```

[Senate Hearing 106-1064]
[From the U.S. Government Publishing Office]

                                                       S. Hrg. 106-1064
 
            CHALLENGES CONFRONTING THE MACHINE TOOL INDUSTRY
=======================================================================

                                HEARING

                               before the

           SUBCOMMITTEE ON MANUFACTURING AND COMPETITIVENESS

                                 OF THE

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                               __________

                            OCTOBER 28, 1999
                               __________

    Printed for the use of the Committee on Commerce, Science, and 
                             Transportation

                        U.S. GOVERNMENT PRINTING OFFICE
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       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                     JOHN McCAIN, Arizona, Chairman
TED STEVENS, Alaska                  ERNEST F. HOLLINGS, South Carolina
CONRAD BURNS, Montana                DANIEL K. INOUYE, Hawaii
SLADE GORTON, Washington             JOHN D. ROCKEFELLER IV, West Virginia
TRENT LOTT, Mississippi              JOHN F. KERRY, Massachusetts
KAY BAILEY HUTCHISON, Texas          JOHN B. BREAUX, Louisiana
OLYMPIA J. SNOWE, Maine              RICHARD H. BRYAN, Nevada
JOHN ASHCROFT, Missouri              BYRON L. DORGAN, North Dakota
BILL FRIST, Tennessee                RON WYDEN, Oregon
SPENCER ABRAHAM, Michigan            MAX CLELAND, Georgia
SAM BROWNBACK, Kansas                
                       Mark Buse, Staff Director
                  Martha P. Allbright General Counsel
     Ivan A. Schlager, Democratic Chief Counsel and Staff Director
               Kevin D. Kayes, Democratic General Counsel
                                 ------                                

           SUBCOMMITTEE ON MANUFACTURING AND COMPETITIVENESS

                  SPENCER ABRAHAM, Michigan, Chairman
OLYMPIA J. SNOWE, Maine              BYRON L. DORGAN, North Dakota
JOHN ASHCROFT, Missouri              RICHARD H. BRYAN, Nevada
BILL FRIST, Tennessee                ERNEST F. HOLLINGS, South Carolina
SAM BROWNBACK, Kansas                JOHN D. ROCKEFELLER IV, West Virginia
                                         

                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held October 28, 1999....................................     1
Statement of Senator Abraham.....................................     1
    Press release and prepared statement.........................     2
Statement of Senator Ashcroft....................................    36
    Prepared statement...........................................    37

                               Witnesses

Clevenger, Jeffrey A., president and chief executive officer, SMS 
  Group, Inc.....................................................    16
    Prepared statement...........................................    17
Danjczek, David W., staff vice president, UNOVA, Inc.............    20
    Prepared statement...........................................    21
Logan, John F., automation group president, DT Industries, and 
  Chairman, Association for Manufacturing Technology.............     5
    Prepared statement...........................................     7
    Summary of the Effect of the Australian Government by Huffman 
      Corporation................................................    13
Manzullo, Hon. Donald A., U.S. Representative from Illinois......    29
    Prepared statement...........................................    32
Neal, Hon. Richard E., U.S. Representative from Massachusetts....    25
    Prepared statement...........................................    28

                                Appendix

Hollings, Hon. Ernest F., U.S. Senator from South Carolina.......    39

            CHALLENGES CONFRONTING THE MACHINE TOOL INDUSTRY

                              ----------                              

                       THURSDAY, OCTOBER 28, 1999

                                       U.S. Senate,
Subcommittee on Manufacturing and Competitiveness Committee 
                  on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 2:05 p.m., in 
room SR-253, Russell Senate Office Building, Hon. Spencer 
Abraham, chairman of the subcommittee, presiding.
    Staff members assigned to this hearing: Gregg Willhauck, 
Republican legislative assistant to Senator Abraham; and Gregg 
Elias, Democratic senior counsel.

          OPENING STATEMENT OF HON. SPENCER ABRAHAM, 
                   U.S. SENATOR FROM MICHIGAN

    Senator Abraham. We will begin this hearing of our 
subcommittee. Today's topic is the challenges which are 
confronting the United States machine tool industry. This 
industry, of course, for those of us who come from industrial 
States is the foundation of the manufacturing sector of our 
economy. And so we thought it was very important today to try 
to focus a little bit of attention on the issues that are 
confronting the industry for reasons I will get into in a few 
minutes.
    Our first panel, though, I want to get going, because I 
know there is going to be a vote here in the House very soon. 
We are fortunate to have two members of the House who are going 
to be addressing us today. They are the co-chairs of the House 
of Representatives Machine Tool Caucus. We already have here 
Congressman Don Manzullo, of Illinois. And I believe that 
Congressman Richard Neal, of Massachusetts, may be joining us. 
We at least expect him to be here.
    Normally I would make my opening statement now, but 
Congressman Manzullo may need to get back to the House soon. So 
what I would like to do is maybe let him comment first, if that 
would help, and then I will make my opening statement. And 
then, if Congressman Neal is here, we may go to him. There is 
the bell.
    Mr. Manzullo. Should I go over and vote and come back?
    Senator Abraham. You probably need to go now if you are 
going to vote.
    Mr. Manzullo. Yes. I will vote and then come right back.
    Senator Abraham. Why don't you do that, Don.
    Mr. Manzullo. Thank you.
    Senator Abraham. I will begin with my statement, and we 
will see how far we get. We will maybe move to the second panel 
and then come back.
    Let me begin, then, by commenting a little bit more 
specifically. As I said, in my judgment, this industry that we 
are focusing on today is the foundation of our Nation's 
manufacturing sector. It is very hard to imagine a 
manufacturing industry that is not in some way very reliant on 
machine tools. Whether that is for the production of some 
component or for some essential element of the manufacturing 
process itself, machine tools are essential.
    Certainly the machine tool industry is a vital component of 
the economy of my home State of Michigan, and I know that it is 
for Illinois and Massachusetts, as we will hear in a minute, 
and for most of the other States, as well. We need a healthy 
and thriving machine tool industry in this country if we are 
going to produce automobiles and auto parts, planes or ships, 
appliances, electronics, construction equipment, and virtually 
every other product that we produce. We need it to maintain a 
healthy manufacturing sector. We need it to maintain a healthy 
economy.
    Which brings us to the reason for today's hearing. There 
have been a number of reports in recent months that the machine 
tool industry was suffering, at a time when most manufacturing 
industries are thriving. This is a particular concern, because 
many look to the machine tool industry as a barometer of the 
health of the manufacturing sector overall. Downturns in the 
business cycle of the machine tool industry often precede 
downturns in other manufacturing industries and, consequently, 
the overall economy.
    Any slowdown in the machine tool industry sends troublesome 
signals about the health of our economy. This, in my view, 
meant that it was crucial for our subcommittee on manufacturing 
and competitiveness to look into the causes of this recent 
sluggishness, and to try to come up with ideas for improving 
the performance of the machine tool industry.
    Let me briefly cite some statistics which illustrate the 
situation for everybody. I would also like to ask unanimous 
consent to include this information in the hearing record. And 
since there is no one to object, I will.
    [The information referred to follows:]
        Senator Spencer Abraham Press Release, Qctober 28, 1999

      Abraham Seeks to Boost Midwest Manufacturing Competitiveness

-Senator chairs hearing to examine the challenges confronting the 
machine tool industry--the largest sector of the manufacturing 
industry-

    (WASHINGTON) U.S. Senator Spencer Abraham (R-Michigan) today 
convened a hearing of the Commerce Subcommittee on Manufacturing and 
Competitiveness to examine the challenges confronting the machine tool 
industry--which is currently suffering the most in the Midwest. The 
machine tool industry is the foundation of the United States 
manufacturing sector. Abraham's statement at today's hearing 
follows.xxx
    ``It is difficult to imagine a manufacturing industry that is not 
in some way reliant on machine tools. Whether for the production of 
some component or for some essential element of the manufacturing 
process itself, machine tools are essential. We often take the goods 
produced by and with machine tools for granted But our economy would be 
a shambles without them. Certainly, the machine tool industry is a 
vital component of the economy of my state of Michigan. Autos and auto 
parts, planes, ships, appliances, electronics and even construction 
equipment, all would be impossible--or impossibly expensive--without 
machine tools.
    ``We need a healthy and thriving machine tool industry in this 
country. We need it to maintain a healthy manufacturing sector. We need 
it to maintain a healthy economy.
    ``Which brings me to the reason for this hearing. There have been a 
number of reports in recent months that the machine tool industry was 
suffering at a time when most manufacturing industries are still 
thriving. This is of particular concern because many look to the 
machine tool industry as a barometer of the health of the manufacturing 
sector overall. Downturns in the business cycle of the machine tool 
industry often precede downturns in other manufacturing industries--and 
the overall economy.
    ``Any slowdown in the machine tool industry sends troublesome 
signals about the health of our economy. This, in my view, meant that 
is was crucial for the Subcommittee on Manufacturing and 
Competitiveness to look into the causes of this recent sluggishness and 
try to come up with ideas for improving the performance of the machine 
tool industry.
    ``To begin, let me simply cite some statistics that I would like to 
include in the hearing record. These figures come from a report issued 
jointly by the Association for Manufacturing Technology and the 
American Machine Tool Distributors' Association. That report is dated 
September 13, 1999. It is a nationwide survey of machine tool 
companies, documenting comparative levels of machine tool consumption 
for this year compared to last year. The results, I think are quite 
significant and clearly demonstrate why it is important for us to be 
here today.
    ``Specifically, this report noted that in July of this year, U.S. 
machine tool consumption totaled an estimated $501 million. That figure 
was down roughly 10% from the revised estimate for the previous month, 
June, 1999, and down 18% compared to the estimated $608 million total 
for July 1998. The year-to-date total of $3.2 billion for 1999 is 35% 
lower than for the same period last year.
    ``Of particular interest is the breakdown of these consumption 
figures along regional lines. Of the five geographical regions 
surveyed--making up the contiguous 48 states--all showed significant 
declines in their 1999 year-to-date figures on consumption when 
compared to the identical period last year. The Midwestern region--
comprising Michigan, Ohio, Indiana, Illinois, and Wisconsin--
experienced a drop of 40.7% over the same period in 1998. This figure 
is even more daunting when one considers that the Midwestern region 
made up 44% of the nationwide consumption volume surveyed. Similarly, 
the Central and Western regions both experienced drops of 37% compared 
to a year ago. And while the losses in the Southern and Northeast 
region were less dramatic--26% and almost 16% respectively--they are 
still quite sizable. So there is no region of the country that has been 
spared significant decreases in the level of consumption of machine 
tool products.
    ``Finally, while the Midwestern region was the only one of the five 
regions to show improved consumption figures between June and July 
1999, the figures for the Midwest this July compared to last July were 
still down 31%.
    ``With those disturbing statistics in mind, let me now discuss how 
we will proceed today.
    ``We are fortunate this afternoon to have with us the two Chairmen 
of the House of Representative's Machine Tool Caucus, Congressman 
Donald Manzullo of Illinois and Congressman Richard Neal of 
Massachusetts. Obviously, these two Members are leaders on Capitol Hill 
regarding issues affecting the machine tool industry. I would like to 
acknowledge and thank them for the interest and dedication they have 
shown on these issues. I would also like to thank them for their 
willingness to take time out of their busy schedules to come over and 
testify at this hearing today.
    ``For our panel of witnesses, we will hear from three individuals 
with impressive backgrounds in the machine tool industry. The first 
gentleman, John Logan, will testify on behalf of The Association for 
Manufacturing Technology, a major trade association for the machine 
tool industry. He currently serves as Chairman of the Board of 
Directors for AMT. Mr. Logan will describe for us the national picture 
with respect to the machine tool industry, outlining the current state 
of the industry and identifying key problems that industry confronts. I 
hope he will also indicate to us ideas for solutions to those problems. 
I should note that Mr. Logan does indeed have his own machine tool 
company as well: DT Industries, of which he is Automation Group 
President.
    ``Our other two witnesses will testify on behalf of the industry in 
their capacity as executives with successful machine tool companies. 
David Danjczek represents UNOVA Corporation, a top producer of machine 
tools and manufacturing systems in the United States. Jeffrey 
Clevenger, of Saginaw Michigan, is President and CEO of SMS Group 
Incorporated. He will provide us with the perspective of a small 
machine tool business. Both these gentlemen will tell us about their 
unique experiences with their own companies and identify for us 
specific challenges that their companies are facing today.''

    Senator Abraham. These figures come from a report issued 
jointly by the Association for Manufacturing Technology and the 
American Machine Tool Distributors Association. It is a report 
which is dated September 13, 1999. In this nationwide survey of 
machine tool companies, the report documents comparative levels 
of machine tool consumption for this year compared to last 
year.
    Specifically, this report noted that in July of this year, 
United States machine tool consumption totaled an estimated 
$501 million. That figure was down roughly 10 percent from the 
revised estimate for the previous month, June 1999, and down 18 
percent compared to the estimated $608 million total for July 
1998. The year-to-date total of $3.2 billion for 1999 is 35 
percent lower than for the same period last year.
    Of particular interest is the breakdown of this consumption 
along regional lines. Of the five geographical regions surveyed 
making up the contiguous 48 States, all showed significant 
declines in their 1999 year-to-date figures on consumption when 
compared to the identical timeframe last year. The Midwestern 
region, comprising Michigan, Ohio, Indiana, Wisconsin, and 
Illinois, experienced a drop of 40.7 percent over the same 
period in 1998; hence, even greater than the national average.
    This figure is even more daunting when one considers that 
the Midwestern region made up 44 percent of the nationwide 
consumption volume surveyed. Similarly, the Central and Western 
regions both experienced drops of 37 percent compared to a year 
ago. And while the South and the Northeast regions were less 
dramatic in their reductions, 26 percent and 16 percent 
respectively, they are still quite sizable. So there is no 
region of the country that has been spared significant 
decreased in the level of consumption of machine tool products.
    Finally, while the Midwestern region was the only one of 
the five regions to show improved consumption figures between 
June and July 1999, the figures for the Midwest this July 
compared to last were still down 31 percent.
    With those troubling statistics in mind, let me now discuss 
how we will proceed today. As I said, we have two Members of 
Congress who will be part of a panel, though it may now be the 
second panel I guess. And, in addition, we will have several 
people from the front lines who will be here for a second 
panel. That panel of witnesses is made up of individuals, all 
with impressive backgrounds, in the machine tool industry.
    And so what I think I will do is ask that panel to come 
forward at this time and take seats. I will ask our staff if 
they would clarify who sits where. We will have you speak in 
the order of the name tags here. Then, if it is OK with the 
panel, what I thought we would do is, when the members come 
back, if they wish to make comments, because of their time 
constraints, we will let them do that.
    Let me introduce the three individuals here, although the 
name tags are now different than the way I have got it written, 
but I am going to introduce you in a different order than you 
are seated.
    First, I want to introduce John Logan, who will testify on 
behalf of the Association for Manufacturing Technology, a major 
trade association for the machine tool industry. John currently 
serves as Chairman of the Board of Directors for AMT. Mr. Logan 
will describe for us the national picture with respect to the 
machine tool industry, outlining the current state of the 
industry and identifying key problems that the industry 
confronts. He will also indicate to us ideas for solutions to 
these problems. I should note that Mr. Logan indeed has his own 
machine tool company as well, which is named DT Industries, of 
which he is Automation Group President.
