,
they would go to a bank and say we need some money, can I
borrow it? They would say yes or no.
Today, banks are as much distributors as loaners. So they
often will underwrite a loan but then sell pieces of that loan
out to parts of the so-called shadow banking system. And that
system provided about half the credit in the United States up
until the credit crisis hit. That part of the banking system is
basically moribund today. And so the TALF helps, hopefully,
revive that part.
I think the way that the Federal Reserve has done it, to
expand the asset classes which are eligible for TALF funding,
is helpful. Commercial mortgages, which drives development,
which drives sales of steel rods and other products used in
construction; expanding it to dealers which helps them buy cars
to be able to sell cars to consumers. And we have an investment
in Hertz, for example. The Fed has expanded TALF to cover auto
fleet financing, which is critical to be able to allow them to
buy cars from the Big Three.
The problem is this AAA limitation is that with falling
asset values, particularly of large physical assets like autos,
it is very hard for companies to qualify for AAA rating. And
therefore, the benefits of the TALF are, by definition, limited
because it does not cover enough products.
So the Fed, I understand, is trying to limit the credit
risk of the Government, which is a very legitimate and
important policy objective. But in order to make it work, I
think there will need to be additional flexibility and broader
coverage area. They have expanded it, for example, from the
residential mortgage sector to the commercial sector to auto
fleet financing, to dealer floor plan financing. If they could
continue to expand it to other markets, including the corporate
loan sector, it would help manufacturing companies access
loans.
Senator Brown. Good answer. Thank you.
Ms. Hart, I have been a little intrigued lately that I seen
an op-ed co-written by Leo Gerard and David Rubenstein, one of
the founders of the Carlyle Group. And now I see this
testimony. Explain this to me, the Carlyle Group and the
steelworkers, what does this exactly mean? That you have been
working in tandem, as you did today? I know you suggested this,
that the op-ed piece.
Why this alliance that some people would find a bit
peculiar?
Ms. Hart. Or perhaps unholy, but we think it is going to
produce great results.
Our union has been trying--we have been a voice in the
wilderness for years on manufacturing. And we are trying every
way we can think of to raise that profile and utilize tools
that might not be available to us if we just stayed to
ourselves. So we are forming partnerships in perhaps unlikely
places to bring the message and to try to help forge policy
solutions.
One of the things I would like--we have a history of it. We
started the Alliance for American Manufacturing with some of
our largest steel producers. It has now expanded to include
Goodyear, as well. They have become a fairly outspoken--in
fact, very outspoken--defender of American manufacturing and a
good resource for many, as well, who choose to make those
arguments.
We have published studies and done a whole lot of
interesting events, as well, including the auto tour that is
going on around the country and is going to culminate in a
teach-in on May 19th that I am hoping you will be able to
participate in at the Capitol Visitors Center to highlight just
how important the auto sector is to our country.
So I think we have an innovative and dynamic leadership
that does not believe we can just be protective. We have got to
go on the offensive and we have got to find partners who are
willing to work with us to do so.
We, of course, are happy to work with you, as well, in any
way you see fit, to help address the problems as well.
Senator Brown. Well, done. Thank you.
Mr. Marchick, do you want to say something?
Mr. Marchick. Let me just add one thing on that, because I
really want to give credit to Leo Gerard and Tom Conway and
Holly and the rest of their team.
We are major investors in the steel sector and other
sectors that the USW supports. And we found them to be--well,
they are very tough negotiators. Some of our folks still have
scars to show for some of that.
But they have also been very progressive, in terms of the
need for attracting capital into hardcore nonsexy manufacturing
in the United States. And we have been able to work with the
USW very closely to increase productivity to align incentives
for the various parts of the capital structure: investors,
management, and workers. And really, this collaboration is a
tribute to Leo's very good work, and creative work, in leading
this union into the 21st century.
Senator Brown. Good, thank you. Mr. Marchick, thank you.
Ms. Hart, thank you very much, both for joining us.
We will take a 60 second break while the second panel gets
in place. So thanks very, very much. I apologize again that you
had to wait today.
[Pause.]
Senator Brown. Thank you for joining us, the second panel.
I will introduce William Gaskin, whom I have known for some
time, President of Precision Metalforming Association,
representing the $91 billion metalforming industry in North
America, the industry that produces precision sheet metal
components and assemblies used in autos, appliances, computers,
and thousands of other applications. He's also President and
Secretary of the PMA Educational Foundation; President and
Secretary of PMA Services, which publishes Metalforming
Magazine, a monthly circulation of 60,000.
He previously served as the Director of Community
Development in Cuyahoga County, Cleveland, Ohio. A graduate of
Heidelberg, Mr. Gaskin received his MS in Public Administration
from Cleveland State. He earned his Certified Association
Executive designation in 1995. Welcome, Mr. Gaskin.
Gene Haffely, whom I met yesterday, was a cofounder,
Advanced Assembly Automation in 1984 and served as Vice
President of Operations until 1996. Mr. Haffely then served as
President of Hansford Manufacturing, a division of DT
Industries; and is the Corporate Vice President of Operations
for DT Industries from 1997 through 1999, when he returned to
AAA as President.
He is a Vietnam vet, a graduate of the University of
Wisconsin with a BS in Computer and Electrical Engineering.
Welcome, Mr. Haffely. Thank you for joining us.
General Larry Farrell, U.S. Air Force, Retired, became the
President and CEO of the National Defense Industrial
Association in September 2001. Interesting timing.
Prior to his retirement from the Air Force in 1998, General
Farrell served as the Deputy Chief of Staff for plans and
programs at the Headquarters, U.S. Air Force in Washington. He
was responsible for planning, programming, manpower activities
within the corporate Air Force and for integrating the Air
Force's future plans and requirements to support national
security objectives and military strategy.
Previous positions include Vice Commander, Air Force
Materiel Command, Wright-Patterson Air Force Base in Fairborn,
Ohio; and Deputy Director, Defense Logistics Agency in
Arlington. He served as Deputy Chief of Staff for Plans and
Programs, headquarters U.S. Air Forces in Europe.
And thank you, particularly, for your service to our
country, too.
Mr. Gaskin, you can begin, if you would. Welcome.
STATEMENT OF WILLIAM GASKIN, PRESIDENT, PRECISION METALFORMING
ASSOCIATION
Mr. Gaskin. Thank you, Mr. Chairman. It is a pleasure to be
here today.
For the record, my name is Bill Gaskin, President of
Precision Metalforming Association in Independence, Ohio.
We have partnered with the National Tooling and Machining
Association today to speak with one voice on behalf of the
small middle-market manufacturers who produced stampings,
fabrications, machine products, tooling, plastic injection
molds, and other items. Together, we have a combined membership
of more than 2,500 companies located in every State and
employing more than 500,000 people.
Small middle-market manufacturers are being clobbered by
the credit crisis and are in serious trouble, especially if
they manufacture parts, components, and assemblies for the
automotive, residential, or commercial construction, appliance,
truck, and aerospace industries. This impacts hundreds of
thousands of jobs, weakens our manufacturing base, and limits
our ability to innovate, allocate funds to R&D, and provide
growth opportunities for the future.
These are by far the most dire times that I have seen for
metal stamping, roll forming, machining, tooling, and mold
building companies. Today our typical metalforming company has
annualized sales 35 percent lower than 1 year ago. They have
had to eliminate nearly 38 percent of their employees.
In our May business conditions survey, some 80 percent
reported that they had either laid off employees or that their
facilities were working on short time, compared with roughly
only 20 percent a year ago.
And it is going to get worse. Forty-nine percent report
that shipping levels will be down over the next 3 months, and
39 percent report that new orders for products will decline
over the next 3 months, as well. Only 17 percent of our members
think that shipments will rise in the next quarter.
It is likely that more than 20 percent of these privately
held or family owned businesses will not exist 1 year from now
unless business conditions improve substantially or until
additional steps are taken to free up lines of credit.
To quote one metalworking company with 60 employees, ``No
bank currently wants to deal with manufacturing. They are
solely about mitigating their risk with their manufacturing
clients. This is the reality that we face.''
Metalforming companies across all industries report credit
challenges. Of respondents to our survey, 36 percent noted
serious problems in their credit situation and 30 percent
reported moderate problems. More than half are having
difficulty accessing credit for day-to-day operations, while
over 70 percent have difficulty obtaining credit to finance
capital investments they need to upgrade their domestic
production facilities. Our greatest concern is that 72 percent
anticipate difficulty securing the credit they will need when
business starts to recover to buy raw materials and rehire
people. Seven percent, 72 percent do not know if they can do
that.
So while the Federal Government is investing billions of
dollars to the Economic Stimulus Package for construction
projects and other activity, through TARP to support banking,
automotive OEM and tier one suppliers, small middle-market
companies integral to our recovery lack the financing they need
to supply the stampings, fasteners, tooling and molds to
assemble the bridges, acquire new equipment, and manufacture
fuel efficient vehicles.
The Automotive Supplier Support Program is helpful to tier
one suppliers of General Motors and Chrysler but the economic
benefits of these expenditures have yet to trickle down to the
small middle-market tier two and three suppliers. Of course,
help for the OEMs and tier ones help us, as well, but we cannot
continue to provide components, tooling, and services without
some guarantees of future payment.
This would also provide assurance to our creditors that we
remain viable. Credit lines in our industry, which are
currently averaging about 14 percent of annual sales, are
largely based on a formula that values 80 percent of current
trade receivables and 50 percent of the value of raw material
and finished goods. In today's environment, receivables are
discounted even more severely or they have almost no value at
all. Most lenders are severely restricting lines of credit from
manufacturing companies, especially automotive suppliers.
Recently, the Small Business Administration announced
changes in their 7(a) and 504 loan programs. Yesterday I heard
from one company, a member in Southern California, who had
applied for an SBA loan from three banks in the last 3 weeks,
including Omni National and Wells Fargo. Unfortunately, the
company was unable to secure any help from the SBA program, as
the banks' underwriting standards, which rule, were too strict
to approve the loan.
The personal guarantees required by SBA on 100 percent of
their loans are also a problem. In the non-SBA market, our
members report that personal guarantees are required only about
40 percent of the time. Understandably, in today's environment,
many business owners are too concerned about losing their
family home to meet their personal guarantee requirements of
the 7(a) program.
Last Thursday, at an auto parts suppliers conference in
Michigan, a representative of the SBA briefed us about the new
requirements, the new program. But in response to a question
about whether he was aware of any SBA loans having been made to
auto suppliers in the Detroit answer, he answered no, he
wasn't. He then asked the audience, 75 people, do any of you
know of a bank that has given a loan, and they said no, as
well. So it is a problem that just is not working.
Mr. Chairman, we hope that the SBA program could be
changed. We appreciate your efforts to find solutions to the
credit crisis in manufacturing. This is not just an Ohio
problem or an automotive problem. It is a global problem that
requires an American solution here in the U.S.
Thank you.
Senator Brown. Thank you very much, Mr. Gaskin.
Mr. Haffely.
STATEMENT OF EUGENE R. HAFFELY, CHIEF OPERATING OFFICER,
ASSEMBLY & TEST WORLDWIDE, INC., ON BEHALF OF THE ASSOCIATION
OF MAUNUFACTURING TECHNOLOGY
Mr. Haffely. Thank you for holding this hearing today and
giving me the opportunity to be here and participate.
I am here today to speak on behalf of the Association of
Manufacturing Technology, the AMT, founded in 1902 as the
National Machine Tool Builders Association. My company,
Assembly & Test Worldwide, Inc., is headquartered in Dayton,
Ohio, and is a member of the AMT and I currently serve on the
Board of Directors of the AMT, which represents more than 400
manufacturing technology providers located throughout the
United States, including almost the entire universe of machine
tool builders who manufacture in America.
I would like to make three points today. Our industry, as
everyone has already said, is vital to American manufacturing,
competitiveness, and national security; is critically weakened
by the economic crisis; and this weakness makes it even harder
to obtain the credit we need to survive the economic downturn.
The manufacturing technology providers I represent here
today supply the innovative tools that enable production of all
manufactured goods. These technological tools of industry--and
I am talking about capital equipment and the technology that is
a part of that capital equipment. These technological tools of
industry magnify the productivity of each individual worker in
our country and give an industrial nation the power to be
competitive in the global marketplace. Our products also create
the means to provide a strong and technologically sophisticated
national defense.
Mr. Chairman, as critical and necessary a part of our
American manufacturing sector as we are, our industry is in
danger of not surviving the current economic crisis. And the
major reason for that is because the lack of credit is
endangering the continued existence of virtually all of our
companies.
My company, as an example, is an American-owned business
that designs and manufactures assembly and test equipment for
global manufacturers, of which 60 percent is in the automotive
and heavy truck industries. We are a critical supplier of
custom designed automation for the production of fuel efficient
engines, transmissions, and drive modules and are one of the
many AMT companies that provides production tools and systems
to a wide range of industries, including the producers of
medical devices, pharmaceuticals, hybrid vehicles, solar
panels, and various defense industry related products.
In 2008, my business was profitable with $150 million in
revenues. During the banking crisis this past fall, in just a
3-month period, we lost over $20 million of our orders. They
were canceled. This is totally unprecedented in the history of
our company.
Due to this decline, mainly in our automotive business, we
have been forced over the last 5 months to reduce our work
force by 25 percent to 530 U.S. employees. In addition, my
company's revenues are projected to decline 40 percent in 2009
primarily due to the weakness in the automotive sector and the
deferral of capital spending in other markets.
In the bigger picture, AMT members are reporting a
reduction in backlogs from 40 to 70 percent.
The overall uncertainty in our economy has caused our
customers to take defensive measures, delaying existing
production improvements, canceling new term orders, and
delaying payments until 2010. The meltdown of the financial
services sector has frozen credit to companies like mine.
But even with this revenue reduction I spoke of, my company
can operate with minimal losses in this difficult environment
and can remain a viable company, but only if we can get
reasonable credit. In my 30 years in this industry, I have
never seen a more difficult time for companies in our industry
to obtain credit. The future holds promise, but our hands are
tied if the banks refuse to lend to automotive manufacturing
companies because their revenues are dismal for the next few
quarters as we work our way through this economic chaos.
