USCC06 07 17 Trans

CHINA’S IMPACT ON THE U.S.
AUTO AND AUTO PARTS
INDUSTRIES
HEARING
BEFORE THE
U.S.CHINA ECONOMIC AND SECURITY
REVIEW COMMISSION
ONE HUNDRED NINTH CONGRESS
SECOND SESSION
_________
July 17, 2006
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Printed for use of the
U n i t e d S t a t e s C h i n a E c o n o m i c a n d S e c u r i t y R e v i e w C o m m i s s i o n
Av a i l a b l e v i a t h e Wo r l d Wi d e We b : www. u s c c . g o v
UNITED STATESCHINA ECONOMIC AND SECURITY REVIEW COMMISSION
WASHINGTON : August 2006
U.S.CHINA ECONOMIC AND SECURITY REVIEW COMMISSION
LARRY M. WORTZEL, Chairman
CAROLYN BARTHOLOMEW, Vice Chairman
Co mmissio ners:
GEORGE BECKER KERRI HOUSTON
DANIEL BLUMENTHAL Hon. PATRICKA.MULLOY
PETER T.R. BROOKES Hon. WILLIAM A. REINSCH
Hon. C. RICHARD D’AMATO Hon. FRED D. THOMPSON
THOMAS DONNELLY MICHAEL R. WESSEL
T. SCOTT BUNTON, Executive Director
KATHLEEN J. MICHELS, Associate Director
The Commission was created on October 30, 2000 by the Floyd D. Spence National
Defense Authorization Act for 2001 § 1238, Public Law No. 106398, 114 STAT.
1654A334 (2000) (codified at 22 U.S.C.§ 7002 (2001), as amended by the Treasury and
General Government Appropriations Act for 2002 § 645 (regarding employment status of
staff) & § 648 (regarding changing annual report due date from March to June), Public
Law No. 10767, 115 STAT. 514 (Nov. 12, 2001); as amended by Division P of the
"Consolidated Appropriations Resolution, 2003," Pub L. No. 1087 (Feb. 20, 2003)
(regarding Commission name change, terms of Commissioners, and responsibilities of
Commission); as amended by Public Law No. 109108 (H.R. 2862) (Nov. 22, 2005)
(regarding responsibilities of Commission and applicability of FACA).
The Commission’s full charter http://www.uscc.gov/about/charter.php and Statutory Mandate
http://www.uscc.gov/about/overview.php available via the World Wide Web
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CONTENTS
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MONDAY, JULY 17, 2006
CHINA’S IMACT ON THE U.S. AUTO AND AUTO PARTS INDUSTRIES
Opening statement of Vice Chairman Carolyn Bartholomew………………… 6

Prepared statement………………………………………………………….. 8
Opening statement of Commissioner Daniel Blumenthal, Hearing Cochair….. 9
Prepared statement…………………………………………………………… 10
Opening statement of Commissioner George Becker, Hearing Cochair………. 35
Prepared statement……………………………………………………………. 37
PANEL I: CONGRESSIONAL PERSPECTIVES
Statement of Sander Levin, a U.S. Congressman from the State of Michigan…. 11

Prepared statement …………………………………………………………… 15
Statement of John Dingell, a U.S. Senator from the State of Michigan……….. 19
Statement of Debbie Stabenow, a U.S. Senator from the State of Michigan….. 22
Statement of Thad McCotter, a U.S. Congressman from the State of
Michigan………………………………………………………………………. 27
Panel I: Discussion, Questions and Answers…………………………………. 28
PANEL II: LABOR PERSPECTIVES
Statement of Ron Gettelfinger, President, International Union, United Automobile,
Aerospace and Agricultural Implement Workers of America, Detroit, Michigan.. 39
Prepared statement ……………………………………………………………. 41
Statement of Leo Gerard, International President, United Steelworkers, Pittsburgh,
Pennsylvania……………………………………………………………………… 46
Prepared statement…………………………………………………………….. 48
Statement of Richard Trumka, SecretaryTreasurer, AFLCIO, Washington, D.C. 50
Prepared statement ……………………………………………………………. 53
Panel II: Discussion, Questions and Answers…………………………………... 53
PANEL III: PERSPECTIVES OF EXPERTS, TRADE ASSOCIATIONS, AND

ANALYSTS
Statement of Prof. Susan Helper, Professor of Economics, Case Western Reserve
University, Cleveland, Ohio……………………………………………………… 68
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Statement of John Moavenzadeh, Executive Director, MIT International Motor
Vehicle Program, Philadelphia, Pennsylvania………………………………….. 71
Statement of Bruce Belzowski, Senior Researcher, Office for the Study of
Automotive Transportation, University of Michigan, Ann Arbor, Michigan…… 81
Panel III: Discussion, Questions and Answers…………………………………. 84
PANEL IV: NATIONAL SECURITY PERSPECTIVES
Statement of Dr. Sheila Ronis, Director MBA/MS Programs, Walsh College,
Vice President, Board of the National Defense University Foundation, Troy,
Michigan……………………………………………………………………….. 101
Prepared statement…………………………………………………………… 104
Brian Suma, U.S. Army TACOM, Manager, Army DMSMS INFO System,
Warren, Michigan………………………………………………………………. 108
Prepared statement……………………………………………………………. 111
Randal Gaereminck, Associate Director Engineering, TankAutomotive and
Armaments, R&D and Engineering Center (TARDEC), Warren, Michigan…… 111
Panel IV: Discussion, Questions and Answers………………………………… 112
PANEL V: PERSPECTIVES OF PARTS MANUFACTURERS
Terrence J. Keating, Chief Executive Officer, Accuride Corporation, Evansville,
Indiana…………………………………………………………………………… 126
Larry Denton, Chairman and CEO, DURA Automotive Systems, Inc., Rochester
Hills, Michigan…………………………………………………………………… 133
Prepared statement……………………………………………………………… 135
Panel V: Discussion, Questions and Answers…………………………………… 135
PANEL VI: PERSPECTIVES OF TOOL AND DIE MANUFACTURERS
Laurie Schmald Moncrieff, President, Schmald Tool & Die, Burton, Michigan… 144
Mark Schmidt, President, Atlas Tool, Inc., Roseville, Michigan………………… 153
Panel VI: Discussion, Questions and Answers………………………………….. 159
PANEL VII: OPEN MICROPHONE SESSION FOR THE PUBLIC
Statement by Myron D. Stokes…………………………………………………… 173
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ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD
Statement of Jennifer M. Granholm, Governor of Michigan………………… 177
Statement of Dale Kildee, a U.S. Congressman from the State of Michigan…. 177
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CHINA'S IMPACT ON THE U.S. AUTO AND AUTO PARTS
INDUSTRIES
Monday, July 17, 2006
U.S.CHINA ECONOMIC AND SECURITY REVIEW COMMISSION
Washington, D.C.
OPENING REMARK S OF VICE CHAIRMAN CAROLYN
BARTHOLOMEW
The Commission met at Universit y of Michigan, Dearborn Campus

Fairlane Cent er, Dearborn, Michigan at 8:35 a.m., Chairman Larry M.
Wo rt zel, and Co mmissioners Michael Wessel, Geo rge Becker and Daniel A.
Blument hal (Hearing Co chairs) presiding.
COMMISSION VICE CHAIR BARTHOLOMEW: Thank you,

everybody. We're expect ing our first member o f Congress t o join us at
8:45. We have a few o pening st at ement s by Co mmissioners. I just want ed
t o say goo d mo rning and t hank you t o everybody for at t ending our hearing.
I'm Carolyn Bart holomew, Vice Chairman of t he U.S.China
Eco no mic and Securit y Review Co mmission. We're here t oday in
Michigan, t he ho me of t he American "Big Three" aut o companies, t o
examine t he impact o f China on t he U.S. aut o and aut o part s indust ries.
We are also considering t he import ance of America's aut omot ive indust ry
t o t he o verall healt h o f t he U.S. indust rial base and t o t he nat ion's milit ary
securit y.
Our Commissio n advises Congress on U.S. policy and legislat io n
affect ing o ur economic and securit y relat io nship wit h China. As part o f
o ur effo rt s, we hold hearings bo t h in Washingt on and aro und t he count ry t o
hear from t he peo ple and indust ries mo st affect ed by China's rise as an
eco nomic and milit ary power.
Last year, we held a similar hearing in Ohio t o hear from t he aut o ,
machine t o ol and rubber indust ries amo ng o t hers. We were in Columbia,
Sout h Caro lina t he year befo re, and it 's been very int erest ing t o go out and
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t alk t o peo ple who have been affect ed in t heir communit ies.
Our Commission submit s an annual repo rt t o Congress cont aining
o ur conclusio ns and recommendat ions. Past annual report s and hearing
t ranscript s are available on o ur Websit e, www.uscc.gov. The reco rd of t his
hearing will also be included on our Websit e.
A number of our commissioners recent ly ret urned fro m a fact finding
t rip t o China during which we t oured an int egrat ed aut o plant wit h
st amping, welding, paint ing and assembly operat io ns all under one roof.
It 's a joint vent ure bet ween Cit ro en and Peugeot o f France and a Chinese
co mpany, Dong Feng Aut o mobile Company.
As in many such cases in China, t he plant appeared t o benefit from a
wide array of special subsidies such as t ax abat ement s, favorable loan rat es
fro m st at econt ro lled banks and disco unt ed land purchases.
Sho uld t he cars being made t here be export ed, t hey also will enjoy a
15 percent t o 40 percent export subsidy in t he form of an art ificially
undervalued currency. In addit io n, t he Chinese aut o indust ry sit s behind a
pro t ect ive 25 percent t ariff on import s of foreignmade cars.
The U.S. aut o indust ry, which enjoys no such pro t ect ion or subsidies
fro m Washingt on, faces a daunt ing challenge in compet ing wit h t he Chinese
indust ry. U.S. aut o part s suppliers, who represent an even larger po ol of
wo rkers t han t he companies t hat assemble t he cars face even great er
challenges.
China maint ains high t ariff and nont ariff barriers t o import ed aut o
part s. Import ed part s face t ariffs of 10 percent t o 25 percent . U.S. part
suppliers face a difficult cho ice: move product ion t o China and risk
arbit rary government t ax, regulat ory and licensing act ions, and t he loss o f
propriet ary t echnolo gy, or keep product ion at home and pro t ect int ellect ual
pro pert y, but co mpet e on a very uneven playing field.
In sum, China's act ivit ies in t hese indust rial sect ors pose a major
challenge t o t heir U.S. co unt erpart s. The repercussions will be felt in
o verall U.S. economic performance and t he vit alit y of o ur defense
indust rial base, t he econo mies o f several st at es, and in scores of cit ies,
t o wns and communit ies. The Commission believes t his issue is of high
impo rt ance, but it merit s t he clo se at t ent io n o f Congress.
I wo uld like t o t hank t he Universit y o f Michigan's Dearborn campus
fo r making t hese facilit ies available t o day and t hank all of you who have
co me t o o ffer your t hought s and yo ur analysis t o us.
I'd also like t o submit for t he reco rd a st at ement t hat we've received
fro m Governo r Granho lm and from Represent at ive Kildee, and now I'd like
t o t urn over t he hearing t o t he t wo cochairs, Commissioner Dan
Blument hal and Co mmissioner Mike Wessel. Mike is sit t ing in for
Co mmissioner George Becker, t he former Int ernat ional President of t he
Unit ed St eelwo rkers Union, who is cochair and is unable t o be wit h us here
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t o day.
Thanks very much.
[The st at ement follows:]
Prepared statement of Vice Chairman Carolyn Bartholomew
Good morning and thank you for attending our hearing. My name is Carolyn Bartholomew. I am the vice
chairman of the U.S. China Economic and Security Review Commission.
We are here today in Michigan, the home of the American “Big Three” auto companies, to examine the
impact of China on the U.S. auto and auto parts industries. We are also considering the importance of
America’s automotive industry to the overall health of the U.S. industrial base and to the nation’s military
security.
Our Commission advises Congress on U.S. policy and legislation affecting our economic and security
relationship with China. As part of our efforts, we hold hearings both in Washington and around the
country to hear from the people and industries most affected by China’s rise as an economic and military
power. Last year we held a similar hearing in Ohio to hear from the auto, machine tool, and rubber
industries, among others.
Our Commission submits an annual report to Congress containing our conclusions and recommendations.
Past annual reports and hearings transcripts are available on our website, www.uscc.gov. The record of
this hearing will also be included on our website.
The Commission recently returned from a factfinding trip to China during which we toured an integrated
auto plant with stamping, welding, painting and assembly operations all under one roof. It is a joint
venture between Citroen and Peugeot of France, and a Chinese company, Dong Feng Automobile
Company. As in many such cases in China, the plant appeared to benefit from a wide array of special
subsidies, such as tax abatements, favorable loan rates from statecontrolled banks, and discounted land
purchases. Should the cars being made there ever be exported, they also will enjoy a 20 percent to 40
percent export subsidy in the form of an artificially undervalued currency. In addition, the Chinese auto
industry sits behind a protective 25 percent tariff on imports of foreignmade cars.
The U.S. auto industry, which enjoys no such protection or subsidies from Washington, faces a daunting
challenge in competing with the Chinese industry. U.S. auto parts suppliers, who represent an even larger
pool of workers than the companies that assemble the cars, face even greater challenges. China maintains
high tariff and nontariff barriers to imported auto parts. Imported parts face tariffs of 10 percent to 25
percent. U.S. parts suppliers face a difficult choice—move production to China and risk arbitrary
government tax, regulatory and licensing actions and the loss of proprietary technology, or keep
production at home and protect intellectual property but compete on a very uneven playing field.
In sum, China’s activities in these industrial sectors pose a major challenge to their U.S. counterparts. The
repercussions will be felt in overall U.S. economic performance, in the vitality of our defense industrial
base, in the economies of several states, and in scores of cities, towns and communities. The Commission
believes this issue is of high importance and that it merits the close attention of the Congress.
I’d like to thank the University of Michigan’s Dearborn campus for making these facilities available
today, and all who have come to offer their thoughts and analysis to us. Now, I’d like to turn over the
hearing to the two cochairs, Commissioner Daniel Blumenthal and Commissioner Michael Wessel, who
is sitting in for Commissioner George Becker, the former International President of the United
Steelworkers Union, who is unable to be here today.
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OPENING STATEMENT OF DANIEL BLUMENTHAL
HEARINGCOCHAIR
HEARING COCHAIR BLUMENTHAL: Thank yo u very much and

welco me t o our hearing and t hank yo u very much t o t he Universit y o f
Michigan fo r ho st ing us t oday.
As Chairman Bart holomew said, our Commission looks broadly at
t he nat io nal securit y implicat ions o f our eco nomic relat ionship wit h China
and t he issue in t erms o f o ur economic relat ionship always comes down t o
no t whet her we should be t rading wit h China but t he issues of fair t rade,
t he issues of playing by t he rules set by t he world when China agreed t o
jo in t he Wo rld Trade Organizat io n.
To day we're going t o t alk about t he U.S. aut o and aut o part s
indust ry which holds a special place in our manufact uring and o ur
eco nomy. The pro duct ion of cars and t rucks, as you kno w, emplo ys
co mput er scient ist s, skilled craft smen and engineers o f all st ripes. It 's o ne
o f t he biggest users of st eel, t ext iles, rubber and semiconduct ors. The
average cars uses 18 comput ers t o mo nit or fuel flow, pollut ion co nt rol,
ignit io n t iming, airbag deplo yment and braking syst ems. Cars may employ
radar and co llision avoidance syst ems and sat ellit e t echnology t o find t heir
way. The process of designing and creat ing a car is one o f t he most
t echno logically so phist icat ed endeavors in business t o day.
So we feel t hat t he survival o f a healt hy aut o indust ry is t he key t o
support ing many of o ur t echnical skills t hat have an import ant cro sso ver
effect in our nat ional securit y. Today we'll be hearing fro m wit nesses who
can draw t hat connect io n wit h first hand knowledge of ho w t he erosio n o f
o ur aut o and aut o part s indust ry direct ly affect s and t hreat ens America's
defense indust rial base as well as it s econo mic and t echnological fut ure.
Today's newspapers are filled wit h grim news abo ut t he indust ry. Layoffs,
wage and benefit cut s, plant closings, dividend cut s and company
co nsolidat io ns are widespread and growing. The aut o part s indust ry is
similarly undergo ing part icularly hard t imes.
The principal cust omer base, t he Big Three, has suffered fro m
declining sales o f finished vehicles and t herefo re t he quant it y o f t heir part s
being ordered has also declined. Foreignbased t ransplant operat ions while
helping us do bet t er have st ill not made up t he slack, and China's expo rt s
o f aut o part s is on t he rise as well.
The Unit ed St at es import ed $5.4 billion in part s fro m China in 2005,
which is a 39 percent increase from t he previous year and, by cont rast ,
U.S. part s shipment s t o China declined t wo percent in t he same perio d t o
$623 million in 2005. Mo re t han a dozen majo r aut o suppliers in t he
Unit ed St at es filed fo r bankrupt cy pro t ect io n in 2005.
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We had invit ed t he Big Three t o t est ify t oday and really regret t hat
we can't hear fro m t hem t o day in o rder t o help us make o ur
recommendat io ns t o Congress. We know t hat t he aut o indust ry is caught
in a bind, as Chairman Bart ho lomew ment io ned, in t erms of moving t heir
o perat ions t o China t o make money, for much o f t he same reason t hat
China's aut o indust ry is gro wing so fast : t he subsidies we hear abo ut in t he
cent ral, pro vincial and local go vernment s in t he form of disco unt ed land,
t ax abat ement s, belo w market int erest rat es, loan forgiveness and lax
enforcement s o f environment al st andards.
Adding t o t hat is t he undervalued currency, and you have a huge
incent ive for pro ducing in China. The same U.S.based companies t hat
have been at t ract ed t o use China as a manufact uring base no w fear t he loss
o f such subsidies if t hey crit icize Beijing's policies.
We welcome o ur wit nesses t o t oday's hearing and t hank you very
much fo r your t imely t est imony. We appreciat e yo ur t ho ught s about t he
challenges faced by t he aut o and aut o part s indust ry as a result o f what
many perceive as unfair co mpet it io n wit h China and abo ut t he overall effect
o n o ur nat ion's defensecrit ical indust rial base.
Thank you.
Prepared Statement of Commissioner Daniel Blumenthal
Hearing Cochair
Welcome to the Commission’s hearing on China’s impact on the U.S. auto and auto parts industries.
America’s auto industry holds a special place in manufacturing and in our economy. The production of