    Our other two witnesses will testify on behalf of the 
industry in their capacities as executives with successful 
machine tool companies. Dave Danjczek represents UNOVA 
Corporation, a top producer of machine tools and manufacturing 
systems in the United States; and Jeffrey Clevenger, of 
Saginaw, Michigan, is President and CEO of SMS Group, 
Incorporated. He will provide us with the perspective of the 
small machine tool business. Both of these gentleman will tell 
us about their unique experiences with their own companies and 
identify for us specific challenges that their companies are 
facing today.
    And I especially of course want to introduce or to welcome 
here Mr. Clevenger, who is a friend and constituent and with 
whom I am very familiar. We appreciate your being here and 
taking the time to come down from Michigan to participate. One 
of the few remaining perks, I think, in the Congress is the 
chance, from time to time, when you chair a subcommittee or a 
committee, to be able to make sure that people who represent 
your own constituency and have some of the challenges and 
issues confronting them that we are dealing with here in 
Washington are given the opportunity to participate. Jeff, I 
want to thank you for coming down today.
    So, with that said, let us begin with this panel. As I say, 
if Congressman Manzullo or Congressman Neal reappear, at an 
appropriate point after whoever might be speaking finishes, we 
will let them have a chance to speak at that time.
    We will begin with you, Mr. Logan. Thanks for being here. 
Good to see you again.

  STATEMENT OF JOHN F. LOGAN, AUTOMATION GROUP PRESIDENT, DT 
    INDUSTRIES, AND CHAIRMAN, ASSOCIATION FOR MANUFACTURING 
                           TECHNOLOGY

    Mr. Logan. The United States machine tool industry is 
critical to both national security and economic prosperity. 
With production of over $7 billion, the machine tool industry 
is small when compared to other industries, but our industries 
products and technology are the essence of the industrial 
manufacturing process and the key to a strong defense 
industrial base.
    With the manufacturing technologies related to machine 
tools, the other manufacturing industries would not exist. 
There would be no aircraft, ships, tanks, or missiles. There 
would be no appliances, automobiles, agricultural machines, or 
factory automation without machine tools. In short, life as we 
know it today would be impossible without the modern machine 
tool industry and the manufacturing technology related to it.
    Over the past year, domestic demand for machine tools has 
fallen dramatically. The first 6 months of 1999 have seen 
machine tool consumption in the United States fall 39 percent 
when compared to the same period last year. This dramatic 
decline can partly be attributed to a decrease in customer 
demand, which in turn can be partly attributed to a collapse in 
the Asian export market for many of our industry's customers.
    To make matters worse, this reduction in machine tool 
demand has been compounded by a sudden change in the marketing 
approach and an increase in the market share of the largest 
three Asian producers of machine tools; that being Japan, South 
Korea, and Taiwan. Asian machine tool builders have increased 
their shares of the U.S. market to the point where U.S. 
builders have seen our share of our market decline to 40 
percent, compared with about 50 percent in the late eighties 
and the early to mid-nineties.
    As the charts accompanying my written testimony show, some 
Asian machine tool builders have cut their prices in some 
commodity lines by 30 to 50 percent over the past year. Machine 
tool consumption has traditionally been used by economic 
forecasters as a leading indicator of the larger economy. 
Whether the decline is a harbinger of an overall slowdown from 
what has been an amazing record of economic expansion or 
whether it is an indication of structural changes in 
traditional capital spending patterns, or is a combination of 
these factors, the sharp decline in U.S. machine tool 
consumption should concern thoughtful policymakers.
    Given the importance of the U.S. machine tool industry to 
America's national and economic security, the U.S. Government 
must adopt policies that assure the continued strength of 
America's machine tool industry and which provide a level 
playing field for American machine tool builders.
    These actions include enactment of an 18-year product 
liability statute of repose, vigorous enforcement of U.S. trade 
laws, passage of tax laws that encourage U.S. manufacturing and 
that are saver/investor friendly, adoption of technology R&D 
policies and funding that ensures that U.S. manufacturing 
technology is second to none, and application of sensible 
export control policy and regulations.
    I would like to say a few words about our current export 
control policy and what I saw at the China International 
Machine Tool Show last week. Several Chinese companies were 
showing very sophisticated machinery, machines that U.S. 
manufacturers cannot export to China because they are 
considered a national security threat in the hands of the 
Chinese. Yet there they were, right on the show floor in China. 
The Europeans were all over the show, urging the Chinese to 
forget about buying American machine tools because of the 
difficulty in getting an export license.
    I will tell you that the unilateral imposition of export 
controls on machines that are readily available elsewhere is 
hurting our industry in this critical market, without affecting 
one iota access of the Chinese to the manufacturing equipment 
they need.
    Last, I would like to comment on the WTO ruling that 
foreign sales corporation must be repealed by October 2000. 
Unless Congress acts, either the Europeans will retaliate 
against U.S. exports or U.S. exporters will face a $3 billion 
per year tax increase on our exports. The solution is to move 
to a territorial, border-adjustable system of taxation, which 
would not tax exports at all, but would impose a tax on 
imports. This is a system used by all of our major trading 
partners. We cannot maintain our leadership as either the 
preeminent world power or as the premier world economy with a 
second-rate machine tool industry. Please listen carefully to 
my colleagues as they present their ideas for meeting the 
challenges facing our industry.
    Mr. Chairman, one of our member companies that is not 
present has asked that a written statement relative to 
Australian Government subsidizing of machine tool exports be 
submitted for the record.
    Senator Abraham. Without objection, it will be submitted. 
Again, I am struggling to find out where the objection will 
come from, but at least it appears as if it is unanimous. So, 
unanimously, it will be included in the record.
    [The prepared statement of Mr. Logan and summary of the 
Huffman Corp. follow:]
  Prepared Statement of John F. Logan, Automation Group President, DT 
   Industries, and Chairman, Association for Manufacturing Technology
                            I. INTRODUCTION
    My name is John F. Logan. DT Industries (DTI) is a leading global 
and the largest North American provider of automated assembly, test, 
material handling and packaging systems for a broad range of consumer 
and industrial products. DTI consists of two complementary operating 
groups--Automation and Packaging. I am President of the Automation 
Group. The Groups, and the divisions within them, share design, 
engineering and manufacturing resources in pursuit of indispensable 
engineered solutions for customers delivering local service within the 
context of global teamwork. DTI provides our engineering and 
manufacturing expertise to customers involved in electronics, 
automotive, pharmaceuticals, consumer products, high technology, 
medical devices, cosmetics, hardware, agriculture and heavy trucks.
    DTI currently operates 20 manufacturing facilities located in the 
United States, the United Kingdom, Canada and Germany. Additionally, we 
have an extensive service network established in over 15 countries. We 
employ approximately 2,800 people.
    I am Chairman of the Board of Directors of AMT--The Association For 
Manufacturing Technology--a trade association whose membership 
represents over 370 machine tool building firms with locations 
throughout the United States, including DT Industries. The majority of 
AMT's members are small businesses. According to the U.S. Census of 
Manufacturers, 73 percent of the companies in our industry have less 
than 50 employees. They build and provide to a wide range of industries 
the tools of manufacturing technology including cutting, grinding, 
forming and assembly machines, as well as inspection and measuring 
machines, and automated manufacturing systems.
  II. THE U.S. MACHINE TOOL INDUSTRY IS CRITICAL TO OUR NATIONAL AND 
                           ECONOMIC SECURITY
    The United States machine tool industry is critical to both 
national security and economic prosperity. With production of over $7 
billion, the machine tool industry is small when compared to other 
industries. But that industry's products and technology are the essence 
of the industrial manufacturing process and the key to a strong defense 
industrial base. Without the manufacturing technologies related to 
machine tools, the other manufacturing industries would not exist. With 
377 members, AMT--the Association for Manufacturing Technology--
represents the U.S. machine tool industry, comprised of companies that 
provide manufacturing technology to cut, shape, form, and assemble 
metal and other materials and provide software and measuring devices 
for those processes.
    By definition, machine tools and related manufacturing technology 
are the ``tools'' of production. Our nation's ability to compete 
globally in electronics, optics, aerospace, and other high technology 
arenas and our ability to produce advanced weapons systems for national 
defense depend on the availability of state-of-the-art machine tools 
and the health of the U.S. industry. Without machine tools and related 
manufacturing technology there would be no aircraft, ships, tanks, or 
missiles. Nor would there be appliances, automobiles, agricultural 
machines, or factory automation without machine tools. In short, life 
as we know it today would be impossible without the modern machine tool 
industry and the manufacturing technology related to it.
    The industry was a serious bottleneck to military production during 
World Wars I and II and the Korean War. Even during the Gulf War, the 
need for production increases in specific weapons and mobilization 
priorities pushed civilian manufacturing projects to the back of the 
production queue so that weapons systems and war materiel would be 
available in a timely fashion for the conflict with the Iraqis. Indeed, 
throughout our history machine tools have been a critical tool for 
mobilization and eventual victory over all the enemies we have faced. 
That is even more true today given the high-tech nature of America's 
weapons systems, than when machine tools were used to make the rifles 
and cannons of the Civil War.
    Wartime production priorities and mobilization require large 
numbers of machine tools be made available on short notice, and that 
can only be accomplished with great assurance by a strong and healthy 
domestic machine tool industry. While the U.S. Government, using laws 
such as the Defense Production Act, can order machine tool production 
to be converted from civilian to military priority as soon as the need 
arises, the U.S. Government cannot order foreign machine tool makers to 
do likewise. It can only make a request, and then hope that our allies 
see a particular conflict in the same way that we do. Certainly, there 
is no guarantee that our European or Asian allies will see every 
conflict from the same perspective as the United States. Moreover, 
despite our current overwhelming military dominance, air and shipping 
lanes are not as secure in wartime as they are in peacetime. That is 
why the U.S. defense industrial base is only considered by the Pentagon 
to include the continental United States, plus Mexico and Canada.
    Machine tools play an equally important role in peacetime as well. 
Machine tools are the heart of our civilian economy and, hence, our 
prosperity. Alan Greenspan has testified before Congress to the fact 
that U.S. corporate profits and worker wages have risen dramatically 
without inflation in recent years in large part because productivity is 
once more on the rise. A good part of that productivity can be traced 
back to the effective use of more efficient machinery and factory 
automation. In essence, Chairman Greenspan was explaining that the 
output of the modern U.S. machine tool industry accounts for a good 
deal of our recent spurt in productivity and, hence, has played an 
important role in our current prosperity.
    If we were to lose the domestic core of our machine tool industry, 
we would become wholly dependent on our allies and trade competitors 
for the industrial production machinery that fuels our productivity and 
our keeps our industries on the cutting edge of the latest technology. 
Without a domestic base for machine tools, Boeing would be second in 
line behind Airbus; and General Motors and Ford would have to wait 
behind Toyota before acquiring the latest in production equipment. 
Being second to market with innovation is not the way to maintain 
industrial leadership. That is not a situation in which we should want 
to place our key industrial sectors, which is why a healthy domestic 
machine tool industry is so important both for national security and 
for continued prosperity. The recent combination of a sharp decrease in 
U.S. demand and a huge increase in Asian exports to the U.S. 
marketplace has been extremely damaging to the U.S. machine tool 
industry.
          III. THE MACHINE TOOL INDUSTRY DOWNTURN (1998-1999)
    Over the past year, domestic demand for machine tools has fallen 
dramatically. The first six months of 1999 have seen machine tool 
consumption in the United States fall 39 percent when compared to the 
same period last year (see Chart 1). While all but a handful of machine 
tool product areas experienced lower order rates in the first half of 
1999, some product areas were severely hit (see Chart 2). Machine tool 
consumption has traditionally been used by economic forecasters as a 
leading indicator of the larger economy. Whether the decline is a 
harbinger of an overall slowdown from what has been an amazing record 
of economic expansion; or whether it is an indication of structural 
changes in traditional capital spending patterns; or is a combination 
of these factors; the sharp decline in U.S. machine tool consumption 
should concern thoughtful policy makers.
    The U.S. machine tool market is composed of manufactured durables 
producers--the largest of which are the auto parts industry, Detroit's 
Big Three, the aerospace industry, and the off-road and highway 
construction industry. Total capital spending (including machine tools) 
for these four sectors fell 21 percent during the first quarter of 1999 
relative to the first quarter of 1998, although the spending levels 
varied significantly by sector. The auto parts industry's capital 
spending climbed 45 percent while capital spending by the aerospace 
industry and Big Three both fell by 25 percent. The 39 percent decline 
in machine orders cannot be accounted for solely by these significant 
capital spending declines among the major customers.
    Some Wall Street analysts suggest that some of the difference can 
be attributed to a significant change in the mix of capital spending in 
1999 relative to the mix over the past three years. In the past three 
years, these four sectors spent heavily on new manufacturing 
technologies and increases in capacity to meet the growing demand of 
the world market. In 1999, capital spending will be focused more 
towards software solutions to the Y2K issue and investments in 
knowledge and information technologies. The Y2K issue is a short-term 
distortion whose impact will dissipate over the next twelve months. The 
shift from investments in new capital equipment is a longer-term issue.
    Many financial analysts point to lax bank regulation and 
extraordinary investment in new capacity during 1994-1997 by Asian 
auto, auto parts, and heavy equipment manufacturers as principal causes 
for the financial crisis in Korea and other Asian countries. Economists 
who follow the situation in Asia suggest that it may take two to five 
years to rationalize the over-capacity in various industries throughout 
Asia. In the meantime, additional capacity needs of the U.S. auto and 
heavy equipment industries will be weighed against the cost of 
investing/buying foreign capacity in Asia at fire sale prices. Not only 
is the U.S. machine tool market three-fifths of the size that it was at 
the end of 1997; but to make matters worse, this already vexing problem 
has been compounded by a sudden change in the marketing approach and an 
increase in the market share of the three largest Asian producers of 
machine tools: Japan, South Korea, and Taiwan. In addition, U.S. 
machine tool exports to Asia have collapsed (e.g., machine tool exports 
to Korea dropped 69 percent from 1996-1998).
    Their approach has utilized a very aggressive--if not predatory--
marketing strategy that has seen, even accounting for currency 
fluctuations, Asian prices for some commodity machines cut 50 percent 
or more in just one year (see Chart 3). As a result, Asian machine tool 
builders have increased their shares of the U.S. market to the point 
where U.S. builders have seen their domestic market share decline over 
the past year to a level where we now supply about 40 percent of the 
U.S. machine tool market, compared with about 50 percent or more a few 
years ago (see Chart 4). AMT does not have legal standing to initiate 
an antidumping case on behalf of its members.
    The import surge from Asia can be explained by the Asian financial 
crisis, brought on in part by over-investment in certain key 
industries, including machine tools. But whatever the cause, the 
response chosen by the Asian machine tool builders to the lack of 
demand in the Asian marketplace has been to export their over-capacity 
to the United States. One telling example of the shift caused by the 
Asian financial crisis is that South Korea, which only exported 15 
percent of its machine tool production to the United States in 1995, 
exported fully 50 percent of that production to the U.S. in 1998. 