I do not mean to tell you that I am an expert on the
solutions to this, but a couple of programs that have been
brought up already I would like to comment on. I read recently
that there is a 25 percent increase in SBA loans. To our
companies in the AMT, no one is lending in this environment. We
do not see it. Not even the SBA Preferred lenders, who must
rely on a level of credit scrutiny for many companies that they
cannot pass due to the recent events.
Small businesses are particularly hit hard. These companies
cannot qualify for the programs that were designed to help
them. We must reprioritize the metrics by which the SBA makes
decisions away from cash flow. The AMT companies' cash flow
position is weakened so they cannot qualify. We need to move to
other relevant criteria. In my written statement, there are
some suggestions about what that other criteria could be.
Moving toward the Defense Product Act. As I am sure you
would agree, Mr. Chairman, our national security depends on a
strong manufacturing technology base. I am here to tell you
that if nothing is done to start credit flowing again to
America's manufacturers, we lose more than the ability to
manufacture automobiles and washing machines. We lose our
ability to provide innovative manufacturing systems for the
defense industry. Without a strong American manufacturing
technology base, we also risk dependence on foreign sources for
our defense needs, foreign sources who may not be there when we
need them.
Mr. Chairman, my industry is absolutely essential to
national security. Title III of the Defense Production Act
provides for Federal loan guarantees to companies that play an
important role in our national defense industrial base,
companies that would be important to mobilize efforts if it
were necessary to move from a peacetime economy to a wartime
economy.
Mr. Chairman, I suggest the Banking Committee consider
increasing this loan guarantee authority as it considers the
DPA's reauthorization in September. With Government guarantees
under Title III, I believe banks in Ohio and elsewhere around
the country will have confidence to get credit flowing to
manufacturing technology companies and the many other
manufacturing companies who make up the backbone of the defense
industrial base.
In conclusion, the United States is perilously close to
losing a critical industry, one that it continues to depend
upon for both economic stability and national security. I hope
that you will be able to provide the legislative vehicles that
can get us through this threat to our existence, building upon
the SBA and the DPA programs I have mentioned and implementing
other new loan guarantee programs targeted at manufacturing
technology companies and our customers, the manufacturers in
this country.
We must get credit flowing again. The only way to break
this cycle of job loss and bankruptcy is to provide the
manufacturing sector the cash flow we need to continue doing
business and securing American jobs.
Thank you.
Senator Brown. Thank you, Mr. Haffely.
General Farrell, thank you for joining us.
STATEMENT OF LIEUTENANT GENERAL LAWRENCE P. FARRELL, JR., (USAF
RET.), PRESIDENT AND CHIEF
EXECUTIVE OFFICER, NATIONAL DEFENSE INDUSTRIAL
ASSOCIATION
General Farrell. Good morning, and thank you for the
opportunity here. My testimony is based upon a white paper that
NDIA produced last year----
Senator Brown. I am not sure your microphone is on.
General Farrell. Oh, sorry. Thank you.
A lot of my testimony comes out of a white paper which we
produced last year, which was prior to the present difficulty,
but we find it still relevant. I will have copies for you.
I also have a coalition of partners that we work with, like
AMT, Society for Manufacturing Engineers, Aerospace Industries
Association, the National Center for Advanced Technology, and a
lot of them have inputs to this as well.
You asked five questions, and I will take them on head on.
First of all, you said, Why should Congress care about
this? Well, in addition to a lot of the things that have
already been said, I would add that the manufacturing sector in
this country throws off $1.37 for every $1 in the manufacturing
sector. That is higher than any other industrial sector in the
country. It provides, as you said, an entry to the middle class
for lots of people, but in addition to that, it throws off a
lot of intellectual property--90 percent of the patents every
year awarded in the manufacturing sector, and in the defense
sector, our edge on the battlefield is based upon the best
weapons systems and platforms we can bring, plus the best
trained people. So we need a highly capable manufacturing
sector to deliver on that. If you will note, just the aerospace
sector itself has a $60 billion trade surplus with the rest of
the world, so it can be very efficient.
Second, you asked about credit. When I look at particularly
my small business members, working capital is vital to what
they do. Working capital basically is supplies and labor costs
for people who get a contract who have not received their
payment yet, and let us say you are a small businessman and you
get a $10 million contract, a bank will loan you up to 50
percent on the inventory. That means you have got to put $5
million up yourself, if you can get a loan. And the invoice to
payment is about 120 days, so credit is kind of important to
these guys.
We checked one of our members in Chicago, one of the
lawyers that has manufacturing clients; 30 percent of his
clients are either in Chapter 11 or anticipating Chapter 11
just because of the lack of access to credit.
You asked a question about the supply chain and demand, but
very quickly, when demand is down, inventories go up and labor
goes down. But a response to that, a robust response, is
maintain diversity across business sectors and segments so
intertwined supply chains can help, especially with small
business, if they can do it.
Your fourth question had to do with strategic and security
considerations for the country and for the defense. I would say
basically the advantage of this country has always been that we
have been the most innovative, the most creative; we bring the
best products to market before anybody else. And in defense, we
do the same thing. How do we do that? We do that by being a
leader in advanced manufacturing. So if you look at the
manufacturing sector, the focus needs to be on the advanced
piece of that and maintaining leadership there.
Then you asked what policies should we be pursuing. I have
nine.
We think we need a higher level of representation in the
executive level. Agriculture is 3 percent of GDP. We have the
whole Agriculture Department. Manufacturing is 14 percent of
GDP. We have a Deputy Assistant Secretary in the International
Section of the Commerce Department. We need higher-level
representation in the executive branch.
You need to reauthorize the Defense Production Act with
particular focus on the Interagency Task Force, raising the
funding to $500 million, and resuming the loan guarantee
program under Title III.
We would like to see stable funding for Defense
Manufacturing Technology at 1 percent of RDT&E. That is $790
million a year.
We would like to endorse the strategic thrust of the DoD
ManTech Strategic Plan. I brought a copy for you here. But
basically, there is a lot of focus in there on advanced
manufacturing funding, which is only $10 million a year right
now in defense.
Fifth, we would like to use Manufacturing Readiness Levels
prior to Milestone B in defense Acquisition.
We need increased focus on the national workforce,
manufacturing workforce. I have members of mine in States with
high unemployment and manufacturing problems who have
manufacturing jobs that cannot be accomplished because they
cannot get a skilled workforce.
My members tell me that a kid coming out of high school,
the average kid is not qualified to enter the manufacturing
workforce without 2 years of community college or a vocational
education on top of high school.
Then we see a bill in the Senate, S. 661, Restoring
America's Manufacturing Leadership Through Energy Efficiency
Act. We think that is a good bill to support because if you
focus on reducing energy and resource consumption in the
manufacturing process, you are going to create organic jobs
here in the United States.
We would like to see progress payments which the original
equipment manufacturers get. We would like to see it flow down
through the supply chain to the Tier 1, 2, and 3 suppliers. And
we would like to see you lower the threshold at which that can
occur.
Then, finally, we would like to see more active leadership
in the Senate. You have a Defense Depot Caucus, which is very
effective. You have a Manufacturing Caucus in the Senate which
is actually not active. We think if you had an active
Manufacturing Caucus in the Senate along with increased
representation in the executive branch, it would really help
the manufacturing sector.
Thank you, sir.
Senator Brown. Well done. Thank you, all three of you.
Former President Bush I remember appointed a manufacturing
czar back in 2003, the Labor Day weekend. I remember the
appointment, and it just sort of did not really work out. There
was not much more after that. And when you say that agriculture
is 3 percent of GDP and manufacturing is 14 percent, that is a
pretty good contrast.
Let me start. Several of you overlapped on several things
you said. I thought the testimony was exceptionally good, and,
General Farrell, I want to get to your skilled workforce issue
in a moment. But, Mr. Gaskin and Mr. Haffely, if you would, you
both talked about SBA and what we need to do with SBA. Would
you each be--and I know you have some more details in your
written statements. Starting with Mr. Gaskin, if you would talk
more prescriptively, more precisely what we ought to--what SBA
needs to do to inject credit into particularly mid-level
companies.
Mr. Gaskin. It is a topic we have heard a lot about as we
have talk to the auto task force and other companies, even,
about what do we do with the credit crisis in manufacturing. It
happens that a lot of it is automotive related, and SBA keeps
being brought up, and the plain fact is that SBA relies on the
banks to determine their lending criteria. Their lending
criteria are severe enough that most companies in distress do
not qualify. Even though they have raised the guarantee level
of a 7(a) loan to 90 percent instead of 80 percent, there is
still 10 percent to the bank, and they are not willing to take
that risk on manufacturing right now.
It does not change the fundamental structure under which
they are evaluating the bankability of the company. The Basel
II does not change for the company, the risk rate, and so it
simply does not work.
Senator Brown. Mr. Haffely.
Mr. Haffely. Yes, I would like to reemphasize that our
companies are not qualifying for this SBA program. The
regulation states that the ability to repay from cash flow is a
necessary requirement, and our companies are weakened to the
point where they cannot depend on cash flow in the near term to
repay--or to qualify, rather. And I think instead they should
take a look at the structure of the companies, the backlogs,
the assets in the company, the employment level, look at some
of the history of the company leading up to the point where the
loan is made to evaluate if that is a solid company, looking at
the profit history.
So as long as they are relying on cash flow, that is a
problem for our companies, and I also do not know of any
companies in AMT that have qualified.
Senator Brown. Yes?
Mr. Gaskin. If I may, Mr. Chairman, there was a proposal
for a direct loan program under SBA. That might be able to have
different criteria--it was not funded--but rather than a
reinsurance program with the banks, there might be a way to do
it directly.
Senator Brown. The SBA has never done that?
Mr. Gaskin. Well, currently, no.
Senator Brown. OK.
Mr. Haffely. Mr. Chairman, there was a provision that did
not make it to the final bill for the SBA 7(a), and it may be
what Mr. Gaskin is referring to. That would allow a
manufacturer, if he was turned down, I think three times, to go
to the SBA and get the SBA to contact a list of preferred
loaners, preferred suppliers of capital. And that I think was a
very sound program, but I do not know why it did not make it to
the bill. It was dropped.
Senator Brown. OK. That is helpful.
Mr. Haffely and General Farrell, you both talked about the
Defense Production Act. Both of your associations, the AMT and
the NDIA, sent this Committee, sent Chairman Dodd and all of us
a letter last month urging reauthorization reform of the
Defense Production Act.
General Farrell, you talked about the Interagency Task
Force. Mr. Haffely, you talked about the loan guarantee
authority in your statements. Now, would you expand on those or
anything specifically that you want us to do with defense
production, particularly in light of--well, just leave it with
that, and I will follow up.
General Farrell, do you want to be more specific for us
orally? And the same with you, Mr. Haffely.
General Farrell. Well, as you know, the Interagency Task
Force has kind of fallen away. We would like to see that
reenergized, and we would like to see maybe the President
appoint a Chair of that. This is really important.
The other thing is we would like to see the funding go up.
Funding should be about $500 million a year, we think.
The advantage of this is that once that money is
appropriated, it is there forever. It can be used forever. And
what it is, it is really a guaranteed purchase. So if you have
got a guaranteed purchase using that money, that means the
small business can now get credit. He can get a loan to enter
this field because now there is a guaranteed purchase
associated with it. So this is really important.
And one of the other things you ought to do under that,
under Title III, is to resume the loan guarantees. That is
going to help the small business as well.
So there are two things in there that----
Senator Brown. Sorry to interrupt. Do we on the loan
guarantee--we want to limit it to Tier 1, Tier 2, Tier 3. We do
not want it to go to the major--it is not an issue--as Mr.
Marchick said, it is not an issue for the big contractors that
sell directly to the Pentagon. They do not particularly need
credit.
General Farrell. Right, right.
Senator Brown. So you would limit it to the Tier 1, 2, 3?
General Farrell. I think that is fair.
Senator Brown. Little applicants, I would assume,
companies, is that--Mr. Haffely, is that what you would think?
Mr. Haffely. Absolutely. If a smart bomb does not have a
small widget from a Tier 3, it is not going to work. So it has
got to go all the way down the food chain.
Senator Brown. But to exclude the major defense--it is OK
to exclude the major defense contractors because credit is
not--I mean, we have--there is a limited amount of money. There
is a limited amount of credit authority. So you go to--do you
aim at the suppliers more than the major contractors?
General Farrell. Yes. You have to aim at the suppliers. And
if you look at defense especially, the large defense companies
have been focusing on integration and higher valued-added
tasks, and they have been outsourcing a lot of their
manufacturing to the Tiers 1, 2, and 3. So there is more
manufacturing being done there than has been done in the past.
So those are the guys you have to focus on.
Let me just say one more thing about the Defense Production
Act. Even though it is just defense, but it crosses over into
commercial. I will give you one example. The batteries for the
FCS vehicles, lithium ion, if somebody were to get a job under
the Defense Production Act for lithium ion, those are the same
batteries that are being used in the Chevy Volt. So that kind
of research and development, it really slops over into the
commercial area as well.
Senator Brown. I am not sure I agree with the term ``slops
over,'' but I got the idea.
General Farrell. Sorry for that. ``Washes over.''
Mr. Haffely. Yes, except for that term, I would like to
emphasize the good point that Mr. Farrell made. Our companies
are supplying the tools to manufacture automotive vehicles,
heavy trucks, off-road vehicles. All of those talents, all of
those capabilities apply to the defense industry. So this--
``spilling over''? What was the term?
General Farrell. Washing over.
Mr. Haffely. Washing over to the commercial side is a fact
of life. If we can get loan guarantees and we can apply that
capital to continuing what we do in those industries I
mentioned, it is a direct parallel to what we would need to
provide for the defense industry if we had to mobilize in a
time of war.