cars and trucks employs metallurgists, computer scientists, skilled craftsmen, and engineers of all stripes.
Today’s cars are one of the biggest users of steel, textiles, rubber, and semiconductors. The average car
uses 18 computers to monitor fuel flow, pollution control, ignition timing, airbag deployment, and braking
systems. Cars may employ radar in collision avoidance systems and satellite technology to find their way.
The process of designing and creating a car is one of the most technologically sophisticated endeavors in
business today.
No wonder, then, that the survival of a healthy auto industry is a key to supporting many of the technical
skills that have a crossover effect on our nation’s security. We will be hearing from witnesses today who
can draw that connection. They have firsthand knowledge of how the erosion of our auto and auto parts
industry directly threatens America’s defense industrial base as well as its economic and technological
future.
Unfortunately, today’s newspapers are filled with grim news about the industry. Layoffs, wage and benefit
cuts, plant closings, dividend cuts and company consolidations are widespread and growing. The auto
parts industry is undergoing some particularly hard times. Their principal customer base in the United
States—the Big Three—has suffered from declining sales of finished vehicles and therefore, the quantity
of their parts being ordered has also declined. Foreignbased transplant operations here, while doing
better, have still not made up the slack. At the same time, China’s export of auto parts is on the rise. The
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United States imported $5.4 billion in parts from China in 2005, a 39 percent increase from the previous
year. By contrast, U.S. parts shipments to China declined 2 percent in the same period to $623 million in
2005. More than a dozen major U.S. auto parts suppliers filed for bankruptcy protection in 2005.
The Commission also invited the Big Three to testify today, but none took us up on our offer. Nor did the
companies designate anyone to testify on their behalf. We regret we cannot consider their views in open
session and provide their testimony and recommendations to Congress. But America’s auto industry is
caught in a bind. While the North American operations of Ford and General Motors lost money last year,
their operations in China apparently made money for much the same reason that China’s auto industry is
growing so fast:: subsidies from the central, provincial and local governments in the form of discounted
land, tax abatements, belowmarket interest rate loans, loan forgiveness, and lax enforcement of
environmental standards. Add to that the artificially undervalued Chinese currency, and you have a huge
incentive for producing in China. Unfortunately, the same U.S.based companies that have been attracted
to use China as a manufacturing base now fear the loss of such subsidies if they should criticize Beijing.
We welcome our intrepid witnesses to today’s hearing and thank you for your timely testimony. We
appreciate hearing your thoughts about the challenges faced by the auto and auto parts industries as the
result of competition with China and about the overall effect on our nation’s defensecritical industrial
base.
COMMISSION VICE CHAIR BARTHOLOMEW: Congressman

Levin, welcome. We look forward t o your t est imo ny and we very much
benefit ed fro m your bro t her's t est imony in Washingt o n recent ly.
PANEL I: CONGRESSIONAL PERSPECTIVES
STATEMENT OF SANDER LEVIN, A U.S. CONGRESSMAN FROM
THE STATE OF MICHIGAN
MR. LEVIN: I'll t ry t o do half as well. He's in Washingt on t oday.
Thank yo u fo r invit ing me t o part icipat e wit h ot her dist inguished
present ers who are going t o t alk about t his impo rt ant issue. You have a
co py of my t est imony, and let me, if I might , summarize it , and t hen
perhaps t here will be some t ime fo r back and fort h. I kno w you have a
very full day.
As I was preparing my remarks, I t hought back over t he bat t le o f
China's ent ry int o t he WTO and t here seemed t o be at t hat t ime t wo clear
fact o rs. One was t hat China had already become a very large economy and
t hat it provided an oppo rt unit y as part o f globalizat ion, an opport unit y for
t heir o wn populat ion, oppo rt unit ies for businesses and workers.
There was also a clearly second fact or, and t hat was a compet it ive
challenge. Even in t ho se years, t hey seemed dist ant . They weren't t hat
lo ng ago. It was clear t hat China was go ing t o become a major co mpet it or
far more t han it was at t he t ime. As a result , as China PNTR was present ed
t o t he Congress, t he det erminat ion was made t o provide some specific
pro visions as t o t heir ent ry int o t he WTO t o make sure t hat t here was
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co mpliance by t hem wit h t heir WTO o bligat ions.
There were several provisions t hat were placed int o t he PNTR
legislat io n t hat had been agreed t o by China and became applicable under
WTO rules t o every co unt ry in addit io n t o t he U.S. which had negot iat ed
t he accession agreement .
The aut omot ive indust ry of t he U.S. t o ok on t he opport unit ies
present ed by China's growing economy and it s ent ry int o t he WTO, and my
t est imony lays t his out , and o t hers will t alk about it . The aut omot ive
indust ry o f t he Unit ed St at es is a majo r part icipant in China's blossoming
eco nomy and it has provided what China want ed, and t hat was compet it ive
pro duct s, majo r invest ment , enhanced t echnology, t o put it mildly, and also
emplo yment for hundreds of t housands o f Chinese.
But t heir emergence, China's emergence, has really increased t he
impo rt ance o f addressing t hese issues of co mpliance and t o address t he
majo r problems because of China's failure t o co mply effect ively, and in my
judgment , t he Bush administ rat io n has failed t o vigorously st and up for t he
American aut o mo t ive indust ry, and I t hink it 's been reflect ive of it s overall
passive approach t o t he maint enance of a st ro ng manufact uring base in t he
Unit ed St at es, and I'm glad t o be sit t ing here wit h my dist inguished
co lleague John Dingell.
As much as t his failure of t he administ rat ion t o st and up for t he
American aut omo t ive indust ry in t hese past years and it s reflect ion on it s
o verall passive appro ach t o maint aining a st rong indust rial base in t his
co unt ry, t hese problems loom even larger for t he fut ure. The aut omot ive
indust ry has no t only, as I said, part icipat ed in t he Chinese economy, but
t he failure o f t he administ rat ion t o t ake st rong measures has helped t o
co nt ribut e t o what you have co nsidered on many occasions t he record
set t ing deficit wit h China.
Let me quickly highlight some of t he problems t hat face t he
aut o mot ive indust ry because of t he failure of China t o abide by it s
co mmit ment s and t he failure of t he Bush administ rat io n t o t ake a vigorous
act ive proact ive approach.
The first o ne I ment ion in my t est imony relat es t o local co nt ent
requirement s. The WTO prohibit s local cont ent requirement s of t he kind
t hat China has been fo llo wing. Their t ariff classificat ion syst em, t heir t ax
st ruct ures essent ially put s majo r pressure on U.S. aut o part s producers and
mo t o r vehicle assemblers. And t here are now new regulat ions t hat , in
essence, as I underst and t hem, require 60 percent do mest ic cont ent and
lo calizat ion of all major high t echno logy component s, and yo u canno t
emphasize t hat pro vision enough.
Secondly, as I po int o ut in my t est imony, t here's been a surge o f
vio lat ions o f int ellect ual pro pert y right s provisions relat ing t o aut o part s.
Aut o part s are being copied, misrepresent ed and sold as genuine, and t his
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o bvio usly has a majo r impact on t he abilit y of U.S. manufact urers o f aut o
part s t o part icipat e in t he Chinese economy, and t here are numerous
examples o f unaut ho rized t rademark usage, of people, o f ent it ies saying
t hey're aut ho rized service cent ers when t hey're not .
The t hird relat es t o t heir invest ment st ruct ures. China no w requires
jo int vent ures. I was just reading a few days ago about t he purchase by
China o f a dist inguished name o f an aut o mobile. You perhaps read about
t hat . They can come here and produce it . There are no rest rict ions as t o
t heir ent ry int o t he U.S. market . We do n't require t hat t hey joint vent ure
wit h anybody. If t hey want t o, t hey can just come here and produce t hose
cars. They also have a 49 percent requirement . Minorit y ownership canno t
exceed 49 percent . So t his is a t hird aspect t hat relat es specifically t o t he
aut o sect o r and China is t he only majo r nat ion in t he aut omot ive world t hat
has t hese rest rict ions.
Fourt hly, and I'm no t sure ho w much yo u will delve int o t his t oday,
because I haven't seen all t he t est imo ny, but it 's clear t hat China is no w
develo ping it s own syst em of regulat io ns. They're under t he umbrella of
safet y/environment al syst ems. However, clearly t hese regulat io ns are going
t o have a major impact on American producers, American workers, and in
my judgment t hey relat e more t o co nt ro lling t heir market t han t hey do t o
t he enviro nment o r safet y.
I ment io n a fift h one, and t hat is China's t ariff of 25 percent o n
impo rt ed aut o mo biles. It 's so much higher t han our own, and as I
underst and it , t hey're at t empt ing t o argue t hat t hey should be exempt ed, as
t he Doha Ro und unfolds, fro m any comprehensive t ariff reduct ions because
t hey're a new member of t he WTO. That would be, I t hink, mindboggling
t o say t hat t he fourt h largest aut omot ive sect or in t he wo rld wo uld be
exempt from any negot iat ed t ariff reduct ions because t hey're a new ent rant .
Let me just briefly t alk abo ut t he U.S. government respo nse. I t hink
t here's been under t he administ rat io n of President Bush essent ially a
cult ure of nonco mpliance.
Let me give you just a few examples. We bat t led t his out in t he
China PNTR legislat ion. There was a pro visio n for an annual review wit hin
t he WTO. If t here hadn't been t hat pro vision negot iat ed in t he accession
agreement , t here would have been a review every fo ur years. So we said,
lo o k, China's an except ional developing economy, it 's huge, it 's going t o
beco me larger. There sho uld be an annual review wit hin t he WTO.
I t hink it 's been made a mockery of. It 's been perfunct ory, and t he
GAO has st udied t he U.S. response t o t his provision and has found t hat o ur
appro ach has been ineffect ive. Essent ially, t here have been writ t en
respo nses by China and so met imes no t even t hat . And so we've lost t he
benefit already o f five years of what sho uld have been comprehensive
vigoro us review o f China's co mpliance wit h it s WTO obligat ions.
13
Let me also ment ion, t hough, t his hasn't yet affect ed t he aut omot ive
indust ry. A seco nd pro visio n t hat we placed in t he China PNTR legislat ion
was an import surge safeguard. And we said, look, t here's likely t o be a
surge of product s fro m China wit h it s very low labor cost s, wit h it s st at e
subsidizat ion, and we want a provision so when t here was injury t o
American businesses and workers, t hat t here wo uld be act ion t aken.
This was negot iat ed. It 's part of t he WTO st ruct ure. So far t here
have been six cases filed against China by ent it ies t hat t ho ught t hat t hey
were harmed by import surges. In four of t he six cases, t he ITC
recommended act ion. In no ne o f t hem has t his administ rat ion t aken any
act io n. None.
What signal do es t hat send? It essent ially says let it happen.
What ever happens will wo rk out in t he wash. This approach, I t hink, has
been reflect ed in t he WTO disput e set t lement syst em and t he failure of t he
administ rat io n t o use it vigo rously. It 's filed only 14 cases in t he last five
years, many less t han t he previous administ rat io n.
Finally act ion was t aken by t he administ rat ion regarding local
co nt ent requirement s and you kno w of t his I t hink, and t here may be more
t est imony, and a complaint was filed. Under t he WTO procedures, t here's
a 90day consult at io n period. Essent ially what t he Chinese government has
done has been t o st onewall. Not hing has happened during t his 90day
perio d.
There was, t herefore, a deadline, and aft er t hat a panel could be filed
fo r, and I fo und it disconcert ing t hat t he U.S. and o t hers did no t
immediat ely file for a panel. It sent again t he wrong signal. Loo k, China
is part of t he wo rld eco nomy; it 's become mo re and more so. There was no
avoiding t hat . What co uld be avoided was allowing t hem not t o play by t he
rules, and so met imes t hey have, but t oo oft en t hey haven't .
This is going t o have I t hink an increasing impact for t he aut o mot ive
sect o r. We're going t o see mo re and more part s coming here from China.
They are more and more t aking advant age o f t he t echnolo gy t hat our
co mpanies t here have impart ed t o t he Chinese economy.
Also, yo u're going t o see more and mo re of t heir vehicles coming
here. The aut omo t ive sect o r is already under immense st ress. It 's doing it s
best t o maint ain it self. If it 's no t do ing it s best , it 's doing much, and it 's
t rying t o do even bet t er, and it isn't go ing t o be able t o succeed in all t hese
effo rt s if o t her co unt ries wit h large aut omot ive sect ors don't follow t he
rules, do n’t follo w t he rules.
So what is a problem t oday lo oms as a much larger problem in t he
fut ure, and I want t o finish by saying t his. So met imes t he Bush
administ rat io n has said, well, we're no t get t ing enough informat ion fro m
t he aut omot ive sect or of t he Unit ed St at es. They seem t o be hedging, and
here's t he answer. Loo k, t hey now have majo r invest ment s in China. The
14
same was t rue, yo u'll remember, as t o Japan as t hey t ried t o break int o t he
aut o part s companies int o t he Japanese market .
They fo und it difficult somet imes t o be as st rong as t hey might have
been because t hey were also t rying t o do business wit h t hem. There's a
role fo r go vernment t o st and up fo r American business and workers.
There's a role for government t o be an act ive part ner. If you just t ake t he
no t io n t o let int ernat ional t rade happen willynilly, if t he rules are violat ed,
in t he end, it wo n't mat t er much because t he count ry t hat violat es will only
hurt it self, which I t hink is incorrect and so met imes nonsensical. The
indust ry, aut omo t ive/aut o part s, needs a vigorous act ive part ner of t he
U.S. government .
So far it has failed t o have it , and my hope is t hat t his hearing will
spo t light t he need for t he government of t he Unit ed St at es t o beco me a
vigoro us, act ive, yes, co nst ruct ive part ner o f t he aut omo t ive indust ry o f
t he Unit ed St at es.
Mr. Dingell and I have t his indust ry in our bloodst ream. But more
impo rt ant , it 's a vit al part of t he American econo mic bloo dst ream. So I
co ngrat ulat e you o n t his hearing, and if yo u would like, before I scoot o ver
t o Clint on To wnship, if t here are a few quest ions, and t hen t he senior
member of t he Unit ed St at es House, and t he champion fo r t he aut o
indust ry, alo ng wit h o t hers of us, will t ake over.
Thank you very much.
Prepared Statement of Sander Levin
A U.S. Congressman from the State of Michigan
When Congress considered China’s entry into the World Trade Organization, I cautioned that China’s
role within the global economy was both an opportunity and a competitive challenge. Because of its size
and growth in its economy, Congress insisted on particular provisions within the legislation granting
Permanent Normal Trade Relations (PNTR) with China in an effort to ensure its compliance with World
Trade Organization (WTO) rules and regulations.
The American automotive industry has worked to take on the opportunities of the rapidly increasing
Chinese domestic market. In 2005, U.S. Automakers sold 722,493 passenger vehicles in China, a 27
percent increase from 2004 and representing 23 percent of overall sales. American participation in the
Chinese automotive sector has provided competitive products, major investment, enhanced technology,
and employment – all of which were goals of the Chinese government.
China’s emergence as the fourth largest and fastest growing automotive industry in the world has
increased the importance of addressing the major problems presented by China’s failure to meet it
obligations when entering the WTO. The Bush Administration has failed to vigorously stand up for the
American automotive industry, reflective of its overall passive approach to maintenance of a strong
manufacturing base.
Our failure to address these problems hinders the U.S. automotive industry now and looms as an even
15
greater threat in the future. It contributes to the recordsetting trade deficit with China. In 2005, the U.S.
– China bilateral trade deficit in goods was $202 billion which accounts for a full 25% of the overall
historically immense U.S. trade deficit. Let me highlight some of these problems.
1. WTO rules prohibit local content requirements and no other major auto producing country has local
content requirements in their auto sectors. But China’s tariff classification system and tax structures
pressure U.S. auto and auto parts makers to source Chinesemade parts. Newly released regulations
require automakers to reach 60% domestic content and the localization of all major high technology
components. If allowed to stand, this results in shifting to Chinese suppliers or the movement of parts
production to China.
2. The recent surge of serious Intellectual Property Rights (IPR) violations in auto parts is unprecedented
in terms of size, scope and severity. Auto parts are being copied, intentionally misrepresented, and sold as
genuine all in direct violation of China’s trademark laws, which are clearly not being enforced in
violation of its WTO obligations. The most common counterfeit parts are aftermarket maintenance and
high volume items such as brake pads, wheel rims and filters and often do not meet national or
international safety specifications.
There also are numerous examples of unauthorized trademark usage on the signage of independent service
centers falsely claiming they are authorized service centers, and the theft of unique and protected design
elements from individual parts to the entire look and design of a vehicle is alarming.
3. China’s auto investment structures restrict the development and operation of the U.S. automotive
sector in China. For example, foreign auto investment is only allowed as a joint venture with a Chinese
partner and, importantly, the foreign partner (the U.S. company) is limited to 49% minority ownership.
China is the only major nation with such restrictions.
4. China is developing its own automotive safety and environmental systems for its automotive industry
rather than using norms developed internationally over a long period of time. The results of these
enumerable rules and regulations seem less to be a response to environmental or safety concerns and more
an effort to restrict the openness of its market.
5. China’s WTO accession commitment was to lower its 25% tariff on imported automobiles. Now
despite its major status in motor vehicle production and sales, it has been arguing in ongoing WTO
negotiations that as a new member it should be under no obligation to be part of any agreement that
requires the further lowering of tariffs.
The U.S. Governmental Response
The U.S. Automotive industry needs a vigorous U.S. governmental partner to tackle these problems.
Unfortunately, the Bush Administration has allowed a culture of noncompliance to set in as to China’s
adherence to both the commitments they made when they entered and their ongoing practices.
China PNTR provided specifically for an annual review of the degree to which China was complying with
their commitments. The rigorous timetable was established for China because it was far larger and far
more competitive than any other developing economy. The Administration has completely failed to make
this a meaningful review and to use it as leverage to bring about full compliance. The Government
Accountability Office (GAO) documented lack of active participation in the reviews, untimely submissions
by the U.S., ineffective procedures that allowed China to refuse to submit a written response, and no
resulting conclusions or recommendations.
16
In short, we have lost the major benefit of five years of annual reviews because the U.S. has allowed them
to become a meaningless exercise with no sign of a different course being set prior to their expiration in
2011.
The China PNTR legislation also provided a specific import surge safeguard that could be used when
China unfairly flooded the U.S. market with imports. A total of six cases has been brought against China
under this mechanism, known as Section 421. The U.S. International Trade Commission (ITC) made
affirmative market disruption determinations and proposed a remedy in 4 of the 6 cases. The Bush
Administration rejected providing relief to the domestic industry in every case. These cases may not seem
directly relevant to the automotive sector (pedestal actuators, wire garments hangers, iron water work
fittings and steel pipe), but the approach by the Bush Administration does not bode well for the future use
of this special trade law and it sends a signal to our industry – don’t bother to bring a case under the
domestic trade law because we won’t be there for you even if the ITC finds in your favor.
The Bush Administration has been very lax in using the WTO dispute settlement system to challenge the
unfair trading practices of our trading partners. We have filed only 15 cases total in the last five years.
Often when you press the office of the United States Trade Representative (USTR) on this, they indicate
that they have not heard many complaints from domestic industry or domestic industry has not done the
legal leg work to allow them to bring a case. Given the examples I cited this morning, this is a completely
unacceptable approach. It is the USTR’s job to lead the charge to end these violations and create a more
level global playing field for U.S. business.
Finally, earlier this year the U.S. and the European Union, later joined by Canada and Japan, filed a
complaint with the WTO against the local content requirements I described. The Chinese have
stonewalled through the 90day consultation process provided under WTO rules. The U.S. missed the
July 6 th deadline for requesting the formation of a WTO dispute settlement panel. This is such a serious
matter that it is disconcerting when any deadline is missed. In addition to a lack of action at the WTO,
we have failed to make clear that China’s position in the negotiations on tariff reductions is a nonstarter.
Conclusion
China’s exceptional pace of economic growth has been providing significant opportunities and unique
challenges. The American private sector has shown its interest in participating in the growth. The major
challenges require a partnership role from our government that has been seriously lacking in important
respects and that is strong, not halting, clear not opaque, persistent not inconsistent and proactive not
passive. And sooner, not later.
HEARING COCHAIR BLUMENTHAL: Thank you very much,