Similar, if less dramatic, shifts have occurred in Japan's and Taiwan's 
exporting patterns (see Chart 5).
    The dramatic decline in U.S. machine tool industry orders over the 
first half of 1999 can be attributed to a decline in customer demand 
and a significant increase in import competition. Both can be directly 
related to the effects of the Asian financial crisis, which has also 
had a substantial negative impact on U.S. machine tool exports to Asia.
    During the past 13 years, two Presidents have seen fit to negotiate 
Voluntary Restraint Arrangements (``VRAs'') with Asian Governments; 
because they concluded that the continuation of a healthy U.S. machine 
tool industry was critical to national security. Those VRAs lasted 
seven years, during which time the industry did exactly what was 
required to return to profitability and competitiveness. U.S. machine 
tool builders doubled their investment to depreciation ratios. They 
dramatically increased expenditures on research and development, and by 
the termination of the VRAs in 1993, U.S. machine tool competitiveness 
in world markets was measured by the fact that the industry was 
actually exporting over 30 percent of its output.
    Nonetheless, the recent combination of a sharp decrease in U.S. 
demand and a huge increase in Asian exports to the U.S. marketplace has 
been extremely damaging to the U.S. machine tool industry.
     IV. WHAT SHOULD BE DONE TO HELP THE U.S. MACHINE TOOL INDUSTRY
    Given the importance of the U.S. machine tool industry to America's 
national and economic security, the U.S. government must adopt policies 
that assure the continued strength of America's machine tool industry 
and which provide a level playing field for American machine tool 
builders. These actions include:

          Enactment of an 18-year product liability statute-of-
        repose.
          Vigorous enforcement of U.S. trade laws--both to 
        assure that trade is fair and that the national security is 
        protected.
          Passage of tax laws that encourage U.S. manufacturing 
        and that are saver/investor friendly.
          Adoption of technology/R&D policy and funding that 
        assures that U.S. manufacturing technology is second to none..
          Application of sensible export control policy and 
        regulations.

    I would like to say a few words about our current export control 
policy. Mr. Danjczek will address the issue in greater detail. However, 
I want to describe what I saw at the China International Machine Tool 
Show last week. Several Chinese companies were showing fully integrated 
5-axis CNC-controlled machines. In addition, several are showing very 
high accuracy turning and milling machines with accuracies of +/- 3 
microns and one spherical lathe with accuracies of +/- 2 microns. These 
are machines that U.S. manufacturers cannot export to China because 
they are considered a national security threat in the hands of the 
Chinese. Yet, there they were right on the show floor in China. I will 
tell you that the unilateral imposition of export controls on machines 
that are readily available elsewhere is hurting our industry in this 
critical market without affecting one iota access of the Chinese to the 
manufacturing equipment they need.
                           V. FSC REPLACEMENT
    Mr. Chairman, my colleagues will be discussing a variety of other 
issues which affect U.S. machine tool manufacturers--from product 
liability to technology policy to trade policy and export control 
reform. I would like to touch on one other issue before I conclude my 
remarks--Foreign Sales Corporations. Specifically what does Congress 
intend to do in the wake of the World Trade Organization's (WTO) 
dispute resolution panel ruling that the Foreign Sales Corporation 
(FSC) violates WTO rules and must be repealed by October 2000. FSCs 
provide an enhancement to exports by allowing U.S. companies to deduct 
14 percent of their export income. These funds are used to make U.S. 
exports more competitive in world markets. DT Industries has a FSC, as 
do many other AMT members--both large and small.
    Unless Congress acts by October of next year, billions of dollars 
of U.S. exports will be subject to retaliatory ``compensation'' by the 
European Union and others. But simply repealing the FSC would deprive 
U.S. companies of a powerful incentive to export and effectively amount 
to a $3 billion per year tax increase on U.S. exports. On the other 
hand, simply replacing FSC with a slightly different version could be 
inconsistent with the WTO decision and could lead to European 
retaliation.
    The dispute resolution panel has pointed the way towards a logical 
solution to FSC replacement. The U.S. currently maintains a system of 
worldwide taxation of its businesses. We are the only major industrial 
nation that does so. The WTO dispute resolution panel clearly states 
that we cannot couple territorial treatment of exports with a system of 
taxing the worldwide income of our companies. The solution is to move 
to a territorial, border-adjustable system of taxation, which would not 
tax exports at all but would impose a tax on imports. This is the 
system used by all of our major trading partners.
    You may recall that a few years ago, your colleagues, Sens. 
Domenici (R-NM) and Nunn (D-GA), introduced a comprehensive tax reform 
proposal called the USA Tax. It called for replacing our current tax 
system with a cash flow tax that would be both border-adjustable and 
territorial and would provide for the expensing of capital purchases. 
Cong. English (R-PA) has introduced similar legislation in the House. 
AMT supports Cong. English's proposal. Enactment of this approach is a 
top legislative priority for AMT.
                             VI. CONCLUSION
    We cannot maintain our leadership as either the pre-eminent world 
power or as the premier world economy with a second-rate machine tool 
industry. Please listen carefully as my colleagues present their ideas 
for meeting the challenges facing our industry.

                                ------                                

SUMMARY of the Effect of the Australian Government Subsidizing 
of Its Machine Tool Industry Over the Decade & How It Has 
Affected the Huffman Corporation, a Privately Owned South 
Carolina Corporation 

    The U.S. machine tool manufacturing base is comprised of 
many small technically innovative companies, with the average 
company being less than 50 people. The focus of U. S. trade law 
has been on larger corporations, but increasingly the fountain 
of technical innovation is actually in small companies. 
Microsoft or Dell is an obvious example of a little company 
turning large. But Small Business Administration statistics and 
forecasts show that the majority of U.S. economic growth and 
job creations are coming from, and will come from the 
burgeoning number of small technically advanced manufacturing 
companies. Indeed, the merging of larger companies into global 
titans is at once able to happen and is caused to happen by 
this trend. Large global corporations are becoming design, 
assemble and service companies that outsource parts 
manufacture. In the latest design of automotive plants, for 
example, it is the parts supplier who actually assembles the 
car, and not the automotive manufacturer. A good reason for 
this outsourcing drive is that smaller companies are early 
adopters of technology, whereas larger companies are late 
adopters or laggards. Increasing use of smaller suppliers 
allows the large companies to enjoy the benefit of the latest 
technology, while not having to fund it or absorb mis-starts or 
mistakes. This trend is gaining momentum, and changes the very 
fabric of how industrial America works. It radically shifts the 
importance in the whole of smaller U.S. manufacturing 
technology innovators.
    Foreign governments seem to have realized this trend and 
have acted to incubate their own growth by significantly 
tampering with U.S. free trade laws. Their subsidy of whole 
manufacturing technology industries to the distinct detriment 
of the same capability in the U.S. is alarming and is 
accelerating. The U.S. economy and government, glowing from the 
effects of the aggregate of these trends, appear to still be 
playing yesterday's game. That is, watching the large companies 
while foreign governments, more alert due to depressed times, 
have been quick to see the change and have acted to take 
advantage of it to foster their own technically led economic 
revolutions. In the balance of this document, I will outline an 
example of what one government has done, and how it has 
affected a typical U.S. company.
    The Huffman Corporation is an example of one of these 
entrepreneurial companies, known for supply of both inventive 
and innovative manufacturing technology to the U.S. Fortune 50. 
In the past year, the average machine sold increased customer 
productivity by 3.5 times. That's 350%. In some cases, gains 
were much higher. The U.S. economy's annual productivity gains 
are on the order of 3.5%. So Huffman's products increase 
productivity 100 times more than average. Products made on the 
company's machines touch virtually every American. If you have 
driven in a car or flown in an airplane, some of the components 
were made on Huffman machines. If you or someone you know have 
had a knee or hip replacement, you have been touched by 
products made on Huffman machinery. The company's machines have 
been exported to 17 other countries.
    Founded in the early 60's. Huffman grew and prospered from 
inventions and innovations in the development of CNC 
Superabrasive Grinding Machining Systems. 20% of its output has 
been exported. The company has a reputation for high quality, 
precise, reliable and durable machines, besides its technical 
leadership. Returns on investment have been, and are extremely 
high, the ultimate test of the value of capital investment.
    In 1990, machine tools built in Australia began to enter 
the U.S. with no prior experience. The product always seemed to 
be priced 1000 below Huffman's prices. The Australians then 
hired away Huffman's Sales Manager and a key software 
development employee. They sold light duty machines, calling 
Huffman's overbuilt for the applications, and telling customers 
that Huffman had not stayed ahead of the cost curve. With price 
as their main advantage, they ate quickly into Huffman's market 
leader position. Huffman's sales fell a staggering 45% from 
1991 to 1994 before stabilizing. Employment went from a peak of 
165 to just below 90, a loss of 75 manufacturing jobs. In the 
self-deprecating mood of the times, the company's problems were 
written off to poor ``American'' management.
    In early 1994, teetering on bankruptcy, new management took 
over. Working through the Association for Manufacturing 
Technology (AMT), a 1990 Australian Government Bounty Act was 
uncovered that gave a 24% subsidy to its machine tool builders 
for exports. One specifically targeted Huffman. As it turned 
out, Huffman's cost was actually competitive all along, but the 
Australian Government had stacked the deck in their industries' 
favor. Old familiar story. Investigating further, several other 
``helps'' were uncovered, but none as strong as the ``Bounty 
Act.'' Earlier the Australian Government created an 
``Australian National Control Association'' for the purpose of 
providing affordable CNC controls to help incubate a domestic 
CNC machine tool industry. Later, to develop specific 
automotive parts manufacturing capability, the Australian 
government provided ``R&D'' subsidies to their machine tool 
builders.
    While Huffman had been staggered by the broad market 
impact, it was able to stop the free fall because it had 
developed a strong base of innovative applications for parts 
that required a significant amount of self funded R&D to 
create. In one case, Huffman had self-funded over $1,000,000 of 
R&D to create an entirely new process for manufacturing power 
steering pump spool valves (the one that eliminated the squeak 
at turning limits of power steering units). The machine was one 
of the first in America to achieve a Six Sigma process 
capability--that later became the world standard. In 1994, the 
Australians quoted a large requirement in Detroit, and with no 
experience promised two times the Huffman productivity. With so 
low pricing, we couldn't figure out how they could afford to 
fund the research to make this complex system. But then AMT 
uncovered the R&D subsidy. The machines they delivered only 
achieved half of the Huffman cycle time and failed to meet the 
Huffman quality level. Three years later, Huffman got the 
business back. But in the meantime, Huffman suffered yet 
another devastating loss of millions in business.
    Working through AMT, other U.S. member companies affected 
by the Australian situation reported other apparently curious 
business practices. To design such technically complex and 
process critical machinery requires a lot of face to face 
technical review time between the buying team and the selling 
team, usually at the supplier's factory. Travel to the other 
side of the world is exorbitantly expensive, besides time 
consuming. Hearsay from customers is that their roundtrip 
airfares to Australia at times have been reimbursed. Other 
customers report that the Australian machine tool manufacturers 
ship to the U.S. by airfreight to avoid the lengthy delay of 
ocean freight. Yet the machines weigh several tons. The 
standard industrial practice is to ship ocean freight.
    All of these practices violate WTO rules, we are told. 
Through AMT work with various U.S. Government agencies, by the 
end of 1997 the Australian Government agreed to end the larger 
documented subsidies. By then, interestingly many of the 
lightweight Australian machines that had entered the U.S. were 
experiencing severe reliability problems. In some cases, a 
machine expected to last 12 years or more was failing to 
perform to its depreciation life of 7 years. Others limped on 
greatly reduced cycle times and poor uptime. The situation 
became so bad that the Australians were forced to design a much 
larger, more robust machine, which was introduced in late 1998. 
But this machine was 30% more expensive.
    In the interim from the first appearance of the subsidized 
Australians, until their subsidies ended in late '97. Huffman 
Corporation reduced its cost by 35%, while retaining its 
premier quality, reliability and precision, and increasing its 
productive rates. In 1998, without the subsidies, Australian 
exports to the U.S. dropped by 35% to below the 1996 level. In 
that same period, Huffman's sales grew by 25%, after 8 years 
finally competing on a true cost and quality basis.
    In 1998 and into 1999, a recession began in the machine 
tool industry worldwide. In the U.S., business dropped by 40% 
industry wide, with equal to or worse drops seen in Asia and 
Europe. In the U.S., the grinding market (Huffman and 
Australia's principal market) dropped 60%. In spite of this, 
Huffman's sales continued into the first and second quarter of 
1999 above its 1998 level. Then suddenly in the third quarter, 
customers began reporting being able to purchase Australian 
machines at huge mark downs, some as much as 35%. In their 
September '99 quarter, Huffman's bookings and shipments dropped 
in spite of having no effect of the overall Industry recession 
to date.
    Again checking with the AMT, it was discovered the 
Australians had instituted yet another subsidy scheme called 
the ``Automotive Industry Export Facilitation Scheme.'' 
Basically the ``scheme'' allowed for 100% subsidy of machine 
tools value added and exported. This clearly accounted for the 
sudden drop in the selling price for the much larger, more 
expensive Australian machine design. Clearly the earlier 
subsidies had fostered a false competition, and now the 
situation was so bad they had to extend a 100% value added 
subsidy for exported machines. No manufacturer in any free 
economy can compete against a government subsidizing 
competition by 100%. Huffman had hired back 20 of the 75 
workers laid off in the early 90's and with the growth, had 
planned to hire another 20. Instead Huffman laid off 20.
    Huffman has worked with NCMS and developed two types of 
machinery vital to reducing the cost of airframe, air engine 
and industrial gas turbine components. Huffman has also 
developed machinery that increases the quality and productivity 
of carbide cutting tools used to increase the productivity of 
making aircraft airframes and engines. Huffman also provides a 
critical machine that results in a 5X productivity gain in the 
production of automotive gears. Advances in the medical 
orthopedic industry were mentioned above. In spite of Huffman 
machines being of higher quality and better productivity, the 
capital goods buyers naturally gravitate to a substantially 
lower price. In some cases, like in the Industrial Gas Turbine 
power generation industry. Huffman has developed what so far is 
the only way to manufacture the latest generation coming to 
market. Without volume generated from past developments, we are 
unable to self-fund new developments. The difficulty with the 
small companies developing critical technologies to support the 
big global corporations is that if they are targeted by foreign 
countries as vital technologies, and then face 100% subsidized 
competition, their critical manufacturing technology will be 
cut off as the knowledge base is dispersed when people are 
scattered to find other employment. Unison, another American 
company hit by the Australian subsidies, went bankrupt. They 
were eventually able to reorganize but lost all their people in 
the meantime. 95% of their intellectual property evaporated, 
causing massive destruction from the lack of support of their 
thousands of installed machines and still born customer 
specific development projects.
    On a free trade basis. Unison was competitive. Huffman is 
extremely competitive, not just in the U.S. but when exporting 
products to 17 countries. A small private company, however, is 
not capable of competing with a government subsidized industry 
that totally supports R&D and reimburses freight and travel 
expense. We certainly can't compete with a 100% valued added 
subsidy. The lost volume takes away R&D money used to fund 
Laser and Waterjet manufacturing in the Gas Turbine Industry 
that raises productivity by 5-700 percent, greatly reducing the 
cost in those industries.
