It would seem to be in the interests of the country and the Government to encourage the development of capacity for defense requirements in private industry. Its own necessary expenditure to implement this capacity in times of emergency will then be much less. Present policy unfortunately seems to be to discourage the development of private facilities for this type of work by creating Government facilities. in peacetime which our private industry cannot compete with and is not even given a chance to compete with.

Our small businesses in the tool, die, and precision machining industry have always provided a great part of the reserve capacity in our economy that can be turned into defense production almost immediately. Being small businesses with much greater flexibility than the large corporations, we are able to change our work from commercial to military very quickly and very efficiently.

Because we serve many industries and many types of customers, we have developed much broader experience and know-how than the specialized captive facilities of the large aircraft manufacturers. We are therefore more adaptable to new problems and new products that may be involved in another mobilization situation.

But I do not want to leave the impression that the justification for our industry is that it should be around if there is another war. On the basis of the services and products we have to offer, we should exist and grow just as a matter of day-to-day economics.

It has been proven time and time again that we can operate more efficiently, and thus at lower costs to the Government, than the large corporations. Why then do we not have an opportunity to compete for and do substantially more Government work under subcontracts from the large aircraft corporations?

It is perhaps debatable whether there is some tooling and machining work that is beyond the capacity of our independent shops. By that I mean work that requires larger facilities than we have. Most of our members feel strongly that we have every facility in our industry that could be found in the captive or Government-owned facilities of the large prime contractors. But even if this is not the case, there is very little work that could be shown to require facilities our companies do not have.

One problem we must contend with, however, is the possible argument that, regardless of cost, it is much more practical as an administrative matter for a large prime contractor to subcontract an entire tooling or machining program to another large company rather than split it up among hundreds of small businesses.

By splitting it up, the prime could argue, it would be necessary to use many more personnel for supervision, quality control, expediting, and other functions that must exist in the liaison between prime contractors and their subcontractors in this kind of work.

I suppose there is something in the relatively new philosophy of a "weapons system" that encourages subcontracting in large packages. If this is a major problem, I think there are a number of points that should be considered. First of all, it can hardly be said that subcontracting in large packages avoids administrative problems. In many cases, it creates them because it concentrates all of the complexities and red tape and risk of unforeseen circumstances in one place. It is

just as likely that a large subcontractor will run into problems in one department of his plant that will delay delivery of the total package as it is that one of several hundred subcontractors of components for a single system will delay delivery of the complete system. There may, as a superficial matter, seem to be some advantage in the centralization of control and responsibility, but, on the other hand it is difficult to generate a higher sense of responsibility than that which exists in a small business whose very survival depends from year to year upon satisfactory and timely performance.

If, in addition, there is some cost saving to the Government in centralized supervision, it should be considered whether this cost saving is more than offset by the cost savings that may be available by dealing with small business.

It undoubtedly requires an effort on the part of the Government and the prime contractors to seek out and investigate the capacities and qualifications of potential small business subcontractors. It may require additional paperwork to invite these companies to bid on Government subcontracts. But there are certainly good reasons for helping small business to obtain a greater share of Government procurement. And where the Government can actually obtain significant cost savings by dealing with small business, it does not make sense to ignore these potential suppliers.

If the Government wishes to expand the capacity of small businesses in our industry to perform Government work, policy changes will be necessary. Our small businesses must be encouraged to seek this work, not discouraged by practices which prevent us from competing on an equal and fair basis.

In order for our industry to maintain its capacity for aircraft and aerospace work we must make tremendous expenditures in new and modern equipment. In just the last 2 years my company has made an expenditure of $1,200,000 in numerical control equipment.

We are ready to make similar expenditures in the coming year if we can find adequate work for this equipment. This type of equipment has been purchased by us specifically for the Government subcontracts we hope to get. Such sophisticated equipment is not necessary nor is it economically feasible for our commercial work.

Unfortunately, I cannot say that our expenditures have been justified thus far. While we have used this equipment in some Government work, too often it has been used on lower tolerance work for our commercial customers.

We are forced to keep this equipment running as much as possible, but for much of the work it is now used on we could have employed less expensive equipment.

As this subcommittee is well aware, one of the traditional problems in our small business industry has been in obtaining adequate financing for new equipment purchases. In the coming years this problem is going to become more and more critical because the demands for modernization are growing. New Government programs with tremendously expanded funds should be recommended to help us finance this modernization.

The Small Business Administration programs have not been adequate either in total amount of funds available or in the amount of funds that can be obtained by an individual borrower.

If the Government can afford to purchase the most expensive and modern equipment and place it in the hands of the prime contractors so that they can compete with us, could it not better afford to make funds available to us for loans to purchase that same equipment?

We are willing to take the risk by purchasing the equipment ourselves, finding a way to use it and finding a way to pay for it. The prime contractors are not. They seek and obtain this equipment from the Government on a loan basis and then use it in both their Government and commercial work in competition with our companies.

In the last few years some agencies in our Government and many Members of Congress have expressed great concern at the growing concentration in many industries and the size and economic power of our huge corporations. The facts we have submitted to this subcommittee indicate that the Government itself may be contributing substantially to some of these problems.

While it is talking about the merits of small business and the essentiality of small business to a competitive economy, the Government should not be spending taxpayer funds to give unnecessary facilities to the large aircraft manufacturers in order to enable them to compete with us.

Thank you very much.

Mr. SMITH. We will have some questions later, but we will now hear from Mr. Armstrong.

TESTIMONY OF JOSEPH ARMSTRONG, SECRETARY, SOUTHERN CALIFORNIA TOOL & DIE ASSOCIATION, LOS ANGELES, CALIF.