Co ngressman Levin. Your st at ement will be ent ered int o o ur record. We
have o ne quest io n.
COMMISSIONER D'AMATO: Thank you very much, Co ngressman
Levin, for t hat very comprehensive and po werful st at ement on t he st at e o f
t he indust ry and t he sit uat ion. Lo oking down t he fut ure, if we're going t o
be import ing int o t he Unit ed St at es Chinese manufact ured cars, what would
be yo ur t hought if it was clear t hat in t ho se vehicles t here was subst ant ial
co mponent s or part s t hat in fact were violat io ns o f Chinese commit ment s in
IPRt hat t here were co unt erfeit part s, or t hat t here were part s t hat had
been t aken as a result of t heft essent ially by t he Chinese company o f
17
American part s?
Do yo u t hink t hat we would be well wit hin o ur right s t o say we
sho uld not allow cars t o be import ed int o t he Unit ed St at es, t here are
vio lat ions of t heir commit ment s in IPR, t hat , in fact , are knockoffs o f ours,
t hat have essent ially prejudiced t he American aut o indust ry? Down t he
road we're going t o be lo oking at a wave of Chinesemade cars and my
t ho ught is t hat t here is going t o be serious problems wit h a lot o f t he
co mponent s in t hose cars. What recourse do you t hink we ought t o be
pursuing now in t erms of t rying t o head off t his or t rying t o indicat e where
we would st and o n t hat kind of a t rade?
MR. LEVIN: First o f all, t hat underlines t he impo rt ance of t he surge
pro vision. I do n't want t o reminisce t o o much about t he past . We had a
real bat t le o ver China PNTR, and t here was an insist ence t hat I was part o f
t hat t here be provisions t o make sure t hat we had some safeguards against
a surge of product s and a violat ion of t he rules by China under which t hey
came int o t he WTO, so t here is t his surge provisio n.
Number t wo, we have t o get off dead cent er regarding t heir
vio lat ions of IPR. There's a WTO mechanism, and it 's so mewhat like what
we do abo ut currencyt alk, t alk, t alk. No act ion. And while t here is
argument abo ut t he availabilit y of a WTO remedy on currencyit 's never
been t ried; I t hink we should have no quest ion about a WTO remedy as t o
vio lat ions o f int ellect ual pro pert y.
A second effort t hat we ought t o t ake is t o be much more vigoro us,
and t his illust rat es how t he aut omo t ive sect or of t he Unit ed St at es want s
t rade t o be a t wo way st reet , and t hey want t he t woway st reet t o be even.
So t he answer is we have right s under our WTO o bligat ions and abilit ies.
We just do n't use t hem. We bet t er. You ment ioned t he vehicles. What
about part s? We've just begun t o see t he influx.
Let nobody t hink t hat t he Chinese economy is not capable o f
pro ducing hight ech product s including aut o part s, and we cannot t olerat e
a o neway st reet like we did wit h Japan. For 15, 20 years, we've been
t rying t o sell a brake in Japan. And t hey have kept us out . I t hink what
American producers are saying is give us a break.
COMMISSIONER D'AMATO: Thank you.
Co ngressman Levin.
MR. LEVIN: Thank you very, very much, and I'm privileged t o be
able t o be here t oday and t o be joined by t wo of my colleagues, and I t hink
Senat or St abenow will be joining us.
HEARING COCHAIR BLUMENTHAL: We are hono red t o have
yo u. If we co uld move t o Congressman Dingell, and first we'd like t o
t hank t he Co ngressman very much and his st aff for helping us put t oget her
t his hearing in Dearbo rn. We very much appreciat e it . Congressman
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Dingell, please go ahead.
STATEMENT OF JOHN DINGELL
A U.S. CONGRESSMAN FROM THE STATE OF MICHIGAN
MR. DINGELL: Mr. Chairman, and bot h cochairmen, Chairman

Becker and Chairman Blument hal, t hank you for yo ur kind words. Mr.
Chairman and members o f t he Commission, I want t o t hank you for holding
t his hearing t o day and for coming here t o Dearborn, which is in t he heart
o f my dist rict and right in t he cent er of aut o mobile manufact uring in t he
st at e o f Michigan, t o explore t he issues t hat t he indust ry faces wit h an
emerging China.
I wo uld observe t hat your presence here is welcome as t he spring,
and you need no t express any t hanks t o me for any cooperat io n we have
given, but t he delegat ion very much appreciat es your presence, and we'd
like you t o know ho w grat eful we are t o you. We hope from your presence
here t o day, ladies and gent lemen, t here will be some awareness generat ed
inside t he administ rat io n o f t he needs t o address t he problem.
The Universit y o f MichiganDearbo rn is a splendid inst it ut ion and, of
co urse, is always very helpful, and I t hink we all owe t hem a vot e of t hanks
fo r t heir kindness t o us t oday.
You will be hearing from my colleagues, from business peo ple, fro m
t heir emplo yees, fro m represent at ives o f organized labor, and from t he
academics. I believe all o f us will have a similar message: China offers
enormous o ppo rt unit ies t o t he Unit ed St at es, but t heir current policies
o ffer enormo us risks, and I see very lit t le being done by our government t o
address t he risk component .
I want t o say t hat my goo d friend and colleague who has just spo ken,
Mr. Levin, has made a number of excellent point s which I will not redo. I
want t o say t hat I'm pleased t o be wit h my goo d friend and co lleague Mr.
McCo t t er, who has been a great help in t hese mat t ers also.
Over t he next few years, t he economic po t ent ial of t he Chinese
market will be rivaled only by t he American market . It is no t unreasonable
and, in fact , very likely t hat by t he middle of t his cent ury, t hey will be t he
wo rld's largest market . Fo r our o wn econo mic prosperit y and securit y, it is
t hen vit al t hat American pro duct s have t he same access t o t he Chinese
market t hat Chinese product s have t o ours.
The cent ral problem we face in t he t rade relat ionship wit h China is
t hat we are a free market and t hey are closed. They will t ell you t hat t hey
are a free market , but t hat is no t t rue, and in point o f fact , t hey are very
much a government cont ro lled market . We view t rade as a way t o raise all
bo at s. The Chinese view t rade as a zero sum game where China will
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benefit t o t he det riment o f openness, fairness, and agreedupon rules for
everybody else.
Take, fo r inst ance, t he t wo biggest challenges in our t rading
relat io nship: who lesale manipulat ion of t he Chinese yuan and t he epidemic
o f co unt erfeit ing t hat imperils American int ellect ual pro pert y and our long
t erm t echnical innovat io ns. Bot h of t hese are immensely helpful or rat her
helpful t o China and hurt ful t o our people.
I'm sure t hat no o ne in t his room needs t o be educat ed on Chinese
currency pract ices and t heir effect on t he U.S. economy. We all kno w t hat
t he Chinese yuan is undervalued by 15 t o 40 percent . This essent ially
pro duces a t remendo us subsidy for Chinese go ods and art ificially raises t he
price o f American goo ds in China while lowering Chinese goo ds prices in
But t he effect s o f t he Chinese currency manipulat io n on t he world
eco nomy are even mo re pernicio us. Chinese behavior in t his part icular area
pro vides cover for ot her compet ing nat ions t o engage in t he same
underhanded pract ice. When China is able t o manipulat e t heir currency by
40 percent , Japan and Ko rea and soon ot hers will be following suit .
So long as China is able t o co nt inue t heir manipulat ion, Japan and
Ko rea feel t hat t here are no ramificat ions. When t wo o f t hree largest
eco nomies in t he world manipulat e t heir currency, t he norms of a free
ent erprise syst em are alt ered and we begin t o see t erribly bad effect s on
wo rld t rade and o n t he Unit ed St at es and t he ot her majo r t rading nat ions.
This worldwide manipulat ion part icularly hurt s our aut o indust ry, but
it is not limit ed in it s impact o n t he aut o indust ry. In an age where Japan,
Ko rea and Euro pe and t heir companies and American aut omo biles should
co mpet e on an equal and fair foot ing t hrougho ut t he wo rld, t he currency
manipulat ion of Japan and Korea provides a discount o f $5,000 on sedans
and up t o $10,000 on t rucks, and informat io n on t hat mat t er has appeared
in t he annual st at ement s o f some of t he Japanese corporat ions.
Mr. Chairman, t his manipulat ion would not be occurring if China
were held more acco unt able fo r it s manipulat ion. One of t he messages t hat
we t ry t o give you t o day, and we ho pe you will give in your comment s, is
t hat we do not here in Michigan or t he aut o indust ry seek a handout . We
o nly seek a fair and decent and level playing field and equal and fair
t reat ment . We t hink t hat o ur government should and we hope t hat o ur
government will, but so far it has not addressed t hat problem t he way t hey
sho uld.
Mr. Chairman, if China were more properly held account able fo r it s
manipulat ion, t his o t her manipulat io n by our ot her t rading part ners I
believe would no t be occurring.
The seco nd fact o r in our relat ionship t hat must be addressed is t he
lack o f any adequat e st andards for American int ellect ual propert y. In t he
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Energy and Commerce Co mmit t ee where I sit as ranking member, we t ook
t est imony from t he Federal Mo gul Corporat ion of So ut hfield, Michigan.
They showed us Champion sparkplugs t hat are made in Chinese knockoff
fact o ries. These sparkplugs are ident ifiable by no part icular device t hat
wo uld make it clear t hey are Chinese. They are ident ical t o sparkplugs
made in Michigan.
U.S. product s penet rat e t he Japanese market , but t here is increasing
co unt erfeit ing st ripping t he U.S. manufact urer of it s advant age in
t echno logy, workmanship, and corporat e memory. Despit e repeat ed
pro dding by t he Unit ed St at es government , t his sit uat io n is get t ing worse.
Chinese officials who are able t o t rack t he Int ernet usage of t heir
individual cit izens claim an ext raordinary inabilit y t o shut down fact ories
t hat pro duce blat ant forgeries o f American goods.
This is of increasing concern as more U.S. companies open
o perat ions in China. Oft ent imes t hese fact ories and t he facilit ies can only
be opened and o perat ed wit h a minimum level of Chinese cont ent or wit h a
part nership wit h t he Chinese or a Chinese company or individual. My
co lleague, Mr. Levin, ment io ned t his.
It is t he view o f many t hat t his enables Chinese and engineers and
co rpo rat io ns t o reverse engineer American product s and use American
int ellect ual pro pert y fo r t heir own purposes and t o beggar t heir neighbor
t rade policies which are so hurt ful t o t he Unit ed St at es.
The Unit ed St at esChina relat ionship is develo ping. I believe t hat if
China is able t o engage t he world t hrough rules based on syst ems we and
o ur allies have so met iculously co nst ruct ed, an emerging China will be an
unparalleled opport unit y for t he Unit ed St at es and for t he rest of t he
wo rld.
World t rade will benefit and China will benefit , but if t his is not t he
co urse of event s, serious problems are in st ore for t he Unit ed St at es and
t he rest o f t he t rading world which complies wit h t he rules. The act ions o f
t he Chinese government o n currency manipulat ion, int ellect ual propert y
pro t ect io n, not t o ment io n enviro nment al co nservat ion and labor right s,
have no t been t o a st andard t hat we pract ice or a st andard t hat we're
ent it led t o pro t ect and t o expect .
I believe change is possible, but it is go ing t o t ake an enormously
st rong effort by t he Unit ed St at es, great vigilance, and it will t ake t he good
wo rks o f t his Commission, which I believe you will do and which I look
fo rward t o having yo u do wit h all vigo r and t o help us.
I want t o make just a quick observat io n about t his. I said t his
earlier, but it is so met hing which merit s considerat io n. We're not here
asking you for preference o r fo r handout s. That is not what we seek fro m
yo u nor is it t he recommendat io n t hat we ask you t o come forward.
We ask you t o come forward wit h a recommendat io n t o t he
21
administ rat io n which says insist t hat t he rules be observed by o t her
co unt ries, China, Japan, Korea and o t hers, and t hat t he t rading syst em
which o ffers t his wo rld such enormo us opport unit y and such wonderful
chance for growt h and benefit t o every nat io n is enfo rced acco rding t o
t hese fair rules.
We ask t hat we have our government wo rk on behalf o f our peo ple,
t hat it does t he t hings t hat are necessary t o see t o it t hat fair rules are
creat ed and fair rules are fairly and st ro ngly implement ed. It is not a
hando ut we seek, but simply fair t reat ment .
Ladies and gent lemen of t he Commission, I t hank you for being here
and I loo k forward t o t he co mment s of my t wo dear friends and colleagues,
Mr. McCot t er and o ur go od friend Senat or St abeno w, who wo rk very hard
o n t hese mat t ers, t oo . Thank you, ladies and gent lemen of t he
Co mmission.
Co ngressman Dingell. I'd like t o ackno wledge Congressman McCot t er.
MR. McCOTTER: When a bill passes t he Ho use, it 's got t o go t o
t he Senat e.
COMMISSION VICE CHAIR BARTHOLOMEW: Alo ng t hose lines,
I just want t o acknowledge t hat we st art ed speaking wit h Mr. McCot t er
back in February when he t est ified befo re us, and we t alked about want ing
t o co me up here t o Michigan. Mr. Chairman, you sho uld know t hat Mr.
McCo t t er said we needed t o be coming t o Dearborn and we absolut ely
needed t o be working wit h you and your office, so he's been very helpful
t hro ugh all of t his and t hank you all for coming.
HEARING COCHAIR BLUMENTHAL: Thanks for your guidance
and t hanks for your pat ience, and we'll move t o Senat or St abenow no w.
STATEMENT OF DEBBIE STABENOW
A U.S. SENATOR FROM THE STATE OF MICHIGAN
SENATOR STABENOW: Thank you, Mr. Chairman, and t hank yo u

