By Dr. Paul Freedenberg,
Vice President Government Relations
AMT—The Association For Manufacturing Technology
Apparently, the U.S. Department of Defense (DOD) is not concerned about the health of the manufacturing technology industry. In late May, the DOD issued regulations to initiate the machine tool purchase incentive program that Rep. Duncan Hunter (R-Calif.), chairman of the House Armed Services Committee, had created in the Fiscal Year 2004 Defense Authorization Act.
The program, intended as an incentive, provides U.S. defense contractors with additional credit, or points, in competitions to win U.S. Government defense contracts when they buy American-made machine tools.
The idea is laudable, since the U.S. machine tool industry's share of the domestic market has dropped from 50%, which it maintained from the mid-1980s to the late 1990s, to the current level of 30%.
This erosion is understandable because the U.S. has one of the few open machine tool markets in the world. Competition for a share has been fierce, particularly with Asian competitors, such as the Koreans, entering with fire-sale prices after the Asian currency crisis in the late 1990s.
In recent years Asian competitors also used undervalued currencies to their advantage. Their governments repeatedly intervened in currency markets to ensure these countries did not lose market share in other sectors to China. Nor did it help that the U.S. dollar was at least 30% undervalued against the euro for a six-year period until 2003.
Some of these currency problems have begun to mitigate, but the diminished market share for U.S. machine tool builders was enough to motivate
Chairman Hunter to take action in reversing a worrying trend. Many will recall that, in 1986, after five years of steady loss in domestic market by the U.S. machine tool industry, President Ronald Reagan took action to limit foreign machine tool imports. Under the authority of the Trade Act of 1962, which authorizes the limitation of imports for national security purposes, President Reagan initiated negotiations with Japan and Taiwan, the two countries with the fastest growing machine tool sales in the U.S. to limit the importation of their machine tools.
Five-year (subsequently extended to 7-yr) Voluntary Restraint Arrangements (VRAs) were successfully negotiated with both Japan and Taiwan, freezing their market share in six key categories of machine tools at pre-1986 levels. President Reagan was concerned that the potential loss of the domestic capacity to develop and manufacture machine tools would endanger the U.S. Government's ability to mobilize in the event of a national emergency.
At the time this trade action was taken, our defense strategy contemplated a need for U.S. armed forces to be able to fight two and one-half wars simultaneously. Today, however, DOD officials state publicly that the current war scenario contemplates a "come as you are" war, with re-supply dependent on whatever happens to be in the U.S. defense industrial base at the time of hostilities with re-supply significantly aided by the manufacturing capacity of our allies. This plan does not anticipate the threat of disrupted supply lines, a concern that existed during the Reagan administration and was an integral part of all previous war planning.
That is why the interim DOD regulation in May contained language that undermined the value of the incentive to "purchase and use capital assets (including machine tools) manufactured in the United States ...." The regulation added the phrase "when pertinent to the best value determination," which allows great leeway to the contractor, or the DOD evaluator, to decide whether there is any advantage to purchasing U.S.-made machine tools for a defense contract.
While this is hardly an incentive and not what Chairman Hunter had in mind when he drafted the legislation, it reflects the DOD's approach to the need for machine tools within the defense industrial base. No matter what law Congress passes, the DOD is determined to do as little as possible to strengthen the U.S. machine tool industry. It apparently does not see leading edge manufacturing technology as relevant to their core mission in the 21st Century. This attitude is not only short-sighted, it is dangerous.