    Huffman is in favor of free trade and seeks no advantage 
from the U.S. Government. Instead, we would like to see 
cooperation between our government and our industry, which will 
address free trade as diligently as the Australians bias trade 
in their favor. The issue here is that if we as a country 
continue to allow violations to our free trade policies, we 
will be destroyed as surely as we would be if we allowed 
similar transgressions from a military standpoint. To deal with 
the slow response, more and more U.S. companies are moving 
production offshore to countries with favorable manufacturing 
policies. When large innovative manufacturing companies, like 
Chrysler, merge with Daimler and choose to become a German 
company due to non-competitive U.S. Government trade and tax 
policy, we are beyond the point when we can afford to take a 
passive view of the economic war we are fighting, and the 
flagrant violations. What a national embarrassment. When the 
U.S. makes a transgression, other national governments are only 
too quick to post retaliatory duties. After ten years of 
flagrant abuse from the Australians, isn't it time to do 
something?

    Senator Abraham. We thank you very much.
    I know Congressman Neal is here, but we will go to you, Mr. 
Clevenger.

    STATEMENT OF JEFFREY A. CLEVENGER, PRESIDENT AND CHIEF 
               EXECUTIVE OFFICER, SMS GROUP, INC.

    Mr. Clevenger. Today I want to address just two areas where 
Congress can help our industry compete in the emerging global 
market: First, the enactment of an 18-year statute of repose 
for work place products; and, second, the continuation and 
supporting of research and development programs such as 
Commerce's Advanced Technology Program and the R&D tax credit.
    My written testimony describes the many reasons for the 
abundance of older machines in use in plants and on shop floors 
today. This old and often modified equipment causes a threat to 
my company and to my industry because of the very costly 
litigation. My written statement documents our product 
liability history.
    We are a 20-year-old company. Of the 23 product liability 
suits we have defended during that time, not one involved a 
machine manufactured by SMS Group. They were built years ago by 
a company we acquired. We do not service, provide technical 
assistance or spare parts for these machines. In every one of 
the 23 cases, the machine had been through at least two owners, 
had been altered or modified, and in every case the machine 
involved was 18 years or older.
    These 23 cases have cost my company in excess of $6.5 
million, most of it in very wasteful transaction costs. That is 
$6.5 million that could have been reinvested to develop state-
of-the-art products which will enhance us to survive in a 
global marketplace. SMS is now able to carry product liability 
insurance, but a large judgment against us could put us out of 
business quickly. It has happened to many companies in this 
industry.
    Our foreign competitors do not bear these long-tail costs 
or risks because they have a 10-year statute of repose in their 
home markets, and their entrance into our market has been in 
relatively recent years.
    H.R. 2005 was recently approved by the House Judiciary 
Committee, and may be on the floor as easily as next week. The 
bill provides a Federal 18-year statute of repose for equipment 
used in the work place. Under this proposal, no injured worker 
would go completely uncompensated. What the bill would do is 
improve the competitiveness of my company and the industry by 
driving down litigation costs.
    Enactment of H.R. 2005 would eliminate 42 percent of my 
industry's product liability lawsuits. Please, we need you to 
adopt the 18-year statute of repose for capital goods in the 
work place.
    While the current product liability system imposes 
financial hardship on my company and the industry, Commerce's 
ATP program does exactly the opposite for research and 
development. Very few companies in my industry have the 
capability and the resources to advance state-of-the-art, and 
then only with substantial risk. Without ATP program 
advancements in manufacturing in our industry, these projects 
will not be taken on as frequently. By forging a partnership, 
however, with government, industry, and academia, the ATP 
enhances and encourages advancements for all.
    SMS has been a very successful recipient of numerous ATP 
awards. My written statement details some of the ATP projects 
that we have successfully completed. I urge you to continue 
supporting this program.
    Last, I would strongly urge the Senate to take action 
before the end of this session to extend R&D tax credits. The 
tax credit is another inexpensive way for Congress to encourage 
the R&D efforts of American businesses. Please do not go home 
without extending that for us.
    Thank you.
    [The prepared statement of Mr. Clevenger follows:]

    Prepared Statement of Jeffrey A. Clevenger, President and Chief 
                   Executive Officer, SMS Group, Inc.
I. INTRODUCTION

    My name is Jeffrey A. Clevenger. I am President & C.E.O. of SMS 
Group Incorporated located in Saginaw, Michigan. SMS Group employs 
roughly 100 workers. The bulk of our product line is devoted to 
vertical and inverted spindle lathes at an annual sales volume of about 
$20 million. I am Chairman of the Government Relations Committee of 
AMT, the trade association that John Logan chairs.
    Today, I would like to focus my remarks on two areas in which 
Congress can facilitate enhanced competitiveness in the global 
marketplace for American manufacturers. One is to address the liability 
exposure resulting from the abundance of overage durable equipment used 
in workplaces today. The other is a continued commitment to government-
sponsored R&D funding such as that provided by the Commerce 
Department's Advanced Technology Program (ATP).

II. THE NEED FOR A FEDERAL STATUTE-OF-REPOSE FOR WORKPLACE DURABLE 
GOODS

    According to American Machinist magazine, in 1996 (the last year 
for which data is available), over 60% of machine tools used in U.S. 
metalworking industries were over 10 years old. When a factory decides 
to invest in new capital equipment, the old machinery is not thrown in 
the trash heap. Instead, companies, who lack the resources for new 
machines, purchase these overage machines, often altering them to fit 
their needs. This process is repeated, as newer machines are acquired 
and older ones resold. As a result of base closures over the past few 
years, the Defense Department has resold over 15,000 overage machine 
tools since 1994. They are now being used in job shops across America. 
Most of the machines are of World War II or Korean War vintage. The 
result of all of these factors is a big overhang of overage machine 
tools in the U.S. market. This exposes the manufacturers of the old 
equipment to costly litigation. In addition, it exposes companies that, 
like SMS, sprung out of corporate divestiture and later discovered they 
had assumed the historical liability for the equipment built by the 
dissolved company. Machines they never even manufactured.
    Under product liability law today, in many states, potential 
liability for my industry's products is endless--literally ``forever.'' 
Many of these machines--built before the creation of OSHA, before Neil 
Armstrong walked on the moon, before the Beatles came to America--are 
still in use today. Although these machines were built decades ago to 
safety standards of their day and although they are likely to have 
passed through several owners--each of whom are likely to have made 
their own modifications to accommodate their needs--they are still the 
subject of almost half of our industry's lawsuits. SMS Group has been 
in business for about 20 years. Of all the product liability suits we 
have defended during that time, not one involved a machine made by SMS. 
All 23 cases involved equipment manufactured by the company whose 
assets were purchased to form SMS more than two decades ago. SMS does 
not even manufacture the same types of machines named in the suits. We 
provide no service for them, no specs, and no spare parts. Yet 
defending them in court has cost us in excess of $6.5 million. In every 
case, the machine in question had passed through at least two owners 
(and in some cases, four or five). And in every case, the machine had 
been modified (sometimes contrary to government safety standards). Very 
often, every safety door and guard had been removed prior to the 
injury. All 23 machines involved were over 18 years old.
    Of that $6.5 million spent to defend these cases, only $2.5 million 
went to claimants, and of that, at least one-third went to plaintiffs' 
lawyers and some went as subrogation to claimant's employers or their 
insurance companies, even in instances where there was substantial 
employer fault. Some of these cases are eventually dismissed. Still 
others are withdrawn by plaintiffs who did not count on companies like 
us fighting back. Yet, we still spent $4 million defending ourselves in 
litigation over machines that we didn't make, and in most cases, has 
lost complete track of. These figures exclude the many extra man-hours 
put in by me and my employees working on these cases. Just tracking a 
serial number for one of these machines is a lesson in diligence and 
patience because most, if not all, of the companies originally 
associated with this equipment have since gone out of business.
    SMS is lucky. We are able to carry product liability insurance 
coverage--$1 million worth of it at an annual premium of $100,000. When 
it came time to renew our policy this year, we wrote to several 
insurance companies with letters looking for additional coverage. We 
did not receive one quote. I believe the reason our carrier continues 
our present coverage is because of the aggressive manner in which we 
tackle these cases. However, should a case ever reach trial and the 
jury find for the claimant, a large judgment would force us to close 
our doors. The $7.5 million verdict in 1996 involving a machine built 
in 1948 against Mattison Technologies, a 100-year old Rockford, 
Illinois machine tool builder, led to the company's bankruptcy.
    In contrast to the significant long-tail exposure of U.S. builders, 
the incursion by foreign machine tool builders into the U.S. market is 
fairly recent (within the past 20 years). American companies that have 
been in business for many years must factor into their prices the risk 
of litigation involving thousands of overage machines. Our Japanese and 
European competitors don't have those risks and those costs. Their 
liability exposure is relatively small (both Europe and Japan have 10-
year statutes-of-repose). Enactment of a federal statute-of-repose for 
workplace durable goods would therefore level the playing field for 
U.S. manufacturers and achieve the uniformity and certainty necessary 
to produce the state-of-the-art products for which we are noted.

III. H.R. 2005

    Over the years, we have testified before this and other 
Congressional committees in support of numerous product liability 
bills. Because those bills were broad in scope, some of their 
provisions drew controversy that could not be overcome during their 
consideration by the Senate and/or the White House. H.R. 2005, recently 
approved by the House Judiciary Committee, deals only with the issue of 
overage workplace products. It provides for a federal 18-year statute-
of-repose for equipment used in the workplace. It does not contain 
controversial provisions on other product liability issues that have 
held up passage in past years. The bill is identical to the statute-of-
repose provisions contained in product liability legislation agreed 
upon for consideration in the last Congress, after extensive 
negotiations between the White House and a bipartisan group of 
Congressional leaders.
    Under this proposal, no injured worker would go uncompensated. H.R. 
2005 would only deal with claims involving injuries allegedly caused by 
workplace durable goods for which the plaintiff has received or is 
eligible to receive worker compensation. For that specific category of 
cases, the provision would create a uniform, national statute-of-
repose, preempting any state statutes-of-repose that apply to those 
claims. Otherwise, state law would continue to apply. Thus, state 
statutes-of-repose that may cover consumer goods and other non-durable 
goods would not be affected.
    The period within which claimants could bring a lawsuit would be 
extended to 18 years in the 12 states that have enacted time limits 
(all of them shorter than 18 years); but our members are willing to 
accept that extension in order to achieve the certainty a national 
period of repose would provide.
    An additional eight states have enacted statutes-of-repose based on 
the ``useful safe life'' of the product. This approach has proven to be 
ineffective; because the ``useful safe life'' of each product must be 
litigated in every case, and substantial transaction costs must still 
be incurred. Enactment of a federal 18-year statute-of-repose for 
workplace products would improve the competitiveness of U.S. workplace 
equipment manufacturers by driving down their litigation costs and 
cutting down on meritless lawsuits. Passage of similar legislation 
relating to private aircraft has revitalized the domestic aircraft 
industry.
    SMS Group sees no end to our potential liability for the machines 
that are the subject of all of our company's lawsuits--machines that 
SMS did not even build. As long as the equipment is still on factory 
floors, we can be sued. Any one of those lawsuits could put us out of 
business. Please adopt an 18-year statute-of-repose for capital goods 
used in the workplace.

IV. THE ADVANCED TECHNOLOGY PROGRAM

    I would like to take a moment to touch on another issue that 
affects the competitiveness of the machine tool industry and that is 
government-funded research and development. House and Senate conferees 
have provided $211 million (5% more than last year) for the Commerce 
Department's Advanced Technology Program (ATP). The ATP facilitates 
cooperative research by private industry and academia to accelerate the 
development of high-risk technologies that promise significant 
commercial payoffs and widespread benefits for the economy. ATP 
projects are private industry driven. Universities and non-profit 
independent research organizations play an important role in ATP 
projects. More than 100 different universities (including the 
University of Michigan) are involved in more than 180 ATP projects. SMS 
has been a very successful recipient of ATP awards. Four out of five 
SMS proposals have received ATP grants.
    Using one as an example, in 1991, SMS, working with the Engineering 
School of the University of Michigan, collaborated to obtain a $1.7 
million grant ``Advanced Compensation Techniques for Enhancing Machine 
Tool Accuracy.'' Because of this ATP grant, we were able to combine the 
development by the University of Michigan of computer mathematical 
modeling with SMS' real-time measuring of heat build-up in various 
parts of cutting-type machine tool.
    The problem this R&D project solved is that, as machinery is used 
on the factory floor, it ``heats up;'' thus changing the parts it is 
producing. As a result of what we learned from this project, the parts 
produced at the end of a day (when the machine is ``hot'') are exactly 
the same as the parts produced when the machine starts up in the 
morning.
    We placed seven sensors in the machine. These sensors feed the 
temperature data into a computer processor, then developed software and 
modeling tells the computer to automatically make adjustments to 
compensate for temperature changes. Temperature changes that occur 
during the day cause the machine to lose accuracy due to ``thermal 
growth.'' The new system improves accuracy (often in the tenths of a 
thousandth of an inch) without manual intervention, yielding higher 
quality and productivity with less operator intervention.
    Our ``commercialization effort'' now has many machines in the field 
successfully working with an expected forecast of up to 50 percent of 
all new machines of this type built with the ``Accu-System'' feature. 
In 1998, we partnered with the University of Michigan again to take 
this technology to a broader application of machine tools through a 
National Science Foundation (NSF) grant entitled ``Robust Error 
Compensation Methods for Machine Tools.''
    In summary, very few companies have the capability and resources to 
advance the ``state-of-the-art'' without substantial risk. As a result, 
further advancements in manufacturing will have to be done 
collaboratively and with reduced risk. By forging a unique partnership 
between government, industry, and academia, the ATP enhances and 
encourages both. I urge you to continue supporting this program.

V. CONCLUSION

    Mr. Chairman, I want to thank you and the Committee for inviting me 
to appear with two of my colleagues to speak on behalf of our industry 
about some of the issues that affect us as we prepare to do business in 
the new millennium. I touched on two areas where Congress can help.
    By enacting an 18-year statute-of-repose, such as H.R. 2005, 
Congress would be declaring that endless litigation involving overage 
workplace equipment in the U.S. marketplace is a serious problem facing 
American producers who are, after all, the foundation of our industrial 
economy; and that the interstate commerce clause impels a federal 
solution. It is a problem not faced by our Asian and European 
competitors in their own markets nor, because of the longtail of 
exposure, in ours. The current system has cost jobs, money, and time. 
The principal beneficiaries have been lawyers on both sides of the 
counsel table. Advances in high-tech products are slowed as a result. 
Resources that could have gone toward the development of new technology 
and higher productivity for America have been expended on wasteful 
transaction costs with a relatively small percentage of total 
litigation dollars going to injured workers.
    H.R. 2005 does not contain controversial provisions on other 
product liability issues that have held up passage of reform in past 
years. In fact, the bill is identical to the statute-of-repose 
provisions contained in product liability legislation agreed upon for 
consideration in the last Congress, after extensive negotiations 
between the White House and a bipartisan group of Congressional 
leaders. I urge you to enact H.R. 2005 as quickly as possible.
