July 18, 2003    Volume 10, No. 14

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'Buy American' Provision Stirs Up Heated Debate About Health Of Manufacturing Sector

An enhanced "Buy American" provision contained within the House Defense Authorization Bill (HR-1588) has stirred up a controversy in Washington policy circles in recent weeks over the health of the U.S. industrial base and what to do about it. The desire to improve the fortunes of the ailing U.S. manufacturing sector by increasing the U.S. content of weapons systems from 50 percent to 65 percent isn't sitting well at the Pentagon, with high-tech industries and defense firms.

However, small- and medium-sized manufacturers being hammered by large U.S. transnational corporations deciding to buy bargain-rate parts and components from foreign suppliers are strongly in favor of the change. The machine tool industry would also get a boost with a provision that would require any new major weapon system procurement to purchase machine tools with 70 percent U.S. content.

"The senior advisors to the President would recommend that he veto the [Defense Authorization] bill if it includes the House's Defense Industrial Base Provisions," said Suzanne Patrick, Deputy Under Secretary of Defense for Industrial Policy, at a rancorous hearing held on July 9 by the House Small Business Committee. The provisions, which passed the House but are not contained in the Senate version of the bill, "are based on inaccurate presumptions that the U.S. defense industrial base needs to be revitalized and U.S. defense systems are vulnerable due to foreign dependencies," says Patrick.

That statement drew vociferous rebukes from Small Business Committee chairman Don Manzullo (R-Ill.), and ranking minority leader Nydia Velazquez (D-N.Y.), as well as machine tool industry executives testifying.

Powerful Republican members of the House are from districts that are being hammered by the loss of manufacturing jobs. As the legislative body most responsive to the immediate needs of its constituents, the House is becoming more aggressive in pursuing a pro-American manufacturing agenda.

But the Pentagon doesn't agree with its prescriptions. In a display of insolence and querulousness rarely seen by a government witness testifying before Congress, Patrick challenged Manzullo on his assumptions that the defense industrial base has been weakened. She incessantly disrupted questions, effectively raising the ire of committee members, and then made triumphant, peevish smiles to other unreceptive members of the panel.

"That is her attitude and her attitude represents the Pentagon," Manzullo told Manufacturing & Technology News after the hearing. "That is exactly what we're dealing with -- that they know everything, that they make all the decisions, that Congress is irrelevant and that manufacturing could pass away and they could care less."

Despite an intensive lobbying campaign against the Buy American provisions, Manzullo says he and his colleagues are not going to give up. (A similar Buy American provision sponsored by Manzullo was adopted by the House in its passage on July 16 of the State Department's authorization.) "This is the first time there has been a good discussion about it in a long time and I'm not going to go away," he says. "We're all over this thing and we're not going to let up one bit because these guys [at the Pentagon] have to realize that they are dealing with critical defense industries and they have no idea what they're dealing with, zero. How many jobs have to be lost in manufacturing before you realize there is a crisis?"

House Armed Services Committee chairman Duncan Hunter (R-Calif.), who sponsored the Buy American provisions, is also not going to acquiesce to a heavy lobbying campaign and presidential veto threats, says a committee staff aide. Hunter "has worked for a long time to get into this position and he's not going to back down now," he said. "This is important to him."

The Buy American provisions are generally not endorsed by many aerospace defense suppliers, however. "Our suppliers are concerned that they will be subject to [international] retaliation and if the [weapons] programs are disrupted to comply with this, they're going to shut down," says Jon Etherton, vice president of legislative affairs at the Aerospace Industries Association. "This is not good for their business."

AIA and about 40 members of its Supplier Management Council spent a day in Washington on July 9 lobbying Congress to reject the provisions. They feel the reporting requirements are burdensome and that DOD would end up micromanaging their contracts.

Etherton has not seen any analysis indicating a large shift in aerospace contractors bypassing U.S. suppliers in favor of cheaper overseas sources of parts and components. "Before you proceed with anything as radical as you have in the House bill, clearly you need to have a better understanding of what the problem is and how you're going to solve it," says Etherton.

AIA is also concerned about the paperwork required in identifying the origin of all components in weapon systems. "For a defense contractor whose sole business is defense, the burden of that is one thing, but for a company whose business is primarily commercial that sells to the Defense Department, you're asking them to either significantly increase their overhead or they will have compliance problems," Etherton notes. Those overhead costs will either get transferred into their commercial business making them less competitive or will be passed to the taxpayer. The other alternative is suppliers will decide not to do business in the defense marketplace.

Manzullo thinks this is a ruse. As a pilot who is current and a lawyer who has been involved in airplane litigation, Manzullo says that "airplane manufacturers know down to the screw where [their components] come from -- who made them and the type of material that they're made of. They identify every single part and they have it computerized. That is not a problem."

Etherton sees the Buy American and machine tool provisions as a reversal of policy that was intended to integrate the U.S. commercial and defense industrial bases through the purchase of commercial off-the-shelf technologies (COTS). "We're going to go back to a situation where commercial and defense are going to split and we're going to lose economies of scale," he said in an interview. "We're going to have much higher overhead and we're going to cut ourselves off from some of the sources of the most advanced technology -- particularly in electronics and IT."

Moreover, many of the new weapons systems are being developed with international participation and "now the United States is going to say, 'We're going to go it alone,' " Etherton adds. If that happens "we're going to have to strip out all of that [foreign] technology and stop the program because you will have to redesign the system to incorporate a whole different technology solution. Programs are going to be put on hold, costs are going to go up and you're likely to trigger some retaliation by our trading partners because the balance of defense trade is heavily in our favor."

A half-dozen aerospace suppliers eating lunch with Manufacturing & Technology News editor Richard McCormack mirrored those concerns, but with even a greater sense of passion, especially on the issue of machine tools. The machinery does not exist in the United States to make many of the small piece parts that go into weapons systems, and much of the raw materials must be purchased from overseas suppliers, they said. "You're dictating the method by which we produce our product which is bad public policy," said Christopher Kneizys, president of Micro-Coax of Pottstown, Penn. "We should be able to use the best available technology out there to produce the best parts for the government."

There was also a great deal of animosity among the six supplier executives toward the U.S. machine tool industry, which they overwhelmingly deplored for being unresponsive to their needs and unable to compete in world markets.

"The metal bending computer-aided machine tools are all German based," said Joseph Murphy, chairman of Ferco Tech Corp. of Franklin, Ohio. "They're not available in the United States and haven't been for 20 years. It's 20 years too late to try to save the machine tool industry."

The machine tool industry says it would have no problem supplying the equipment needed to comply with the House Defense Authorization bill's requirements.

"We are succeeding in all corners of the globe by offering a superior product at a competitive price," Chip Storie, vice president of aerospace sales at Cincinnati Machine told the House Small Business Committee on behalf of the Association for Manufacturing Technology. "An increase in defense orders will allow us to better utilize our assets, which will, in turn, assist in keeping our costs in line with our foreign competition. Without a doubt, U.S. suppliers are capable of delivering a cost-effective product, especially in the area of high-tech products."

As for whether the industry has the capacity to service the defense industry, Storie says that "there is nothing fundamentally different today that would prevent us from increasing capacity in a rapid fashion when called upon. We have met the demand in the past and we are prepared to do so again."

Added Olav Bradley, government liaison director of the American Mold Builders Association: "It would have been inconceivable during the Cold War years to have a defense contractor subcontract critical military and defense components to a Communist country, yet that is what is happening currently when government contractors sub-let contracts to companies in Red China owned and operated by the Communist government. That is a double slap in the face to all of us in manufacturing in the United States."

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