Senator Brown. Thank you. Because my time is up, before
turning to Senator Merkley, I wanted to follow up with one
thing General Farrell said about skilled workforce. I have done
around the State probably 140 roundtables where I will bring
people--I have gone to each of Ohio's 88 counties and brought a
group of 15, 20 people and a cross-section of the community--a
carpenter, a school teacher, a superintendent, a hospital
administrator, a plant manager, whatever. I hear universally
that even in a State with higher-than-national-average
unemployment, people cannot find--in all kinds of businesses
and all kinds of organizations, they cannot find a skilled
workforce. We are working on something called the SECTORS Act
to bring together, as we reauthorize Workforce Investment
legislation, to bring together local--to have local people to
make it sort of homegrown organically coming from them,
spending these WIA dollars locally, allowing community
colleges, the local businesses, the Workforce Investment
Boards, and labor unions when it is applicable, to make the
determination what, in fact, they--what kinds of job skills
they need. And, you know, in Toledo it might be food
production. In Dayton it might be aerospace issues. And let
local people decide that, local businesses working with others.
So any thoughts on any of that briefly? And then I want to
turn to Senator Merkley.
General Farrell. Yes, the problems my members tell me with
respect to people coming into manufacturing, there are two
skills that they lack: the ability to read and write, and math
skills. They say they are just lacking. And if we look at the
statistics, you want somebody to have a technical education, if
you want them to, in college. You see? We look at 100 ninth
graders. Within 6 years, only 18 graduate from college. Of
those 18, less than 50 percent enter some kind of a technical
education program.
So why is that? Well, if you look at the education in
middle school, if you do not take Algebra I in middle school,
you cannot take Algebra II in high school, and you cannot take
AP Calculus, and you cannot enter a technical education college
if you have not experienced Algebra I in middle school. There
are only about six States in the Union that have a requirement
for Algebra I.
It is more fundamental than just that. It goes way down at
least to middle school where this thing starts.
Senator Brown. Thank you.
A brief comment, Mr. Gaskin?
Mr. Gaskin. Yes, on skills, you know, foundation skills are
critical to the success in the future of PMA and the other
metalworking associations, for NIMS, the National Institute for
Metalworking Skills, which is a foundational skill. And through
the WIA program, the key there is--and your SECTORS Act--to
make sure that there is the bringing together of community
leaders, but also the local industries through the WIA boards
to make sure that we drive it the right way and make sure that
there is integration with the community colleges and the 4-year
schools so there is that path from the foundational skills into
community colleges and then into the Society of Manufacturing
Engineers type higher-level programs.
Senator Brown. Good. Thanks.
Mr. Haffely. I am obviously here because I love
manufacturing. It has been my life, and I am deeply distressed
by the opinion that our high school and college students have
about the dirty-fingernailed manufacturing industry. Some of
the smartest people I know are machinists who are turning
cranks on bridge ports and lathes. These are bright people who
are very creative and innovative. These are fantastic jobs, and
there is not enough being done to get our high school students
excited about coming into manufacturing. And they are excellent
paying jobs. The skilled trades and the engineering professions
pay very, very well.
The AMT provides a scholarship for 2-year technical school
students, but there are other organizations. NAM has a
wonderful program for educating high school and college
students. Our local NTMA association in Dayton, Ohio, has one
of those robot programs where the college students and the high
school students work on those robots in a competition. They
have done a lot to educate the local schools about
manufacturing. They have put on a lot of programs.
There is a lot being done by the manufacturers, but I do
not believe it is enough, because I think we still have a bad
reputation amongst the students.
Senator Brown. Thank you. And few communities in the
country have the proud history of entrepreneurship that Dayton,
Ohio, has, as you know. And that is a problem with it that is
so serious, I think, that young people--just blue-collar jobs
generally, whether it is manufacturing, whether it is the
building trades--and they are good paying tickets to the middle
class, and kids are not taking math in junior high, as General
Farrell said, and all that. We have got to do much better with
obviously the whole system of education.
Senator Merkley.
Senator Merkley. Thank you very much, Mr. Chair. I am
listening to this conversation as the son of a mechanic and
machinist who--I had the privilege of growing up building
things in the garage, as I think most American kids did a
generation ago. And as I was listening to you, I was thinking
about the distinction between essentially the programs we lay
out and the cultural influences. And as I watch my own
children, they are far more interested in using software,
playing games on the computer, and so on and so forth, than
they are building things in the garage, which is something of a
frustration to me, because I was looking forward to that.
But one of the things that seems to that is the virtual
complete disappearance of shop activities in junior high and
high school. Have you all been tracking that? And is that a
significant factor in the lack of preparation of our students
for the manufacturing workforce?
Mr. Gaskin. If I may, it is. Customers need to want to buy;
they need to perceive that that particular training will result
in a good career. And as Mr. Haffely said a few minutes ago,
there is a perception that manufacturing is not where the
future is. And the prior panel was asked what can we do about
the perception of manufacturing. I think that the Chair hit on
it a minute ago. We need a strong leader in the administration
to talk about manufacturing, and we need every Senator to talk
about manufacturing and every Congressman to talk about the
importance of manufacturing to help create that demand.
In the Cleveland area and in most areas where we have
members, there are very few strong machining programs to teach
people the skills they need, the fundamental core skills.
There are now skill standards. There is non-time-based
apprenticeship programs. There are new models based on
competency that are coming online. And I think this is
positive. I think the community colleges have bought into this
level of training very well and will complement it was
associated degrees in manufacturing, which will make it more
palatable, even to the guidance counselors, who would never
want to put somebody into a vocational education program. They
want somebody to go to college. Well, let us get that career
path that includes an associated degree, perhaps leading to an
engineering degree.
So there are some good things starting now, I think.
Senator Merkley. Anyone else want to throw in any comments?
Yes.
General Farrell. What we are hearing is that manufacturing
is perceived, you know, like Charles Dickens portrayed it in
his novels. We do not see it in the schools; like you asked the
question, we do not see it. Where we are most effective, at
least in what we do, is where the community gets together some
manufacturers and they put together a program, an after-school
program, a mobile program. They take it to the schools, get the
kids to go through it, and operate some of the equipment. And
they are having a great deal of success that way, putting some
advanced equipment in a mobile capability and taking it around
to the schools. That is working pretty good.
Senator Merkley. OK, thank you.
I want to turn to the financial side of the puzzle that you
all spent quite a bit of time talking about. Certainly the
story you are presenting fits with the story I am hearing on
the ground in Oregon. I wanted to get a little better sense of
the traditional forms of financing.
Of course, we have the bank loans at one end. We have bonds
being issued as well. And then I am hearing from a lot of folks
in Oregon who have revolving 7-year commercial loans, that is
more the developers, and where they have had performing
properties and they are just not simply able to roll over those
loans as they have in the past.
But do you utilize commercial 7-year loans? Are we really
talking about primarily bonding, or are we talking about loans
that are related to the development of new facilities? Or is it
the whole spectrum? Where is the real heart of the challenge?
Mr. Haffely. Well, if I could speak just from my
experience, being an engineer and not a finance guy, our
programs go as long as 1 year. They can be million-dollar
programs, 5, 10, 12, 15 million dollar programs. Very often in
the automotive industry our payment terms are 90/10--90 percent
when we ship, 10 percent when we prove that the equipment works
properly in production.
So over the course of most of that year, we are spending up
to 90 percent of the cost of that equipment, and we get our
financing based on that work in process. Then once we ship, our
financing is based on our receivables. So the credit problems
that we are having, that our industry is having, are related to
financing these large programs that last for a long period of
time.
Mr. Farrell mentioned progress payments. They have always
been hard to come by. No one wants to give progress payments
today. And as I mentioned earlier, a lot of our customers now
are saying you can have this program, but we are not going to
make the first payment until 2010. So they are even getting
worse than 90/10 payments. They are deferring the first payment
and the shipment until next year.
So that is what we are talking about in my industry and in
my company as far as the loan problem.
Senator Merkley. OK. Yes?
Mr. Gaskin. If I could, sir, the tooling side of what Mr.
Haffely described is one thing. You are making a lot of mated
assembly systems and such, and those are complex and take time.
But, you know, tools and dies, molds that are used by second-
and first-tier auto suppliers, it is even worse. The small
business, the smallest piece of the credit, you know, market
for the supply chain--and this is true in other markets as
well, but primarily automotive. Billions of dollars of tools
are off the books of the auto manufacturers and on the books of
small businesses that are making progressive dies, molds, et
cetera. It may take 12 to 18 months to complete it, and not
only complete the die but then you need to go through the PPAP
process, the Production Part Approval Process, where all the
individual components that are made on a number of different
dies get assembled, and then finally at the automotive plant,
they say 18 months later, ``OK. We got an assembly that works.
It fits the requirement.''
Well, the tooling company, the mold-building company has
not been paid. At PPAP approval, the 60-days terms start so now
it has gone from WIP into receivables, and they may get
financing on that, 80 percent typically. So it can take up to
18 months. Progress payments do not exist within domestic auto
manufacturers. We surveyed this recently among new domestic
auto makers. There still are progress payments in tooling in
some cases, although they are starting to change that. They are
becoming more like General Motors, Chrysler, and Ford.
So it is a huge problem. The smallest companies are
financing tooling and assembly machines.
Senator Merkley. That is helpful and I appreciate that.
Actually, I have one more question, if I can.
One of you mentioned--Mr. Haffely, I think it was you--that
instead of looking at revenue flows, we should be looking a
little bit more at--I thought I understood you to say backlogs,
and I assume by that you meant backlogged orders?
Mr. Haffely. Yes, sir. Actually, the criteria for the SBA
is cash flow and analyzing cash flow to ensure that the loan
can be paid back from cash flow.
What I am suggesting is in the current economic situation,
that is an almost impossible criteria for today's small
companies, small manufacturers. So if we looked at--and I do
not know the right things. But, I mean, I think it is a mix
of--and it is like the equity companies when they are analyzing
your company for investment. They are looking at the same
things. They are looking at your backlogs. They are looking at
your history of backlogs. They are looking at your assets. They
are looking at your employment levels, what is your employment
level doing. And they look at historical profitability and they
compare that to the future situation for the company.
Senator Merkley. So I would have assumed that during this
downturn, the number of backlogged orders would have dropped
dramatically. Am I correct about that?
Mr. Haffely. Yes. I stated earlier for the AMT companies,
their backlogs are running 40 to 70 percent lower, but that 30
to 60 percent backlog they still have requires credit. And so
that is what I am talking about them looking at.
I mean, we would love to be at 100 percent and looking at
the larger number, of course, but we still need--they still can
look at those backlogs. That still requires the capitalization
financing.
Senator Merkley. Thank you very much. I appreciate it.
Senator Brown. Senator Merkley, thank you. General Farrell,
thank you; Mr. Haffely, thank you; Mr. Gaskin, thank you very
much.
The Subcommittee record will remain open for 7 days. If
there is additional information or additional comments you want
to make to the Subcommittee, certainly feel free to be in touch
with us. Our Members, of course, also have 7 days to respond.
If there would be written questions to you, we would ask you if
any Members send you written questions, any Senators, we would
like you to answer those, too.
Thank you again for your testimony and your public service.
The Subcommittee is adjourned.
[Whereupon, at 12:26 p.m., the hearing was adjourned.]
[Prepared statements and response to written questions
supplied for the record follow:]
PREPARED STATEMENT OF LEO W. GERARD
President,
United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied
Industrial and Service Workers International Union
May 13, 2009
Mr. Chairman. Members of the Subcommittee. It is indeed a pleasure
to appear before you on an issue that is vital not only to the future
of the members of my union, but to the Nation. I'm Leo Gerard,
president of the union, commonly known as the Steelworkers Union, which
represents more than 1.2 million active and retired members.
While workers in the steel sector are represented by our union,
workers we are extremely proud of, the full name of our union is the
United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied
Industrial and Service Workers International Union. Members of our
union make products ranging from steel to aluminum to cement to tires
to glass to many, many other products. They work in mines, in smelters,
in oil refineries and many other industrial operations. But, we also
represent nurses, bus drivers, bank workers and university professors
who are supported in no small measure by domestic manufacturing. We are
the largest industrial union in North America.
Your hearing comes at a very important time. The economic meltdown
occurring in the U.S. and the world economy has devastated our
manufacturing sector. Capacity utilization in many of our sectors is at
levels unseen since the Great Depression. Many of the sectors in which
my members work are on the front lines of this economic collapse. When
retailers start cutting back, members of the Steelworkers who work in
box-making plants feel the cutbacks as producers buy fewer boxes to
ship their products. When commerce slows down, the workers in my union
who make tires see orders decline as truckers drive fewer miles and buy
fewer tires. The list goes on.
Well over 100,000 of the members of my union have either been laid
off or face reduced hours as a result of the economic crisis. Their
employers have seen orders dry up, and they've seen credit dry up as
well. Too many of my members were hit by the subprime crisis not only
in terms of the mortgages they took out, but also by the cascading
problems that blew the lid off the economy. The harm to working
families has been enormous.
Shuttered factories and shattered dreams are what many of my
members and, indeed, workers in the manufacturing sector all across
this great country face. But, while these problems accelerated at warp
speed when the subprime crisis spiraled out of control, the
manufacturing sector has been decimated by acts of omission and
commission by prior Administrations. There's more than enough blame to
go around. Rather than looking backward, however, I'd like to focus my
comments today on where we are, and where I think we need to go.
Mr. Chairman, the first question you raised in your letter of
invitation is the most important question: Why should Congress care
about manufacturing? When I received your invitation, quite frankly, my
view was that this is a question that, in past years, would never even
need to be asked. But today, after more than 20 years of neglect and
even adverse policy pursuits, it's clear to me that, indeed, this is a
question that needs to be asked and answered.
Regrettably, we may be the only nation on earth that actually has
to ask this question.
Over the last 20 years, or so, we have seen policy makers look to
the information economy as the key to our future. Then the Internet
bubble burst and they realized that not every student will be able to
become a software programmer or Internet Web site developer. We have
seen so-called ``experts'' say that the future is the service economy;
that we provide the best and most competitive services in the world.
Then, the economy came crashing down and the financial services sector
finds itself on the wrong side of that optimism as we are going through
fundamental questioning as to what the future of the financial sector
should be and as the top management of our ``best and brightest''
financial institutions find themselves ridiculed for their excesses.
Manufacturing is a source of strength. Economic strength. Community
strength. And, indeed, military strength.