    And by continuing to fund government-sponsored R&D programs, such 
as Commerce's ATP, Congress would be supporting a working partnership 
between the government, American industry and universities that will 
develop the technologies that will lead to the state-of-the-art 
products for which we are known throughout the world--a partnership 
that would not come together without the program.
    Lastly, I would strongly urge the Senate to take action before the 
end of the session to extend the R&D tax credit. The Senate Finance 
Committee has approved an 18-month, retroactive extension of the 
credit. The tax credit is an inexpensive way for the Congress to 
encourage the R&D efforts of American businesses. Please do not go home 
without extending it.
    Thank you for your attention. I would be pleased to respond to your 
questions.

    Senator Abraham. Thank you very much.
    Mr. Danjczek.

 STATEMENT OF DAVID W. DANJCZEK, STAFF VICE PRESIDENT, UNOVA, 
                              INC.

    Mr. Danjczek. Thank you very much, Mr. Chairman. I 
appreciate the opportunity to appear before you today.
    I am Staff Vice President of UNOVA, Inc., which is the 
largest producer of machine tools and manufacturing systems in 
the United States. Today I would like to focus on the issue of 
how our Nation's export controls and its policies affect the 
machine tool industry.
    The most difficult issues revolves about what to do about 
China. China presents a dilemma for U.S. export policy. The 
picture is no clearer with our allies. There is no consensus 
about how to treat technology transfer to China, and there is 
presently no effective multilateral forum in which to address 
U.S. Government concerns. The Chinese can readily obtain the 
machine tools they desire, and U.S. companies are denied 
participation in the business.
    The Wassenaar arrangement with our allies leaves licensing 
decisions up to individual countries based on a concept called 
national discretion. This arrangement provides neither a level 
playing field nor clear rules. U.S. licensing policies and 
practices have been far more restrictive than those of our 
European allies. In some cases, U.S. machine tool manufacturers 
have been denied even the opportunity to bid on projects by the 
Chinese because of the likely outcome of the U.S. licensing 
process.
    At least seven different Chinese machine tool manufacturers 
were exhibiting sophisticated machine tools this month, which, 
if they were of U.S. origin, would have required a U.S. export 
license. Under separate cover, I am submitting the data and the 
brochures from the recent Chinese show for your records.

    [The information referred to was not available at the time 
this hearing was sent to press.]

    Mr. Danjczek. Our current multilateral export licensing 
system is not keeping the Chinese from acquiring highly 
sophisticated machine tool technology, since they can either 
manufacture such machines themselves or obtain them from the 
Europeans. There is a basic, fundamental problem with the 
current export regime. It puts U.S. companies on an uneven 
playing field with regards to sales to what is likely to be the 
fastest growing and largest market for capital goods over the 
coming decade. The Chinese have been denied nothing in terms of 
high technology, but U.S. firms have lost out in a crucial 
market, and U.S. jobs have been lost.
    I would like to commend the Banking Committee for 
undertaking the critically important task of revising the 
Export Administration Act. That bill is a strong beginning 
toward new export control legislation. We are pleased that the 
legislation acknowledges, for the first time, that foreign 
availability can exist within a multilateral control system, 
including Wassenaar, not just outside that system.
    I am, however, concerned with the length of time proposed 
for negotiations to eliminate foreign availability. Eighteen 
months is simply too long. We recommend that the time limit be 
reduced to 6 months.
    We would also recommend that within the next year the 
administration make a serious effort to strengthen the overall 
Wassenaar arrangement, to include far better rules for 
information exchange than exist today. There ought to be a 
commitment among regime members to honor one another's denials. 
It is imperative that the status of China be clarified under 
the regime.
    Permit me to digress very briefly on two other issues. The 
U.S. machine tool industry is highly successful in world 
markets. Our technology is absolutely second to none. We can 
compete head to head and win against the best machine tool 
companies that Europe and Asia have to offer. However, we 
cannot prevail on an uneven playing field. I join my two 
colleagues in urging you to pass an 18-year statute of repose 
during this Congress.
    Second, UNOVA has had a very positive experiences with the 
Advanced Technology Program of the Commerce Department. The 
vast majority of these funds have gone to the universities, 
which were our partners in this program. The ATP program offers 
just the right incentive to stimulate cooperative ventures in 
the new technologies that are mandatory to keep American 
manufacturing ahead of the worldwide competition.
    I will go back to the thrust of my testimony. The manner in 
which the current multilateral export regime is administered by 
the U.S. Government constitutes a major impediment to accessing 
key world markets, such as China. We need to create both a 
domestic and an international regulatory climate that puts U.S. 
companies on an equal footing with our foreign competitors. Our 
Nation's economic health and our national security demand no 
less.
    We urge you to support the Banking Committee's EAA renewal 
when it comes to the Senate floor, and to oppose amendments 
that will make U.S. export control policy even more unilateral 
than it is today.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Danjczek follows:]

    Prepared Statement of David W. Danjczek, Staff Vice president, 
                              UNOVA, Inc.
    Mr. Chairman, members of the Subcommittee, I appreciate the 
opportunity to testify before you today. I am the Staff Vice President 
of UNOVA , Inc. UNOVA is the largest producer of machine tools and 
manufacturing systems in the United States, with total sales of $2 
billion and machine tool sales in excess of $1 billion. Today I appear 
before you on behalf of AMT--The Association for Manufacturing 
Technology and will focus my testimony on The United States 
Government's technology policy and on the issue of how our nation's 
export controls affect the machine tool industry, particularly those 
controls as they apply to China.
    There seems to be widespread agreement regarding United States 
export control policies aimed at keeping dangerous technology out of 
the hands of the so-called pariahs, or rogue states, and AMT strongly 
supports this policy. Nevertheless, the most difficult issues revolve 
around what to do about China.
    Certainly China presents a dilemma for U.S. export policy. On the 
one hand, China is a major trading partner and needs to import capital 
goods, including machine tools, to support its commercial economic 
development. On the other hand, China is quite clearly viewed by U.S. 
export licensing authorities as a potential military threat and 
technology transfer risk.
    The picture is no clearer with our allies. There is no consensus 
within the Western alliance about how to treat technology transfer to 
China, and there is presently no effective multilateral forum in which 
to address U.S. Government concerns about dual-use exports. This 
dilemma has led to the worst of all worlds for both the U.S. Government 
and U.S. machine tool companies. The Chinese can readily obtain the 
machine tools they desire, and U.S. companies are denied participation 
in the business.
    UNOVA, particularly our Cincinnati Machine Division, has been a 
major exporter to China, and so I would like to add something of our 
own experiences as a U.S. Government licensee. In the days of CoCom, 
the multilateral organization that coordinated technology transfer 
during the Cold War, the licensing process was slow and the outcome was 
uncertain. But we were confident that it provided a level playing field 
among our potential competitors, with rules that were reasonably clear. 
Its successor regime, the Wassenaar Arrangement, which has been in 
existence since 1996, leaves licensing decisions and methods up to 
individual countries, based on a concept called "national discretion." 
This arrangement provides neither a level playing field nor clear 
rules, and our experience operating under it suggests that since CoCom 
ended, U.S. licensing policies and practices have been far more 
restrictive than those of our European allies.
    As a result of our trade association--AMT's--role as a machine tool 
list technical advisor to the Wassenaar negotiating team, we have 
conducted studies of the licensing process and its outcomes among 
Wassenaar members. These studies show that the licensing process in the 
U.S. is far lengthier and far less certain in outcome than the 
equivalent process in European countries and Japan. The length of the 
process and the uncertainty of the outcome combine to put U.S. 
companies at a tremendous competitive disadvantage in China, even when 
we are competing for obviously legitimate commercial projects.
    In some cases, U.S machine tool manufacturers, including Cincinnati 
Machine, have been denied even the opportunity to bid on projects in 
China because of the wariness of the Chinese customer about the likely 
outcome of the U.S. licensing process. More recently, Chinese customers 
have asked that my company provide a guarantee that an export license 
will be obtained as a condition of the order with significant financial 
penalties to accrue if the license is denied. Of course, no U.S. 
machine tool company could offer such a guarantee.
    The view of these Chinese companies is well justified. Statistics 
indicate that the United States Government is far more likely to 
disapprove machine tool licenses for China than any of our European 
allies. While a mere handful of U.S. machine tool licenses have been 
approved over the past five years (a total of 25 licenses, or an 
average of five licenses per year during the period from 1992 through 
1997), trade statistics indicate that our European allies have, during 
that period, shipped a substantial volume of highly sophisticated 
machine tools to Chinese end-users.
    This is reflected in the average unit prices of machine tools 
exported from Europe to China, which are up to five times the average 
unit price of machine tools exported from the U.S. to China. Since the 
technical sophistication, accuracy, and productivity of a machine tool 
is directly proportional to its selling price, this indicates that the 
Europeans are shipping to China precisely those machine tools that are 
likely to be subject to export controls. Trade figures further indicate 
that by freely selling the same sophisticated machine tools to the 
Chinese which would be most likely unavailable from United States 
manufacturers, German, and other European providers, are also garnering 
sales in the non-controlled machine tool categories, putting U.S. 
manufacturers at a further disadvantage. Germany alone now has twice 
the market share of machine tool sales to China as does the United 
States. This is in marked contrast to the situation in South Korea 
where favorable export policies by the U.S. Government have led to a 20 
percent market share by U.S. companies, twice the market share that we 
have in China. Of course, exports to Korea have deteriorated sharply 
due to the Asian financial crisis.
    In the past three years, representatives of my company have visited 
many of the Chinese companies involved in the manufacture of components 
for commercial aircraft. We were astounded at the number of state-of-
the-art European machine tools (all of which required export licenses) 
that had been delivered into those companies since 1994. Just last 
week, as John Logan has noted in his testimony, those same European 
manufacturers were exhibiting their five-axis machines at the China 
International Machine Tool (``CIMT'') show, in Beijing, and assuring 
their Chinese customers that there would be no problem obtaining an 
export license from their Governments. Even more significantly, at 
least seven different Chinese machine tool builders were exhibiting 
sophisticated machine tools at the show, machines that would require an 
export license if sold by a U.S. manufacturer as a consequence of 
features on the Chinese machines such as five axes and very high levels 
of precision. One Chinese-made spherical lathe had a stated accuracy 
down to +/- .2 microns, as good as any machine made in the United 
States, Europe, or Japan. Under a separate cover, I am submitting data 
and brochures from the CIMT for the record.
    Our current multilateral export licensing system certainly isn't 
keeping the Chinese from acquiring highly sophisticated machine tool 
technology, since they can readily obtain it from the Europeans or, as 
the CIMT demonstrated, even manufacture such machines themselves.
    By far the most frustrating aspect of this situation is that many 
of the commercial aircraft factories in China contain joint ventures 
and co-production arrangements with American aircraft companies. Some 
of our industry's most valued domestic customers are moving production 
work from the U.S. to China to satisfy offset requirements related to 
Chinese aircraft purchases. Offsets are the practice by which China (or 
any other buyer of defense products or machinery) demands that a 
certain percentage of large capital goods sales to their country be 
built in their country, or that a comparable amount of business be 
directed to China as an offset'' for the large capital goods contracts 
that China signs.
    China already accounts for seven percent of Boeing Company's sales. 
Boeing projects that China will become the largest aircraft market 
outside of the U.S. and could, within seven years, account for nearly 
25 percent of Boeing's total business. Thus, there is every reason to 
believe that production of commercial aircraft parts in Chinese 
factories will continue to grow in tandem with the Chinese demand for 
commercial aircraft.
    The Chinese factories producing parts for American aircraft are 
often supervised or monitored on site by American managers, yet current 
U.S. Government export control policy virtually assures that the 
machine tools used in those factories will be of European, not 
American, origin. I am at a loss to understand how this policy enhances 
our national security.
    In sum, as my industry has testified previously, there is a 
fundamental problem with the current export regime. Not only does it 
lack discipline internationally with regard to a country about which 
the United States Government has indicated technology transfer 
concerns; it also puts U.S. companies on an uneven playing field with 
regard to sales to what is likely to be the fastest growing and largest 
market for capital goods over the coming decade. Repeatedly over the 
past five years, the United States Government has taken a negative 
approach toward machine tool sales to China while our allies have not. 
The result has been that the Chinese have been denied nothing in terms 
of high technology, but U.S. firms have lost out in a crucial market. 
This serves neither our commercial nor our strategic interests and 
needs to be addressed in whatever legislation that is produced during 
the 106th Congress.
    With this as background, I would now like to comment on specific 
provisions in the Export Administration Act which has just been 
reported to the Senate by Chairman Phil Gramm's Banking Committee.
    First, I would like to commend the Banking Committee for 
undertaking the critically important task of revising the Export 
Administration Act (``EAA''). As everyone is aware, the EAA was last 
amended in 1988, a year before the collapse of the Soviet Union, and 
the authority of the Act lapsed almost five years ago. Certainly, there 
is ample justification to draft and adopt a new EAA to guide export 
controls in the 21st Century. The Banking Committee bill is a strong 
beginning toward new export control legislation. AMT would like to 
comment on a few areas where we feel the bill deals with issues 
important to the machine tool industry.
    In earlier testimony, AMT strongly recommended that any export 
control legislation have a very strong provision defining "foreign 
availability" in order to reflect the reality in which U.S. companies 
compete today. Current law defines "foreign availability" as any item 
that can be supplied from outside the multilateral export control 
system in sufficient quantity and comparable quality so as to make the 
existing export controls on any particular item ineffective in 
achieving the objective of the controls.
    Today, however, we operate in a context of weak to non-existent 
multilateral controls and, as I have pointed out, a multilateral system 
that allows any member country to use its own "national discretion" to 
decide whether or not, or how rigorously, to license a product. We 
agree with the Banking Committee that the new EAA should not be allowed 
to perpetuate the fiction that the current multilateral export control 
system functions effectively to deny technology to targets of the 
multilateral regime, particularly China, which has, at best, an 
ambiguous status in relation to the Wassenaar Arrangement's list of 
restricted technologies.
    We are pleased that the legislation acknowledges that ``foreign 
availability'' can exist within a multilateral control system, not just 
outside that system. We strongly support language in the bill that 
explicitly acknowledges that ``foreign availability'' can come from 
U.S. allies and fellow participants in multilateral export control 
regimes, such as Wassenaar. The Banking Committee bill mandates that 
the Secretary of Commerce shall determine that an item has foreign 
availability status if the item ``is available to controlled countries 
from sources outside the United States, including countries that 
participate with the United States in multilateral export control 
regimes.'' This provision should create a more reasonable ``foreign 
availability'' definition, one that reflects the new reality, where 
``foreign availability'' of a controlled product is most likely to come 
from a U.S. ally rather than a company outside the multilateral control 
regime.
    Nevertheless, we are concerned with the length of time proposed for 
negotiations to eliminate "foreign availability." In an age when the 
product cycle for some high technology products is scarcely two years, 
eighteen months is simply too long a time limit for such negotiations. 
Either the country in question is willing to stop selling the 
particular product or technology to the target country, or it is not. 
For many U.S. companies, a year and one-half would give foreign 
competitors too great a head start in developing a new market. Thus, in 
practice, the liberal time limit in the proposed legislation could 
fatally undermine the stated purpose of the foreign availability 
provision, which would be to give U.S. companies a fair opportunity to 
compete for business in products already available to the target 
country. AMT recommends that the time limit be reduced to six months, 
or, at most, nine months to ensure a better balance between adequate 
time for negotiations and competitive consequences to U.S. companies.