t o bo t h o f my co lleagues and t o Congressman McCot t er, t hank you for
allo wing me t o speak and, o f course, o ur chairman, Congressman Dingell,
who se words are always very wise.
I want t o part icularly express support t o each of you for t he wo rk
t hat yo u've already do ne. As a member of t he Banking Commit t ee, I have
used your wo rk as it relat es t o currency manipulat ion and o t her economic
issues and am here t o day t o bot h t hank you and urge your co nt inued
vigilance and frankly t o ask for yo ur help t o cont inue t o what we as a
federal go vernment need t o do.
I t hink we're in a bro ad sense at a crossro ads in a global economy.
This isn't about pro t ect io nism. Yo u couldn't st o p t he Int ernet o r your cell
22
phone if yo u want ed t o ; it would jump any law we put up. This is about
ho w we're going t o co mpet e effect ively in a global economy and whet her or
no t t his is go ing t o be a race t o t he bot t om for Americans in wages and
lo ss o f way of life or whet her t his is go ing t o be a race t o t he t op, and I
believe t hat yo u st art wit h t he race t o t he t op wit h so many of t he issues
t hat yo u are grappling wit h because it has t o st art wit h a level playing field
o n t rade.
Our American businesses and wo rkers have t o know t he rules will be
t he same, t hat t he rules will be enforced, and t hen we t oget her have t o
t ackle t he issues like t he cost of healt h care and energy and t hen race t o
t he t o p wit h educat io n and innovat ion. I believe t hat 's t he American
fo rmula for success in a race t o t he t o p. But it really st art s wit h where we
are in t his discussion t oday, about whet her o r not our businesses and
wo rkers kno w t hat we will have a level playing field and ot her count ries
will no t be allowed t o cheat quit e frankly, and t his is part icularly t imely
and import ant here in Michigan where t he t rade deficit wit h China
co nt inues t o po st reco rd levels and jo bs are cont inuing t o be lost .
We are harmed direct ly in Michigan. We are t he po st er child for
what happens in a global economy when we do not enforce our t rade laws.
We are t he epicent er o f manufact uring which has creat ed t he middle class
o f t his count ry. We haveproudly socreat ed t he middle class of t his
co unt ry not just t hro ugh o ur aut o indust ry, which we are very proud of,
but t hrough t he furnit ure business and a wide variet y of ot her
manufact uring ent it ies t hat have been here in Michigan. But now, if we
don't pay at t ent io n and if we do n't get it , in a global econo my of what it
t akes t o succeed, we will find ourselves in a real fight fo r o ur way o f life,
and you know t he numbers. I will just repeat by saying t hat in 2005, t he
U.S. hit an all t ime t rade deficit wit h China t hat t ot aled $202 billion and
t hat 's a formula t hat direct ly relat es t o jo b loss fo r us in Michigan as well
as across t he co unt ry.
Last mo nt h, China's global t rade surplus hit an all t ime mo nt hly
record o f $14.5 billion mo re t hat t hey are able t o sell t o us t han we are
able t o sell t o t hem, and last week t he World Bank declared China as t he
fo urt hlargest eco no my in t he world. So we bet t er get t his right and t hat 's
why we need yo ur reco mmendat io ns and yo ur leadership.
At t he same t ime, China leads t he world in piracy and co unt erfeit ing
and currency manipulat io n. They're no t t he seco nd, t hey're not t he t hird,
t hey're no t t he fourt h, t hey are t he leader in unfair illegal t rade pract ices,
which is why t his hearing is so import ant .
For us in Michigan when you loo k at t he numbers, 2004, t he aut o
part s count erfeit market was about $12 billion$12 billionin 2004, and
t hat equat es t o abo ut 200,000 jobs, go odpaying jo bs, middle class jobs,
t hat people t ake care of t heir families on and have a go od life o n. So t his
23
is serious.
In 2005, China was t en t imes more likely t han any ot her of o ur
t rading part ners t o have sent pirat ed product s over our borders and most
recent ly it 's been est imat ed t hat in t o t al China's count erfeit ing and piracy
act io ns have cost us, o ur American indust ries, about $250 billio n a year.
That 's money t hat could be invest ed back here in America in jobs.
So we're here because o ur jobs are at risk. It 's not just abo ut a
t heoret ical discussio n about compet it io n. This is about whet her or no t
China is go ing t o be able t o cont inue t o cheat or ot her co unt ries, as my
co lleagues have t alked abo ut . They're st ealing pat ent s, t hey're pro ducing
co unt erfeit product s, t hey're manipulat ing t heir market s, and t hese are all
illegal t oday, period.
One o f t he mo st frust rat ing t hings for me as a member o f t he
Banking Commit t ee is t o see t he U.S. Treasury Secret ary come in every six
mo nt hs. We ask for a repo rt on currency manipulat ion, we kno w it 's
happening, and yet t hey co me right up t o t he edge, and t hen t hey say,
“well, t echnically, we can't say it 's happening.”
If t hey wo uld just file a repo rt , we would be able t o act , and quit e
frankly, t here is t remendous frust rat ion in t he Unit ed St at es Senat e. We
were able t o get 67 members o n a bipart isan basis t o vot e t o proceed t o a
bill t o force t he administ rat io n t o do what t hey ought t o be do ing, and so I
feel very st rongly, as do colleagues on t he Banking Commit t ee o n bot h
sides o f t he aisle, t hat eno ugh is enough o n t his issue, and it 's t ime t o st ep
up and use t he appro priat e aut horit y t hat we have t o fight fo r American
businesses and American workers.
Since I've been in t he Senat e, I have been speaking out loudly about
t he loss of manufact uring jo bs, fight ing everyday for a level playing field
and unfort unat ely what we have heard over and over again from t he
administ rat io n is assurances t hat China is making progress. I don't see it .
It 's been fiveandahalf years t hat I have been in t he Senat e. I do n't
see it . Inst ead I see a gro wing t rade deficit . We all know t he numbers. I
just spoke abo ut t he numbers. We're lo sing jo bs. We're losing businesses.
Every t ime I ask about o ur t rade policy wit h China, t he administ rat io n
claims t hey are warning China and t hat t his t ime, t his year, it 's going t o be
different . I do n't t hink t hey t ake us seriously. I t hink t hey o nly t ake us
serio usly if we are t ough enough t o st and up and use t he legal mechanisms
t hat we have t o be able t o level t he playing field.
So it 's t ime t o st op warning and t o st art act ing, and your voices
lo udly and clearly in recommendat ions are crit ical t o t hat .
The administ rat ion has cont inued t o give China a way out by st at ing
t hey don't have t he enforcement st ruct ure in place, which also I do no t
agree wit h. If China was able t o st o p t he sale and t he product io n o f
co unt erfeit Olympic pro duct s, it 's clear t hey have t he abilit y t o st op t he
24
sale and product ion o f any count erfeit product s. They just don't feel t he
need. They do n't t ake us serio usly.
The administ rat io n hasn't pushed hard enough and we are t rying t o
get t hat sense of urgency going and pushing very, very hard. I will say t hat
t here are some t hings t hat are happening t hat are very posit ive. Based on
yo ur reco mmendat ions about creat ing a chief prosecut or, int ernat ional
pro secut o r, I've int roduced legislat ion in t he Senat e wit h my Republican
co lleague Lindsey Graham, and we have received bipart isan suppo rt t o
mo ve fo rward for a U.S. Trade Pro secut or t hat wo uld be on our side for
o ur businesses and our workers t o be able t o enforce against t rade
vio lat ions.
We have t he suppo rt of bot h Chairman Grassley and Ranking
Member Baucus o n t he Finance Commit t ee. They have put t his concept ,
t his po sit ion, int o a larger t rade bill t hat is current ly befo re t he Senat e. In
t he House, my colleagues Represent at ive Camp and Represent at ive Levin
have int ro duced a companion bill. So we are poised and again I would ask
fo r and urge your cont inued support for t his idea since it came fro m
members of yo ur Commission for us t o get t hat done.
The impact of China's manipulat ive behavior and t he cont inued
pressure we've been put t ing on t he USTR has also led finally t o a first st ep,
which is t o dedicat e a division t o China t rade enforcement . So we've go t
t hat set up. Now t he quest ion is: are we go ing t o use it ? Are t hese going
t o be words o n paper, persons sit t ing in an o ffice, or are we act ually going
t o have t he muscle t hat co mes from a co mmit ment t hat t his needs t o get
done?
We all know t hat China manipulat es t heir currency, and as I
indicat ed befo re we're not do ing anyt hing about it . The Economic Policy
Inst it ut e has measured t hat we've lo st over 51,000 manufact uring jo bs in
Michigan alo ne, just fro m China, not Japan. And t hat do esn't count lo sses
fro m 2005 or t his year.
We also kno w t hat China is not t he only place. China, Japan, So ut h
Ko rea, o t her co unt ries are invo lved in ot her pract ices t hat are illegal, but I
believe if we can st ep up o n China, which is t he major force right no w o n
so many of t hese front s, t hat we will send a message t o ot her count ries.
It 's import ant t o acknowledge what o ur companies have t o go t hrough t o
do business in China. As yo u know, in order for a company t o dist ribut e a
pro ject in China, t hey are required t o do t hree t hings: provide full specs,
which are considerably more co mprehensive t han any American po licy; t hey
have t o allo w and pay for a t eam of Chinese engineers and managers t o
visit t heir American plant , again a st ipulat ion not required fo r an American
invest ment ; and t hey have t o send a co mplet e working model of t he product
t o a government research lab in China.
Imagine t hat ? Basically, t he companies are fo rced t o divulge t rade
25
secret s in order t o do business in Chinese market s, and t hen what do t hey
do? They t ake t hat informat io n, t hey make it in a Chinese co mpany
invest ed in by t he Chinese government . We're smart er t han t his. We ought
t o be able t o figure t his out here t hat t his isn't wo rking for us.
I have t o t ell you o ne st ory, and t his isn't abo ut aut os, but furnit ure,
which is also impact ed. We're t he largest furnit ure producers in o ffice
furnit ure and ot her furnit ure in west Michigan, and a gent leman who has a
wo o d machinery business, Pet er Perez fro m Grand Rapids, came t o me
o riginally, and he act ually got me int erest ed in t he idea of t he t rade
pro secut o r, which you had recommended, because he showed me a product
t hat he had pat ent ed and developed t hat he sells for $70. It involves ho w
yo u cut t he end o f a piece o f woo d. It 's a piece on a saw, and he
develo ped it , pat ent ed it , and showed me t he package and t he bo x, t he
direct io ns, and so on.
Aft er he put it out for $70, a Chinese business came in and st ole
everyt hing including t he bo x, t he packaging and t he direct ions, and was
selling it for $10.
He said I went t o court and t here was t he Chinese business and t he
Chinese government . He said I'm t here by myself and he said t o me you
guys are t he ones t hat are suppo sed t o be enforcing. This is int ernat io nal
t rade violat ions here, not just my individual business. Now he ult imat ely
was able t o act ually win t he case, it was so egregious, incurring all t he
co st s, but came back t o me and said where is my federal government
fight ing for me, and t hat 's what led me t o look at your recommendat io ns
and t o come up wit h t he bill t hat relat es t o a t rade prosecut or's o ffice.
We've got t o have a place for folks t o go so t hat when t hat pat ent is
st o len, when t hat product is st o len, t here's somebody t hat will act o n behalf
o f American businesses and no t hold our companies host age which is what 's
happening right now.
Let me just emphasize again t hat t here is a t remendo us amount at
st ake fo r us. Our U.S. aut o indust ry alone employs 350,000 peo ple a year,
and t hat doesn't count all t he suppo rt ing cast . It do esn't count aut o
suppliers and financial account ant s and researchers and dealerships and
everybody who relies on t he aut o indust ry. The t o t al jobs at st ake are
about 4.5 millio n go odpaying jobs, and I would st ress again t hat t his is
about middle America. I believe it 's about our way of life in t his count ry
because I believe t hese jobs have creat ed o ur middle class way of life, and
t hat t he rules mat t er.
As a co unt ry and as a st at e, we should all be fight ing fo r t hese jobs,
and I'm hopeful t hat wit h yo ur cont inued support and advocacy and wise
t ho ught ful recommendat ions t hat yo u can help us light t he fire we need t o
be able t o get t his right in a glo bal econo my.
Thank you.
26
Senat or St abenow. I t hink we sho uld now move t o t he very pat ient
Co ngressman McCot t er fo r his st at ement .
STATEMENT OF THAD McCOTTER
A U.S. CONGRESSMAN FROM THE STATE OF MICHIGAN
MR. McCOTTER: Thanks. Chairman Henry Hyde has a wonderful