Manufacturing provides millions of jobs in our economy. American
manufacturing, prior to the downturn, directly employed 14 million
Americans and accounts for 8 million additional jobs in other sectors.
It is the single largest economic sector contributing to our economy.
Our manufacturing sector is responsible for two-thirds of research and
development investment in the U.S. and almost 80 percent of all patents
that have been filed come from the sector. Manufacturing is a
tremendous engine of growth.
Manufacturing is also key to community strength. Unlike service
sector jobs that can migrate virtually anywhere, the enormous
investments in plant and equipment that many of manufacturers make
ensure that these companies are the bedrock of their communities.
Michigan is known for autos. Pennsylvania for steel. Ohio for auto
parts, glass, and rubber. The list goes on. These industries, these
companies, have helped shape the communities they operate in and the
lives of the workers that are employed there. Generations of workers
have followed previous generations in working at these great industrial
companies. They've created millions and millions of family and
community supporting jobs. Manufacturing jobs pay, 40 percent or more
in wages than other jobs in our economy.
America's standing in the world is, first and foremost, a tribute
to our values of freedom and democracy. America is still a great beacon
of hope.
But, America's values and vision have been backed up by our
military might. Our willingness to stand up to injustice. Manufacturing
is key to our military strength. In the first and second world wars,
our ability to supply our troops and, often, our allies, with the
weapons and the wherewithal to defeat aggression was the deciding
factor. On today's battlefields, our high tech weaponry has been the
deciding factor in many battles. Aggressors know that the power of our
military is unmatched.
But all of this is increasingly at risk. Our economic strength has
been eroded by those who have blindly worshiped at the altar of free
trade and have traded away our manufacturing base. These free trade
ideologues measure the success of our trade policies by the number of
agreements they can negotiate, rather than the results they produce for
our people.
Our market has been flooded, all too often, with products resulting
from unfair and predatory trade practices. Subsidies. Preferential
government policies. Mercantilist development strategies.
The result has been factory after factory that have either
downsized, or shut completely. The steel crisis of the late '90s and
early part of this decade left the steel sector devastated. Today's
auto crisis will potentially lead to dozens of assembly plants and
suppliers shutting down.
The result has been not only a continuing decline in manufacturing
jobs here in America, but increased off-shoring and outsourcing of
production. While many once viewed the production of high technology
products as a bright star on the economic horizon, we now run a trade
deficit in advanced technology products of tens of billions of dollars.
And, our overall trade deficit in goods has grown year-after-year and
is a significant drag on economic growth and a sign of increasing
economic weakness and dependence. We're buying billions more in
products from overseas than we make here at home, driving up our trade
deficit and our borrowing costs. China, for example, now holds hundreds
of billions of U.S. dollar-denominated securities.
More and more companies are setting up research and development
facilities overseas to be closer to the production operations they've
set up abroad. As that happens, the lifeblood of our economy
continually drains away.
And, if that weren't enough, our national strength, our military
security, is increasingly at risk. We no longer have the domestic
capacity to make all the ammunition for our troops and law enforcement
needs. Replacement parts for the military are harder to come by as the
skills necessary to service older equipment--the machining and other
skills--are dwindling. The military testified that our Nation was at
risk of having to buy propellant for the Hellfire missile from China
because there was no longer a domestic supplier. And now, we find that
the globalization of the supply chain for computer equipment may have
contributed to incursions into our defense contractors and government
computer systems.
So, does manufacturing matter? The question, once again, shouldn't
even have to be asked. But, yes, manufacturing matters and it's time
that we look at policies to address the challenges confronting this
vital sector.
While some small manufacturers may be able to rely on self-
generated cash to be able to fund investments in existing operations as
well as new plant and equipment, that is far from the norm. Many of the
investments required to maintain and increase operations require credit
to fuel the company's ongoing and future needs. Credit is the lifeblood
of the manufacturing sector and when credit dries up or becomes
prohibitively expensive, its impact can be felt throughout the economy.
Look at the collateral damage that has hit the manufacturing sector
from the subprime crisis. As banks looked to shore up their balance
sheets to address declining asset values in the home mortgage
portfolios, they began to limit credit to other sectors, like
manufacturing. As credit availability and terms got worse, operations
began to suffer. First consumers--both commercial and private--felt the
pain, then the shockwave reverberated throughout the economy.
Manufacturers saw credit terms get stricter and had to tighten
their belts. Their suppliers felt the impact. The entire supply chain
started to suffer. One only has to remember that auto parts suppliers
were looking to guarantee $15 billion in receivables they had with the
Big Three as a way to protect their operations.
There is a clear correlation between credit availability and terms,
and the growth of manufacturing and its employment levels.
There are more members of my union whose jobs are affected by the
current crisis in the auto industry than are in the United Auto Workers
union. Virtually every car has six pieces of glass, five tires,
hundreds of pounds of steel and other metal and many other parts and
components that are produced by the members of my union.
So, when the auto companies sneeze, my members are at risk of
getting pneumonia. When construction slows, there is less demand for
steel, for cement, for glass, and many other commodities which my
members produce.
Supply chains are intricately intertwined with the production of
end products. So, when credit restrictions hit at any level--ordinary
consumers or commercial entities--the impact can be devastating.
Right now, credit is still exceptionally tight for manufacturers.
I've talked to companies that have had to cut back dramatically on
spending plans because they can't afford credit, and if they can find
it, at rates approaching 18 and 20 percent for some. Some employers
have told me that the credit markets, when they open, have been doing
so only for very short windows. Company after company has seen their
credit ratings downgraded thereby forcing their borrowing costs up.
Thirty companies have filed for Chapter 11 bankruptcy protection
since January. Seven companies have gone directly to Chapter 7. The
economic crisis has forced these companies into bankruptcy and the
dramatic freeze in the credit markets has meant that those companies
that went directly to Chapter 7 couldn't find debtor-in-possession
financing.
Too many financial institutions that had an inflow of capital from
the government used it to simply shore up their own balance sheets
without helping to strengthen the economy as a whole. They sat on their
funds, refusing to reignite economic growth by opening up their credit
operations.
And, let's recognize the unique problem that faces many
manufacturers who produce globally competitive products. You don't
simply flip a switch and bring a blast furnace back online once it has
shut down. A company needs to know that its order book will start to
fill again if it's going to be able to access the credit markets to
resume operations. Our competitors--China, Russia, and many others are
just waiting on the sidelines to dump products into our markets to gain
market share. Their willingness to do whatever it takes--even resorting
to subsidies and other unfair and predatory trade and pricing
practices--means that some of our companies may not be able to increase
production in the short-term. And, if credit doesn't begin flowing more
freely and markets begin operating fairly, they may never come back.
Fewer and fewer companies are now triple-A rated. Every downgrade
increases borrowing costs, if capital is, in fact, available. Small and
medium-sized firms are heaviest hit, but the anemic credit markets have
hurt everyone.
Policy Options
Mr. Chairman. The needs of the manufacturing sector are broad and
deep. There is no one silver bullet. Just as manufacturing supply
chains are increasingly intertwined, so are the policy issues that
confront manufacturers. Health care policy. Pensions. Trade. Education
and skills. Labor policy. Tax policy. Banking and credit policy. There
are very few issues confronting you and your fellow legislators whose
resolution does not have an impact on our Nation's manufacturing
sector.
But, let me start with some things that need to be done quickly if
we are to stabilize the sector and see it begin to grow again.
Restoring growth in the manufacturing sector is vital to reigniting
economic growth in this country.
Let me first make an important point. We all travel on planes
regularly and probably no longer listen to the safety instructions the
flight attendants give at the start of every flight. The other day,
however, I stopped to listen for a moment. During the flight
attendant's comments she said, ``if the cabin pressure drops, oxygen
masks will drop. Before helping those who may need assistance, put your
own mask on first.''
That's what we have to do here in America. If we are able to help
the world economy, we first have to help ourselves. A strong America
leads to a stronger world. We can no longer be the economy of first
resort where other countries can send their products. World demand and
supply needs to be in better balance in the future. But, if we fail to
provide oxygen to the U.S. economy, it's hard to see any other economy
surviving the crisis we face.
Credit for the manufacturing sector is oxygen to our economy. We've
got to provide more credit at reasonable rates if we're going to
succeed. The financial injections our government has made into the
economy have stabilized some financial firms. But, too many of these
firms have not restored credit operations and too many have spent more
time worrying about how much their CEOs and senior management should be
paid than on reviving the economy.
This isn't just limited to the banks and financial institutions. A
press story recently related how some firms were refusing to
participate in government support programs because of the potential
limits on their own pay. They were seeking other sources of credit, at
far higher rates, so that their own pockets wouldn't be affected. The
victims were the workers and, indeed, the shareholders. This should be
subject to legal challenge.
We need to restore demand in this country. The stimulus package was
a good start. That law, as you know Mr. Chairman, since you were one of
the leaders, included provisions to promote Buy America policies. This
provision was vital, but it must be followed up with strong
implementation actions at the State and local level and transparency at
all levels. Already the Steelworkers have led efforts across the
country that has led to hundreds of State and local resolutions
supporting procurement policies that source domestically, whenever
possible. We also need to urge the Administration to implement the law
in a way that furthers Congressional intent. I'm troubled by how they
have drafted the interim regulations, including their definition of
manufactured good, and how they have failed to adequately ensure that
the waiver request process is transparent, so that the public can
determine how their tax dollars are being spent.
Credit must be more readily available to get companies that have
had to declare bankruptcy to resume operations and to become profitable
again. And, we need to make sure that it's available so that more
companies don't go straight into liquidation.
Mr. Chairman, we also need a trade policy that works for working
Americans. Too many companies and workers have lost faith in their
government's willingness to enforce the laws we have on the books.
Imports still flood our markets and, as I said before, if we're going
to bring production back online, much less invest in growth for the
future, companies have to have confidence that they're going to be able
to get an adequate return on their investments. The cost of credit is
one thing, and, indeed, it's in part, a function of our trade policies.
But without substantial changes in the direction of our Nation's trade
policies, we're going to continue to see devastation in our
manufacturing sector.
We must also recognize that our economic strength and our national
strength are intertwined.
We also need to get our auto policy right. We must not pursue a
policy of trying to downsize and outsource to prosperity. That's a
recipe for disaster. It will only result in downsizing the American
dream.
Conclusion
Mr. Chairman, I want to thank you and the Members of the
Subcommittee for holding this important hearing. I know that the
challenges our Nation faces are great, and the solutions will not
always come easily. But, we cannot afford not to act. The members of my
union stand ready to work with you and others to restore the American
Dream.
______
PREPARED STATEMENT OF DAVID MARCHICK
Managing Director,
The Carlyle Group
May 13, 2009
Mr. Chairman and Members of the Subcommittee: Thank you for the
opportunity to testify today on the impact of the financial crisis on
manufacturing. A healthy manufacturing base is essential for our long
term economic position, and no sector has been hit harder in this
downturn than the industrial and manufacturing sector. I am also
pleased to testify alongside Leo Gerard, President of the United Steel
Workers (USW), with whom we have worked very closely on a variety of
investments and issues.
Carlyle and Manufacturing
The Carlyle Group is one of the world's largest private equity
firms, with $85.5 billion under management and current investments in
around 260 companies around the world. Our core business is investing
in small, medium, and large companies, improving their performance, and
providing attractive returns to our investors, the largest group of
which are public pension funds in the United States.
Over Carlyle's 22-year history, we have been a significant investor
in the U.S. manufacturing sector because of our confidence in the
creativity, vibrancy, and dynamism of our Nation's industrial base and
because American workers are the most productive in the world. More
specifically, we have been a significant investor in the aerospace,
automotive and transportation, consumer, chemicals, building products,
metals, and technology sectors. Today, we have more than $9 billion of
equity invested in more than two dozen companies that manufacture
products in the United States ranging from aircraft components to
semiconductors to auto parts. We are also proud to be a significant
investor in Ohio, where two of our companies, Veyance Technologies and
John Maneely Company, employ thousands of workers manufacturing
conveyer belts for coal mines, tracks for armored tanks and steel pipe
and tube for the construction and energy industries. Approximately 80
percent of the employees at John Maneely and two-thirds of the
employees at Veyance are members of industrial unions, primarily the
USW.
Carlyle's strategy is to invest in companies with leadership
positions in their product areas, back management teams with vision and
operational discipline, and invest in growth. We often will acquire
noncore divisions of companies from large multinationals and, with a
singular focus on their product areas, improve and expand the
companies. And, contrary to popular belief, we often hold our
investments for many years before we are satisfied that our work with
management has achieved the desired results.
For example, we acquired Veyance from Goodyear, Allison
Transmission from General Motors, and Hertz from Ford. Allison, for
example, is the global leader in automatic transmission for Class V and
larger trucks, with a heavy manufacturing presence in Indiana. When we
and Onex, another private equity firm, acquired Allison from GM in
2007, truck transmissions were far from General Motor's top priority.
We and Onex are working closely with Allison's management to enhance
research and development, including with respect to hybrid
transmissions, expand products offerings, and increase exports from
Indiana to Asia. We are also proud that, through close collaboration
with the United Auto Workers (UAW), Allison's management has been able
to reduce labor grievances from 2,400 at the time of the acquisition to
less than 60 today.
In the last 12 months, we sold two industrial companies, both of
which exemplify the work we pursue on a daily basis.
Carlyle acquired a Kentucky-based company called Kuhlman Electric
in October 1999. Kuhlman designs, manufactures, and markets a broad
range of transformers for electric utility distribution systems that
serve commercial, industrial, and residential customers. We acquired
Kuhlman when the industry was strong and the company's sales and
revenue were on the rise. Shortly after the acquisition, Kuhlman was
hit by one of the worst-ever downturns in the utility industry caused
by, among other things, the California energy crisis and the
dislocation in the markets related to Enron. Revenue dropped for four
consecutive years, including 17 percent in 2002 alone. Employment and
sales volumes also declined. By December 2003, Carlyle had written down
the value of this investment to zero. But rather than throw in the
towel, we and Kuhlman's management and workers redoubled our efforts to
make this company a success. Because the value of the investment was
written down to zero, Carlyle did not seek additional investment from
its investors. Instead, partners at Carlyle invested their own money to
keep Kuhlman afloat, enabling the company to retool and restructure. By
2007, sales had increased and employment was up 25 percent from the
time we acquired Kuhlman. In August 2008, after a 9-year ownership
period, global power company ABB acquired Kuhlman.