    Finally, we would recommend that, within the next year or so, the 
Administration go back to the negotiating table and make a serious 
effort to strengthen the overall Wassenaar Arrangement. As I have 
noted, and as the Cox Committee points out, Wassenaar provides weak 
guidance and almost no discipline upon its members. It is almost worse 
than having no multilateral regime at all, because it gives the 
appearance of restricting technology transfer, while leaving all the 
key judgments up to Wassenaar's constituent members.
    Revisions of the Wassenaar charter ought to include far better 
rules for information exchange than exist today. Under current rules, 
there is not even a ``no undercut'' pledge, under which each member 
state promises not to grant licenses to companies in target countries 
which have been previously denied licenses by another member of the 
multilateral regime. At the very least, the U.S. Government ought to be 
informed beforehand of the intent of other members to grant such 
licenses, and, at best, there ought to be a commitment among regime 
members to honor one another's denials.
    It is imperative that the status of China be clarified for regime 
members. If China is not a target of Wassenaar, what is it? Are there 
any limits on what technology Wassenaar members, at their own 
discretion, can export to China? These are the sorts of questions that 
need to be addressed. They are left ambiguous in the current 
multilateral arrangement.
    The U.S. machine tool industry is highly successful in world 
markets. Its technology is second to none, and its companies can 
compete head-to-head and win against the best machine tool companies 
that Europe and Asia have to offer. But those companies cannot prevail 
on an uneven playing field. I join my colleagues in urging you to pass 
an eighteen-year statute of repose during the 106th Congress. I 
strongly believe that such a law would be a beginning point in the 
battle to level the playing field with our foreign competitors. I would 
also like to say a word about the Advanced Technology Program (``ATP'') 
of the Commerce Department. UNOVA has had a very positive experience 
with the ATP program. Although the vast majority of the funds have gone 
to the universities that were our partners in this program, we found 
that the ATP program offers just the right incentive to stimulate 
cooperative ventures in the new technologies that are necessary to keep 
American manufacturing ahead of the worldwide competition.
    But let me return to the thrust of my testimony. As I have argued, 
the manner in which the current multilateral export regime is 
administered by the U.S. Government constitutes a major impediment to 
accessing key world markets, such as China. I have attempted to detail 
some of those problems here today. There is some reason for optimism. 
In particular, we are encouraged by the legislation that has just been 
reported by the Banking Committee, and it is our hope that an 
appropriately amended Export Administration bill will become law. We 
need to create both a domestic and an international regulatory climate 
that puts U.S. companies on equal footing with their foreign 
competitors. Our nation's economic health and national security demand 
no less.
    We urge you to support the Banking Committee's EAA renewal when it 
comes to the Senate floor and to oppose amendments that would make U.S. 
export control policy even more unilateral than it is today.

    Senator Abraham. Thank you very much, Mr. Danjczek.
    What I am going to do is ask this panel if you would not 
mind taking seats in the first row for a brief period of time, 
and we will hear from our congressional panel. And then we will 
ask our business panel to return so that we might engage in 
some questioning with them.
    Let me again welcome Congressman Don Manzullo, and now 
Congressman Richard Neal, from Massachusetts. They are the co-
chairs of the Machine Tool Caucus of the House of 
Representatives. And we appreciate very much your efforts on 
behalf of this industry. And as you can tell, there is some 
interest over here as well on some of the issues that you both 
have worked on in the Caucus.
    I just wanted to add, we normally, as everybody knows, 
would have had the congressional panel first. So I suspect some 
of the issues we have just heard about are going to be part of 
the comments that you are making in terms of some of the 
legislative efforts that you have engaged in. And we apologize 
for the re-sequencing here, but hopefully it will not lose the 
purpose of trying to draw together both the -- in fact, it may 
be in some ways, hearing some of the problems first and then 
hearing about some of the ideas that are being debated for 
solutions is in some ways more effective.
    So we will begin with Congressman Neal. Thank you for being 
here today.

              STATEMENT OF HON. RICHARD E. NEAL, 
             U.S. REPRESENTATIVE FROM MASSACHUSETTS

    Mr. Neal. Thank you, Mr. Chairman. And I want to thank 
members of the subcommittee who have taken an ardent interest 
in this critical issue.
    I appreciate the opportunity to testify today on a subject 
of great concern to me, the status of the United States machine 
tool industry. I am especially pleased to appear here with my 
fellow co-chair of the House Machine Tool Caucus, 
Representative Don Manzullo, one of the most ardent champions 
of the industry in the House.
    As we are all aware, our Nation is going through an 
unprecedented economic boom. Much of that boom can be 
attributed to a revolution that has taken place in 
productivity. In the past 5 years, productivity grew at double 
the pace of the previous 25 years. This, in part, explains why 
the economy grew at 4 percent last year, while the core 
inflation rate dropped by a half a percentage point, and the 
employment rate remained stable.
    But what explains this remarkable productivity increase?
    Well, in part, it is obviously a result of productivity 
gains of the information age, the computer, and the Internet. 
But dramatically better machine tools and industrial automation 
deserve a significant part of the credit, as well. This is why 
I would argue that machine tools are vital underpinnings of our 
economy and our continued prosperity.
    It is the health of this critical industry that we are 
concerned about today. The industry witnesses certainly will, 
and have, provided details on the health of the industry 
itself, which we know is not good. And they will make 
suggestions about how to improve that health. You will hear 
about the recent downturn in both U.S. and foreign demand and 
how the Asian financial crisis has reached across the Pacific 
to affect the profitability of the U.S. industry.
    In 1998, we saw a dramatic 39 percent drop in U.S. machine 
tool consumption. At the same time, demand for machine tools 
everywhere in Asia, with the exception of China, went down to 
almost nothing. In response, much as they did with steel, the 
major Asian producers--Japan, Taiwan and Korea--redirected 
their machine tool sales efforts to the United States. 
Literally, the Asian machine tool producers exported their 
unemployment to our shores by conducting fire sales on machine 
tools, cutting their prices 30, 40 and even 50 percent in order 
to unload their inventory in the U.S. marketplace.
    Fortunately, there are trade remedies under U.S. law to 
deal with such practices when U.S. companies are injured by 
unfair foreign competition. The continued availability of those 
trade remedies--anti-dumping and countervailing duty rules--is 
one of the reasons why I will be attending the WTO ministerial 
in Seattle as a member of the Ways and Means Committee Trade 
Subcommittee next month.
    As the press has reported, developing nations, along with 
Japan, are trying to undermine our trade laws by placing 
revisions to the international guidelines concerning these 
trade remedies on the agenda for the next trade round, 
beginning in Seattle at the end of November. If the U.S. 
Government were to accept these trade law revisions as a 
debatable topic, I believe that the already fragile coalition 
that supports free trade in the U.S. Congress would fall apart. 
It is that serious.
    The situation in which the machine tool industry finds 
itself today is a perfect example of why we need strong and 
effective trade remedies. Whether the industry decides to 
petition for the redress under U.S. trade laws or not, it is 
critical that the machine tool industry retain that option.
    I am a cosponsor, along with more than 200 of my colleagues 
in the House, of the Visclosky resolution, H. Res. 298, 
instructing our trade negotiators not to participate in any 
negotiations which revision of trade remedies is part of that 
negotiating agenda. We cannot afford to make any concessions 
regarding these vital protections available under international 
agreement, and which are a cornerstone of the open trade policy 
of the U.S.
    Another issue about which you will be hearing today is that 
of our Nation's export control regulations and how they affect 
the U.S. machine tool industry. In that regard, I would like to 
share with you the experience of one of my constituencies, 
Bostomatic, which employs 140 people in Milford, Massachusetts. 
Bostomatic has aggressively pursued business in the China 
market, which is the fastest growing machine tool market in the 
world and one of the few markets where there is not an 
artificial barrier to protect the home industry.
    Bostomatic makes an excellent five-axis machining center, 
which is highly competitive with products made by its 23 
competitors who make a similar product for the Chinese market. 
However, the Defense Department seems to feel that there is 
something unique about the Bostomatic model that causes DOD to 
either object or slow down the licenses that are submitted for 
sales to China. This is a tremendous handicap for a company 
already in a highly competitive market.
    Just last week, Defense objected to a license for an 
aircraft engine plant, even though the Chinese have made it 
clear that they will switch to a Swiss competitor if a license 
is not forthcoming from the U.S. shortly. Other potential 
Chinese customers have become aware of the delay and do note 
this problem when deciding from whom they wish to buy.
    This particular situation is especially puzzling because 
there are so many competitors ready to step up and take over 
the business from Bostomatic. Moreover, none of the European 
companies take any more than a few weeks to obtain a license 
for machine tools destined for China, while the U.S. process 
goes on and on and on for months and months and months.
    While I fully and completely support export controls on 
critical machinery, I fail to see how our national security is 
protected by ensuring that the Swiss or the French or the 
Germans get machine tool business in China, in lieu of American 
companies like Bostomatic. As both Vice President Gore and 
Governor Bush pointed out in separate speeches last week, our 
export control system is broken and we need to fix it.
    We need to fix it before more of my constituents and your 
constituents are put out of work for no good reason, and the 
U.S. machine tool industry is put at an overwhelming 
disadvantage in the fasting growing market in the world--China. 
As you will hear, there are a number of other things that we 
could do that would help this vital industry. We certainly need 
to renew the research and development tax credit. We in 
Congress need to realize how important it is to support 
technology research and development funding, which has enormous 
payoffs in the competitiveness of U.S. companies at home and in 
world markets.
    The Advanced Technology Program, ATP, has been underfunded, 
in my view. That should be corrected as soon as possible, as 
well, although most of the work needs to be done in the House, 
rather than in the Senate.
    In sum, let me thank you for the opportunity to bring these 
matters to your attention. The machine tool industry is a vital 
part of our Nation's competitiveness and prosperity. And I 
cannot think of a better subject for your subcommittee to 
explore.
    Thank you very much, Mr. Chairman.
    [The prepared statement of Congressman Neal follows:]

    Prepared Statement of Hon. Richard E. Neal, U.S. Representative 
                           from Massachusetts
    Mr. Chairman, members of the Subcommittee, I appreciate the 
opportunity to testify today on a subject of great concern to me, the 
status of the United States machine tool industry. I am especially 
pleased to appear here with my fellow cochair of the House Machine Tool 
Caucus. Rep. Donald Manzullo, one of the most ardent champions of the 
industry in the House.
    As we are all aware, our nation is going through an unprecedented 
economic boom. Much of that boom can be attributed to a revolution that 
has taken place in productivity. During the past five years, 
productivity grew at double the pace of the previous 25 years. This in 
part explains why the economy grew at four percent last year, while the 
core inflation rate dropped by half a percentage point and the 
employment rate was stable.
    What explains this remarkable productivity increase? Well, in part 
it is obviously a result of productivity gains of the information age, 
the computer and the Internet. But dramatically better machine tools 
and industrial automation deserve a significant part of the credit as 
well. This is why I would argue that machine tools are a vital 
underpinning of our economy and our continued prosperity. It is the 
health of this critical industry which we are concerned about today.
    The industry witnesses will provide detail on the health of the 
U.S. machine tool industry, which is not good, and they will make 
suggestions about how to improve that health. You will hear about the 
recent downturn in both U.S. and foreign demand and how the Asian 
financial crisis has reached across the Pacific to affect the 
profitability of the U.S. industry. In 1998, we saw a dramatic 39 
percent drop in U.S. machine tool consumption. At the same time, demand 
for machine tools everywhere in Asia, with the exception of China, went 
down to almost nothing. In response, much as they did with steel, the 
major Asian producers--Japan, Taiwan, and Korea--redirected their 
machine tool sales efforts to the United States. Literally, the Asian 
machine tool producers exported their unemployment to our shores by 
conducting fire sales on machine tools, cutting their prices 30, 40, 
and even 50 percent in order to unload their inventory in the U.S. 
marketplace.
    Fortunately, there are trade remedies under U.S. law to deal with 
such practices when U.S. companies are injured by unfair foreign 
competition. The continued availability of those trade remedies, i.e. 
antidumping and countervailing duty rules, is one reason why I will be 
attending the WTO Ministerial in Seattle at the end of next month. As 
the press has reported, developing nations along with Japan, are trying 
to undermine our trade laws by placing revisions to the international 
guidelines concerning these trade remedies on the agenda for the next 
trade round beginning in Seattle at the end of November. If the U.S. 
Government were to accept these trade law revisions as a debatable 
topic, I believe that the already fragile coalition that supports free 
trade in the U.S. Congress would fall apart. It is that serious.
    The situation in which the machine tool industry finds itself today 
is a perfect example of why we need strong and effective trade 
remedies. Whether the industry decides to petition for redress under 
U.S. trade laws, or not, it is critical that the machine tool industry 
retain that option. I am a cosponsor, along with more than 200 of my 
colleagues, of the Visclosky Resolution (H. Res. 298) instructing our 
trade negotiators not to participate in any negotiations in which 
revision of trade remedies is part of the negotiating agenda. We cannot 
afford to make any concessions regarding these vital protections 
available under international agreement, and which are a cornerstone of 
the open trade policy of the U.S.
    Another issue about which you will be hearing today is that of our 
nation's export control regulations and how they affect the U.S. 
machine tool industry. In that regard, I would like to share with you 
the experience of one of my constituents, Bostomatic, which employs 140 
people in Milford, Massachusetts. Bostomatie has aggressively pursued 
business in the China market, which is the fastest growing machine tool 
market in the world, and one of the few markets in which there are not 
artificial barriers to protect the home industry. Bostomatic makes an 
excellent five-axis machining center, which is highly competitive with 
the products made by its 23 competitors who make a similar product for 
the Chinese market. However, the Defense Department seems to feel that 
there is something unique about the Bostomatic model that causes DOD to 
either object or slow down the licenses that are submitted for sales to 
China. That is a tremendous handicap for a company already in a highly 
competitive market. Just last week Defense objected to a license for an 
aircraft engine plant, even though the Chinese have made it clear that 
they will switch to a Swiss competitor if a license is not forthcoming 
from the U.S. shortly. Other potential Chinese customers have become 
aware of the delay and do note this problem when deciding from whom 
they wish to buy. This particular situation is especially puzzling 
because there are so many competitors ready to step up and take over 
the business from Bostomatic. Moreover, none of the Europeans companies 
take any more than a few weeks to obtain a license for machine tools 
destined for China, while the U.S. process goes on for months and 
months. While I fully and completely support export controls on 
critical machinery, I fail to see how our national security is 
protected by ensuring that the Swiss, or the French, or the Germans, 
get machine tool business in China in lieu of American companies like 
Bostomatic. As both Vice President Gore and Governor Bush pointed out 
in separate speeches last week, our export control system is broken, 
and we need to fix it. We need to fix it before more of my 
constituents, and your constituents, are put out of work for no good 
reason, and the U.S. machine tool industry is put at an overwhelming 
disadvantage in the fastest growing market in the world, China.