saying whereby in a co mmit t ee he says t hat everyt hing t hat needs t o be said
has been said, but not everyone has said it . So I will t ry, alt hough it will
be difficult , t o make a co uple po int s, perhaps in t he int ernat io nal sense,
perhaps in a concept ual sense, t hat have not been made in t he pract ical
sense o f dayt oday realit y.
I would like t o begin by saying perhaps it 's because I'm 40 now, but
I'm having my first wist ful summer, and I'm remembering t hat I was born in
t he Arsenal o f Democracy, Det ro it 40 years ago. In t hose 40 years, we
wat ched t he Arsenal of Democracy eroded by unfair t rade pract ices, most
no t ably at t he present t ime, but t he unfair t rade pract ices of Communist
China.
I've wat ched a generat ion o f my peers have t o leave t his st at e upo n
graduat ion fro m co llege t o look for ot her jobs as t he manufact uring sect or
and t he aut o indust ry t ried t o deal wit h t heir unfair compet it ors. And no w
wit h my older friends, I wat ch t heir children leave our st at e fo r fut ures
uncert ain because of t he co nt inuing decline o f manufact uring bo t h wit hin
o ur st at e, wit hin t he Midwest , and wit hin our nat ion.
One o f t he clear reasons for t his decline is, again, t he unfair t rade
pract ices of Co mmunist China, as has been ment ioned, wit h t he currency
valuat ion, wit h t heir co unt erfeit ing, wit h t heir dumping, wit h t heir pirat ing,
and yet it co nt inues unabat ed.
It was born of a bad, I believe, policy decision. The policy decisio n
was t hat a co nst it ut ional republic whose fundament al principle is t he
co nsent o f t he governed could somehow engage in free t rade wit h a
co mmunist count ry who believes t he vanguard of t he pro let ariat has an
abso lut e right t o direct t he lives of it s cit izens t oward some perceived goal
o f ut o pia which do es not exist .
Can we co nt inue on t his pat h and expect a different result t han t he
o ne we see no w? Can we cont inue t o expect fair t rading pract ices from a
co unt ry t hat will put peo ple in jail fo r t hree years fo r handing out bibles
t hat will suppress t he Falun Go ng, t hat can run a co mmand and cont ro l
eco no my, will not allow labor unions t o build up any o pport unit y fo r t he
improvement in t he qualit y of lives of t heir workers?
One of t he fundament al act s of hubris on t he part of t he Unit ed
St at es in dealing wit h Communist China has always been t he t hought t hat if
we t rade wit h t hem, in 20 years t hey will look mo re like us. My fear is t hat
27
wit hin 20 years, we will lo ok more like t hem, and if we do no t have a
manufact uring base bot h for our economic prosperit y and our int ernat ional
securit y, t hen t he Unit ed St at es by t he t ime I am 60 will no lo nger be a
Unit ed St at es recognizable t o me o r t o my parent s or t o my grandparent s.
These are t he st akes which we find.
Now, in o ur dayt o day wo rk as members o f Co ngress, every no w
and t hen we don't have such bipart isan comit y, and t he pract ical dayt oday
lo w int rigues of polit ical life int erfere. Yo u as a Commission have an
o ppo rt unit y t o address some o f t he larger concept ual quest io ns t hat we, o n
a dayt o day basis eit her because of polit ics or because of t he necessit ies
o f pract ical policymaking, do not have t he luxury in which t o indulge.
I wo uld ask yo u t o look at t he concept of whet her a free count ry can
expect fair t rade wit h a co mmunist nat ion? I ask you t o lo ok at t he realit y
o f whet her or not t he Unit ed St at es, as some in t he administ rat io n will t ell
ant icommunist s like myself, t hat our t rade pract ices are designed t o make
China mo re capit alist and mo re free, do we no t t hink t hat somehow t he
Co mmunist Chinese t hink t heir t rade pract ices make us less democrat ic and
less free in t he lo ng run or are we simply smart er t han t hey are?
To dat e t he t rade deficit wo uld show t hat we are not necessarily so .
I wo uld also ask if we can lo ok at t he larger longt erm consequences in
t erms of int ernat io nal sit uat ions where t he Unit ed St at es t hro ugh it s t rade
deficit is pro viding t he st eroids t o t he Communist Chinese superst at e, while
at t he very same t ime we emaciat e o urselves? What are t he longt erm
int ernat io nal ramificat ions?
The t rade deficit is not simply a number. It is American mo ney
going offshore int o t he hands of someone who is eit her an adversary or an
ally, but at t he present t ime when t hey pump $10 billio n int o t rying t o get
Iranian oil o r whet her t hey allow t he Nort h Korean st at e t o cont inue t o
dabble in longrange missiles t hat can hit t he Unit ed St at es, I would argue
t hat in my mind t hey are more of an adversary t han an ally.
But t hese are t he longert erm concept ual quest io ns t hat you as a
Co mmission, I believe, would be well availed t o deal wit h and would well
serve your appoint ing po wer t o provide recommendat ions and det ailed
possibilit ies fo r t hem t o consider. I don't t hink t hat t his was sufficient ly
done at t he t ime. I don't t hink it 's being sufficient ly done now, and I t hink
t hat Senat o r St abeno w, Co ngressman Dingell, Co ngressman Levin and
myself wo uld all agree t hat in t he absence o f t he proper planning, t hat it is
o ur co nst it uent s who have felt t he brunt o f a t rade pract ice t hat was built
mo re on a hope t han upo n a realit y.
Thanks.
Panel I: Discussion, Questions and Answers
28
HEARING COCHAIR BLUMENTHAL: Thank you very much. I
t hink all of you were gracious enough t o st ick around for a couple o f
quest ions and I'm wondering if any commissio ners have quest ions?
HEARING COCHAIR BLUMENTHAL: Co mmissioner Mulloy.
COMMISSIONER MULLOY: Thank yo u very much for being here,
all t hree of you. As I lo ok at t his int ernat ional syst em t hat we have no w,
o ur co rporat io ns are fo cused on shareholder value, and from what I can see
t he Chinese have figured o ut how t o put incent ives int o place including t he
currency undervaluat ion t o make our corporat ions find it profit able t o
mo ve our indust rial and t echnological base across t he Pacific Ocean t o
China and t hen t o ship t he goods back here, and t heir get t ing int o t he WTO
was enormously impo rt ant because it locked our t ariffs down, and we didn't
have t he abilit y wit hout get t ing out of t he WTO t o deal wit h t his kind o f
sit uat ion.
So it seems t o me what we need t o be doing is t hinking, as you said,
Senat or, comprehensively about a nat io nal vision and st rat egy, so t hat we
can have our corpo rat ions find t heir incent ives t o keep t he higher value
added jobs here rat her t han having t hem migrat e. What wo uld be in t hat
syst em is t he enormo usly import ant t hing I t hink t he Congress and we have
t o be loo king at . It may be t ax policy. Clearly it 's exchange rat e policy.
It 's being very aggressive o n IPR, using 421 whenever we can, but I t hink
it 's a more comprehensive visio n and po licy t hat we have t o be put t ing in
place.
Do yo u see it t hat way, Senat or and Congressman McCot t er and
Chairman Dingell?
MR. DINGELL: The answer t o your quest ion is yes, and t o what
yo u have said, I would say amen.
SENATOR STABENOW: If I might just add anot her amen, and also
say t hat a couple of years ago we t ried a lit t le bit t o move in t hat direct ion
when, if you remember, aft er t he European Union t oo k us t o court saying
t hat t he way we t axed int ernat io nal invest ment by our companies, we were
unfairly subsidizing t hro ugh o ur t ax syst em, and t hey t ook us t o court .
They wo n. We had t o rewrit e our t ax laws under what was called t he FSC,
o r Fo reign Services Act , and so on.
In t here, I was pro ud t o champion what became a part of t hat law,
which gives a lo wer t ax rat eI call it t he "More Jobs Tax Credit ," a nine
percent t ax credit if you creat e jobs or eco nomic act ivit y in t he U.S. rat her
t han t aking it overseas. That 's a po sit ive st ep in t he right direct ion. It
subst ant ively will equat e t o abo ut a $6 billion t ax cut .
We didn't do t he next st ep t hough, which was t o t ake away t he
subsidies for invest ing o verseas. So , on t ax policy, we did a piece o f it .
We said if you creat e eco nomic act ivit y, if yo u creat e jobs here, yo u'll get a
lo wer t ax rat e, but t here are st ill a number o f t hings t hat we are doing o n
29
t he t ax po licy side we need t o do.
I wo uld also argue and I'm sure you have heard or will hear fro m o ur
majo r manufact urers t hat in a broad sense we've go t t o t ackle healt h care.
We're t he only count ry t hat funds healt h care t he way we do. We spend
t wice as much o f our GDP o n healt h care as any o t her count ry, and have 46
millio n peo ple and count ing wit h no healt h insurance. There is somet hing
wro ng wit h t his pict ure, and t here are a number of ways. In fact , t hat 's a
majo r emphasis for me, and t here are a number of ways t hat we can and
sho uld be changing t hat as well as dealing wit h energy policy.
If we in Michigan are go ing t o have five et hanol plant s by t he end of
t he year, and if we can be able t o say buy your fuel from middle America
rat her t han t he Middle East , frankly we would dramat ically change what t he
wo rld sit uat ion loo ks like. But t hen o n educat ion and innovat io n, we know
t hat t he fut ure is high t ech manufact uring, it is innovat io n, and in t he broad
sense, you kno w, it 's very t roubling t o me when we see t he president
pro po se t he largest cut in educat ion in t he hist ory of t he co unt ry next year
right at a t ime when we ought t o be boldly and aggressively mo ving.
Not o nly is China cheat ing on t rade pract ices, t hey pro duced someI
do n't know t he exact numberit was so met hing like 700,000 engineers last
year compared t o 70,000 in America, so met hing like t hat , so we've got t o
be bo ldly and aggressively mo ving on educat ion fo r t he fut ure and
inno vat io n and t echno logies and so o n as well.
So I t hink it 's a bro ad pict ure t hat we have t o look at . Ot herwise,
it 's a race t o t he bot t o m. If t he st rat egy is, you kno w, if you'd only wo rk
fo r less, we can be compet it ive, t hat 's a loser because t here will always be
so mebody in anot her co unt ry who can work for less, and t hat 's been t he
st rat egy unfort unat ely in recent years. But I don't t hink we can, you kno w,
while we do t his, if we don't deal wit h a level playing field, t hen we can't
get beyo nd t hat .
I would just say one more t hing, and not on China but Ko rea. Right
no w t he administ rat ion is nego t iat ing a t rade agreement t o o pen Sout h
Ko rean borders, but let 's lo ok at what 's happening. Last year, t hey sold I
believe again t he numbers are somet hing like 700,000, 720,000 vehicles
int o America. We could o nly get 4,000 int o Korea because of nont ariff
t rade barriers as well as t he fact t hat t heir t ariffs are higher t han ours.
Now, if we don't deal wit h t hat and we open t he border more t o
Ko rea, what are we do ing? But , again, China is t he big example here
because of t heir size, t heir econo mic impact and what t hey are do ing. If
we can get it right wit h China, t hen we can go on and we need t o address
t he o t her issues as well.
MR. McCOTTER: I would like t o echo a lot of t hat in t he sense t hat
when we t alk abo ut cit izenship amongst t he corporat ions, it 's always been
my po sit io n t hat we, whet her Republican, Democrat , libert arian, what ever,
30
wit hin a const it ut ional republic, o ur first ult imat e at t achment is o ur
cit izenship t hat we share, and t hat t he first priorit y of any cit izen is t o
perpet uat e t his revo lut io nary experiment in democracy; it is not t o enhance
t he profit s o f any individual co rporat ion or ent it y who is suckered here in
t he boso m o f libert y and derives it s prot ect ion and it s benefit s and it s
pro sperit y fro m o ur nat io n and o ur nat ion's government .
I would t hink t hat t hey should put t hat first . I would t hink it is easy
t o say t hat t he Unit ed St at es has t o do t hings int ernally t o make us more
co mpet it ive. That is t rue. Everyo ne would agree t hat educat ion is a
crit ical issue. Everyo ne would agree t hat healt h care is a crit ical issue. I
t hink we would all feel in o ur heart t he grief at wat ching human po t ent ial
t rapped in an urban underclass t hat we have yet been able t o release in t he
Unit ed St at es.
But t he crit ical dist inct ion t o me is t hat t he Unit ed St at es, we can
have t hese differences. We can have t hese argument s and we can have
t hese consensuses reached t hro ugh a free democrat ic process, just as o ver
t ime we have had a so cial safet y net evo lve; we have had free public
educat ion evolve; we have had t he benefit s of life in t he Unit ed St at es built
up o ver a long period of t ime t hrough o ur free inst it ut ions.
My co ncern is t hat if we t end t o focus on t he Unit ed St at es o f
America beco ming more compet it ive wit ho ut looking at t he unfair
co mpet it io n t hat has co me our way fro m unfree count ries, from t o t alit arian
co unt ries, fro m communist count ries, it 's t hat you will never be able t o
co mpet e wit h a count ry t hat do es not have t o care for t he needs of it s
cit izens.
It will no t happen, and what will t hen happen is, if t here's a
co nt inued emphasis solely on what t he Unit ed St at es has t o do , will be
what Senat o r St abenow said, is you will t hen have int ernal pressures wit hin
t he economic syst em of t he Unit ed St at es, because we were being dealt
wit h unfairly, for t hese very same corpo rat ions t o t hen deal unfairly wit h
t he wo rkers.
I say t his as a Republican who is co mmit t ed t o t he rule of law and t o
t he sanct it y o f co nt ract s, and yet here in our dist rict s, in our st at e, what
we t end t o see is t hat t he pressure t o compet e when only int ernalized
wit hin t he Unit ed St at es t ends t o have dire consequences for t he worker
and especially t he ret irees o f t hese manufact uring ent it ies t hat have gone
o ut o f business due t o t his unfair co mpet it ion.
So I wo uld say, yes, t hat we have t o do t hings here in t he Unit ed
St at es t o beco me more co mpet it ive and more ent repreneurial, but I would
also argue t hat simply t o loo k at t he Unit ed St at es and say t hat Communist
China is a realit y, unfair t rade pract ices by communist co unt ries are a
realit y, and t hat we t hen have t o race t o t he bot t om here int ernally would
be a horrible mist ake.
31
COMMISSIONER MULLOY: Thank yo u.
HEARING COCHAIR BLUMENTHAL: Thank yo u. Would yo u
indulge us for ano t her quest ion?
COMMISSION VICE CHAIR BARTHOLOMEW: Thank you very
much t o all of o ur wit nesses bo t h for appearing here t o day and for yo ur
leadership on behalf o f t he people of your great st at e of Michigan. They
benefit enormously and we're benefit ing fro m your wisdom.
There seems t o be a sense among t he policy elit e t hat our indust rial
base in t his count ry no longer mat t ers and t hat t he fut ure of our economy
is in o ur abilit y t o innovat e. No w many of us, of course, disagree wit h t he
co ncept t hat our indust rial base doesn't mat t er and believe t hat it do es fo r
a number o f reasons including our abilit y t o defend ourselves down t he
road.
But I wonder if yo u could just speak briefly about t he role of t he
U.S. aut o indust ry bo t h in t erms of t he American economy and t he role o f
t he aut o indust ry, t he role it has played in inno vat io n, and o ur abilit y t o
inno vat e and compet e as we mo ve forward?
SENATOR STABENOW: To st art , let me say we make t hings and
gro w t hings in Michigan, and we do it very well, and I don't t hink yo u can
have an eco no my nat ionally t hat do esn't make t hings and grow t hings and
add value t o it .
The aut o indust ry has been t he t o p indust ry, t he t op jo b provider in
t he co unt ry, in t he wo rld. It has been, first of all, t he focus, as I said
before, of t he middle class of t his count ry and t he innovat ions t hat have
co me from t hat have go ne int o our milit ary. We're very proud t hat in t he
BRAC pro cess t hat loo ked at clo sing facilit ies around t he count ry a year
ago , t hat we act ually ended up adding jobs in Michigan.
We were very pleased t o see t hem coming up from Alabama and
Virginia t o Michigan t o Warren t o a place called TARDEC and TACOM
because if t he milit ary drives it , we make it , fix it , improve it . We do. We
do all of t he wo rk here in Michigan t hat relat es t o t he milit ary.
When you look at space, when you lo ok at ot her effort s t hat have
been leveraged from manufact uring, coming from t his st at e, it really has
been a fo undat ion. As you t alk about our nat ional defense, as yo u t alk
about t he st eel indust ry, as you t alk about manufact uring, furnit ure, we
co uld go on and o n and on.
If we lose our abilit y t o creat e t hings, make and expand, of course,
it 's different . This isn't your fat her's fact ory anymo re. We can show yo u
enviro nment ally friendly, green plant s t hat are high t ech t hat are very close
t o here. We'd be happy t o have you come and visit t o see what we're
t alking abo ut .
But t he t echnology and t he brain power t hat has come from t here is
crit ical t o t he fut ure of t his co unt ry. Frankly, I t hink t he administ rat ion
32
t hinks as long as yo u can buy an aut o mo bile, it doesn't mat t er where it 's
made. It cert ainly mat t ers. In t his economy, here in Michigan, it 's not just
about t he plant . It 's t he int ernat ional headquart ers. As I said before, it 's
t he aut o suppliers and t he account ant s and t he advert ising and all o f ripple
effect t hat t akes 350,000 jo bs and makes it 4.5 million because we are t he
int ernat io nal headquart ers.
So t hat makes a difference. And what happens if we in fact do n't
have t he capabilit y t o manufact ure anymore? A few years ago we were
t hreat ened and we cont inue t o be concerned about whet her or no t we're
going t o be able t o make st eel in t his co unt ry? And what does t hat mean?
Yo u kno w t here are o nly so me six mines left in t he count ry t hat yo u can
pull iron ore up out of t he ground and make st eel, and we were very
co ncerned abo ut t hat from a defense st andpoint , milit ary st andpoint , as
well as econo mic st andpo int .
These fundament al indust ries mat t er. They will change, t hey will
evolve, and t he innovat ion is co ming right fro m here, and we know t hat .
But we canno t give up on t hese indust ries, and frankly I t hink we can be
co mpet it ive. I have no doubt . If t here is a level playing field, we can
co mpet e wit h anybo dy and win.
MR. McCOTTER: Regarding t he int ellect ual policy elit es, I would
just make t wo po int s. The first is I t hink t hey sho uld be paid on
perfo rmance. Secondly, I would remind t hem, t he int ellect ual po licy elit e,
t hat Pat t o n's 8t h Army didn't drive t hink t anks t o liberat e Europe.
Your quest io n is an excellent one and it is right very much at t he
heart of t he problems t hat lie befo re us and t hat you are looking int o. First
o f all, t he aut o indust ry is no t a low t ech indust ry. When I was a bo y,
t here were 190,000 peo ple wo rking over here at t he Rouge plant ; t oday
t here are about 13 o r 14,000. They produce more cars. This doesn't mean
t hat t hose jobs have been moved o verseas. What it means is we have
beco me enormously more efficient . We used t o spray cars wit h a spray
gun. To day, you dip t hem and t he car is bet t er.
The aut o mobile t hat comes off t he assembly lines o ver here at Rouge
o r any of t he o t her plant s in t his count ry have a comput er co nt rol syst em
t hat is more advanced t han t hat which was on t he first lunar lander. These
are no low t ech, and if yo u loo k, t he designing and t he manufact uring o f
t he aut omo bile is high t ech.
But if you lo o k at how import ant t his is t o t he econo my, first o f all,
o ne jo b in seven in t his co unt ry is dependent on t he aut omo bile indust ry.
Each o f t hose jobs is t here. It may be glass in Pit t sburgh. It might be st eel
in Yo ungst own or Det ro it . It may be t ext iles in t he Carolinas. It might be
wo o d or wo od pro duct s so mewhere. It might be rubber in Akron. This
is a crit ical part o f t he U.S. econo my and it is high t ech. They manufact ure
cars now t hat are designed largely on t he comput er, and t he slide rule t hat
33
I used t o use when I was going t o college, you don't . You use a comput er
inst ead. And yo u get t he comput er t o t urn t he car aro und on t he comput er,
upside down, and mo ve it all around, and make a judgment as t o what t hat
car o r what t hat part is go ing t o do and how it 's going t o look and how it 's
going t o wo rk. That 's a crit ical part of U.S. manufact uring.
So Silicon Valley out t here in Califo rnia has a real int erest in what
we do here. No w, how impo rt ant is t his? Aut os we use as an example, but
aut o s are only a part of it . Imagine what t his count ry would do if we had
t o fight a war again as we did when I was a boy and when I was in t he
Army in Wo rld War II. We won t hat war part ly on t he bat t lefields, but
very much right here in o ur manufact uring operat io ns in t he Unit ed St at es.
Willo w Run, when I was a boy, was a cornfield. All of a sudden, it
was a bo mber plant t hat produced 24,000 liberat o r bombers, t he largest
pro duced bomber in t he hist ory of aviat io n, t remendous aircraft and it won.
It no t only bombed Germany, but it wo n t he bat t le o f t he At lant ic because
o f t he enormous range it had, and just t o t he no rt h and t o t he east o f here,
yo u can see t he Chrysler Tank Arsenal. There t hey produced M4 t anks
which t hey produced somet hing like about 60,000 of t hem, and t hose t anks
wo n t he war. It was a massive pro duct io n.
We armed ourselves. We armed every o t her co unt ry in t he wo rld
because we had t he capacit y t o manufact ure. If t hat is lost , t he abilit y o f
t his count ry t o be a leading power o f t he world and t o fight wars or t o do
what ever else t hat we have t o do is go ne. Imagine an army of t his count ry
fielded by an America t hat can't pro duce boot s or can't pro duce t anks or
can't produce t ires o r can't produce guns or can't pro duce any of t he o t her
t hings t hat are import ant , and we are, I repeat , high t ech here. We use t he
mo st advanced t echnolo gy and if yo u would like, I would be delight ed t o
arrange t o urs of t he plant s so t hat you can go t hro ugh and see t he
ext rao rdinary compet ence and effo rt and skill and t he advanced t echnolo gy
t hat is used in t hese plant s.
This co unt ry in t erms of t he t echnolo gy of it s manufact uring or t he
qualit y o f it s manufact ured product s need t ake secondplace or need t o
hang it s head in t he presence of no one. We are t he best . And if our aut o
indust ry weren't as go od as it is, it would have been driven under a lo ng
t ime ago by t he unfair compet it ion which is impo sed upon it by our t rading
part ners.
The Chinese are just follo wing a succession of ot her wrongdoers,
and t hey are using inst rument alit ies like t he World Trade Organizat ion:
where it is go od for t hem, t hey insist on us complying; where is it is goo d
fo r t hem, t hey disregard compliance in t heir o wn o perat ions. And as a
result , yo u can see what is happening in t he way t he money flo w is going:
we have an eno rmous t rade deficit wit h t he Chinese which grows every
year.
34
So , yo u, my dear friends, are going t o be t he force t hat 's go ing t o
help us get t he st o ry t o t he administ rat ion of t he fact s and you are going t o
have t o t ell t hem t hat t hey have t o fo cus on a pro per cure. I said t his
several t imes, but I have t o say it again, we seek no handout s. We seek a
government which will see t o it t hat we are fairly t reat ed. Seeing t o it t hat
we are fairly t reat ed in t he world market place in manufact uring and by o ur
co mpet it o rs is not a whit less impo rt ant t han seeing t o it t hat we have t he
weapo ns and t he equipment t o fight a majo r war.
So I t hank you fo r what you're doing. I t hank you fo r your quest io n
and I pray fo r your success and I beg you help us t o get fair t reat ment for
o ur people here.
HEARING COCHAIR BLUMENTHAL: Thank you very much t o all
o f yo u for your excellent t est imo ny and your excellent comment s. We
benefit ed from all o f your comment s. We'll t ake a five minut e break and
t hen reco nvene t o do o ur seco nd panel.
[Whereupo n, a short break was t aken.]
OPENING STATEMENT OF COMMISSIONER GEORGE BECK ER

