Some of the traditional markets we have served may be shrinking in the coming years. These conditions make it difficult for a company to expand and modernize and maintain its force of skilled employees on a long-term basis. I think there is much the Government can do in its procurement policies which would help our industry to level out the peaks and valleys which we have traditionally experienced.

Specifically, I would like to discuss with you a very substantial market in Government procurement which our industry could serve effectively and at a great saving to the Government and the taxpayers. Every year hundreds of thousands of metal parts and structures are made for military and other Government programs by American industry. Many of these structures or machines continue to be used in the Government's service long after they are no longer in production. For instance, there are many good operational fixed wing aircraft, helicopters, naval ships, guns, tanks, rocket launchers, and similar items that are still in use but no longer in production. All of these items need replacement parts.

The expenditures each year by the Government for spare parts of this type must be in the area of at least $2 or $3 billion. Where does this business go? In practically every case it goes to the large corporations that built the original items or assembled them from many subcontracted components.

This is because the original manufacturer has a great advantage in bidding competitively for this work. His advantage is that he has the tooling that was built and used to stamp, mold, or forge or machine the finished part that is now being reordered.

The Government has already paid the original manufacturer for this tooling. Its cost was included in the price of the original structure or machine. Normally, however, the manufacturer has retained title and possession of the tooling and it cannot be used by any other party.

Thus, if a business such as ours would seek to compete for spare parts orders its bid would have to reflect the cost of building on its own, all over again, the necessary tooling. The cost of this tooling would make its bid higher than the original manufacturer who already has the tooling in his plant.

Suppose, for instance, that 50 wing hinge fittings are needed for spares and quotation requests are issued by the appropriate Government purchasing authority. Suppose further that one of our independent tool, die, and precision machining companies bids against the original prime contractor to produce these fittings.

Assume that both bidders could produce the items in 500 manhours of direct labor, which is debatable. The small business would have a total overhead figure of probably 125 percent of direct labor. The prime contractor would have an overhead factor of at least 250 percent.

The small company's price at $5 per direct labor hour would be $5,625; the prime contractor's price would be $8,750. Thus, on the basis of the actual job to be done, it would appear that the small business should get the contract.

However, in order for the small business to get the contract, it would also have to include in its bid the cost of designing and building the

32-579-69- -7

tooling. It would also be handicapped by the fact that it would have to take the time to build the tooling and this could push it beyond the necessary delivery schedule.

The increased cost of building the tooling-duplicating the tooling already in existence would undoubtedly push the small business price above that of the prime contractor, and the prime contractor would therefore get the contract.

To interject for a minute, a set of tooling to produce an aircraft part such as you are looking at there on the table could run in the neighborhood of $10,000, so with the figures I have previously stated, you can see how far beyond the contract price we would be.

Mr. SMITH. When you say a set of tooling, what do you mean by a set?

Mr. MCGINNIS. I will clarify that a little later. It would seem to be a simple matter for the Government to acquire title and possession, and this is important, gentlemen, it would seem to be a simple matter for the Government to acquire title and possession to all tooling that is used in the production of the parts that it purchases.

The Government pays for this tooling in the price it pays for the original production items and since every item of tooling is a one-of-akind thing, it could not be used to make any other part. The Government could then keep this tooling in storage warehouses located throughout the country. The tooling could easily be cataloged by number identification and recorded on microfilm.

Engineering drawings of the tooling could also be microfilmed and the package of tool type, tool drawing, and location stored in computers. When a need arose for spare parts of any kind, the tooling and necessary drawings could immediately be located and competitive bids could be obtained for the production of the necessary spare parts with the successful bidder being given the necessary tooling for the job.

This would result in a tremendous saving for the Government. It would introduce competition into a market that now has literally no competition. Most importantly, it would provide an excellent market for the small businesses in our industry. Our companies could produce these spare parts at a much lower cost than the prime contractors in practically every instance. We are much more flexible and adaptable than the large prime contractors.

Our estimating, purchasing, production, planning, and quality control departments are many times made up of two to five people rather than an unwieldy organization of many personnel and supervisors. Our people are trained to react quickly and are not as limited as the work forces of the huge contractors in terms of job classifications or the capacity to work whatever hours are needed to get the job done. These are the characteristics that permit us to give our customers the service they want, and this is what keeps us in business. Also, the size of our companies permits us to shuffle our schedules much more easily than the large companies who would have to accommodate numerous production lines in order to begin spare parts operations, especially since spare parts operations are generally of a very small quantity.

As has been proven time and time again, our overhead burden is much lower than that of the large companies.

Let me give you an example of the waste that could be eliminated by adopting this proposal. We were called upon by Ogden Air Force Base to produce some spare parts. The Air Force knew that we had made these parts on a subcontract basis for a prime contractor. We had the production tooling in our possession with the exception of the forging die.

Since we had received drop shipments of the forgings direct from the forging vendor in Texas I called that vendor to obtain a price on the forgings in order to quote our price to the Air Force. The forging vendor, however, could not make the forgings for us because the original prime contractor refused him permission. This eliminated us from contention.

However, a few days later we received an inquiry from the same prime contractor as to whether we would produce these same spare parts in the identical quantity that had been requested from us by Ogden Air Force Base. What had happened does not require a great deal of imagination. Rather than buy the spare parts from us directly, the Air Force was compelled to go to the original prime contractor because the prime contractor had control over the necessary tooling. Thus, the original prime contractor got the job and in turn subcontracted it to us. We received the work in any event, but instead of just paying our price the Government has to pay the prime contractor's markup.