    As you will hear, there are a number of other things that we could 
do to help this vital industry. We need to renew the Research & 
Development tax credit. And we in Congress need to realize how 
important it is to support technology research and development funding, 
which has enormous payoffs in the competitiveness of U.S. companies at 
home and in world markets. The Advanced Technology Program (``ATP'') 
has been underfunded in my view, and that should be corrected as soon 
as possible, although most of the work needs to be done in the House 
rather than in the Senate.
    In sum, I would like to thank you for the opportunity to bring 
these matters to your attention. The machine tool industry is a vital 
part of our nation's competitiveness and prosperity, and I cannot think 
of a better subject for your Subcommittee to explore. Thank you.

    Senator Abraham. Thank you very much, Congressman.
    We will now turn to Congressman Manzullo. We appreciate 
your having had to go back and forth here. We appreciate that 
you came back to participate today and for your leadership on 
this issue.

             STATEMENT OF HON. DONALD A. MANZULLO, 
               U.S. REPRESENTATIVE FROM ILLINOIS

    Mr. Manzullo. Thank you very much, Senator. I appreciate 
the opportunity to speak here.
    Mr. Neal and I formed the House Machine Tool Caucus earlier 
this year to work together to find bipartisan solutions to the 
problems facing the machine tool industry. I represent the 
northern tier counties of the State of Illinois, which includes 
Rockford, a center of machine tool manufacturing in the United 
States. Over the past year, I have heard from my business 
leaders back home that they have never had it this bad.
    The city of Rockford has less than 150,000 people, but has 
over 1,100 machine shops and factories of all sizes. The 
situation, they tell me, is even worse than in the recessions 
of the early eighties and nineties. In fact, in 1981, Rockford, 
Illinois led the Nation in unemployment, with between 25 and 27 
percent. We lost 100 factories and over 10,000 highly skilled 
jobs.
    Some of the old-timers even believe that business prospects 
are worse than the Great Depression of the 1930's. So here we 
are, from the Rust Belt, if you want to call it that, 
testifying before the Senate. People are absolutely jubilant or 
ebullient, whatever the word is, over the economy. And yet, we 
see a very dark side to the economy that is growing and 
growing. And that is why Mr. Neal and I formed this Machine 
Tool Caucus and why we appreciate the opportunity to express 
our concerns to you, Senator.
    Just this past Monday, I met with owners of small machining 
shops who are thinking about closing up because, in part, 
orders from machine tool companies have dried up. How can this 
be, when many say that these are the best of economic times? I 
believe that these rosy economic statistics mask an underlying 
reality that may erode our manufacturing base and our long-term 
competitiveness.
    While the machine tool industry is small when compared to 
other industries, it forms the base of manufacturing in this 
country. In my mind, the health of the machine tool industry is 
a harbinger of things to come for the rest of the U.S. economy. 
The machine tool industry is usually the first to suffer during 
an economic downturn and the last to recover.
    We may be seeing the first steps toward an economic 
downturn in this country unless we take steps now to improve 
the state of the U.S. machine tool industry. Let me give you 
some concrete examples from back home.
    Beloit Corporation, of Rockton, Illinois, a manufacturer of 
large paper-making machines, and Reed-Chatwood, of Rockford, a 
textile machinery manufacturer, went bankrupt primarily because 
the Asian financial crisis dried up all their export markets.
    W.A. Whitney, of Rockford, makes punch plasma machine tools 
for farm equipment manufacturers. Because U.S. farmers are 
suffering primarily due to a drop-off in U.S. agricultural 
exports to Asia, they are not buying new farm equipment. Thus, 
farm equipment manufacturers are cutting back on their 
suppliers, including their purchases of machine tools from W.A. 
Whitney. To further compound the problem, the strong U.S. 
dollar has dried up W.A. Whitney's exports to Europe, and made 
it very difficult for them to compete domestically against 
price-discounted imports.
    The Ingersoll Milling Machine Company, of Rockford, is one 
of the largest employers of the City, with over 2,000 workers. 
Just last week, Ingersoll announced an additional cut of 17 
workers, on top of the 60 jobs lost last summer, because of 
slow sales.
    Our export policy compounds the domestic problems that face 
every machine tool builder. Ingersoll finds it very cumbersome 
and difficult to export to China. Our Nation's export control 
laws have made it next to impossible for Ingersoll to sell a 
five-axis machine tool to legitimate civilian end users in 
China.
    In 1997, only one U.S.-made five-axis machine was sold to 
China. Germany has sold China 18. Something is not right.
    The Export Administration Reauthorization Act, as reported 
by the Senate Banking Committee, goes a long way toward a 
sensible export control policy that recognizes post-cold war 
realities.
    In addition, Ingersoll was caught up in the middle of the 
sanctions imposed on India. Just as they were about to close a 
deal on selling a $5 million, four-axis machining center to a 
state-owned electrical powerplant in India, the U.S. put the 
brakes on this and future Ingersoll exports to India as 
retaliation for India testing a nuclear device. This is 
retaliation? Laying off workers in Rockford, Illinois, to 
protest India's new nuclear testing policy?
    All India has to do is purchase similar machines from 
Europe. It is time for a total reexamination of our unilateral 
economic sanctions policies.
    Senator, it is very, very disheartening, as Mr. Neal and I 
sit by and see the members of our House with the so-called 
retaliations, that every time there is a bad actor overseas, 
they come up with sanctions and stop us from exporting to these 
bad actors, where as the bad actors will simply turn around and 
buy the very same machinery from a foreign country. And here we 
are back home, with hundreds and hundreds of employees that are 
being laid off because of a misguided, misunderstood, so-called 
export policy.
    Rockford used to have Madison Technologies, a manufacturer 
of large grinding machines. Shortly after celebrating their 
100th birthday, Madison went bankrupt because they could not 
pay a $7.5 million product liability verdict on a machine they 
had built almost 50 years earlier. In fact, at the time they 
filed bankruptcy there was a summons sitting on the desk of the 
president on a machine that they had built at the time that the 
Czars had ruled Russia.
    Other nations place limits on the number of years someone 
can file a product liability lawsuit. This helps foreign 
machine tool builders reduce the cost of their machines. 
Adopting a modest statute of repose for work place durable 
goods, such as 18 years as contained in H.R. 2005, in the U.S. 
would go a long way toward helping machine tool manufacturers.
    In fact, Senator, it is the very same philosophy that Dan 
Glickman and others in the House of Representatives and members 
of your body set forth when private aviation manufacturing came 
to a stop when Cessna no longer manufactured anything other 
than commercial aircraft and business jets. Former 
Representative Dan Glickman guided legislation through the 
House and other members guided it through the Senate. In fact, 
I think it passed the House unanimously and the Senate 
unanimously, a bill that applied a nationwide statute of repose 
on aircraft and aircraft parts.
    That brought back the aircraft industry and Cessna. They 
built, a plant in Topeka, Kansas for starting all over again in 
private aviation that now employs between 2,000 and 3,000 
workers. That is the situation where reasonable and practical 
product liability reform brought back a sector that we had 
completely lost.
    Finally, Mr. Chairman, I would be remiss if I did not 
mention the regulatory and tax burdens that face the machine 
tool industry. Profit margins are so thin, and in some cases 
nonexistent, that any increase in cost in these areas could 
push the companies into bankruptcies. Several companies--and 
these are the little guys, Senator, some with 10-15 employees, 
most with under 100 employees--have mentioned to me that their 
health and accident insurance premiums went up 30 to 40 percent 
this past year.
    Other companies described increased inspections by the 
Occupational Safety and Health Administration, OSHA, even 
though they have never had a worker injured on the job in the 
entire history of the company. These inspections always result 
in the payment of some fine for an obscure violation to justify 
the inspector's visit. This is in spite the rhetoric I keep on 
hearing from OSHA in Washington that they no longer issue fines 
for paperwork violations and they want to help companies comply 
with the law.
    That is why I believe we need to pass comprehensive OSHA 
reform in order to transform the agency--one that ensures the 
safety of the worker, but does not penalize the small 
businesses that are trying to improve the worker environment.
    Thank you, again, Mr. Chairman, for holding this important 
meeting. We need a vibrant machine tool industry in the U.S. 
for our national defense and for our future economic well-
being.
    [The prepared statement of Congressman Manzullo follows:]

            Prepared Statement of Hon. Donald A. Manzullo, 
                   U.S. Representative from Illinois
    Thank you Chairman Abraham and Members of the Subcommittee for 
allowing both Representative Neal and I to speak to the challenges 
confronting the machine tool industry.
    We formed the House Machine Tool Caucus earlier this year to work 
together to find bipartisan solutions to the problems facing the 
machine tool industry. I represent the northern counties of Illinois, 
which includes Rockford, a center of machine tool manufacturing in the 
United States. For over the past year, I have heard from my business 
leaders back home that they have never had it this bad. The situation 
is even worse than the recessions of the early 1980's and 1990's. Some 
old timers even believe that business prospects are even worse than the 
Great Depression of the 1930's. Just this past Monday, I met with the 
owners of small machining shops who are thinking about closing up 
because, in part, orders from machine tool companies have dried up.
    How can this be when many say that these are the best of economic 
times? I believe these rosy economic statistics mask an underlying 
reality that may erode our manufacturing base and our long-term 
competitiveness.
    While the machine tool industry is small when compared to other 
industries, it forms the base of manufacturing in this country. In my 
mind, the health of the machine tool industry is a harbinger of things 
to come for the rest of the U.S. economy. The machine tool industry is 
usually the first to suffer during an economic downturn and the last to 
recover. We may be seeing the first steps towards an economic downturn 
in this country unless we take steps now to improve the state of the 
U.S. machine tool industry.
    Let me give you some concrete examples from back home. Beloit 
Corporation of Rockton--a manufacturer of large paper-making machines--
and Reed-Chatwood of Rockford a textile machinery manufacturer--went 
bankrupt primarily because the Asian financial crisis dried up all 
their export markets.
    W.A. Whitney of Rockford makes punch plasma machine tools for farm 
equipment manufacturers. Because U.S. farmers are suffering primarily 
due to a drop-off in U.S. agricultural exports to Asia, they are not 
buying new farm equipment. Thus, farm equipment manufacturers are 
cutting back on their suppliers, including their purchases of machine 
tools from W.A. Whitney. To further compound their problem, the strong 
U.S. dollar has dried up W.A. Whitney's exports to Europe and made it 
very difficult for them to compete domestically against price 
discounted imports.
    The Ingersoll Milling Machine Company of Rockford is one of the 
largest employers in the city with 2,000 workers. Just last week, 
Ingersoll announced an additional 17 workers, on top of the 60 jobs 
lost last summer, were laid off because of slow sales.
    Our export policy compounds the domestic problems that faces every 
machine tool builder. Ingersoll finds it very cumbersome and difficult 
to export to China. Our nation's export control laws has made it next 
to impossible for Ingersoll to sell a five axis machine tool to 
legitimate civilian end-users in China. In 1997, only one U.S.-made 
five axis machine was sold to China. Germany sold them 18. Something is 
not right. The Export Administration Reauthorization Act as reported by 
the Senate Banking Committee goes along way towards a sensible export 
control policy that recognizes post-Cold War realities.
    In addition, Ingersoll was caught up in the middle of the sanctions 
imposed on India. Just as they were about to close a deal on selling a 
$5 million four axis machining center to a state-owned electrical power 
plant in India, the U.S. put the brakes on this and future Ingersoll 
exports to India as retaliation for India testing a nuclear devise. 
This is retaliation? Laying off workers in Rockford to protest India's 
new nuclear testing policy? All India has to do is purchase similar 
machines from Europe. It's time for a total reexamination of our 
unilateral economic sanctions policy.
    Rockford used to have Mattison Technologies, a manufacturer of 
large grinder machines. Shortly after celebrating its 100th birthday, 
Mattison went bankrupt because it couldn't pay a $7.5 million product 
liability verdict on a machine they built in 1948. Other nations place 
limits on the number of years someone can file a product liability 
lawsuit. This helps foreign machine tool builders reduce the cost of 
their machines. Adopting a modest statute of repose for workplace 
durable goods--such as 18 years as contained in HR 2005--in the United 
States would go a long way towards helping machine tool manufacturers.
    Finally, Mr. Chairman, I would be remiss if I did not mention the 
regulatory and tax burdens that face the machine tool industry. Profit 
margins are so thin--in some cases, nonexistent--that any increase in 
costs in these areas could push these companies into bankruptcy. 
Several companies mentioned to me that their health and accident 
insurance premiums went up 30 to 40 percent this past year.
    Other companies describe increased inspections by the Occupational 
Safety and Health Administration (OSHA) even though they have never had 
a worker injured on the job in the entire history of the company. These 
inspections always result in the payment of some fine for an obscure 
violation to justify the inspector's visit. This is in spite of the 
rhetoric I keep hearing from OSHA in Washington that they no longer 
issue fines for paperwork violations and they want to help companies 
comply with the law. That's why I believe we need to pass comprehensive 
OSHA reform in order to transform the agency into one that helps--not 
penalizes--these small businesses improve the worker environment.
    Thank you, again, Mr. Chairman, for holding this important hearing. 
We need a vibrant machine tool industry in the United States for our 
national defense and our future economic wellbeing.

    Senator Abraham. Congressman, thank you.
    I thank you both for coming over here. I know there are 
activities still going on, on the House floor, and so we will 
let you return to your side of the Hill. But we appreciate your 
leadership on these issues as well as the time you have spent 
with us today. And we look forward to continuing to work on 
these together. Thank you.
    Mr. Manzullo. Thank you.
    Mr. Neal. Thank you.
    Senator Abraham. Now we will ask our first panel to return, 
now in the form of being the second panel. We thank you again 
for your patience.
    I also want to state, on behalf of Senator Dorgan, who you 
saw stop by briefly, he had hoped to be able to participate in 
full in the hearing today, but has had something come up with 
the Democratic leadership that he has to attend to. So he asked 
me to please convey his regrets, but also to express his 
interest in what we are doing here today and his continuing 
involvement with us in that effort.
    Let me start with you, Mr. Clevenger. You mentioned that 
you had supported broader-based legal reform of product 
liability legislation but had--in fact testified in favor of 
that in the past, but now have sort of been willing to shift 
gears a little bit to support the notions contained in H.R. 
2005. Could you give us just a little bit more of a expansion 
of why?
    Mr. Clevenger. Well, as I think you know, Senator, we have 
been at this for a long time, my colleagues and I. I am a 
second-timer on the Government Relations Committee, endeavoring 
to help the industry. In the analysis of what would do us the 
most good, the statute of repose is that. As I stated, 42 
percent of our industry lawsuits would be eliminated just by 
taking out of context the machines over 18 years.
    The other issues were very difficult to get by the Senate, 
and even the House, the number of times we have attempted. And 
we felt pretty comfortable that this got as far as the White 
House last year. By narrowing it to the statute of repose, we 
are willing to look at a half a loaf of bread, frankly.
    Senator Abraham. I understand.
    Mr. Danjczek, let me ask you this. You have talked about 
export control policies and concerns about that. In your 
judgment, what do you think is the best thing we could do to 
strengthen the current export control system?