Another example is AxleTech, a medium-sized, Michigan-based
manufacturer of heavy axles. We acquired Axletech in September 2005 and
sold the company in December 2008. In the more than 3 years we owned
Axletech, the company expanded product offerings and designed stronger,
more durable suspension systems and components for light, medium, and
heavy tactical and combat vehicles, including the MRAPs that our
soldiers use in Iraq. During our ownership period, revenue and
employment more than doubled, and the number of UAW-affiliated
employees increased by almost 50 percent. Although small, Axletech may
be one of the only UAW-affiliated companies that has created, and not
lost, jobs in the last 5 years.
These are two success stories. And, according to a recent study by
economist Robert Shapiro, they are typical of the performance of
manufacturing firms when private equity firms take stakes in them.
Sales and capital expenditures, on average, grow faster than the
national average. Unfortunately, the financial crisis has had a
devastating impact on parts of the manufacturing sector, and some of
our companies have been negatively affected.
The State of the U.S. Manufacturing Sector
Manufacturing is the bedrock of our Nation's gross domestic
product, producing approximately $1.40 of additional economic activity
for every $1 of direct spending in the sector--more than all other U.S.
industries. The manufacturing sector has driven productivity growth in
the United States, and manufacturing workers make on average 41 percent
more in wages than the rest of the workforce. Unfortunately, the
manufacturing sector, particularly in the Midwest, has been the hardest
hit by the financial and economic crisis.
Credit is the lifeblood of the manufacturing economy, and when the
credit crisis hit, the industrial sector was immediately affected.
Allison provides a good example. Free and available credit is critical
throughout the manufacturing and distribution chain in the industrial
truck sector. When Allison sells a transmission to an Original
Equipment Manufacturer (OEM), the OEM typically buys Allison's products
for inventory using credit. When the OEM sells a bus or truck to a
dealer or distributor, and when a dealer or distributor sells a truck
or bus to an end user, those transactions also require the use of
credit.
When the credit crisis hit, it negatively affected each stage in
the manufacturing and sales process. The sector literally fell off a
cliff. When one part of the manufacturing sector is hit, it flows
through other parts of the economy, creating a vicious cycle.
Ultimately, this results in lost sales, lower demand and higher
unemployment. The chart below shows what seems to be a clear
correlation between the drop in manufacturing orders and increase in
unemployment. Importantly, the uptick in the bottom right of the chart
does not indicate a return to growth but rather a reduction of the rate
of contraction, a decline of well over 15 percent in year-over-year
orders.
Widely available data shows the staggering hit the manufacturing
sector has experienced. The downturn in some parts of the manufacturing
economy has been depression-like, not recession-like. A few examples:
Steel production dropped by more than 50 percent between
August 2008 and January 2009. Today, the steel sector is
operating at slightly more than 40 percent of capacity. Only 8
of the 28 blast furnaces in the United States are in
production.
A staggering data point: Through the beginning of May, the
U.S. steel industry is producing at a rate last seen in 1939.
After falling 34 percent between 2005 and 2007, private
residential construction dropped by another 33 percent in
2008--and is now at a run-rate 44 percent below that level.
This has decimated manufacturers of building products.
Suppliers to the Big 3 have seen drops in revenues in
excess of 50 percent, and the impact of this decline in demand
has created ripple effects throughout their supply chains.
The combination of dramatic drops in demand with lack of
availability of credit has placed small, medium, and large
manufacturing companies under severe stress. In these circumstances,
managers stop focusing on profits and instead focus on liquidity and
survival. Restructuring under Chapter 11 is an undesirable option today
because of the lack of debtor-in-possession (DIP) financing. In normal
times, companies use Chapter 11 to reduce debt, restructure operations,
and lower costs. DIP lenders gain a preferred, senior status when
lending into a Chapter 11 process. Today, however, DIP financing is
scarce. As a result, filing under Chapter 11 could easily result in
Chapter 7 liquidation.
There has been a significant amount of discussion in recent weeks
of the ``glimmers of hope'' in the economy. On the positive side of the
ledger, it does appear that the free fall has stopped. Consumer
confidence is inching forward. The ISM index, a commonly used barometer
of manufacturing activity, suggests that the rate of decline is
slowing. And housing inventory in certain parts of the country has
dropped. The Federal Reserve's extraordinary intervention in credit
markets has freed credit up for the most credit worthy borrowers.
Although there have been some positive signs, the economy is still
contracting. Whereas some parts of the economy may be at or near
bottom, other parts of the economy are just beginning their downward
cycle. The aerospace industry, for example, typically lags the rest of
the economy both going into downward cycles and coming out of them. The
foreclosure crisis shows no signs of abatement. The Wall Street Journal
reported on May 6 that the downturn in home prices has left nearly 30
percent of U.S. homeowners owing more on a mortgage than their homes
are worth. Until Americans across the country feel secure in their jobs
and their homes, they won't begin spending again.
We would caution against reading one or 2 months of data and
creating too much optimism. We hope that we will turn to growth again
soon, but it is too early to tell, in our view. Credit markets remain
severely compromised. Bank lending remains anemic, particularly to
small- and medium-sized companies. The nonbank credit system is
moribund. Unemployment will likely increase as consumers continue to be
very cautious in their spending patterns. Finally, even if we are at
the bottom, it will take years to climb out of the hole.
Policy Options
I would encourage Congress to avoid a sense of complacency and
continue to support aggressive policy efforts by the Administration and
the Federal Reserve.
The Administration, Federal Reserve, FDIC, and the Congress have
been active, creative, and aggressive in their policy responses to the
crisis. Secretary Geithner and his team deserve credit for not only
being designing strong policy responses, but also articulating a
conceptual framework to attack the problems with the economy:
increasing aggregate demand; restoring credit markets; and mitigating
problems in the housing sector. Without these actions, it is hard to
imagine the carnage in the U.S. economy. A strong policy response is
essential for the resumption of market confidence. And strong policy
actions to strengthen credit markets are essential for the resumption
of growth in the manufacturing sector.
Congress should be commended for increasing spending on
infrastructure projects as part of the stimulus package earlier this
year. But now the real work begins: deploying the $311 billion in
Federal, State, and local spending in a way that jump-starts the
economy and creates jobs. The key to success of the stimulus is
maximizing the economic activity generated by each tax dollar spent.
The more money spent in the manufacturing sector, the greater the
economic benefit. That's why it's so important to concentrate the
expenditures on products with significant domestic value added, which
will more quickly generate more jobs and economic benefits.
One other point on the stimulus: unless the credit markets are
repaired, the benefits of the stimulus package could be blunted.
Unfortunately, in some cases, suppliers that want to fill orders
related to stimulus demand don't have access to working capital
necessary to buy parts and equipment to fill those orders.
The Administration and Federal Reserve's efforts to jumpstart
credit markets have been important and well designed. For example, the
Term Asset-Backed Securities Loan Facility (TALF) seeks to bring
liquidity to the securitization market, the once large but now largely
closed source of funding for residential mortgages, commercial real
estate, small businesses, and large corporations. Year to date Asset
Back Securities (ABS) financings are way down, and this financing
source is critical for credit for consumers, businesses, and
manufacturers.
Treasury and the Federal Reserve should be applauded for expanding
the asset classes eligible for TALF funding to include commercial real
estate, auto fleets, and dealer floor plans. At the same time, while it
is critical that the Federal Reserve limit its risk exposure, potential
beneficiaries, including auto dealers, may not be able to benefit from
these securitizations because they may not be in a position to qualify
for or support a AAA rating, especially because monoline insurance
enhancement is no longer available in this market. Policymakers should
consider expanding the credit criteria for securities that qualify for
TALF support.
One important area of future focus for Treasury and the Federal
Reserve will be to ensure that the corporate loan market remains
vibrant. Today, only six large publicly traded companies are rated AAA,
showing how difficult it is to achieve AAA rating. Small, medium, and
large manufacturing companies, for example, lack access to term loans,
working capital facilities and the bond market. This means that they do
not have financing to undertake capital improvements, to fund research
and development projects, or to fund new inventories. Moreover, given
the staggering amount of new loans that were issued in the 2005-2007
that will come due in 2010-2014, it will be essential that credit
markets can facilitate refinancing of this debt. Hopefully, credit
markets will rebound in time, but if not, the Federal Reserve and
Treasury will need to find ways to support the corporate loan market to
avoid massive bankruptcies.
Allow me to flag three other areas of potential policy actions by
the Treasury and Federal Reserve, which hopefully this Subcommittee
will support.
First, once the economy starts to grow, businesses will need to
increase inventory. To do so, they will need access to working capital.
Today, companies' access to working capital loan facilities is very
limited. I would encourage this Subcommittee to explore ways to
invigorate this part of the credit market, which will be essential for
recovery. The program recently launched by the Administration to insure
receivables to the auto makers provides a good starting point.
Second, I would encourage the Committee to explore ways for Federal
Reserve and Treasury programs to facilitate franchisee financing. Small
business is a powerful and important driver of economic expansion. The
relationship between lending, small business jobs and economic output
can be summed up by the following: For every million dollars of lending
obtained by small businesses, 34.1 jobs are created and $3.6 million in
annual total economic output is realized. We know this through our
investment in Dunkin Brands, which last year created 762 new Dunkin
Donut and 124 Baskin Robbins stores in the U.S, resulting in more than
20,000 new jobs. A new franchise creates construction jobs, demand for
new equipment and material, and employs dozens of workers. The loan
market for franchisees, unfortunately, is very weak, and many
franchisees are either not eligible for SBA loans or find the process
too bureaucratic and slow. As a result of the credit crisis, many of
the traditional lenders have pulled out of the market. Making capital
available to small businesses and franchisees is critical to growing
local economies.
Third, the number of bankruptcies will inevitably increase this
year. The absence of an active debtor-in-possession financing market
will cause companies that otherwise would be strong candidates for
restructuring to instead liquidate. Without an active DIP financing
market, unemployment will continue to soar and companies that should be
restructured will cease to exist. I would encourage the Subcommittee to
work with the Treasury and Federal Reserve to explore whether policy
actions could help bring liquidity to the DIP financing market.
Finally, a few words on General Motors. It is hard to overestimate
the importance of the auto sector to the U.S. economy. Virtually every
manufacturer touches the auto sector in one way or another. Auto
suppliers are already under distress, and the lack of orders and lack
of credit has virtually eliminated any cushion. If not handled
properly, a GM bankruptcy could be the ``Lehman Brothers'' of the
manufacturing sector given the sensitivity of the automotive supply
chain. It could affect suppliers outside the auto sector, including
commercial vehicle, heavy equipment, and even military suppliers. If GM
is indeed required to file under Chapter 11 reorganization, it will be
critical that the process be efficient, quick, and transparent. It will
be essential that GM honor its commitments to suppliers and business
partners. A GM filing with any type of meaningful trade payment delays
or impairments could push the next group of troubled suppliers into the
abyss. And, as Leo Gerard has said, it is important that GM maintain as
much manufacturing as possible in North America. I also want to
compliment you, Mr. Chairman, on your work with Senator Stabenow on the
``cash for clunkers'' legislation, which I encourage the Senate to
adopt.
Conclusion
Thank you once again for calling this hearing on the impact of the
financial crisis on the manufacturing sector. Unfortunately, as
mentioned above, the manufacturing sector has been hit harder than
virtually any other sector, and no other sector is more important to
the vitality and vibrancy of the U.S. economy. The Congress, Treasury,
and Federal Reserve's policy actions have been helpful and important in
reducing the impact of the crisis, but additional and broader policy
actions will be needed.
One of the hallmarks of the U.S. economy is its resilience. The
U.S. economy is more flexible, more diverse, and more dynamic than any
other economy in the world. We are experiencing the most difficult
economic circumstances of most of our lifetimes, but even in the
darkest days, we should be comforted by the fact that we will rebound,
retool, and return to growth and prosperity.
______
PREPARED STATEMENT OF WILLIAM GASKIN
President,
Precision Metalforming Association,
On Behalf of the Precision Metalforming Association and National
Tooling and Machining Association
May 13, 2009
Mr. Chairman, Ranking Member DeMint, Members of the Subcommittee,
thank you for the opportunity to testify today. My name is Bill Gaskin,
President of the Precision Metalforming Association (PMA) based in
Independence, Ohio. We have partnered with the National Tooling and
Machining Association (NTMA) in Washington to speak with OneVoice on
behalf of small middle-market manufacturers including thousands of
manufacturing companies producing stampings, fabrications, machined
components, tooling, plastic injection molds, and other products for
the defense, aerospace, medical, and automotive industries among many
others critical to our national and economic security. Our combined
membership totals more than 2,500 companies, located in every State,
with average employment between 40 and 100 persons.
Small middle-market manufacturers are being clobbered by the credit
crisis and are in serious trouble, especially if they manufacture
parts, components, and assemblies for the automotive, residential/
commercial construction, appliance, truck, and commercial aircraft
industries. This situation impacts hundreds of thousands of jobs,
jeopardizes our ability to respond to any military situation, and
weakens the manufacturing base in the U.S. Importantly, it also has
impacted our ability to innovate, allocate sufficient funds to R&D, and
provide growth opportunities for the future. Policy implications for
your consideration relate to the need to restore access to credit for
middle-market companies, providing stability in the face of
unprecedented weakness in the automotive supply chain and other
markets. Unless solutions are found, and quickly, there is likely to be
a cascade of company failures over the next few months among middle-
market manufacturers. The most financially precarious part of the
business cycle is when the end of the downturn is reached and cash (or
credit) is required to rehire workers and buy raw materials to supply
customers with finished product.