Our independent tool, die and precision machining industry is in critical need of additional markets. The continuing Government demand for spare parts could provide a substantial source of business of this type. The program I have proposed need not involve any inequity to the original prime contractor. If he has been paid for the tooling that is used in producing the original parts there is no reason why he should not relinquish control over the tooling and thus permit the Government to make it available to whatever company can offer the most competitive bid for the production of the spare parts that are later needed.

Ideally, this market should be set aside for small business. It is the type of production that the large prime contractors are not equipped in most cases to handle, and it is the type of production that small businesses can do most efficiently. In any event, however, there could be no reason for continuing to exclude small businesses from competion for this business against the prime contractors. Action by the Government to open up this market to small business would serve not only the interests and the health of our industry but the value of the Government procurement dollar as well.

Mr. Chairman, I urge your subcommittee to consider this proposal and if you find it reasonable to recommend appropriate changes in Government procurement policy.

Thank you.

At this time I have a few slides to show that would illustrate in some detail just what a set of tooling is comprised of.

Mr. SMITH. All right, go ahead. I do not think we need to take this down verbatim.

(There was a showing of slides, off the record.)

Mr. SMITH. That was very interesting and very good. I want to say Mr. Hungate wanted to be here but he is unable to be present. Here he is right now.

Mr. McGinnis has finished his statement. His statement was so clear that I do not think I really have any questions. He pointed up the program and suggested a very constructive remedy which we will look into.

Mr. Burton?

Mr. BURTON. Thank you, Mr. Chairman.

I have one question. You mentioned an air base in my district, Hill Air Force Base at Ogden, and pointed that up as an example of some waste. Was the decision made at Hill or was it made somewhere else that they would go to the Texas company rather than your own?

Mr. MCGINNIS. The Hill Air Force Base called me long distance personally, the purchasing agency there; and I of course had to obtain the forging, or a price on the forging. I knew what my machining costs would be but I had to obtain a price on the forging itself or the raw materials as I pointed out. I called the people in Texas where the forging was being made. I happened to know about it of course, since in making these parts previously they had been shipped from Texas to me so that I could machine them and then in turn pass them on to the prime contractor. They told me that the particular prime contractor frowned on this, and they would not produce the forgings for us. They told us what the price was but they told us they would not be able to send the parts.

Mr. BURTON. Who told you that?

Mr. MCGINNIS. The forging vendor in Texas.

Mr. BURTON. So who made the decision that it had to go to Texas rather than yourself?

Mr. MCGINNIS. I would say the prime contractor did. He is the only one that could. He had the ownership or the title to the tooling. Mr. BURTON. Was it people at Hill?

Mr. MCGINNIS. No, no; the prime contractor that produced the aircraft in question, the ones that actually made the aircraft.

Mr. BURTON. All right. I think you have made a very fine statement here, and if it had been anybody in my district that had that responsibility, I would raise a little but I suppose now it is up to the

subcommittee to do that.

Mr. SMITH. Do you have any questions?
Mr. HUNGATE. No questions.

Mr. SMITH. Thank you very much.
Mr. Hardman?

TESTIMONY OF WILLIAM E. HARDMAN, EXECUTIVE VICE PRESIDENT, NATIONAL TOOL, DIE & PRECISION MACHINING ASSOCIATION, WASHINGTON, D.C., ACCOMPANIED BY WILLIAM C. BRASHARES, COUNSEL

Mr. HARDMAN. Mr. Chairman, I would just like to read my statement for the record.

Mr. Chairman and members of this distinguished subcommittee, my name is William E. Hardman and I am the executive vice president of the National Tool, Die & Precision Machining Association.

This is a national trade association representing the contract tool, die, and precision machining industry in the United States with 1,500 member companies. Association headquarters are located at 1411 K Street NW., Washington, D.C. We have organized chapters in most of the industrial cities of the country and a small permanent force of field representatives.

At this time, speaking for the association and for the industry, I would like to summarize the problems that were cited yesterday morning by Mr. Gordon Cleveland in his opening statement and which have been so capably unfolded by the witnesses and so ably explored by this committee during these past 2 days.

I believe that I can most easily describe the importance of the tool and die industry by quoting a report of this very subcommittee issued during the second session of the 89th Congress-House Report No. 2345:

The economic well-being of the Nation-depends to a great extent upon the economic well-being of the tool and die industry.

A further quote states that:

The tool and die industry is properly referred to as the keystone of mass production.

I see Mr. Horton has left but he asked the question yesterday which I would like to take 1 second to answer here. He said:

What would happen if the tool and die industry were to disappear at a given moment from the face of the earth?

I do not think the witness at that time answered the question emphatically enough, and I would just like to elaborate that probably within 90 days the standard of living and the economy as we know it in the United States would disappear, would come to a complete halt, and to reassemble all of the skilled personnel involved in the industry and all of the physical equipment would be a monumental task that the country probably could not recover from in maybe 5 to 10 years. I think that is a very accurate answer to Mr. Horton's question. With these statements of fact acknowledged by the record, it would seem wasteful of the committee's time to attempt to speak further in behalf of the status and prestige of the tool-and-die industry. Rather than to so, I would like to quickly turn to the matter at hand and stake out the metes and bounds of the question as they appear to me.

Here we see, in the complaints of the tool, die, and precision machining industry, not an isolated group asking for special favors, but rather a crystalization of the now classic struggle between big and small business. This has been a titanic battle mounted over several decades. The innumerable firefights and skirmishes that have been a constant part of the struggle have resulted in a thousand victories and a thousand losses but with small business retreating more frequently with each passing year.

The final crucial battle is already joined. There can be, inevitably, only one outcome to this struggle total defeat for small business in the United States-absolute obligation-unless, unless this subcommittee, through its parent committee and with the concurrence of a majority of the Congress, deems that it shall be otherwise. Unless Congress holds that small business is vitally important to the American way of life and thereby is worth preserving.