Mr. ARMSTRONG. Mr. Chairman, my name is Joseph Armstrong. I am presently serving in the position of secretary of the Southern California Tool & Die Association, and as the administrator for the apprentice training program in the Los Angeles area operated by the National Tool, Die & Precision Machining Association pursuant to a contract with the U.S. Department of Labor.

I have seen the contract tool, die, and precision machining industry from many different angles and in many different areas. Before coming to Los Angeles I owned and managed a contract shop in Lynn, Mass. I also owned a shop in Canoga Park, Calif., which is in Los Angeles County. I sold this business 3 years ago.

In my work in the Los Angeles area I have become quite familiar with the problems of the contract tool, die, and precision machining companies which rely primarily upon the subcontracts of the large aircraft manufacturers. There are approximately 1,100 contract shops in the southern California area and I would expect that the average employment would be around 35,000.

This large segment of the national contract industry has grown up largely around the aircraft and aerospace industries. Perhaps more than any other segment of the industry, it has been continually dependent upon in times of war for the development of new airplanes and other military items at a rapid pace.

It is also worthy of note that the southern California segment of the contract industry has generally been the leader in tooling and machining technology in the country and in the world. This is ex

plained by the extremely close tolerances and new techniques necessary to serve the aircraft and aerospace industries.

Practically all of the shops in our area which serve the aircraft and aerospace industries use numerical controlled equipment. The cost of this equipment is astronomical and the skills required to operate it are hard to find and even harder to develop. Nevertheless, the contract shops serving the aircraft industry have made the necessary expenditures and today can claim to be as modern and capable as any tooling and precision machining facilities in the world.

The huge expansion of the aircraft and aerospace industries in California and elsewhere on the west coast has been responsive mainly to Government policies and Government aircraft requirements.

A close partnership grew up among the Government, the prime aircraft manufacturers and the hundreds of small companies in the tool, die, and precision machining field which provided the skills and facilities for many phases of aircraft mass production.

In recent years, however, the third partner-our industry-has been increasingly excluded from the plans of Government and the prime

contractors.

The Government has properly recognized the national security interest in keeping alive the capacity of the aircraft industry and in preserving the maximum number of companies in that industry. Accordingly, it has endeavored to disperse its contracts among these large companies in such a way as to avoid destructive cycles for them as new models were needed and old models became obsolete.

The Government has also done much to lessen the risk of the prime contractors in the aircraft industry by providing millions of dollars' worth of its own plants and equipment for their use. Some of the aircraft manufacturers whose annual sales run into the billions own but a small fraction of the plants and machinery used in their day-to-day operations.

At the same time, the contract tool, die, and precision machining industry that has traditionally served the aircraft manufacturers has remained fully subject to the competitive pressures and cycles of free enterprise. The small companies have not had the benefit of Government programs to stabilize their production and protect it from the inevitable slumps that occur between the tooling phases of new production models. These small businesses that are least able to afford the enormous expenditure for modern equipment are not given Government-owned plants or machine tools. They must find the financial resources on their own and accept the risks if they wish to remain in this business.

The contract industry serving the aircraft prime contractors has managed to survive and contribute despite these circumstances. But present conditions suggest that a large portion of the independent capacity serving the aircraft market may be unable to continue. The basic problem is that the Government has directly encouraged the large prime aircraft contractors to develop their own facilities for tooling and machining and thus to take over the work that our industry has traditionally done. The Government has done so by providing the primes with Government-owned plants and equipment to do this work without any recognition of the fact that this capacity already exists in

the small businesses of our industry and is as capable of performing these functions as any of the facilities established by the prime con

tractors.

The use of Government-owned equipment by prime contractors obviously should depend upon the lack of such resources in other private industries, and surely it has been the intention of Congress that such equipment was not to be used to duplicate the facilities of small business.

But when the aircraft companies have requested millions of dollars of new machine tools for tooling and machining operations the responsible procurement agencies have not investigated available capacity. As a result, a great deal of excess capacity has been created at great waste to the Government and ultimately to the taxpayers.

The particularly unfortunate aspect is that the excess capacity that has been developed in the prime contractors' plants is not as efficient or as economical as the capacity that previously existed and still exists in the contract shops. Yet this captive capacity is the capacity that is used first when new tooling and machining requirements arise and when new aircraft models approach production.

Our procurement policies encourage the prime contractors to do this work on their own facilities because they receive a higher profit percentage in this manner than if they subcontracted the work to our industry. The fact that the cost of tooling and machining work is much higher when done in these captive facilities is not a deterrent, because these companies typically operate on a cost plus fixed fee basis.

As a result, through the generosity of the Government to large prime contractors a substantial amount of the tooling and machining work goes to the inefficient excess capacity of the captive toolrooms that should never have been created in the first place, and the spillover, if any, goes to the more efficient small businesses in our industry who are operating without subsidy or special favor of any kind.

The captive tooling and machining facilities of the large aircraft prime contractors do not compete for the work that they are taking away from our industry. Our companies do not have an opportunity to bid on this work. If they did, and if the captive facilities quoted competitive prices based upon their actual costs, our industry would soon prove that the captive facilities are for the most part a colossal waste of Government money-because they would be practically idle most of the time.

It is not enough that the Government itself is actively protecting the large aircraft prime contractors from competition. They are also straining to protect each other. When one of the prime contractors is operating his own captive tooling and machining facilities to capacity and has additional work, he first looks at the other prime contractors to see if they have available capacity in their captive facilities.

If the other primes do not have the necessary capacity available in the time required, the last resort is to the independent companies of our industry. Once again, this work is not subcontracted on a competitive basis except for the spillover which eventually reaches the contract shops. At the spillover stage the bidding is extremely competitive.

A dramatic illustration of this practice is in the tooling and machining programs of Lockheed for the C-5A transport and the L-1011