Small middle-market manufacturers are bearing the brunt of the
current global economic downturn. It has impacted virtually all market
sectors in every State. PMA and NTMA members report this is not limited
to the automotive industry, but includes aerospace, truck, appliance,
construction, off-highway, and most every other market as well. As an
example, as travelers fly less, the commercial and private airline
industry cuts back on orders and decreases the demand for components
and tools. In addition, because our companies have undergone
significant diversification in their customer base in the past several
years, when one sector of the economy begins a slide, it disrupts the
entire supply chain reverberating throughout the economy.
In my more than 30 years in this industry, these times are by far
the most dire times I have seen for stampers, roll formers, machining,
tooling, and mold-building companies who comprise the thousands of
small middle-market suppliers who employ millions of workers around the
country. Today, the typical metalforming company has annualized sales
which are 35 percent lower than 1 year ago and they have had to
eliminate nearly 38 percent of their employees. And it is going to get
worse--49 percent report that shipping levels will be down over the
next 3 months compared to the last 90 days. Our monthly business
conditions report for May, released yesterday, indicated that 39
percent expect that their new orders for products will be lower over
the next 3 months than they were over the past 3 months, and only 17
percent think shipments will rise in the next 90 days. In the same
survey, 80 percent of metalforming companies reported that their
facilities are working on short time or have laid off employees,
compared with roughly 20 percent this time last year. It is highly
likely that somewhere near 30 percent of these privately held or family
owned businesses will not exist 1 year from now, unless the U.S.
government takes additional steps to support manufacturers, including
taking steps to free up lines of credit to these industries.
To quote a metalworking company with 60 employees that responded to
a credit survey this weekend, ``No bank currently wants to deal with
manufacturing--they are solely about mitigating their risk with their
manufacturing clients.'' This is the reality we face.
Manufacturers across all industries report challenges to their
credit health. Of respondents to the survey conducted May 9-11, 2009,
66 percent reported problems in their credit situation with more than
half of them (36 percent of the total) experiencing ``serious''
problems. This includes companies in the medical, agriculture, and
appliance sectors along with those supplying the automotive and truck
sectors. In addition, more than half are having difficulty accessing
credit for day-to-day operations. Our greatest concern is that 72
percent anticipate difficulty securing the credit they need to purchase
raw materials and rehire workers as business conditions improve later
this year. And more than 70 percent of metalworking companies who need
credit to finance capital investments to upgrade their domestic
production facilities are unable to obtain the credit they need to do
so.
In the current environment, manufacturers who would invest in
domestic production and stimulate growth are denied the lines of credit
they need to help jump-start the economy. While the Federal government
is investing billions of dollars through the economic stimulus package
for construction projects, companies integral to those projects lack
the financing they need to supply the stampings, fasteners, tooling,
and molds to assemble the bridges, build the equipment, and manufacture
fuel-efficient vehicles. If this situation continues, the reality is
that our customers will increasingly simply offshore the job to a low-
cost country. And we all know that once the job is gone, it will never
return. Preservation of our defense industrial base and our ability to
manufacture critical supplies for national security needs is essential
to our survival. Any disruption in the domestic supply chain can cause
a reaction felt throughout our lives.
The Federal government has spent hundreds of billions of dollars
extending support to financial institutions, General Motors, Chrysler,
and large Tier 1 companies in the automotive supply chain, but the
benefits have yet to trickle down to smaller middle-market Tier 2 and
Tier 3 suppliers. The Automotive Supplier Support Program is helpful to
Tier 1 suppliers of General Motors and Chrysler, but we have seen
little benefit to Tier 2 and 3 companies. Of course, any help to the
OEMs and Tier 1 suppliers helps our customers and therefore helps us
survive, but we cannot continue providing components, tooling, and
services to Tier 1 suppliers or vehicle manufacturers if we cannot
guarantee or insure payment. In the past, Ford, GM, Chrysler, and
others would pay downstream suppliers directly. However, over time,
they began to pass payment through the Tier 1 suppliers. Recognizing
the dire situation throughout the supply chain, I have heard recent
reports of GM again bypassing the Tier 1 and paying the Tier 2
suppliers directly to ensure payment. That temporary Band-Aid cannot
work for everyone and the government should play a more direct role.
I believe the Federal government can extend relief to middle-market
companies by insuring or guaranteeing receivables of businesses
supplying a vehicle manufacturer which receives taxpayer funds. For
example, a tooling company could register their purchase order with the
government to either guarantee or insure (or reinsure) payment under
certain terms. The government, as is the case under current U.S. and
Canadian programs, could charge downstream suppliers a 2 or 3 percent
fee depending on the service provided. Under this scenario, the Federal
government would make money, Tier 2 and 3 suppliers could continue
operations providing tooling and components with the confidence that we
will receive payment within a reasonable amount of time. This would
also provide a significant comfort level to our creditors who would
have assurance that we will remain viable.
The entire automotive supply chain tooling payment process has been
dysfunctional for some time, and NTMA, PMA, and others are working with
OEMs and others on long-term plans to fix the situation. However, in
the short term, we need relief and one key element is for the
government to provide a ``safe passage'' mechanism of our receivables
through higher tier suppliers in the event of bankruptcy or disruption
in the supply chain. There is no question the Federal government has
much more leverage and resources to collect on outstanding invoices
than the typical tool and die manufacturer with 50 to 100 employees.
Over the years, the domestic automotive industry has adopted a
model for tooling payment that is unsustainable over the long term.
When credit was easy, we were willing to live with it, but in the
current environment we cannot continue because we can no longer secure
credit for operations. We are working with the automobile
manufacturers, Tier 1 suppliers, the White House Automotive Task Force
and key players on both sides of the U.S.-Canadian border to find long-
term solutions. In our meetings, we are not only focusing on the
payment aspects of our industry but also trying to improve tooling
design and part design to make our domestic industry more competitive.
It is critical that we all partner together--industry, government, and
labor--to help us emerge from the current situation more globally
competitive and efficient.
Credit lines in our industry, which currently average 14 percent of
annual sales, are largely based on a formula that values 80 percent of
current trade receivables and 50 percent of the value of raw material
and finished goods. In today's environment, receivables are discounted
even more severely. This limits the ability of the business to invest
in profitable growth areas due to lack of resources. Many lenders are
severely restricting lines of credit if a manufacturer serves a Tier 1
automotive supplier. In addition, our members report that their ability
to purchase credit insurance on accounts receivables is also
drastically reduced. In some cases insurance brokers are only backing
10 percent of a Tier 1 automotive receivable, whereas the same company
was typically able to secure 70-80 percent in the past. The lack of a
market for guaranteed receivables further exposes small middle-market
manufacturers to financial strain.
On several occasions we have reached out to our memberships and
educated them on government support programs such as the newly modified
Small Business Administration's 7(a) and 504 loan programs. Yesterday,
I heard from one member in Southern California who had applied for an
SBA loan from three banks, including Omni National and Wells Fargo.
Unfortunately, the company was unable to secure any help from SBA, as
the bank's underwriting standards were too strict to approve the loan.
Personal guarantees required by SBA loans are also a problem, as
they are required on 100 percent of the loans. Yet in the non-SBA
market, our members report that personal guarantees are required only
about 40 percent of the time. Understandably, in today's environment,
many business owners are too concerned about losing their family home
to meet the personal guarantee requirements under the 7(a) program.
Also in today's environment, if your business is connected with the
automotive industry, you are highly unlikely to be able to qualify for
SBA financing despite the government providing a 90 percent backing of
the loan. Last Thursday, at a PMA automotive parts suppliers conference
in Novi, Michigan, a representative of the SBA briefed the audience
about SBA financing opportunities. In response to a question about
whether the speaker was aware of ANY automotive supplier who had been
approved by a Detroit-area bank for an SBA loan, the speaker indicated
that he was not aware of a single loan being approved.
Chairman Brown, I applaud your efforts to highlight the credit
crisis in manufacturing industries. I urge the Federal government and
this Congress to take a ground-up approach. Rather than focusing almost
exclusively on large financial institutions and the largest
manufacturing companies, policymakers must support the small middle-
market companies that are the backbone of our economy. This is not an
Ohio problem. This is not an automotive problem. Access to credit and
preservation of our domestic manufacturing base is a global problem
that requires an American-led solution and it starts on Main Street,
not Wall Street.
Thank you for the opportunity to testify before you today.
______
PREPARED STATEMENT OF EUGENE R. HAFFELY, JR.
Chief Operating Officer,
Assembly & Test Worldwide, Inc.,
On Behalf of the Association of Maunufacturing Technology
May 13, 2009
Introduction
Thank you for holding this hearing today and for giving me the
opportunity to be here and participate.
I am Chief Operating Officer of Assembly & Test Worldwide, Inc.,
(ATW) headquartered in Dayton, Ohio. ATW is an American-owned company
that designs and manufactures assembly and test equipment for global
manufacturers. In 2008, our customer base was 60 percent in the
automotive and heavy truck industries. We are a critical supplier of
engineered special equipment which enables the production of fuel
efficient, state-of-the-art automobile engines, fuel injectors,
transmissions, and drive modules. We also provide custom designed
turnkey automation for the production of medical devices,
pharmaceutical packaging, solar panels, and various defense industry
related products. Due to the expected decline in mainly our automotive
business, we have been forced to reduce our workforce by over 25
percent to 550 U.S. employees.
I serve on the Board of Directors of AMT--The Association For
Manufacturing Technology. Pursuant to House Rule XI, I am obliged to
report that AMT received $225,100 from the Commerce Department's Market
Development Cooperator Program for a technical center in China--
$207,254 of which was disbursed in 2005 and $17,846 in 2006.
AMT represents more than 400 manufacturing technology providers
located throughout the United States--including almost the entire
universe of machine tool builders who manufacture in America. Our
members cover the full range of engineering and manufacturing
capabilities--from product innovation, design, assembly, and
installation services for a diverse range of technologies including
automation, material cutting and forming, to workholding, cutting
tools, assembly, inspection, and testing, and computer communications
and control systems. Our employees include engineers, tool and die
makers, mechanics, electricians, and of course the many professionals
in administrative jobs. The overwhelming majority of our members are
small businesses--more than half have revenues under $10 million--but
what we contribute has a large impact on our country's ability to
manufacture competitively and hence on the economy as well.
Manufacturing technology provides the innovative tools that enable
production of all manufactured goods. These master tools of industry
magnify the effort of individual workers and give an industrial nation
the power to turn raw materials into the affordable, quality goods
essential to today's society. In short, we play a significant role in
making modern life in an industrialized society possible.
Manufacturing technology provides the productive tools that power a
growing, stable economy and a rising standard of living. We represent
an industry with a proud history that dates back to the founding of our
country, and today we are recognized worldwide for the advanced
manufacturing technology we produce for a wide range of industries.
These tools make possible modern communications, affordable
agricultural products, efficient transportation, innovative medical
procedures, space exploration, and the everyday conveniences we take
for granted. If we are to provide medical care to all Americans, a
strong creative manufacturing base will assist this noble objective by
supplying creative innovative solutions and tools that will reduce our
medical costs. Our products also create the means to provide a strong
and technologically sophisticated national defense.
The manufacturing technology industry is critical to building and
maintaining the strong and dependable defense industrial base that
enables our military to protect our citizens and our ideals around the
world. Mr. Chairman, I am here to tell you that if nothing is done to
get credit flowing again to America's manufacturers, we lose more than
our ability to manufacture automobiles or washing machines in this
country. We lose our ability to create the new innovative defense
systems that provide an advantage over our Nation's adversaries
throughout the world. We also risk dependence on foreign sources for
our defense needs. I am not talking about merely producing inexpensive
and convenient goods for everyday life. I am talking about an industry
that is essential to America's national security.
Mr. Chairman, as crucial and necessary a part of our American
manufacturing sector as we are, our industry is in danger of not
surviving the current economic chaos, and the major reason is because
the lack of credit is endangering the continued existence of virtually
all of our companies. Although the Treasury Department's Troubled
Assets Relief Program (TARP) is focused on addressing the credit crisis
and getting money flowing through the economy again, there is still no
evidence that this is happening in the industrial sector in any
significant way. It certainly is not apparent to the members of the AMT
or to the several hundred thousand small businesses that rely on their
products to remain in business!
The Credit Crisis
Over the past few decades, AMT members have faced significantly
increased competition from abroad, and they have seen a decline in
their domestic market share. But our industry has weathered every storm
and emerged even stronger. The depth of this current economic crisis,
however, is threatening its very survival. In ATW's case, revenues are
projected to decline approximately 40 percent in 2009 primarily due to
weakness in the automotive sector. During the banking crisis last fall,
over $20 million of existing orders were cancelled by the U.S.
automotive companies and their suppliers due to their uncertain
futures. This has never occurred in the history of our company.
The meltdown of the financial services sector has frozen credit to
companies like mine. I have been involved for 30 years in the
innovation application of manufacturing technology toward the objective
of increasing the reliability and efficiency of manufacturing
processes. In 2008, we were a profitable business with $150 million in
revenue. We can operate with minimal losses in this difficult
environment and will remain a viable company if reasonable credit is
available. However, in all my years in business, I have never seen a
more difficult time than the present for companies in our industry to
obtain the credit necessary to continue to stay in business.
Many companies in the manufacturing technology sector historically
have been debt-financed, with some of that debt actually personally
guaranteed by the owners themselves. For the last 3 years, however, it
has become increasingly difficult to obtain financing for businesses
like mine (and many of my customers) because we are small privately
owned manufacturing companies and more importantly because of our ties
to the automotive industry. As you can imagine, the lending environment
has gotten worse rather than better these last months as the automakers
struggle to survive and restructure. The overall uncertainty in our
economy has caused our customers to take defensive measures, delaying
existing production improvement programs and cancelling near term
orders. AMT members are reporting a reduction in backlogs of 40-70
percent.
The future holds promise, but an increasing number of banks are
reluctant to lend to automotive manufacturing companies whose revenue
forecasts are dismal for the next few quarters. ATW has been asked to
quote material handling and test equipment for the General Motors (GM)
Tier 1 electric vehicle battery suppliers, but we are hesitant due to
the exposure to GM. This equipment is critical to developing an
electric car platform for the United States.