    Mr. Danjczek. I think that we need to have true 
multilateral controls. I do not think the unilateral sanctions 
have ever achieved their intended goal, if that goal was to 
stop someone from gaining certain technology. I also think that 
we need to speed up the time period of the licensing process to 
that in fact U.S. companies know where they will stand in a 
much more expeditious manner, so that our foreign customers 
cannot complain that our system is holding us hostage.
    Finally, I think that we really also need to have better 
certainty in the system. I mean, in the old days there was a 
much tighter system, but there was much more certainty to it, 
as well. And I think those are the three areas that need 
improvements done.
    Senator Abraham. Have you felt that our allies have been 
cooperating and helping us with our efforts to prevent 
sophisticated technology from falling into the hands of 
countries----
    Mr. Danjczek. By helping making them be stronger 
competitors, they have helped us in that way, Senator. 
[Laughter.]
    But in fact they actually go around to our customers 
saying, why would you ever consider buying a U.S. machine tool; 
you do not know whether you can get an export license; chances 
are you cannot. And so they really have been a great hindrance, 
and they take advantage of the U.S. export control system to 
their own competitive advantage.
    Senator Abraham. If the United States does decide to 
license sophisticated machine tools to China or other places, 
what kind of protections are there that they would not be 
misused?
    Mr. Danjczek. Senator, there is no absolute certainty that 
they would not be used for an inappropriate purpose. I think I 
need to state that right up front. However, the U.S. 
Government, in the past, has imposed export restrictions and 
conditions on the exports that U.S. companies have been able to 
abide by without too much difficulty. Our foreign competitors 
have no such restrictions. Even having some small restraints, I 
think, helps.
    Generally, in the plants in which these machine tools are 
used, those plants have U.S. citizen managers and U.S. co-
producers. The U.S. air frame manufacturers, which co-produce 
the parts, are physically present, who are able to monitor and 
who will be able to report on the event of any diversion or 
inappropriate use.
    Senator Abraham. Are you familiar with Senator Gramm's 
export legislation?
    Mr. Danjczek. Yes, sir, I am.
    Senator Abraham. What are your thoughts on that?
    Mr. Danjczek. I think that it is an outstanding step. I 
would love to see it become law--the sooner, the better. I 
believe that it does provide some of the necessary conditions. 
There are areas, such as in foreign availability research, and 
I think 18 months is too long a period of time. It should be 6 
months. I think that there should be some requirement for the 
administration to negotiate with our allies a stronger 
Wassenaar regime.
    Senator Abraham. Mr. Logan, would you comment on that at 
all?
    Mr. Logan. I think Mr. Danjczek has clearly spelled out the 
position that the organization has on that.
    Senator Abraham. Very well. Earlier this year I sponsored a 
symposium here on the Hill, along with NACFAM, which is the 
National Coalition for Advanced Manufacturing. I know that each 
of you, as well as I think maybe our congressional members, 
commented a little bit about some of the advanced technology 
programs and so on.
    The symposium included almost three dozen companies, most 
of which are involved in manufacturing to one extent or 
another. Our topic that day was basically ways by which 
Congress and the administration can assist businesses in 
improving productivity. One came away from these meetings with 
the certainty that increasing productivity was the key factor 
in terms of increasing American economic growth, because the 
size of our work force is really not going to be much of a 
positive factor in the future, in terms of overall economic 
growth. Growth is more or less a function of both the labor 
force and productivity.
    So one of the things we were trying to do was to come up 
with various ideas and so on which we thought would be useful 
actions for us to take potentially here, or actions to avoid 
taking, to increase productivity. And so I guess I was 
wondering if maybe each of you could comment a little bit on 
this in general, and maybe just comment from your own 
experiences on the whole question of productivity and its 
relationship with all these issues, such as economic growth, 
higher salaries and so on. And if you wanted to add to it any 
specific recommendations to us that might assist people in the 
industries you represent in terms of increasing productivity, I 
would be interested in that, as well.
    Mr. Danjczek. Senator, I think some basic research--and I 
had spoken earlier, and I believe that both Jeff and John had 
also spoken on the Advanced Technology Program--companies 
themselves will often do applied research and apply their own 
money to that to take an existing idea and productionize it, to 
join with the universities, where the universities are getting 
the majority of the funds under the ATP program. Companies 
participate with them in what is a basic level of research 
which actually leads us to have higher productivity, to come up 
with new ideas and new technologies that can assist all of us 
in achieving the productivity gains that we need to achieve to 
grow as a Nation.
    Senator Abraham. Mr. Logan.
    Mr. Logan. My view is one that encouraging manufacturing 
productivity is the essence of our industry. And in order to do 
that, we need to continuously reinforce the competitiveness of 
the industry itself. And, to me, the shortest distance between 
where we are today and where we should be is a review of tax 
issues, border adjustability issues, tax credit issues. Those 
are the steps I think that could be most effective in promoting 
the industry and hence promoting productivity.
    Senator Abraham. Jeff.
    Mr. Clevenger. I think my colleagues have covered the two 
areas I think that are probably the most important. But I would 
leave you with the thought that technology development is still 
a business. It is not some inventor in the basement of his 
house inventing things. Today technology development is a 
collaboration, as I said, of academia, of government and of 
business. It cannot be competitive alone.
    I think ATP has facilitated, through the grant efforts, us 
working together. If we could learn to work together on and on 
and on, we can increase productivity. It is our goal, every 
time we sit down with a major manufacturing business or 
company, it is our goal to increase their productivity. That is 
all we think about in terms of gaining orders is what can we do 
new, different and better. And sometimes it does not exist 
within the cobwebs or the experience of a 100-person factor and 
it does require working with other people.
    So our company has been very successful at it. We will 
continue to use it. But, clearly, the cost of doing business 
has to enter into everything we do.
    Senator Abraham. Good. We have been joined by Senator 
Ashcroft, who is, I know, very interested in a number of these 
issues. I have come sort of to the end of my questions, and the 
panel has made their statements. If you had either an opening 
statement or questions, either one really, John, I think the 
floor can be yours.
    I know we have a Senate Republican conference coming up at 
3. So what I am inclined to do is to turn this over to you and 
let you finish. I have got a few more questions, but I think I 
may submit them in writing so that we can make it to that 
meeting. So I will just turn it over to you.

               STATEMENT OF HON. JOHN ASHCROFT, 
                   U.S. SENATOR FROM MISSOURI

    Senator Ashcroft. Thank you, Mr. Chairman. Let me just 
commend you for your interest in the fundamentals of American 
productivity.
    There are industries that are sort of the last participants 
in the line of productivity. There are industries that are the 
first elements of the line of productivity. The machine tool 
industry is at the very beginning of our capacity. For that 
reason, I think it is very, very important. No one understands 
or cares about that more than you do, Mr. Chairman. I am 
grateful.
    I believe that the genius of America is not that you come 
to Washington and hear Senators speak, not that you come to 
learn, but that you come to teach, and it is for us to hear 
you. I thank you for coming.
    I think you can help us make informed judgments and 
decisions about things we can do to make sure that the U.S. 
machine tool industry participates in a tremendous surge in the 
next century, as America leads the world. And I am aware of the 
sort of double hit that is come on the machine tool industry, 
that has come from lowered exports because of the depressions 
in some parts of the world, and the rise of individuals in 
other settings that would compete.
    I want you to know that I want to do everything within my 
power to make it possible for the United States superiority, 
creativity, vitality, energy, and understanding of productivity 
to be reflected in the U.S. machine tool industry. I know that 
we have that industry present in the State of Missouri. It is 
not only present in the State of Missouri, close to my home in 
the southwest of Missouri, in Lebanon there, but in other 
settings around the State.
    Machine tools are the foundation of an industrialized 
society, and I think we need to make sure that there is an 
environment in which we operate which provides a basis for you 
to be competitive. If you are the foundation of industry, 
America and its governmental setting needs to be a foundation 
for you, to put you on a playing field that makes it possible 
for your superior skills to prevail.
    Mr. Chairman, without a healthy and robust machine tool 
industry, I strongly believe that not only our economic 
freedom, but our national security is at risk. I hope this 
committee will work with industry and other committees in the 
Senate to explore areas where our national policies have, in 
the past, maybe hindered the ability of the machine tool 
industry to survive and thrive, and that we could adjust those 
policies to make it possible for us to be the world leaders and 
continue to be the world leaders.
    We have watched as the Asian response to reduced demand at 
home in the Pacific Rim was to unload their machine tools at 
cut-rate prices in other markets. And we have got to make sure 
that our industry has the great opportunity.
    The last point I would like to make is sometimes other 
foreign manufacturers do not suffer from what would be referred 
to as the long tail of liability that follows the American 
machine tool industry. We cannot add a cost that is not only 
substantial, but very difficult to estimate and ascertain and 
sort of an undetermined liability hanging over the head of this 
industry. I think we need to correct that, to make it possible 
for this industry to thrive.
    With that, I have exhausted our time. I want to thank again 
these folks for coming, and I look forward to your written 
submissions, as well.
    I would ask that the entirety of my remarks be made a part 
of the record.
    Senator Abraham: Without objection, it will be.
    [The prepared statement of Senator Ashcroft follows:]

               Prepared Statement of Hon. John Ashcroft, 
                       U.S. Senator from Missouri
    Mr. Chairman, I thank you for holding today's hearing. The machine 
tool industry is vital to the American economy. It also is vital to the 
security and defense of this nation. It also is very important to my 
state. During the fist five months of 1999, U.S. machine tool 
consumption was down 39% from the same period in 1998. Compounding the 
decrease in U.S. machine tool consumption, imports also are growing--
rising from 50 percent of the entire U.S. market in 1995 to an 
estimated 60% in 1999--resulting in a reduction in business and jobs 
for U.S. machine tool producers. The Asian response to reduced demand 
at home is to unload their machine tools at cut-rate prices to the 
United States.
    There are a number of reasons for this decline in demand for U.S. 
machine tools. First, the U.S. export controls are the toughest in the 
world and frequently are unilateral. Second, unlike foreign 
manufacturers, who do not suffer from a ``long tail of liability,'' 
U.S. machine tool producers must factor into their prices the cost of 
product liability insurance and litigation on overage products. Other 
countries, the U.S.' main competitors, have a ten-year statute of 
repose while our companies have unlimited liability. Finally, the Asian 
economic crisis has created an overcapacity in the industry. Most 
economists conclude it may take 2 to 5 years before the various 
overcapacities throughout Asia can be absorbed. U.S. market share in 
Asia has all but disappeared in some countries: machine tool exports to 
Korea dropped 69% from 1996-1998. Meanwhile, South Korea has increased 
its exports to the U.S. from 15% of its machine tool production in 1995 
to an astonishing 50% of that production in 1998.
    The U.S. machine tool industry suffers from a double hit -- a 
decrease in domestic demand for machine tools and lowered exports 
while, at the same time, imports, particularly from Asia, are seizing 
more and more market share in the United States. Historically, the 
machine tool industry is the first to suffer in an economic decline and 
the last to recover.
    Because machine tools are the foundation for an industrialized 
society, the state of the machine tool industry should be of concern to 
all Members of Congress. If American's machine tool industry is 
severely weakened, how long can America's productivity continue to 
improve and its economy continue to grow? If U.S. buyers of machine 
tools become too dependent on imports, they will be at risk of 
receiving yesterday's manufacturing technology while the productivity 
of their foreign competitors will be enhanced by the infusion of 
tomorrow's technology into their facilities.
    Mr. Chairman, without a healthy and robust machine tool industry, I 
strongly believe that not only our economic freedom but also our 
national security is at risk. I hope this Committee will work with the 
industry, and other committees in the Senate to remediate areas where 
our national policies hinder their ability to thrive. Again, thank you 
for holding this very important hearing.

    Senator Abraham. Thank you very much, Senator Ashcroft.
    I want to thank our panelists and our audience. Again, we 
apologize. The convening of this conference was not on the 
agenda when we set today's meeting date, but I think that it 
may account for a couple of our other members who we thought 
were going to be able to join us not having gotten by yet. And 
so we will ask them to submit any questions they have in 
writing.
    Senator Abraham. We look forward to working with each of 
you and with the various associations that have helped us put 
today's hearing together; for the future, to try to focus more 
specifically on the issues that we talked about today and some 
of the solutions we have heard about. We thank you all for 
being here.
    With that, our hearing is adjourned.
    [Whereupon, at 3 p.m., the hearing was adjourned.]
                            A P P E N D I X

      Prepared Statement of Hon. Ernest F. Hollings, U.S. Senator 
                          from South Carolina
    Mr. Chairman, I too am troubled by the downturn of the machine tool 
industry in this country. Because of the industry's importance to other 
manufacturing sectors and to the economy in general, this is a trend 
that we need to continue to monitor closely. I thank the Chairman for 
holding this hearing so that we can talk more about the specific 
problems confronting machine tool makers.
    I would like to speak to one of the issues that I expect to come up 
at this hearing, namely product liability. We often hear small 
manufacturers, both in the machine tool industry and in other sectors, 
complaining that they are forced to spend too much money on litigation 
to defend themselves against liability claims. Their solution to this 
problem is to ask Congress to enact statute-of-repose legislation to 
shelter them from claims on products that are older than a specified 
age. I disagree with this course of action.
    Manufacturing firms can protect themselves against lawsuits by 
purchasing liability insurance. It is my understanding that this 
insurance is presently widely available, at affordable cost, both for 
small and large manufacturers. Of course, if insurance is not available 
at reasonable rates, then that is an issue that must be examined. In 
fact, if it is shown that insurance is available only at high costs in 
an otherwise booming economy, insurance availability is the central 
issue. The machine tool industry has already asserted that insurance 
costs are too high for them to afford. That being the case, I 
definitely want to see numbers that back up this assertion. So far the 
industry has not been able to prove that insurance costs make up a 
large portion of their revenues, or that insurance is prohibitively 
expensive.
    My concern is that the statute-of-repose issue is really a backdoor 
effort to justify federal tort reform. As I have noted in the past, 
tort law is controlled and managed by the states; it has been since the 
founding of the Republic. The states have the most experience with 
legislating tort laws. Given this tradition, Congress should only 
interfere when there is proof of a compelling reason to do so. From 
what I have read thus far, this standard has not been met.
    I was happy to see that in their written testimony our witnesses 
mentioned the value of the Advanced Technology Program (ATP) within the 
Department of Commerce. The ATP is a unique partnership between 
government and private industry to accelerate the development of high-
risk, pre-competitive technologies that promise significant commercial 
payoffs and widespread benefits for the economy. With the help of 
people working in industry like yourselves, it is my hope that we can 
now move the debate over ATP away from partisan politics and back to 
national policy--which is how the program was viewed in Congress when 
it was created under the leadership of President Bush.
    Measurement and evaluation have been part of the ATP since its 
beginning. The benefits of the program are well documented. What the 
analysis has shown many times is that the ATP is stimulating 
collaboration, accelerating the development of high-risk technologies, 
and paying off for the nation. In fact, a March 1999 study found that 
future returns from just three of the 50 completed ATP projects--
improving automobile manufacturing processes, reducing the cost of 
blood and immune cell production, and using a new material for 
prosthesis devices--would pay for all projects funded to date by the 
ATP. I strongly support this program, and I thank the representatives 
of the machine tool industry for doing so as well.
    I thank the Chairman for this time and I look forward to hearing 
the testimony of the witnesses, in particular in regard to the product 
liability issue.

                                
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