HEARING COCHAIR
HEARING COCHAIR WESSEL: In deference t o t he members o f

Co ngress, I wit hheld from giving Chairman Becker's st at ement , and I
apo logize. We're already running lat e, but Commissioenr Becker was t o be
co chair o f t oday's hearing. He was unable t o make it and asked me t ake
o ver and fill in his shoes, so met hing t hat I could only dream of doing, but
I'll t ake a st ab at it .
The Commission is pleased t o be meet ing t oday here in Dearborn, an
excellent venue fo r a hearing o n China's Impact o n t he U.S. Aut o and Aut o
Part s Indust ries. Michigan is t he heart o f aut o and aut o part s product ion
here in t he U.S.
To day is t he first field hearing t he Commission has held t his calendar
year and it is int ended t o respond t o our co ngressional mandat e t o assess
ho w t he U.S.China t rade and invest ment relat io nship is affect ing vit al
regio ns and sect ors of o ur econo my.
The hearing follows an earlier hearing we held in Akron, Ohio, in
Oct ober o f 2004, which addressed, in part , t he changing nat ure of China's
aut o and aut o part s sect or and it s impact o n U.S. int erest s.
At t hat t ime, we learned t hat U.S. producers had already set up
pro duct io n act ivit ies in China t hro ugh joint vent ures and t hat U.S. part s
manufact urers were set t ing up sho p not o nly t o service t hose joint vent ures
but also t o supply U.S. product io n facilit ies here at home.
Since our hearing less t han t wo years ago, t he U.S. aut o and aut o
35
part s indust ries have gone t hrough dramat ic changes. We've seen Delphi, a
giant in t he sect or, declare bankrupt cy. We've seen Fo rd and General
Mo t o rs having t heir debt do wngraded as t heir market shares and prospect s
co nt inue t o decline. We've wit nessed t he offer of buyout s for t ens o f
t ho usands of wo rkers as t he aut o producers seek t o shed emplo yment and
pro duct io n and reduce t heir presence here in t he U.S.
At t he same t ime, we've seen t he cont inuing rise and expansion o f
China's capacit y and capabilit ies in t his sect or. Their success has mirrored
t he failures here at home. China is already export ing aut o part s and is but
a few years away from expo rt ing built up vehicles.
The quest io ns we co me here t o Michigan t o seek answers t o are:
What do es China's success mean bot h fo r China it self and for o ur
o wn fut ure here? Is t here a connect ion bet ween t heir rise and our fall? Is
China's success co ming at o ur expense?
These are quest ions not just for Michigan but fo r our ent ire nat ion.
The aut o part s and aut o mot ive sect o r is o ne of t he real engines o f
eco no mic growt h here in t he U.S. America creat ed t he modern aut omot ive
indust ry and helped t o open a new age o f t ranspo rt at io n. The sect or has
pro vided innumerable jo bs and has helped make t he American dream real
fo r count less Americans.
It has been an eno rmous cont ribut o r t o econo mic growt h and has
helped spur innovat ion in our eco nomy. It has been t he largest user o f
semiconduct o rs int egrat ing high t echnology int o our t ransport at ion syst em.
It is a major user of st eel, glass, rubber and count less ot her product s. It s
indust rial capacit y has creat ed t he demand for skills t hat have been put t o
use not only in t his indust ry but have creat ed advant ages in many ot hers.
It s indust rial capacit y has been used in t ime of need t o out fit o ur
nat io n t o fight t he wars t o keep o ur people safe and t o pro mot e freedo m
and democracy aro und t he globe.
What do es t he decline o f t his indust ry mean for us? What happens
when t he demand for t hese skills begins t o evaporat e? What happens when
plant s shut down? Will we have t he surge capacit y we may need if a large
scale conflict erupt s?
Manufact uring is an indispensable part of t he U.S. eco nomy. Two
t hirds of t he money t hat t he U.S. spends on research and development is
spent by t he manufact uring sect or and 90 percent of new pat ent s o riginat e
in manufact uring. Manufact uring is also import ant for t he maint enance o f
t he middle class wit h it s jobs paying 20 percent more t han t he average
American jobs accompanied by bet t er benefit s.
Befo re we t urn t o our wit nesses, all of whom I sincerely t hank for
accept ing our invit at io n, I want t o make a special point of singling out t he
leadership of t he majo r aut o companies and t heir t rade associat ion for
refusing t o appear befo re us t oday. It 's no secret t hat t hey've been
36
expanding t heir operat ions in China and have looked at China as a place t o
so urce part s and in t he longt erm probably vehicles.
To o o ft en t hey act as if China is t he fut ure and America is t heir past .
I fo r one do n't want t o accept t hat no t ion. But fro m years o f experience
o n t his Co mmission, it 's no secret t hat t o o many U.S. co mpanies are
reluct ant t o speak o ut o n China's po licies and pract ices, not t o ment ion
t heir o wn.
I'm t o ld t hat t he Big Three are co ncerned t hat crit icizing China in
any way might result in t he advant ages t hat have been sho wered upon t hem
in o rder t o persuade t hem t o mo ve t heir o perat io ns t o China t o begin t o dry
up. Indeed, we've been t o ld t hat already t he Chinese have indicat ed t hat
subsidies and preferences given t o jo int vent ures are going t o be wit hdrawn
and t hat Chinese indigenous companies will begin t o expand. They've
learned eno ugh fro m us and are ready t o go it on t heir own.
I lo ok forward t o t oday's hearing t o shed some light on t hese
quest ions. Our nat ion needs some answers. Thank you.
Prepared Statement of Commissioner George Becker
Hearing Cochair
The Commission is pleased to be meeting today here in Dearborn, an excellent venue for a hearing on
China's Impact on the U.S. Auto and Auto Parts Industries. Michigan is the heart of auto and auto parts
production here in the U.S. Today's is the first field hearing the Commission has held this calendar year
and is intended to respond to our Congressional mandate to assess how the U.S.China trade and
investment relationship is affecting vital regions and sectors of our economy.
The hearing follows an earlier hearing we held in Akron, Ohio in October of 2004 that addressed, in part,
the changing nature of China's auto and auto parts sector and its impact on U.S. interests. At that time, we
learned that U.S. producers had already set up production activities in China through joint ventures and
that U.S. parts manufacturers were setting up shop not only to service these joint ventures, but also to
supply U.S. production facilities here at home.
Since our hearing less than 2 years ago, the U.S. auto and auto parts industry have gone through dramatic
changes. We've seen Delphi, a giant in the sector, declare bankruptcy. We've seen Ford and General
Motors having their debt downgraded as their market share and prospects continue to decline. We've
witnessed the offer of buyouts for tens of thousands of workers as the auto producers seek to shed
employment and production and reduce their presence here in the United States.
At the same time, we've seen the continuing rise and expansion of China's capacity and capabilities in this
sector. Their success has mirrored the failures here at home. China is already exporting auto parts and is
but a few years away from exporting builtup vehicles.
The questions we come here to Michigan to seek answers to are: What does China's success mean both for
China itself and for our own future here? Is there a connection between their rise and our fall? Is China's
success coming at our expense?
These are questions not just for Michigan, but also for our entire nation.
37
The auto parts and automotive sector is one of the real engines of economic growth here in the U.S.
America created the modem automotive industry and helped to open a new age of transportation. The
sector has provided innumerable jobs and has helped make the American dream real for countless
Americans. It has been an enormous contributor to economic growth and has helped spur innovation in
our economy. It has been the largest user of semiconductors integrating high technology into our
transportation system. It is a major user of steel, glass, rubber and countless other products. Its industrial
capacity has created the demand for skills that have been put to use not only in this industry, while
creating advantages in many others. Its industrial capacity has been used in time of need, to outfit our
nation to fight the wars to keep our people safe and to promote freedom and democracy around the globe.
What does the decline of this industry mean for us? What happens when the demand for these skills
begins to evaporate? What happens when plants shut down will we have the surge capacity we may need
if a large scale conflict erupts?
Manufacturing is an indispensable part of the U.S. economy. Twothirds of the money that the U.S. spends
on research and development is spent by the manufacturing sector, and 90% of new patents originate in
manufacturing. Manufacturing is also important for the maintenance of a middle class, with its jobs
paying 20% more than the average American jobs, accompanied by better benefits.
Before we turn to our witnesses all of whom I want to sincerely thank for accepting our invitation I
want to make a special point of singling out the leadership of the major auto companies, and their trade
association, for refusing to appear before us today. It's no secret that they have been expanding their
operations in China and have looked to China as a place to source parts and, in the longterm, probably
vehicles. Too often, they act as if China is the future, and America is their past. I, for one, don't want to
accept that notion.
But, from years of experience on this Commission, it's no secret that too many U.S. companies are
reluctant to speak out on China's policies and practices, not to mention their own. I'm told that the Big
Three are concerned that criticizing China in any way might result in the advantages that have been
showered upon them, in order to persuade them to move their operations to China, to begin to dry up.
Indeed, we've been told that already the Chinese have indicated that subsidies and preferences given to
joint ventures are going to be withdrawn and that Chinese indigenous companies will begin to expand.
They've learned enough from us and are ready to go it on their own.
I look forward to today's hearing to shed some light on these questions. Our nation needs some answers.
Thank you.
PANEL II: LABOR PERSPECTIVES
HEARING COCHAIR BLUMENTHAL: Thank you. Thank you very

much, Commissio ner Wessel. We will now t urn t o o ur second panel on
labo r perspect ives where we're very pleased t o have Ron Get t elfinger,
recent ly reelect ed President of t he Unit ed Aut o Workers Union, which has
it s So lidarit y House headquart ers here in t he Mot or Cit y; Mr. Leo Gerard,
Int ernat ional President of t he Unit ed St eelworkers Union, headquart ered in
Pit t sburgh; as well as Mr. Richard Trumka, t he Secret aryTreasurer of t he
AFLCIO in Washingt o n, D.C.
So we are very pleased t o have t hem here t o give t heir perspect ives
and we are go ing t o t ry t o make up some t ime. We are going t o hold you t o
38
t he sevenminut e present at ion so we have eno ugh t ime for Q&A. So
wit ho ut furt her ado, we'll st art wit h Mr. Get t elfinger.
STATEMENT OF RON GETTELFINGER, PRESIDENT
INTERNATIONAL UNION, UNITED AUTOMOBILE, AEROSPACE
AND ARICULTURAL IMPLEMENT WORK ERS OF AMERICA
DETROIT, MICHIGAN
MR. GETTELFINGER: Thank yo u very much, and t o t he men and