An AMT survey on the credit crisis conducted earlier this year
asked if and how our members are affected by the tightening of credit
throughout the financial sector. An overwhelming majority of
respondents have experienced a tightening of credit and altered the way
they do business as a result. Additionally, most have experienced
changes in lending terms, and some reported that banks have cut (or
threatened to cut) their lines of credit altogether. Most telling are
the comments given by survey respondents in the open-ended question at
the end of the survey--comments from company owners across the country
painting a profoundly bleak picture of what is really going on in the
heart of American manufacturing, in case the grim statistics are not
enough evidence that more must be done. I have included those comments
with my written statement. (See AMT Credit Survey Comments at http://
www.amtonline.org/amt_items/031209surveycomments.pdf.)
I appreciate that solving this problem is a hugely complex issue--
and I do not presume to give you a simple answer--but I would like to
offer suggestions that would help get credit flowing again to companies
like those in the manufacturing technology industry.
SBA Loan Programs
The recent global economic collapse has resulted in a severe
curtailment in capital spending. Many AMT members have seen a dramatic
decrease in orders. Some have suffered through months without a single
order. Others have reported that their new orders are off by 70 or 80
percent. That is due not simply to a lack of demand but more
significantly to the lack of credit up and down the manufacturing
production chain. Although many of us have sought bank loans to stay in
business, NO ONE is lending in this environment--NOT EVEN the SBA
Preferred Lenders, who must rely on a level of credit scrutiny that
many cannot pass due to the unprecedented recent events.
I applaud the Congress for including the Small Business
Administration (SBA) and its 7(a) loan program in The American Recovery
and Reinvestment Act of 2009 (ARRA). However, higher guarantees and
lower fees alone will not enable many small businesses, including many
AMT members and customers, to obtain urgently needed funds to stay in
business and preserve jobs. The SBA recently reported an increase in
7(a) loan volume since the ARRA was enacted. However, even with 90
percent guarantees and no borrower fees, our members have not seen an
increase in SBA lending. One reason is that it is impossible for many
AMT members to quality for an SBA 7(a) loan in this current recession.
Companies cannot obtain an SBA loan if they do not have sufficient cash
flow in these trying times.
SBA loan regulations state, ``Repayment ability from the cash flow
of the business is a primary consideration in the SBA loan decision
process.'' Given the extreme downturn in the economy, most small
businesses have suffered a dramatic decline in business and will not,
in the near term, be able to meet normal credit standards. We must
reprioritize the metrics upon which 7(a) loan decisions are made away
from cash flow as the primary consideration. I would suggest
alternative but equally valid criteria for judging credit worthiness of
a prospective borrower in the current economic environment such as:
backlogs, assets, employment levels, and historic performance.
In addition to changing the metrics for SBA 7(a) loans, the
Administration should move quickly to fulfill its pledge to purchase up
to $15 billion in SBA secured assets. The secondary market for these
SBA loans is frozen; forcing SBA preferred lenders, which include
community banks and credit unions, to keep these loans on their books.
This has severely restricted SBA 7(a) lending. The Administration's
plan to purchase SBA securities should get banks lending again.
However, a mechanism must be in place to ensure that banks increase
their 7(a) lending.
Lastly regarding SBA, the House version of the ARRA contained a
provision that would allow small businesses, repeatedly turned down for
bank credit, to apply directly to the SBA for a loan. The agency would
be required to first forward the application to lenders within 100
miles of the applicant's location. If none of these lenders decide to
make the loan, the SBA would send the application to participants in
the agency's Preferred Lenders program. If these lenders pass, the SBA
itself could then originate, underwrite, close, and service the loan.
Unfortunately, this provision did not make it into the final bill. I
urge Congress to take another look at establishing this type of direct
loan program within the SBA.
Title III of The Defense Production Act Loan Guarantees
As I am sure you would agree, Mr. Chairman, our national security
depends on a strong manufacturing technology industry. It is at the
very foundation of America's defense industrial base--an industry that
produces the high technology that America depends upon to maintain its
military superiority over potential adversaries.
A bit of history is in order. In 1985, President Ronald Reagan
acknowledged our industry's importance when he declared the criticality
of certain categories of machine tools under Section 232 of the Trade
Act of 1962, authorizing our government to restrict the importation of
machine tools for reasons of national security. President Reagan
suspended that Section 232 finding after a Voluntary Restraint
Arrangement (VRA) was successfully negotiated with Japan and Taiwan.
That VRA limited the importation of machine tools into the United
States for a period of 5 years so that the domestic industry could be
rebuilt and strengthened. President Reagan's decision is one of the
very few times in our history that our government has made the decision
to restrict imports for national security purposes. It demonstrates how
essential our industry is to our national defense.
Unfortunately, the current credit crisis has left many AMT members'
very existence extremely precarious. I would argue that it threatens to
accomplish what low-cost foreign competition almost did in the 1980s--
with even more serious consequences.
For the past 7 months, banks have been denying credit to even the
most creditworthy manufacturing technology companies. This lack of bank
credit is threatening to drive those companies out of business. America
can ill-afford to lose our machine tool industry and other critical
parts of the defense industrial base that are now at risk. Without
these companies, this country would be forced to rely on foreign
sources to provide us the innovative manufacturing solutions the
defense industry will require in times of critical need. The Chinese
have been a generally reliable part of our peacetime industrial supply
chain. But do we really want to be dependent on them--or any other
foreign country--for critical products at a time of crisis?
ATW has a highly skilled domestic workforce that contributes to the
technological advancement of U.S. and global manufacturing. The failure
of our company would negatively impact this country's competitive edge
in special equipment design to the benefit of our European and Japanese
competitors. Not only that, if the U.S. defense required redeployment
of our domestic manufacturing capacity, ATW's expertise as a critical
asset would be gone.
The Defense Production Act (DPA) confers on the President the power
to mobilize the domestic economy in order to best supply the military
in the event of a wartime mobilization. It authorizes the President to
direct certain industries to produce vital military products. It also
authorizes the President to direct those industries to place military
production as a priority over civilian production in order to serve the
defense needs of our Nation.
In order to advance America's defense production needs, Title III
of the DPA provides for Federal loan guarantees to companies that play
an important role in our Nation's defense industrial base--companies,
like ATW, that would be important to mobilization efforts if it were
necessary to move from a peacetime economy to a wartime economy. The
Banking Committee has jurisdiction over the DPA, and I understand that
the DPA is up for reauthorization during 2009.
Mr. Chairman, I suggest that this Subcommittee consider increasing
the loan guarantee authority under Title III as it considers the DPA's
reauthorization, so that credit is available to our defense industrial
base companies that are unable to get credit elsewhere in the current
economic environment. This program allows assistance to be quickly
targeted and precisely applied to defense-related companies, such as
those in the manufacturing technology industry, that are in desperate
need of bank credit.
I would note, however, that the current Title III guarantee program
funding is insufficient to have an effect in this current crisis. Thus,
if this Committee decides to authorize Title III once again, it would
be necessary to provide significantly greater lending authority. With
U.S. Government guarantees under the DPA's Title III, I believe banks
in Ohio, and elsewhere around the country, would have the confidence to
get credit flowing to manufacturing technology companies and the many
other companies who make up the backbone of the defense industrial
base. Reauthorization at a higher loan guarantee level would be a step
toward protecting America's national security while at the same time
saving jobs and small industrial companies that are so important to our
economic health.
Conclusion
In his February 24 address to a joint session of Congress,
President Obama said that, ``the flow of credit is the life blood of
our economy.'' He also noted that, ``credit has stopped flowing the way
it should. With so much debt and so little confidence, these banks are
now fearful of lending out any more money to households, to businesses,
or to each other. When there is no lending, families can't afford to
buy homes or cars. So businesses are forced to make layoffs. Our
economy suffers even more, and credit dries up even further.''
Mr. Chairman, every member of AMT manufactures products in the
United States, and our products are located in factories around the
world. Each is fiercely competitive and determined to ensure that
American manufacturing technology remains preeminent. Our members
continue to create jobs and spur innovation by investing time and money
in their businesses to grow their share of the American Dream not only
for themselves and their families, but for their employees and their
employees' families as well. However in this economic crisis, most of
them are struggling not for that share of the American Dream but to
simply stay alive.
We must get credit flowing again to America's producers of
manufacturing technology and our customers. We are where it all begins
and we are where it will end for ``Manufactured in America.'' The only
way to break this cycle of job loss and bankruptcy is to provide the
manufacturing sector the cash flow we need to continue doing business
and securing American jobs. Building upon successful programs, such as
the SBA's 7(a) loan program and Title III of the Defense Production
Act, and implementing new targeted programs, such as the SBA direct
loan program included in the House version of the ARRA, are ways to
support companies that are unable to get access to credit, like AMT
members, while the economy recovers. AMT would be glad to discuss
additional suggestions for supporting America's manufacturing
technology sector during these difficult times.
The United States is perilously close to losing a critical
industry--one that we depend upon for both economic stability and
national security. The manufacturing technology industry provides
productivity improvements that level the playing field for America's
highly skilled workforce, helping us to compete against producers in
low-cost labor markets. It's not an exaggeration to say that essential
future innovations in manufacturing are simply impossible without a
robust supply chain that includes stable and healthy factory floor
equipment producers. We need your help. I hope that you will be able to
provide the legislative vehicles that can get us through this threat to
our existence.
Thank you for allowing me to testify today.
______
PREPARED STATEMENT OF LIEUTENANT GENERAL LAWRENCE P. FARRELL, JR.,
(USAF RET.)
President and Chief Executive Officer,
National Defense Industrial Association
May 13, 2009
Chairman Brown, I am Larry Farrell, President and CEO of the
National Defense Industrial Association and on behalf of our 1,518
corporate members, and just over 67,800 individual members, I'm pleased
to appear before the Senate Subcommittee on Economic Policy today to
emphasize the importance of manufacturing to the health of the U.S.
economy and security of the Nation. The Manufacturing Division of NDIA
has recently published a white paper entitled, Maintaining a Viable
Defense Industrial Base, which I urge you to review in addition to my
testimony today. (See http://www.ndia.org/Divisions/Divisions/
Manufacturing/Documents/MaintainingAViableDefenseIndustrialBase.pdf.)
Based upon your request to cover topics of vital interest to
manufacturing and in consideration of the reauthorization of the
Defense Production Act slated for later this year, I will address five
questions:
Why should Congress care about manufacturing?
How do manufacturers rely on credit?
How are manufacturing supply chains intertwined and what
happens when demand falls off?
What strategic and security considerations regarding
manufacturing should Congress know of?
What policies should Congress consider in supporting
American manufacturing?
Why should Congress care about manufacturing?
Congress MUST care about manufacturing simply because of its
enormous impact across all aspects of our Nation, including economic,
class, and security. While manufacturing has been declining as a
percent of GDP since the 1950s, manufacturing still remains the largest
productive sector in the overall U.S. economy at 13.6 percent, and the
U.S. produces more goods than any other country--$1.6 trillion worth,
according to the Federal Bureau of Economic Analysis. Additionally,
manufacturing multiplies each dollar spent into an additional $1.37 of
economic activity, higher than any other sector. However, the most
critical benefit of manufacturing is not simply the size of the sector,
but that manufacturing CREATES wealth by producing something of higher
value from materials or common components. It is not a service sector
that just transfers wealth between entities. And unlike other wealth
creators, such as mining or agriculture, the jobs produced by
manufacturing activities are generally higher paying and represent an
entry into the middle class for a large portion of the workforce. For
all these reasons and more, manufacturing is, and must continue to be,
the foundation of a strong economy, and thus needs active support by
Congress.
How do manufacturers rely on credit?
Manufacturers rely extensively on credit, particularly for working
capital. Thus, while access to credit for capital equipment or
facilities is necessary, the lack of credit to buy supplies and meet
payroll will more rapidly drive manufacturers out of business.
Manufacturers are obliged to purchase materials and supplies prior to
being paid by their customer. This problem is exacerbated by the fairly
long period between invoice and payment in the supply base, sometimes
up to 120 days.
A recent comment by Roger Stelle, a lawyer for many small
manufacturers in the Chicago area, reveals the degree of the current
situation: ``Many of my clients are contemplating filing or have
already filed for Chapter 11, not because their business volume has
fallen below previously viable levels, but rather because they can no
longer get credit to borrow for their long established working capital
needs.''
How are manufacturing supply chains intertwined and what happens when
demand falls off?
Manufacturing is most productive when company resources, such as
capital equipment or workforce, are being fully utilized to generate
product, or wealth. When demand falls off, and company resources are
not used to their fullest capacity, inventories rise and revenues
fall--initially impacting employment and if the decline is too severe
impacting the viability of the business. Diversity is one business
strategy that can mitigate a downturn in specific business segments. A
company that serves more than one market sector is less likely to face
failure from a downturn in one sector. Even in today's business climate
there are sectors that remain healthy, and many businesses that
participate in these markets, such as the Defense and Energy sectors,
remain viable. Therefore, supply chains intertwined among various
market sectors will promote more viable and robust manufacturing and
preserve jobs.
What strategic and security considerations regarding manufacturing
should Congress know of?
America relies on the development and implementation of advanced
manufacturing technologies to maintain a globally competitive
industrial base, which is strategically vital due to the 13 million
jobs contained within the sector. Our industrial base provides these
advanced manufacturing technologies through innovation and application
of technologies that promote both performance and affordability.
National security requires a manufacturing sector based on assured
sources to safeguard our economy and national defense and provide
trusted sources of supply to meet the demands of our citizens and
warfighter.
In today's global political environment, National Security includes
an underlying requirement for economic strength and viability, which in
turn requires an industrial base that generates wealth based upon
manufacturing goods, not based upon the transfer of wealth.
What policies should Congress consider in supporting American
manufacturing?
Above all else, manufacturing requires a senior leader in the
Administration, at a level sufficient to drive a national campaign
advocating the government's policies. Considering that agriculture is 3
percent of GDP and is represented by a department with a cabinet
position, a segment representing 13.6 percent of GDP such as
manufacturing should have greater visibility than a Deputy Assistant
Secretary within the International Trade Administration of the
Department of Commerce. We recommend that Congress endorse an Assistant
Secretary for Manufacturing within Commerce in a new top level
department, responsible for coordinating policy, strategic investment,
and workforce development.
