DEFEND OR DIE

The importance of restoring available credit to ensure a strong U.S. manufacturing technology industry to support the nation?s economy and defense industrial base was the subject recently when an executive from a test equipment manufacturing company testified before the U.S. Senate Banking Committee?s Economic Policy Subcommittee.

Eugene Haffely, Jr., Chief Operating Officer of Assembly and Test Worldwide, Inc. (Dayton, OH), testified on his own behalf and as a member of the Board of Directors of AMT ? The Association for Manufacturing Technology, which represents America's machine tool industry and other manufacturing technology companies that form the basis of manufacturing in the United States.

Addressing the committee, Haffely said the manufacturing technology industry is critical to building and maintaining the strong and dependable defense industrial base that enables the military to protect U.S. citizens and their ideals around the world. He testified that if nothing is done to get credit flowing again to America?s manufacturers, the country could lose its ability to create the new innovative defense systems that provide an advantage over adversaries throughout the world. Then too, there is risk of dependence on foreign sources for U.S. defense needs and national security.

In his testimony, Haffely noted that for the past seven months banks have been denying credit to even the most creditworthy manufacturing technology companies. This lack of bank credit is threatening to drive those companies out of business.

Haffely implored the committee to look to the Defense Production Act (DPA) as part of the solution. The DPA confers on the president the power to mobilize the domestic economy in order to best supply the military in the event of a wartime mobilization. It authorizes the president to direct certain industries to produce vital military products.

In order to advance America?s defense production needs, Title 3 of the DPA provides for federal loan guarantees to companies that play an important role in the nation?s defense industrial base ? companies that would be important to mobilization efforts if it were necessary to move from a peacetime economy to a wartime economy.

Haffely suggested that the committee consider increasing the loan guarantee authority under Title 3 as it considers the DPA?s reauthorization this year, so that credit is available to the U.S. defense industrial base companies that are unable to get credit elsewhere in the current economic environment. This program would allow assistance to be quickly targeted and precisely applied to defense-related companies, such as those in the manufacturing technology industry, that are in desperate need of bank credit.

He further noted, however, that the current Title 3 guarantee program funding is insufficient to have an effect in this current crisis. Thus, in reauthorizing Title 3, it would be necessary to provide significantly greater lending authority to give banks the confidence to get credit flowing to manufacturing technology companies and the many other companies who make up the backbone of the defense industrial base. Reauthorization at a higher loan guarantee level would be a step toward protecting America?s national security while at the same time saving jobs and small industrial companies that are so important to our economic health.

CHAIN REACTION

Testifying about the far-reaching effects of the auto industry?s crisis on its supplier base, one manufacturing executive told the House Committee on Small Business that unless suppliers get help immediately, many of them will ?take their last breaths.?

Carl Reed, President and CEO of Abbott Workholding Products, Inc. (Manhattan, KS), testified on behalf of many small and mid-sized manufacturers, a number of whom have ties to the domestic auto industry. ?Manufacturing technology suppliers are a small ? yet critical ? component to the production of next-generation automobiles,? said Reed. ?Without us, you can?t manufacture an ?American-made? car.?

But he warned that if a high number of those suppliers suddenly cease operations, it would set off a ?domino effect? that will go well beyond the automakers and could affect aerospace and other industries. While Reed applauded the Treasury Department?s auto supplier support program, he warned that it does not go far enough to reach every part of the auto supply chain.

?Inexplicably, Tier 1 suppliers have been left out of the program,? commented Reed. ?The car companies have interpreted the program as protection for companies who supply them on a flow basis rather than on a transaction basis. This leaves out suppliers whose commitments come one transaction at a time ? amounting to essentially an ?all-or-nothing? agreement with the auto companies. There is no opportunity to adjust shipments based on health of customers or payment integrity as with the flow suppliers. I cannot believe that this is what the President?s Auto Task Force had in mind when it created this program, but it is how the carmakers have chosen to administer it.?

In a statement, Committee Chairwoman Nydia M. Velazquez stated, ?Industry analysts estimate that more than half of North America?s 1,200 small auto suppliers will be pushed into bankruptcies, mergers and liquidations within the next three years based solely on the current decline in sales ? the loss of these small parts manufacturers has the potential to cause a cascade of problems throughout the entire auto industry.?

Reed issued particular caution against a structured Chapter 11 bankruptcy by General Motors, citing the devastation it would bring to the supplier base. He said a recent survey suggests that member manufacturing technology suppliers have between $1.2 billion and $1.6 billion currently tied up with the car companies in the form of contracts, works in progress, and receivables, averaging about $7 million per supplier. As such, a GM Chapter 11 filing without protection would likely force many of those suppliers into bankruptcy as well.

Reed also made a plea that Congress and the Administration loosen credit standards for Small Business Administration 7(a) loans, particularly for small manufacturers tied to the auto industry, so that they can get the financing necessary to pursue new business opportunities. He urged Congress to shift the program so that there is less emphasis on cash flow as the primary consideration to instead also look at a company?s backlogs, assets, employment levels, and historic performance.

While Reed emphasized that American small businesses have long proved themselves able to adapt to changing market needs, those tied to the auto industry won?t be able to move forward without help. ?Looking ahead, I urge members of this committee, the entire Congress, and the administration not to overlook manufacturing technology suppliers up and down the automotive supply chain ? each of our companies is fiercely competitive and determined to ensure that American manufacturing technology remains preeminent.?

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AMT ? The Association for Manufacturing Technology, 7901 Westpark Drive, McLean, VA 22102-4206, 703-893-2900, Fax: 703-893-1151, www.amtonline.org.