wo men of t he Commission, we appreciat e t he opport unit y t o be here t his
mo rning, we appreciat e your t aking t he t ime t o be here as well, and since I
first appeared before t he Commission in Oct ober almo st t wo years ago ,
really t hings have got t en much wo rse inst ead o f get t ing bet t er so we do
appreciat e t he opport unit y t o be here.
I'm not going t o go int o any of t he prepared remarks. I wo uld rat her
just t alk, no t so much off t he cuff, but t o t ry t o address some of t he t hings
t hat have been said in t he prepared remarks, and let me begin by saying
t hat in 2005, China's vehicle sales was about 5.7 million sales. That makes
t hem t he t hirdlargest aut o market in t he world and t he fourt hlargest
manufact urer of vehicles.
Their product ion capacit y was a t ot al of eight million. By 2010, we
expect t o see t hat capacit y bet ween 18 and 20 million vehicles wit h a sale
o f abo ut nine t o t en million vehicles. So you can see t he excess capacit y is
t here and I wo uld just ask you t o not e as you go alo ng where t hese
assembly plant s are being lo cat ed in China. They are being locat ed clearly
fo r export ing vehicles.
In 2003 t o 2005, t he t rade deficit doubled t o $4.5 billion and already
t his year t hrough April, t he deficit is up 26 percent which is led by 30
percent increase o n t he impact of aut o part s. We've heard o f companies
like Chery and Geely who are going t o be export ing vehicles t o t he Unit ed
St at es wit hin t he next t hree years.
We heard a lot from t he dist inguished members of Co ngress who
t est ified here t his mo rning about jo int vent ures, and t hey do have jo int
vent ures wit h t he U.S. companies, Japanese co mpanies, European and
Ko rean companies, including Shanghai Aut omot ive Indust ry Corpo rat ion,
and t hey've made it clear t hat t hey're going t o be export ing vehicles t o t he
U.S. While at t he same t ime in t he past five years in t he aut o part s sect o r,
we've wat ched t he lo ss of about 200,000 jo bs.
We t alked abo ut just briefly in t he opening, Mr. Wessel, about
Delphi being in bankrupt cy, being in bankrupt cy in t he Unit ed St at es and
co nt inuing t o invest aro und t he world, and t heir worldwide operat ions are
no t impact ed by t hat , and since 1994 Delphi has invest ed $500 million in
China. Addit io nally, t hey've put 380 million in Poland, 300 million in
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Singapore, and 100 millio n in India, and t hey have 60,000 workers in
Mexico, but t hey're in bankrupt cy in t he Unit ed St at es.
TRW is ano t her company t hat 's running off t o China, and t here are
many companies t hat we co uld list t hat are in t hat cat egory. It is
t ro ubling, t ho ugh, t o see t hat China has been able t o get aro und t heir WTO
agreement where t hey have eliminat ed t hat 40 percent minimum lo cal
co nt ent requirement for vehicles. Their policy just simply kept it in place,
t he po licy t hat t hey've implement ed.
The Sect ion 301 o f t he U.S. t rade laws, China's currency
manipulat ion specifically, which we also heard about , and t heir violat io n o f
int ernat io nallyrecognized workers' right s, t he pet it ion was refiled. I
believe it was on June 8, and again we find o urselves loo king do wn at t he
very issues t hat we in organized labor have been t alking about fo r so long.
Their currency manipulat ion, where it 's now at t hree percent , and I
t hink when we t est ified, we were t alking somewhere in t he neighborho od o f
40 percent t o make it equit able bet ween t he t wo count ries. But at t hree
percent , it 's hardly do ne anyt hing, and now China has surpassed Japan as
t he wo rld's largest holder o f foreign currency reserves and most of t hese
reserves are held in U.S. dollars so China can simply ret ain full cont ro l
o ver t he do llaryuan exchange rat e.
Their syst emat ic violat ion of workers' right s, t here is no quest ion
about t hat . It pro vides serious unfair advant age t o pro duct s t hat are made
in China and again t hat was dramat ically document ed in t he Sect ion 301
pet it io n t hat was filed in '04.
The administ rat ion at t hat t ime dismissed t he pet it ion saying t hat
t hey would have discussio ns wit h China, but t hat never happened. Now t he
new pet it ion t hat 's been submit t ed confirms t he workers' right s' violat ions.
80 percent of China's 1.3 billion peo ple have no medical insurance at
all. Their healt h and safet y records in t heir workplaces are horrendo us.
And we have pet it ioned and long made t he case for Yao Fuxin and Xiao
Yunliang, t wo wo rkers who haven't been paid for 18 mont hs, didn't have
t heir pensio n payment s, not hing made int o anyt hing. They had a peaceful
pro t est . One of t hem was seven years in prison and t he o t her was fo ur
years. Xiao Yunliang was released 14 days I t hink befo re his four years
was up on February 23 of t his year on February 23 of t his year. But t hat 's
t he kind o f abuse t hat workers are facing.
HEARING COCHAIR BLUMENTHAL: Mr. Get t elfinger, I just
want ed t o give you fair warning t hat yo u have about a minut e left .
MR. GETTELFINGER: The t rade deficit , 124 billion in '03. It was
201 billio n in '05. We kno w t hat . Aut o t rade deficit do ubled, as I
indicat ed, t o 4.5 billio n, and bot h deficit s are st ill climbing. So t he
administ rat io n must be willing t o use t he special safeguard measures
included in t he U.S.China WTO Accession Agreement and st rengt hen t he
40
pro visions of Sect ion 201 o f t he U.S. t rade law.
Prepared Statement of Ron Gettelfinger, President
International Union, United Automobile, Aerospace and Agricultural
Workers of America, Detroit, Michigan
Mr. Chairman, members of the Commission, my name is Ron Gettelfinger. I am the president of the
International Union, United Automobile, Aerospace and Agricultural Implement Workers of America
(UAW). I appreciate the opportunity to present the UAW’s views on the impact of the development of
China’s automotive industry on the U.S. auto and automotive parts industries.
Since I appeared before the Commission nearly two years ago, new investment in China to produce
automotive vehicles and parts has continued to grow at a rapid pace. The U.S. deficit in automotive trade
with China has also grown rapidly and we expect that trend to continue unless fundamental changes in
trade policies are adopted by the U.S. government. In our 2004 testimony, we presented several proposals
for addressing auto trade problems with China. Unfortunately, the Bush Administration has not taken
action on any of them. We are deeply concerned that the excess production capacity that is being built in
China will result in a massive increase in U.S. imports that will add significantly to the already serious job
losses in the U.S. automotive industry and further depress the wages and benefits of UAW members and
other American workers in this critically important and productive industry.
The industrial policy for the automotive industry that was adopted by the Chinese government in 2004 has
been effective in continuing the flow of investment and technology into China, while giving Chinese
automotive companies greater resources to develop their own production capacity to meet demand in
China and to generate exports. In the past two years, China has become a net exporter of assembled
vehicles and exports of auto parts have skyrocketed, more than doubling from 2004 to 2005, while imports
of auto parts fell. The Chinese government’s plan to raise the domestic content of vehicles assembled in
China and to turn China into a substantial exporter of automotive products is meeting its goals.
In 2005, China’s vehicle sales rose to 5.7 million, making it the third largest automotive market in the
world. Production of 6 million vehicles made China the fourth largest manufacturer of vehicles. But,
equally important, China’s production capacity in 2005 was 8 million vehicles. By 2010, the continuing
parade of auto industry investments is expected to raise that capacity to 1820 million, while sales in
China are only expected to grow to 910 million. Excess capacity could grow over those 5 years from 25
percent to 100 percent. It is the tremendous excess capacity in China that causes grave concern about the
potential for dramatically higher U.S. imports of Chinesebuilt vehicles and automotive parts.
The worsening trend in U.S.China automotive trade that we identified in 2004 has continued. From
2003 to 2005, the U.S. automotive trade deficit with China doubled to $4.5 billion and it is continuing to
climb this year. Through April, the deficit is up by 26 percent, led by a 30 percent increase in imports of
automotive parts.
Two Chinese auto companies, Chery and Geely, have already announced their intention to export vehicles
to the U.S. within the next three years. With the creation of so much excess capacity in China in the next
few years, we expect the Chery and Geely exports to be just the tip of the iceberg. DaimlerChrysler has
floated the idea of importing subcompact vehicles from China and several of the Chinese auto companies
that are in joint ventures with U.S., Japanese, European and Korean auto companies, including Shanghai
41
Automotive Industry Corporation, have made it clear that they intend to export vehicles to the U.S. and
other developedcountry markets.
Chinese vehicle imports, which could easily reach one million units quickly, would add to the growing
U.S. automotive trade deficit with China and to the already recordsetting overall U.S. automotive trade
deficit. The growing share of imports in total U.S. vehicle sales is depressing employment in the U.S.
auto industry and contributing to the falling market shares of the largest U.S. producers – General Motors,
Ford and DaimlerChrysler.
Adding imported vehicles from China to the current mix of imports will affect U.S. auto parts production
and employment, in addition to eliminating the jobs of thousands of assembly workers. Employment in
the U.S. auto parts industry has already fallen by about 200,000 in the past five years and that number will
grow dramatically when the many companies that have filed for bankruptcy implement their jobcutting
plans. Further job losses in the auto parts industry will be devastating to many communities across the
nation, as well as to affected workers.
For many of the top U.S. auto parts suppliers that have already invested in Chinese production, U.S.
production and employment would be hurt by imports of vehicles from China, but their Chinese
operations would benefit. These companies have followed assemblers to China, hoping to grow along
with the expansion of production capacity there. With the market in China growing slower than capacity,
exports to the U.S. will keep more of their own Chinese capacity viable. Delphi and TRW Automotive are
among the companies that are exporting to the U.S. in order to utilize excess capacity in China. For the
smaller auto parts companies that are suppliers to the Tier 1 companies, many of which have resisted
moving production to China or other lowcost production sites, the loss of U.S. customers due to growing
imports from China could be devastating. With much of the auto parts supply chain having moved abroad
due to tremendous costcutting pressures from assemblers and the largest supplier firms, imports of
vehicles from China could become the last straw that forces smaller suppliers to leave the business or
move production abroad.
A further negative impact on U.S. suppliers will come from the benefits that Chinesebased suppliers will
gain from vehicle exports to the U.S. Chinese companies that either have established joint ventures with
U.S.based suppliers or independently supply Chinese assemblers that export to the U.S. market would
establish their presence in this market through those Chinese exports. As original equipment suppliers to
U.S.sold vehicles, they would be in a much stronger position to challenge all of the layers of U.S. and
global suppliers for business in this country, for both original equipment and aftermarket parts. Their
relationships in China with U.S. and other multinational auto companies, as partners or as customers,
have given the Chinese parts companies the technology and experience to meet the quality and reliability
standards that make them serious competitors for U.S. producers.
One of the ways China was able to reduce auto parts imports was by raising the effective tariff on some
imported parts. In the middle of 2005, China started to apply the higher tariff for imported vehicles on
imported parts when those parts account for more than 60 percent of the parts value of a vehicle
assembled in China. While some countries have applied vehicle tariffs to parts that are included in
complete knockdown (CKD) kits, China decided to apply the same standard to parts that were imported
separately if the value of imported parts in a Chinaassembled vehicle reached 60 percent of the total parts
value. China’s WTO agreement eliminated the 40 percent minimum local content requirement for
vehicles, but this tariff policy allows China, effectively, to keep it in place. The governments of the U.S.,
the European Union and Canada have filed a case with the WTO that claims China’s policy is an unfair
trade practice, but it could take more than a year to get an answer from the WTO. By then, even more
global parts companies will have set up plants in China and/or transferred their technology to Chinese
42
parts producers. Even if the WTO case forces China to stop this unfair practice, the Chinese
government’s policy goal of raising domestic content will have been advanced.
The remedies that we proposed in our 2004 testimony to address the growing U.S. deficit in automotive
trade with China are equally appropriate today. However, the inaction of the Bush Administration in the
past two years has allowed the deficit to grow, making a quick and effective solution more difficult to
achieve. The Bush Administration has the responsibility to ensure that the U.S.China economic
relationship is improving living standards for Americans. But the Administration has simply abandoned
this responsibility, leaving multinational corporations in charge of that relationship. The results speak for
themselves – an unprecedented U.S. overall trade deficit with China of $201 billion in 2005 and a steadily
rising automotive trade deficit.
Two of our proposals are related to issues that have been the subject of petitions for action by the Bush
Administration under Section 301 of U.S. trade law, as unfair trade practices – China’s manipulation of
its currency and its violation of internationallyrecognized worker rights. The Administration has rejected
petitions on both issues, but a new worker rights petition was submitted last month that, once again,
demonstrates the damage to U.S. production and employment that results from China’s denial of the core
labor standards.
The widely recognized undervaluation of China’s currency remains a major advantage for parts
companies seeking additional sales in the U.S. through imports from China and a powerful disadvantage
for U.S. exports to China. Intense cost competition in the U.S. auto industry continues to drive purchasing
decisions, for original equipment and aftermarket parts, and for all levels of the automotive supply chain.
Since many U.S. companies have their own production facilities in China, they can control the quality of
the components they import, as well as benefit from the low cost. While many major parts systems are
assembled close to assembly plants, many of the components that are assembled into those systems are
imported. The currency manipulation by the Chinese government makes the rapid growth of Chinese auto
parts possible.
When China joined the WTO and agreed to reduce tariffs on imports of vehicles and automotive parts,
many trade experts expected U.S. exports to grow substantially. While there has been an increase in U.S.
exports as tariffs have fallen, the Chinese government’s manipulation of the exchange rate, keeping it
undervalued, has prevented many U.S. products from being pricecompetitive in China. The miniscule
devaluation of China’s currency that began a year ago and has raised the value of the yuan by only three
percent has been far too small to make a dent in the direction of the automotive trade deficit. With China
surpassing Japan as the world’s largest holder of foreign currency reserves, and with most of those
reserves held in U.S. dollars, the Chinese government retains full control over the dollaryuan exchange
rate. To defend Chinese producers against import competition and to stimulate additional exports, the
Chinese government remains committed to an undervalued yuan and a soaring trade surplus. Automotive
trade, in vehicles and parts, will be affected by this exchange rate policy and we do not expect that a
change will take place until the U.S. government takes effective action.
The systematic violation of workers’ rights in China also provides an unfair advantage to products made
in China. The impact of these violations was dramatically documented in the Section 301 petition filed in
2004 by the AFLCIO on behalf of the UAW and other U.S. unions. The Bush Administration rejected
that petition on the grounds that it would address these violations in other discussions with China.
Unfortunately, those discussions never took place. To ensure that the Administration cannot continue to
ignore the repression of Chinese workers’ rights, a new petition was submitted on June 8. It confirms that
worker rights violations in China, and the suppression of Chinese workers’ wages and incomes that result,
remain widespread and continue to give Chinese products an unfair advantage in trade with the U.S. and
43
cause massive job losses for American workers. Chinese workers are prevented from exercising the right
to freedom of association, which would allow them to form independent unions, and other rights included
in the Section 301 provision and covered by the International Labor Organizations’ Fundamental
Principles and Rights at Work. All too many Chinese workers are forced to put in excessive hours, paid
less than the legallyrequired minimum wage, denied overtime pay and forced to wait months to receive
their pay.
The social safety net that once helped Chinese workers sustain themselves and their families in the face of
worker rights violations has been shredded in the past 25 years, leaving more than 80 percent of China’s
1.3 billion people with no medical insurance. A tremendous increase in laborrelated lawsuits and
spontaneous demonstrations against abusive working conditions and violations of citizens’ rights by
various government entities has been one response to the attacks on millions of workers’ incomes and
living standards.
Combined with the dangerous health and safety conditions facing workers, including the deaths of
thousands of workers in 2005 in mining accidents alone, it is clear that the situation of workers in China
is bleak and that strong, democratic, independent unions are desperately needed to fight for the interests of
workers. Support for this position has been voiced from unexpected sources – Washington Post oped
writer Jim Hoagland recognized the need for independent unions in a column on March 13 this year, and
MSN Money’s Jim Jubak came to the same conclusion in his April 5 Jubak’s Journal. The repression of
workers’ rights must be identified clearly as an unfair trade practice and the Section 301 petition must be
used to force the Chinese government to improve the conditions of Chinese workers quickly.
In our 2004 testimony to the Commission, we cited the cases of Yao Fuxin and Xiao Yunliang as
examples of the Chinese government repression that must be stopped. They received sentences of seven
years and four years, respectively, for leading demonstrations that demanded the payment of wages and
benefits that were owed to workers by a stateowned company. Earlier this year, Xiao Yunliang reached
the end of his fouryear sentence and he was released. Yao is still serving the remaining three years of his
sentence, despite being in very poor health. The fact that these workers, and countless others, were given
prison sentences for demanding legallymandated payments and engaging in peaceful protests indicates
the degree of Chinese government repression of basic worker and human rights.
In the past two years, the overall U.S. trade deficit with China has soared from $124 billion in 2003 to
$201 billion in 2005, and the auto trade deficit doubled to $4.5 billion. Both deficits are still climbing this
year. To turn around the damaging trends in U.S.China automotive trade and investment and to make it
possible for UAW members and other workers in the U.S. automotive industry to avoid serious harm from
a rapidly rising U.S. automotive trade deficit in the very near future, the U.S. government will have to act
quickly and decisively. We made these proposals in 2004 and, because of the Bush Administration’s
inaction, we must repeat them now.
China’s manipulation of its currency must stop and the value of the yuan must rise in dollar terms. The
Bush Administration’s Treasury Department has had many opportunities since we appeared before this
Commission in 2004 to identify China’s government as a currency manipulator and, in bilateral meetings,
to challenge it to move quickly to fix this problem. The fanfare that surrounded the two percent
revaluation of the yuan last summer, and the paltry additional one percent revaluation since then, has had
no impact on the ability of Chinese producers to keep the prices of their exports to the U.S. low and to
undercut the prices of U.S. exports in China. U.S.China automotive trade would look very different with
a fair exchange rate and reciprocal access for competitive products in the two markets. The “China price”
would be far less threatening to competing U.S. producers and workers with a fair exchange rate. That is
what we seek and that is what the Bush Administration must accomplish.
44
The vicious repression of Chinese workers must end. The Bush Administration has a new opportunity to
make a difference by accepting the recently submitted Section 301 petition and using it to open a new era
of progress for millions of Chinese workers. Ending the Chinese government’s suppression of worker
rights and the repression of workers who try to exercise them would open the door to higher incomes for
millions of Chinese workers and reduce the downward pressure on the incomes of American workers.
More income for Chinese workers would increase demand in China for automotive products and reduce
the excess capacity that is pushing Chinese producers to export and depressing prices in the U.S. and
other countries. It would relieve some of the competitive pressure that is leading auto parts companies to
declare bankruptcy and to seek to abandon pension and health care obligations to their unionized
employees.
While China’s accession agreement to the WTO has major flaws, the U.S. must be sure to take full
advantage of the WTO commitments that China has made. Filing a case against China’s unfair treatment
of some auto parts imports, by applying the higher tariff for vehicles, is a small step in that direction, but
it is not enough. China’s actions only demonstrate that it will go to great lengths to preserve the auto
policies it had in place before joining the WTO – forcing investment in local production in place of
imports; compelling technology transfers to local producers; imposing higher local content requirements;
and, providing export incentives. The Bush Administration must develop a full catalogue of the practices
(including subsidies and discriminatory taxes) that China is using to achieve these objectives, assess their
compatibility with China’s WTO commitments, and take actions as needed to defend U.S. production and
employment.
With the rapid growth of excess production capacity in China’s automotive vehicle and parts industries,
we are likely to see a surge of Chinese exports to the U.S. that would cause serious, and potentially
permanent, injury to U.S. workers and producers in the near future. When an import surge occurs, the
Bush Administration must be prepared to act forcefully and quickly. To prevent the industry and its
workers from suffering any sustained injury, the Administration must be willing to use the special
safeguard measures included in the U.S.China WTO accession agreement and to strengthen the
provisions of Section 201 of U.S. trade law. The special safeguard was included in China’s accession
agreement because the U.S. understood the potential for China to ramp up production for export that
could rapidly overwhelm competing U.S. industries. Without justification, the Bush Administration has
been reluctant to file WTO cases against China. It must not hesitate to use the special safeguard measure
to stop any import surge in the automotive industry.
The Administration’s halfhearted enforcement of the Section 201 case on steel products showed that
greater certainty of action and less discretion in implementation must be incorporated into the law, and we
urge Congress to make those necessary improvements. When facing a surge of automotive imports from
China, we believe the Bush Administration must take effective actions under Section 201 to blunt its
impact and put this critically important industry on a path that will make it even stronger in the future. If
the Administration fails to take such actions, we are ready to mobilize intense pressure from workers, the
public, Congress and the industry to ensure that the Administration takes the most effective actions
permitted by the law.
Action by Congress to pass and implement the UAWendorsed “Marshall Plan” for the auto industry
would stimulate U.S. investment and production of advanced technology vehicles and their components,
giving U.S. workers and producers an edge over Chinese and other foreign suppliers. A study by the
University of Michigan found that this plan would create tens of thousands of new American jobs. By
shifting the competitive ground in the industry to effective use of new technologies rather than
minimizing costs, the adoption of this strategy would take advantage of the skills and experience of UAW
45
members and other American workers in the automotive industry. Accelerating the development of the
infrastructure for producing advanced technology vehicles would also improve fuel economy and the
environment and strengthen the nation’s economic and national security by reducing our dependence on
imported oil.
Taken together, all of the actions we propose would alter the forces at work that are creating the
foundation for a tremendous increase in the U.S. deficit in automotive trade with China and contributing
to downward pressure on the wages, benefits and working conditions of workers in these industries. They
would raise incomes and increase demand for automotive products in China, promote investment,
production and employment in the U.S. automotive industry and eliminate several of the incentives that
unfairly stimulate investment and production in China. Because of the size of the increase in Chinese
production capacity that is expected by 2010, any delay in the adoption of these measures would seriously
weaken their impact.
Mr. Chairman, members of the Commission, thank you for holding this hearing on the China’s impact on
the U.S. auto and auto parts industries and their workers. By continuing to focus on developments in
these industries, you demonstrate to the public and policymakers how important they are to the health of
the U.S. economy and how the challenges they face threaten to depress U.S. living standards. We applaud
the Commission’s ongoing efforts to highlight what is at stake in our economic and security relationship
with China and we urge you to support our proposals for government action. The UAW looks forward to
working with the Commission and answering any questions you may have.
HEARING COCHAIR BLUMENTHAL: Thank you very much for