We strongly endorse the reauthorization of the Defense Production
Act (DPA) with particular emphasis on:
1. Revitalizing the Interagency Task Force which administers the
DPA, with a chairman designated by the President.
2. Increasing the level of funding available for DPA to
approximately $500M across all Departments (DHS, DoE, DoD, DoC,
etc.) in order to significantly impact the domestic industrial
base.
3. Resuming the practice of loan guarantees under the Title III
Authority, in accordance with OMB guidance.
We strongly agree with the 2006 Defense Science Board
Recommendation that a stable funding profile should be established for
the Department of Defense (DoD) Manufacturing Technology (ManTech)
program, by returning the total program investment to 1 percent of the
RDT&E budget. (This would represent a $790M program, vice the $200M in
the Fiscal Year 2010 Budget.) Furthermore, we endorse the four
strategic thrusts of the DoD Manufacturing Technology Strategic Plan,
submitted to Congress in March 2009 by the Under Secretary of Defense
for Acquisition, Technology and Logistics, which emphasizes investment
in advanced manufacturing technology.
We recommend the use of Manufacturing Readiness Levels early in the
Development and Acquisition of Defense Systems as a ``Producibility
Stress Test'' to assess manufacturing feasibility and promote
affordability.
The average age of the U.S. manufacturing workforce exceeds 52
years. Policies are needed to attract, educate, and retain future
generations of skilled workers. The Federal government must help
encourage and promote manufacturing as a respected and desired career
path.
Another policy need is to incentivize Sustainable Manufacturing,
using a cohesive policy framework to include legislation such as S. 661
``Restoring America's Manufacturing Leadership Through Energy
Efficiency Act,'' currently under consideration by the Senate Committee
on Energy and Natural Resources. Timely enactment of this legislation
would result in more local (U.S.) manufacturing as the true impact of
global sourcing is better understood in terms of economic,
environmental, and social costs.
A final approach to decrease the impact of the credit crisis is to
encourage the practice of progress payments throughout the supply chain
by reducing required threshold value for which progress payments can be
made.
While considering the manner in which to pursue these
recommendations, I must note that an active Senate Manufacturing Caucus
could provide effective leadership for all the issues I've just
outlined. I urge you to revitalize this organization to advocate for
manufacturing within Congress.
Chairman Brown and Members of Subcommittee, I'm honored to have had
this opportunity to provide you a defense industry perspective on the
critical nature of manufacturing to our Nation, and hope that you
embrace the opportunity to strengthen the government's commitment to
manufacturing in the economic and national security interests of the
country.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR BROWN
FROM EUGENE R. HAFFELY
Q.1. Title III of the Defense Production Act is designed to
help companies that are integral parts of the defense
industrial base, so that they are capable of building the
weapons systems and weapons system components that are
necessary to procure in the event of a mobilization pursuant to
national emergency requiring the use of America's armed forces.
How would helping such companies stay viable during the
current recession have a crossover benefit to helping the
general manufacturing base gain access to capital to help them
through the economic downturn?
A.1. America's manufacturing base is an integrated group of
companies who are dependent on each other to provide services
to virtually all U.S. industries. Take for example a typical
production system that my company, Assembly & Test Worldwide
(ATW), would provide. When we design and build a system we
outsource a large amount of machining and tooling. Each of
these tooling suppliers is a part of a tooling industry that is
also critical to our national defense. They in turn must
purchase machine tools and related tooling accessories,
hopefully from U.S.-based companies, to make their machined
products. In addition, purchased materials are usually over 50
percent of ATW's final product and are provided by U.S.-based
manufacturers like Allen-Bradley controls, Hoffman enclosures
and Parker Hannifin fluid power and servo controls. They, in
turn, must tool their production systems with products and
services provided by other manufacturing companies. All of the
manufacturing technology and manufacturing companies are
customers of a vast array of service providers who rely on them
as a major part of their customer base. These service providers
are companies whose products range from insurances to
landscaping, medical and legal services. If manufacturing
technology companies have increased access to working capital
through Title III, it would introduce cash flow into the
manufacturing supply chain and the entire manufacturing sector
plus many service companies would benefit.
Many companies in my industry are at the low tiers of the
production chain but they are no less critical to the process.
If you don't have every single part of a wind turbine or a
smart bomb, for example, it won't work. And you need companies
in my industry to provide the means to make those parts and
assemble and test the end product. We don't want to depend on
foreign suppliers for the wind turbine or the smart bomb. An
expanded Title III of the Defense Production Act can help
ensure that we don't have to by making sure the companies that
are critical to our national defense survive this economic
crisis.
Right now, the number one problem facing U.S. manufacturers
is lack of credit. Looking back to just over a year ago, many
would not have predicted this crisis in the manufacturing
sector. Early last year, the manufacturing technology industry
was poised for a successful 2008 with substantial backlogs on
the books and orders on the horizon. At that time, access to
working capital was not a problem. However, as 2008 wound down
and the economic recession began to take hold, orders lagged,
cancellations mounted, and negative bookings resulted in
dramatically decreased backlogs. Now many of us are looking to
barely break even in 3rd and 4th quarters of this year, as some
companies have suffered through months without a single order.
Banks are not extending credit under these circumstances, even
to companies that they have long successful histories with. The
crisis in Detroit has only exacerbated the problem.
The country is at very real risk of losing an industry that
we depend on to protect our national security because companies
like ATW cannot access the credit we need to stay in business.
When our companies are forced to close their doors, it affects
the entire manufacturing production chain, in many industries,
all important to America's competitiveness. America's
manufacturers are natural innovators, and many of our most
successful innovations were developed from the close working
partnership that exists between product manufacturers and the
manufacturing technology suppliers. That informal partnership
between manufacturing technology suppliers and our customers
takes us from concept to factory floor to commercial
marketplace. Ink jet printing cartridges, electronic ignitions,
micro valves (in everything from appliances to artificial
hearts), are just a few examples of products whose
manufacturing process was engineered by an American
manufacturing technology supplier. U.S. innovators simply could
not have been a success in these industries without companies
like ATW that possess the engineering know-how to see a product
from idea to commercial application.
That is why Congress must act now to halt the decline in
manufacturing. If nothing is done, America's competitiveness
will continue to suffer and we, as a nation, will be forced to
go offshore to meet our defense needs. These are precisely the
harsh economic times that Title III is intended to protect our
critical industries against.
Q.2. My understanding of Title III of the Defense Production
Act, is that it assists companies that manufacture products
with both government and commercial applications. Do you think
that use of the Title III loan guarantee program authorities
help manufacturers attract that private financing that is
lacking today?
A.2. It has to improve the current situation. As I stated in my
written testimony, credit for companies like those in my
industry has all but dried up. By reducing risk with a loan
guarantee backed by our Federal government, cautious lenders
are more apt to start lending again. Once critical suppliers
get the working capital they need to start producing again, our
customers benefit, and our customers' customers' benefit, and
so on throughout the production supply chain as I described in
the previous question. As business improves and cash flow
increases, it should become easier to attract private sector
financing.
Extending Title III loan guarantees to companies critical
to national security will act as a lifeline to companies with
no other option. It will also introduce some much needed cash
into the entire cash-starved manufacturing sector, as the
effects of the loan guarantees ripple through the production
chain. This is exactly the type of program we need to help us
survive this trying time.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR BROWN
FROM LIEUTENANT GENERAL LAWRENCE P. FARRELL, JR.
Q.1. My understanding of Title III of the Defense Production
Act is that it assists companies that manufacture products with
both government and commercial applications. Do you think that
use of the Title III loan guarantee program authorities help
manufacturers attract that private financing that is lacking
today?
A.1. Yes, the use of the Title III loan guarantee program
authorities will significantly help both government and
commercial manufacturers attract private financing,
particularly the type of financing that is difficult to secure
in the current economic climate.
Title III loan guarantees and loans for working capital and
facility expansion are effective tools to assist businesses
that are viable, but are unable to obtain credit either on
reasonable terms or at all. Of particular importance to
manufacturers is the availability of working capital, which
pays salaries, buys supplies, and services creditors. Many
viable U.S. businesses, including small and medium sized
manufacturers, are currently struggling to maintain the cash
balances needed to meet these obligations, due to the credit
crisis. The U.S. manufacturing base could benefit substantially
from Government loan guarantees.
The lack of private financing that is currently being
experienced is based upon the uncertainty in the demand for
manufactured goods. The Title III loan guarantees would
significantly reduce the risk associated with financing
manufacturers, particularly for working capital needs. With
risk lowered, more financial lenders are attracted and
reasonable terms are made available.
Similarly, the Title III production commitments authority
can also be used to attract private financing. By providing a
commitment to purchase a certain level of manufactured goods or
supplies, the uncertainty due to market conditions is
substantially reduced, allowing access to reasonable terms for
credit. Under this approach, the risk due to uncertain demand
is eliminated. The use of loan guarantees leads more directly
to the elimination of risk through credit default.
However, it should be noted that the Title III loan/loan
guarantee authorities have not been used since 1982 when an
agreement was reached between the Director, Office of
Management and Budget, and the Secretary of Defense not to use
the authorities without OMB approval. None of the objections
cited by OMB in 1982 still apply, leaving the 1982 agreement as
an obsolete obstruction. Ironically, the obsolete agreement
serves only to prevent use of Title III authorities that could,
under certain circumstances, be the most cost-effective tools
to meet a national defense need. At a minimum the agreement
should be amended if not outright canceled.
The loan/loan guarantee authorities exist as a matter of
law within Title III of the Defense Production Act and there
should be no prohibition on the use of these authorities by the
President when their use is appropriate to address domestic
manufacturing issues.
I understand that there are proposed amendments, which I
fully support, providing new requirements for loan guarantees.
These requirements specify that Government loan guarantees or
loans may only be provided if: (1) credit is not, otherwise,
available to loan applicants on reasonable terms; (2) the
earning power and pledged security of the applicants provide
reasonable assurance of repayment; (3) the interest rate on
guaranteed loans is determined to be reasonable by the
Secretary of Treasury; (4) the terms on guaranteed loans cannot
be changed without Government approval; and (5) borrowers are
at risk for at least 20 percent of the guaranteed loan amounts.
Q.2. There have been media reports over the past several years
about the threat our military faces because of counterfeit
components, including microchips. As our military becomes more
high tech, how equipped are we for the domestic production of
key components? Is this an issue of concern for the National
Defense Industrial Association?
A.2. Counterfeit parts are an issue of significant and growing
concern to the National Defense Industrial Association. This
has been a key element addressed in many recent member forums,
as well as the USAF ManTech Strategic Planning session we
participated in. Counterfeit parts have two motivations: greed
and malice. To combat greed, Counterfeit detection tools and
Qualified Vendors are required. To combat malice, an assured
supply chain is required, including domestic production
capability.
Counterfeit parts are facilitated by component
obsolescence, the growing sophistication of counterfeiters, the
inherent profitability of demanding military applications, and
the globalization of the supply base. The reliability of
counterfeit components is suspect and the chain of ownership is
unverifiable, which means they are dangerous if they are
unknowingly used in U.S. weapon systems.
Counterfeit parts is not the only issue of concern for
NDIA. Microchip functionality must also be assured. A growing
number of these components are coming from high-risk locations
such as China, the Far East, and Russia. Therefore we must
protect our supply chain from any possibility of malicious
alterations of microchip functionality, which are then embedded
in defense systems. In particular, there is great concern that
the number of ``trusted'' foundries for ASIC chips is rapidly
shrinking as companies outsource foundry services to the Far
East. Only IBM and several small suppliers remain in the U.S.
to fabricate classified, national security or ITAR devices.
Also, the potential for subtle sabotage is very high in high
function COTS devices, especially if an offshore supplier knows
that a specific lot is destined for delivery to a defense
contractor.
A domestic microchip supply is therefore crucial for
national security. A recent Department of Commerce study
entitled Defense Industrial Base Assessment: U.S. Integrated
Circuit Design and Fabrication Capability \1\ implies the U.S.
does indeed have sufficient capacity and resources to design
and produce microchips for military use. The report relies upon
the relatively small production numbers of microcircuits
required for defense use to conclude that the U.S. Industrial
Base has enough production capacity. However, our members tend
to disagree with this position. Although assured capacity does
exist, primarily in large firms for design and production of
specialized circuits, there has been and will continue to be a
growing trend to implement Commercial Off The Shelf (COTS)
components for cost reduction and maintainability. These COTS
components are part of a global supply chain, and are outside
the control of the defense industrial base due to the small
market share.
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\1\ www.bis.doc.gov/defenseindustrialbaseprograms/osies/
defmarketresearchrpts/bis_ote_ic_report_051209.pdf.
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Unfortunately the COTS electronics supply chain is moving
and now manufacturing in the U.S., Japan, and Western Europe
account for less than 50 percent of global electronics output.
Between 1995 and 2006, the Asia Pacific area's share increased
from 20 percent to 42 percent, with China seeing the largest
share of that increase, from 3 percent to 20.5 percent. \2\
Further there are some critical components for our high tech
weapon systems, such as LCD flat panel displays, that have no
domestic source. All these components are imported from foreign
suppliers, some from the high-risk countries mentioned above.
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\2\ Source: Printed Circuit Design and Fab, 6/6/08.
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A longer term risk lies in the historical fact that
leading-edge R&D tends to follow production. The most
attractive positions for talented process scientists and
engineers moves with advanced production. For this reason and
others, the 2005 DSB Study on High Performance Microchip Supply
concluded that ``The Department of Defense and its suppliers
face a major integrated circuit supply dilemma that threatens
the security and integrity of classified and sensitive circuit
design information, the superiority and correct functioning of
electronic systems, system reliability, continued supply of
long system-life and special technology components.'' \3\
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\3\ Defense Science Board Task Force on High Performance
Microchip Supply, February, 2005.
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In summary the NDIA is concerned that the U.S. is not
currently equipped for domestic production of some of the key
components, particularly microcircuits, in our high tech
defense systems. This highlights the importance of the Defense
Production Act Title III program, which is able to monitor gaps
between the defense requirements and the domestic capabilities
and then invest in the U.S. Industrial Base to assure the
required capability.