May 31, 2012    Volume 19, No. 9

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NIST Director Defends $1-Billion Manufacturing Program, But Doesn't Know Where The Money Will Come From

By Richard A. McCormack

In the first airing of the Obama administration's proposed $1-billion National Network for Manufacturing Innovation (NNMI) on Capitol Hill, Republicans expressed reservations about the program and grilled the director of the National Institute of Standards and Technology, who adeptly handled their complaints.

Republicans repeatedly stated that the Obama administration was attacking the wrong problem -- that taxes and burdensome regulations are more important to manufacturers than is the "valley of death" between basic research and the production of a new generation of commercial products.

Patrick Gallagher, the charismatic NIST director, deftly assuaged Republican skeptics and presented a strong case for the creation of 15 national manufacturing innovation centers that would focus on driving the commercialization of research funded by American taxpayers.

Gallagher, however, could not easily answer some of the most important questions about the proposal regarding funding and the administration's legislative strategy. He was forced to defend an expensive spending program at a time when Congress is overwhelmed with concerns about out-of-control federal deficits.

He told the House Science subcommittee on technology and innovation that the Obama administration does "not intend to send over a ready-to-enact piece of legislation" to authorize the program because "we believe the best vehicle to do this would be to come up with a legislative proposal that has broad bipartisan support."

When asked by Rep. Lamar Smith (R-Texas) who was going to write that legislation, Gallagher said: "We're hoping that the effort would be led from the Hill and we would work with any interested committee that would be able to do that."

This answer was too vague and Smith wanted to know the names of the congressional leaders the Obama administration has approached to write and sponsor the legislation. Gallagher deferred, stating that the legislative strategy was being led by the White House "and I am sure they have had discussions with many manufacturing groups, but I don't have a list of who they have talked to," he said. Developing a congressional strategy to pass a law to authorize funding was not his role in the program. NIST will "outline those parts of the program that would be defined in the legislation to have these institutes function effectively."

Smith said Gallagher's response "worried" him. "When you have the administration propose a new program and you can't say who they have talked to in Congress and you can't say specifically where the money is going to be coming from -- that begins to look more and more like a political election year-eve initiative that is not really serious or is not conceived to be a piece of legislation that will actually pass. Do you understand why we might think that when you can't say who you have approached and why you can't give specifics?"

Gallagher said he could understand Smith's sentiment, "but I have to say, it's my failure to communicate effectively [and] not a signal of the administration's intent. The priority of the program would be to find a vehicle -- a piece of legislation -- that has as broad as support as possible. I don't think this is being done for political purposes."

When asked where the Obama administration intends to find $1 billion to fund the 15 manufacturing innovation centers, Gallagher again had a tough time with specifics. "My understanding [is] the administration's 2013 budget has identified a number of potential offsets," he replied. What specifically might those be, Rep. Smith asked. Gallagher said he did not know, but that he understood there were several hundred million dollars of offsets that were identified. "I would be happy to follow up with you," Gallagher stated. To which Smith concluded: "Until they come up with specifics, I'm slightly skeptical about how serious the administration is."

Other Republicans on the subcommittee were equally querulous, making difficult to fathom where the Obama administration might find a Republican to co-sponsor a bill. Subcommittee chairman Rep. Ben Quayle (R-Ariz.) noted in the first line of his opening statement that U.S. manufacturing output has stayed constant at 20 percent of GDP for the past 30 years. The manufacturing sector "is far from vanishing," he said. "I am troubled by the continued reliance on politically driven research and development." To help improve the conditions for U.S. manufacturing it would be better to "reduce the cost of doing business in the U.S." he said.

Rep. Randy Hultgren (R-Ill.) questioned whether the program is "even necessary," reflecting Republicans' concerns about overwhelming tax and regulatory burdens the federal government places on American companies. Rep. Steven Palazzo (R-Miss.) said that he would prefer to spend the $1 billion on "roads and bridges and possibly even $1 billion on the NASA heavy lift program." He also cited the $162 billion that companies have to spend each year to comply with federal regulations, which siphons off spending on capital equipment and the hiring of new workers. "As a former small business owner and a CPA, I would like to be trying to remove these hurdles to job creation and American competitiveness before I invested $1 billion."

Rep. Chip Cravaack (R-Minn.) was also fixated on taxes and regulations, telling Gallagher that when he speaks with manufacturers in his district "those are the two main issues they talk about. Can you tell me how you are planning to move this forward after five years so we don't see you again in five years asking for another billion dollars," he asked. Gallagher responded by stating that the program architects are developing a sustainable business model for the institutes, where they will be taken over by the private sector in the same manner as has occurred with Sematech in the semiconductor sector and NCMS in the automotive sector. Cravaack wasn't buying it. The government needs to "get to the root cause of why companies go overseas which is taxation and regulation," he said. "Is that going to be part of your paradigm?"

Gallagher answered that question the same way he answered it from other republicans: "We agree that taxation and regulation is part of creating a better business environment -- there is no disagreement there. But the reasons companies go overseas. . . is actually broader than taxation, regulation or labor cost issues. Those are clearly drivers, but one is they are following capacity."

R&D investment is growing more rapidly overseas than in the United States, and it is growing fastest in areas where manufacturing plants are being located -- in Asia, Gallagher explained. The Asian countries are leveraging manufacturing investments to build their research capacity -- "they are working it the other way," said Gallagher. "They have the advantage of relatively cheap labor and they build their way up the value chain and they are building research capacity. They have a synergy effect where it is easier for a company to make a decision [to move R&D] because we have hollowed out the capacity in the U.S. This is what we are addressing." Without high-tech manufacturing, the United States is losing the capacity to translate the knowledge it is creating in its basic research enterprise into healthy companies. "It might be cheaper to make that product offshore, [but] then you have lost the capacity to generate the next generation of product and this is the long-term tradeoff [and] what we are trying to address here."

The intention is to create physical centers so that companies will pool their research capabilities, take advantage of university and federal research capabilities, train skilled workers, and have companies throughout a technology supply chain locate manufacturing in the immediate vicinity.

The NNMI cannot address all of the issues associated with reviving American manufacturing, Gallagher told the subcommittee. But the federal government has a role to play in making sure the sector is strong, because of its ties to national security, and the fact that the private sector funds the majority of R&D in the country, with manufacturing accounting for 70 percent of the R&D conducted by the private sector. But the gap between research funded by companies and basic research funded by the federal government is growing "and there are no programs in the middle to bridge those two," said Gallagher. If the United States does not build the institutes "it is actually enabling foreign competition to reap the very open and diverse output from our basic and applied research simply because we are not taking steps to nurture the next stage which is the translation of that knowhow and knowledge into the commercial sector. I would argue right now we actually do disadvantage ourselves by basically doing one part of it -- publishing [the research] and then stopping and not providing vehicles for the efficient translation into companies."

Albany, New York, provides a good example of the benefits of a shared research center. Its nanomanufacturing institute "is driving very strong attraction by other companies to be located there by knowledge created and the talented researchers in that area," said Gallagher. "That region is capturing that knowledge and making sure we benefit from it."

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