yo ur very educat ional and concise remarks and we'll move on no w t o Mr.
Gerard o f t he Unit ed St eel Wo rkers Unio n.
STATEMENT OF LEO GERARD, INTERNATIONAL PRESIDENT,
UNITED STEELWORK ERS, PITTSBURGH, PENNSYLVANIA
MR. GERARD: Let me just say t hat I'm also pleased t o be here and
I t hank you for t he work you're doing, in part icular my friend George
Becker and his st at ement .
I'm going t o give you a st at ist ic t hat may shock you. Unit ed
St eelwo rkers of America has 850,000 members of which 175,000 of t hose
members produce pro duct s t hat may end up in a Nort h American
aut o mobile. We represent wo rkers t hat make t he st eel, t hat make t he
aluminum, t hat make t he glass, t hat make t he t ire, t hat make t he rubber,
t hat make t he plast ic, and also unfort unat ely t hat make so me of t he energy.
But if you t hink about t hat and what 's happening t o t he aut o indust ry
and t he number t hat Senat or St abenow used, t he over four million, I don't
t hink t hat t akes int o account t he people t hat make t he pro duct s t hat make
it int o t he cars, and so t hat what happens t o t he American aut o indust ry has
t remendo us repercussions t hro ugho ut indust rial America and t hroughout all
o f t he manufact uring sect o r.
I would be less t han respo nsible if I didn't say t hat it 's not just
China. Here yo u're t alking about China, but it 's in fact a series of rot t en
46
public policy decisio ns and cert ainly bot h part ies are respo nsible for
creat ing t his mess, but t he last five years in part icular t he Republican
administ rat io n and t he Republicanled Congress have been even mo re
neglect ful t han t hey should be.
We've just in t he last t hree weeks had t hree t ire plant s announce
clo sure o r relo cat ion. Tho se t ire plant s and what t hey're anno uncing t o
clo se co mes t o about eight million t ires per year t hat are being shut or
relocat ed.
Simult aneously, we heard Ko rea announce t hey're going t o build a
10.2 millio n t ires per year plant in China t hat will probably be direct ed at
expo rt s. I t hink it 's a t remendo us st at ement when t he leaders and t he
leading manufact urers in t he count ry refuse t o appear before t his
Co mmission. I t hink it 's a t errible indict ment of what t hey believe is t heir
respo nsibilit y. They'd rat her ignore American workers and American
manufact uring while t hey bend down t o kiss t he feet o f t heir Chinese lords.
I want t o say t he same t hing for t he administ rat ion. I heard t he
polit ical panel t alk abo ut t rying t o find polit ical remedies. The
st eelworkers have been co pet it ioner in four cases under Art icle 421
against China at t he ITC. We succeeded in all four cases except it get s
recommended t hen t o t he administ rat io n, t o t he execut ive branch, and in all
fo ur cases t he president vot ed wit h China rat her t han wit h American
manufact uring.
Now, I'm not shocked by t hat because last year we ran a $200 billio n
plus t rade deficit coming on t he heels of $170 billion t rade deficit , and if
yo u go back since PNTR, growing t rade deficit s wit h China.
The reaso n I'm not surprised by t hat is I guess if I had a first
mo rt gage, a seco nd mort gage and a t hird mort gage on my ho use, I'd be
wo rried about pissing o ff my banker, t o be very blunt , and t hat 's what 's
going o n, t hat China is ho lding so much of o ur currency, as are o t her
co unt ries, t hat we've become subservient , and we don't want t o st and up
fo r American workers fo r fear t hat t hey act on t hat .
So I'm t remendously frust rat ed by what 's happening t o t he American
aut o indust ry and it s impact on o ur friends and bro t hers in t he Aut o
Wo rkers Union and in ot her unio ns, but in part icular my respo nsibilit y is
fo r t he st eelworkers t hat are get t ing devast at ed by what 's happening in t he
aut o indust ry.
To put it in perspect ive, again referencing what Senat or St abeno w
and ot hers said about t he currency manipulat io n and t he labor right s abuses
and t he det erminat ion t o make sure t hat a left wing t ot alit arian St alinist
regime t hat is in a marriage wit h co wboy capit alism ignores t he t radit ional
roles of t he market , I'll give you a st eel example, and I can po int o ut
pro bably if I had more t ime eight o r nine different examples in different
indust ries t his is go ing on.
47
The st eel indust ry and unio n just recent ly released a st udy of what 's
been going on in China. In t he year 2000, China was producing 126 million
met ric t ons o f st eel. By t he end of 2006, t hey will be on t he verge o f
pro ducing 400 million t o ns of st eel. You can't generat e enough pro fit fro m
yo ur indust ry t o put t hat much back int o t he indust ry t hat quickly t o build
t ho se mills t hat quickly unless it 's been t ot ally subsidized, environment al
regulat ion has been t o t ally ignored, and t hat t he count ry makes it as a
mat t er of purpo se t o accomplish t hat .
Their impo rt s int o t he U.S. are up 37 percent . They're doing t hat in
glass. They're now do ing it in t ire and rubber and t hey're going t o soo n be
doing it in aut o, and in America, we're st anding here deaf, blind and dumb
while t hey do t his t o us.
This is no t just bad policy wit h China. It 's bad policy overall. We
fall int o t he t rap o f referencing t his as free t rade. This has no t hing t o do
wit h t rade. When you t ake $10 billion of aut o part s and you shut it down
in No rt h America and yo u move it t o China, t hat 's not t rade; t hat 's
invest ment policy.
Cit ibank, Goldman Sachs, t hey lo ve t his st uff, but indust rial
America, indust rial workers are get t ing killed. What we've go t in China is
subsidy versus bad policy in America. What we've go t in China is
o ppressio n versus neglect in America. What we've go t in China is
explo it at ion versus erosion in America. And what we've got in China is a
cent ralized economy t hat has decided t o t ake us out of t he manufact uring
game.
We o ught no t t o have any illusions about t hat and while we go
t hro ugh t he mot io ns o f having hearings and we go t hrough t he mot ions, t he
Co ngress is fiddling while Rome burns.
HEARING COCHAIR BLUMENTHAL: Mr. Gerard, I am go ing t o
have t o ask you t o sum up.
MR. GERARD: I just want t o close by making one last comment . I
t hink t hat t his Co mmissio n t hat was empowered by t he House and Senat e
o n China needs t o be direct and po werful because if we don't do somet hing,
in five years, in t en years, t here will be no middle class manufact uring job
fo r o ur kids and grandkids and I don't want t hat t o be t his generat io n's
legacy.
Prepared Statement of Leo Gerard, International President
United Steelworkers, Pittsburgh, Pennsylvania
Mr. Chairman, members of the Commission, my name is Leo W. Gerard. I am the International President
of the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service
Workers International Union (USW). I appreciate the opportunity to present the United Steelworkers'
views on how trade with China has impacted the U.S. motor vehicle and parts industries, and how that in
48
turn has impacted and will likely impact the members of my union.
I am delighted to appear today with my colleagues Ron Gettelfinger and Richard Trumka before this
Commission. I would like to take this opportunity to thank the Commission for holding this hearing
today, as well as for its excellent reports and research on a wideranging set of economic issues related to
U.S.China relations.
Mr. Gettelfinger has outlined for you in some detail the exploding U.S. trade deficit with China in autos
and auto parts, the potential for that trade imbalance to expand drastically in coming years, and the
devastating consequences such expansion could have on American jobs and living standards. Certainly his
members have been and will continue to be directly impacted by China's unfair trade practices in the
automotive sector.
Our union represents workers who produce electronic and mechanical motor vehicle parts, rubber and tire,
plastics, aluminum, leather, and glass, as well as steel. The longterm health of the U.S. steel industry, as
well as these other components and raw materials sectors, depends crucially on the continued vitality of
the U.S. motor vehicles and parts industries, and in particular, on their ability to survive in the United
States of America. If we are to avoid further devastation in these industries, our nation's trade and
industrial policies need to recognize this interconnectedness.
While a significant amount of steel production is used in infrastructure, almost 80% is consumed in
products that can be made anywhere. If steel's key customers move offshore, it will be much more
challenging to sell them domestically produced steel. Our union's experience makes it clear that as
America's largest consumers of steel the manufacturers of autos, auto parts, white goods, and other steel
intensive products increasingly move their manufacturing facilities elsewhere, the logic for a large
domestic steel industry will exit the U.S. with those consumers. There is little that is manufactured that
does not somewhere along the line, directly or indirectly, require steel. But this means that the less we
make here, the less we need a steel industry here to feed it. 1
To prevent this dire outcome, steel producers, auto producers, and components producers, as well as their
unions, must unite in demanding a coherent and integrated trade and industrial policy that doesn't seek to
protect one sector at the expense of another, but rather lays out a framework of trade, tax, infrastructure,
and R&D policies that will sustain a vibrant domestic manufacturing sector.
Changing our misguided trade policies with China is an essential starting point. It is crucial that we begin
this conversation today, as the Chinese government lays out longrange strategic plans to dramatically
increase its presence in international motor vehicle markets rather than waiting another day let alone
five or ten years which will be far too late.
As Ron Gettelfinger told us earlier, China has become a net exporter of assembled vehicles in the past two
years. Its exports of auto parts have also skyrocketed, while imports of auto parts fell over the same period.
In 2005, China became the third largest automotive market in the world and the fourth largest
manufacturer of vehicles. But China's production capacity is expected to grow rapidly to 1820 million
vehicles (from 8 million in 2005), while sales in China are only expected to grow to 910 million. Excess
capacity could thus reach 100 percent in the next five years, with the domestic U.S. auto market a key
target for Chinesebuilt vehicles and automotive parts exactly the sort of excess capacity that led to
dumping and the steel crisis at the turn of the century.
We have more than 175,000 members whose products make it into the domestic auto industry. If China

would displace 10%, that would effect more than 17,500 of our members or more than 1,750 members for
49
every percent of erosion of domestic capacity. It is clear that these dramatic shifts in global auto
production and capacity are quite relevant for the security of the jobs, wages, and benefits of our members.
This trend is more pronounced for certain sectors. Economists Dan Luria, Matt Vidal, and Howard Wial
found in a recent study of component manufacturing that "the assembly plants of ... the U.S.based
automakers remain a huge market for onshore component producers. A U.S.assembled car gets more than
60 percent of its value from component suppliers ... and nearly 75 percent of that 60 percent comes from
U.S. component suppliers." 2 They found this to be particularly true for mechanical parts (as opposed to
electrical/electronic components), "which tend to remain clustered in the same areas as the customers that
buy them, though global sourcing is making this less and less true." 3
The Chinese government's targeting of the auto industry as a "pillar industry" eligible for special
government support violates China's WTO and other international obligations in numerous ways, and our
government must act swiftly and unequivocally to counter these unfair practice.
1 Ron Bloom, "Remarks to Steel Success Strategies XXI," New York, 6/21/06.
2 Dan Luria, Matt Vidal, and Howard Wial, "'FullUtilization Learning Lean' in Component
Manufacturing: A New Industrial Model for Mature Regions, and Labor's Stake in Its Success, p. 5." 3
Ibid, p. 5.
While the U.S. government has identified numerous areas where the Chinese government's actions violate
WTO obligations, USTR has initiated relatively few cases ignoring some key areas such as currency
manipulation, violations of workers' rights, and illegal subsidies. The Treasury Department has repeatedly
failed to label China a currency manipulator, despite overwhelming evidence that the Chinese government
is intervening repeatedly and onesidedly in currency markets to prevent the yuan from appreciating. The
President has rejected all of the 421 import surge cases that have been brought, even in the face of the
International Trade Commission's finding of injury.
I join my colleagues Ron Gettelfinger and Richard Trumka in calling on the Administration to act
decisively and swiftly on both Chinese currency manipulation and worker rights violations. Each of these
contributes significantly to the competitive difficulties facing the motor vehicle and parts industries, as
well as their suppliers.
On currency manipulation, we call on Congress to enact H.R. 1498, the RyanHunter bill, which would
allow the government to address currency manipulation as an illegal subsidy. On worker rights, we join
many of our friends in Congress, on both sides of the aisle, who have called on the Administration to
accept the AFLCIO's Section 301 petition and send a message to the Chinese government that it is
neither legitimate nor humane to compete in the global economy through the systematic and violent
repression of workers' fundamental human rights.
The Steelworkers support the UAWendorsed "Marshall Plan" for the auto industry. This plan would
stimulate U.S. investment and production of advanced technology vehicles and their components, giving
U.S. workers and producers an edge over Chinese and other foreign suppliers. By supporting the
development of advanced infrastructure, this plan would also improve fuel economy and the environment,
thereby strengthening the nation's economic and national security by reducing our dependence on
imported oil.
It would have the added benefit of putting to rest, once and for all, the Hobson's choice that narrow
interests have falsely foisted on the American public of jobs vs. renewable energy and environmental
integrity.
50
The policies we have recommended here today must be put in place without delay, as the trajectory of
Chinese production and exports in the motor vehicle sector makes their implementation absolutely urgent.
Mr. Chairman, members of the Commission, I would like to express my appreciation and that of my
members for your leadership in holding this hearing today and for all the excellent work you have done. I
look forward to any questions you may have.
HEARING COCHAIR BLUMENTHAL: Thank you very much, Mr.

Gerard. Mr. Trumka.
STATEMENT OF RICHARD TRUMK A, SECRETARYTREASURER
AFLCIO, WASHINGTON, D.C.
MR. TRUMKA: Thank yo u, Mr. Chairman, and I also want t o

ackno wledge and t hank t he Commission for t he gro undbreaking work t hat
yo u've been engaged in. As t he Co mmission is aware from previous
appearances befo re t his body, t he AFLCIO has cont inuously challenged
t he unfair t rade pract ices by t he Chinese government , especially currency
manipulat ion and workers' right s legislat ion, H.R. 1498.
Last mont h, t he AFLCIO t oget her wit h Represent at ives Ben Cardin
and Chris Smit h filed a 301 pet it ion charging t hat t he Chinese government 's
syst emat ic and egregio us violat io ns o f workers' right s are, in fact , an unfair
t rade pract ice under U.S. t rade law and give Chinese manufact urers up t o a
77 percent advant age o ver everyone else. A co py of t hat pet it ion will be
submit t ed t o t he USCC fo r t he record.
The explosive growt h of Chinese manufact uring and it s pro ject ed
t raject o ry po sed t roubling quest ions for o ur nat io n's indust rial base and o ur
nat io n's nat ional securit y.
The aut o mot ive indust ry is t he singlemo st impo rt ant indust ry t o
American manufact uring. It account s for fo ur percent of o ur GDP and
fully 25 percent of all manufact uring. It 's t he cornerst o ne of an advanced
manufact uring eco nomy. From t he glass, rubber, st eel, and elect ronics t o
engines, t ransmissions, design, engineering, R&D and more, t hat result in
t he co mplex int egrat ion and assembly of leadingedge t echnologies, t he
aut o mot ive indust ry encompasses t he crit ical element s o f t his nat io n's
indust rial infrast ruct ure.
To have a vibrant advanced manufact uring economy, a nat ion must
have a st rong inno vat ive, diverse and broad indust rial base as a foundat io n.
Our ent ire economy benefit s fro m manufact uring because it is t he leading
pro duct ivit y leader, t he primary source of innovat ion, t he leading purchaser
o f new t echnolo gy, financial and t echnical services, and t he leader in new
wo rk organizat io n and wo rk process, and it acco unt s for t wo t hirds of all
R&D invest ment .
Manufact uring jobs, it is est imat ed, are asso ciat ed wit h up t o fo ur
addit ional jobs. Today t hese dividends and benefit s t o o ur nat io n are
51
t hreat ened. Fo r manufact uring t he past five years have been a brut al
widespread and deep st ruct ural decline. Since 2000, more t han 40,000
manufact uring est ablishment s have closed, and we've lo st t hree million
manufact uring jobs. That 's 17 percent of t he manufact uring workforce.
Wit hin manufact uring, nearly every subsect or suffered do uble digit
emplo yment declines. St udies by t he EPI and our own Indust rial Union
Co uncil and o t hers confirm t hat over half t he job loss is t rade relat ed.
At t he same t ime, t he job growt h has been t he weakest on record and
real wages act ually declined. Our ent ire net job growt h was in non
t radable serviceprovided act ivit ies. We no w borrow an unsust ainable $2
billio n a day t o pay fo r goo ds we co nsume, and we do not produce as a
nat io n. And we face a debt of nearly $1 t rillion wit h China alone, and t hat
is a t hreat t o t he st abilit y of t he world econo my.
The free market economist s' response t o all t his is t o t ell us t here's
no cause t o alarm, t hat all we're wit nessing is t he nat ural mat uring of our
eco nomy. The pro cess t hey claim is inevit able and in t he long t erm benign.
Tho se kno wledge jobs t hat economist s claim wo uld t ake place of lo st
manufact uring jobs in t he globalized new economy simply never appeared.
Since 2001, t he info rmat ion sect or, t elecommunicat ions, commut er
syst ems design and relat ed o ccupat io ns have all suffered massive job
lo sses. Overall so me 725,000 professional business and informat ion
service jo bs disappeared.
At o ur universit y engineering enrollment s are shrinking. Offshore
o ut sourcing has left t he U.S. wit h rising unemployment rat es amo ng t he
highly educat ed. For a majorit y o f American workers, current global
policies have bro ught deindust rializat ion, an at t ack on unions, declining
real wages, vanishing pensions and vanishing healt h care. For
manufact uring, it 's beco me a cancer t hat is dest roying our t echnical
capacit y t o innovat e and t o pro duce.
Offsho re invest ment in indust rial capacit ydo mest ic manufact uring
invest ment fell nearly 17 percent in real t erms bet ween 1998 and 2004, and
invest ment in manufact uring st ruct ures declined 44 percent over t he same
perio d. At t he same t ime, many firms made record offshore invest ment s in
R&D, engineering, design and product ion jo bs. The foreign direct
invest ment flow int o China reached $62 billion in 2004 and co nt inues t o
so ar.
70 percent o f China's FDI is in manufact uring and heavy
co ncent rat ions in expo rt orient ed companies and advanced t echno logies.
Fut ure FDI pro ject ions are more t han double t he act ual level t oday. The
t rend in aut o is just as apparent .
In t he past t wo years, Delphi, Fo rd, GM have all announced major
R&D t o product ion invest ment s in China.
HEARING COCHAIR BLUMENTHAL: One minut e left , Mr.
52
Trumka.
MR. TRUMKA: A recent ly leaked memo from GM t o it s suppliers
t o ld t hem t hey must st art doing a percent age of t heir business in China.
Mr. Chairman, members of t he Commission, if we lose our indust rial
capacit y, we lo se far more t han just t ho se plant s. We lose inno vat io n; we
lo se R&D; we lose t echnical kno whow; we lose our edge. We become less
t han t he wo rld's leaders and we become dependent on ot her nat ions,
part icularly China where majo r U.S. co mpanies are relocat ing t o t ake
advant age of t he climat e t hat t hey've helped creat e, a climat e where laws
aren't enforced, where currency is manipulat ed, and t hey get a majo r
advant age o ver American pro ducers.
Our t echnology wit t ingly and unwit t ingly is leaked and sent t o t hose
co unt ries so t hat we co nt inue t o lo se ground nat ionwide. That , Mr.
Chairman and members of t he Commissio n, simply can't exist if our nat ion's
securit y and o ur nat ion's econo my are t o proceed and be t he world leaders.
Thank you.
[The st at ement follows:] 1 and 2
Panel II: Discussion, Questions and Answers
HEARING COCHAIR BLUMENTHAL: Thank yo u very much t o all

o f yo u for your very insight ful t est imony. I'm going t o lead o ff wit h a
quest ion for all of you sparked in part by comment s by Mr. Gerard in t erms
o f who is act ually benefit ing, and also , Mr. Trumka, in t erms of wo rk
co ming back t o t he Unit ed St at es, part icularly in t he aut o indust ry.
I'd like all o f you t o comment , if you can, on t he benefit s t o
American workers from t he o pening of plant s by Japanese and Korean
manufact urers in so me of t he st at es out side of Michigan, t he benefit s
part icularly t o American wo rkers. I wo uld imagine t hat some feel t hat t his
is a posit ive t hing, and I'd like t o get yo ur comment s on t hat , each of one
o f yo u, please.
MR. GETTELFINGER: First of all, if you go back in t ime when
Do ug Frazier was t he president of our union, Doug made a t rip t o Japan
and he said if you're going t o sell vehicles here, you should build vehicles
here. And we're pleased t o see t hat we do have manufact urers of foreign
name plat e vehicles in t his count ry.
And we're also pleased t hat because o f our cont ract s, t hose workers
are making a decent wage. The quest io n beco mes t hough how much act ual
invest ment have t hey made in compariso n t o t he t radit ional Big Three
aut o mot ive indust ry? And t hat 's where t he invest ment is and it co nt inues
1
Click here to read the prepared statement of Mr. Richard Trumka
2
Click here to read the supplemental appendix of Mr. Richard Trumka
53
t o be. I t hink it 's over 90 percent of t he aut o wo rkers in t his count ry are
emplo yed by t he Big Three.
You have 80 percent of t he part s, if you count t he part s t hat are
manufact ured in Canada, are included in t he cont ent o f t he vehicles t hat are
manufact ured by t he Big Three. So t hey purchase 80 percent o f t he part s.
They assemble about 75 percent of t he vehicles t hat are sold in t his count ry
here, and in addit io n t o t hat , t hey o perat e, and I'm not sure now t hat we've
had so me clo sings, but it was 20 st at es. I t hink we're probably down now
t o 18 st at es.
So t here is a benefit t o having t he foreign name plat e operat io ns
here, but again we're clo sed out of t ho se market s. In Ko rea, I t hink we
have t wo percent of t he sales of vehicles in Korea. In Japan, it 's abo ut five
percent , and in Europe it 's around 20 percent . So we're cat ching it o n bot h
ends.
MR. GERARD: I would add t o what President Get t elfinger said by
saying t hat I t hink t he foreign name plat es have added t o t he erosion o f
eco nomic st abilit y in t he aut o sect or, and one of t he ways t hat t hey've done
t hat is t hat t hey have managed t o escape having any pension obligat ions
and t hey put t remendo us pressure on t hat syst em because in t he count ries
in which t hey co me from, t hey have a different form o f healt h care t hat 's
no t emplo yer based.
Their healt h care cost s per vehicle is subst ant ially, subst ant ially
lo wer t han t he healt h care cost per vehicle in America, and in fact I was
o nce at a meet ing where t here was a vice president of Toyo t a and we're
st anding around t alking, and he said I can do t he same t hing as GM. I can
build a new plant . I can put t he same equipment in as GM. I can man it
t he same way. I can pay t he same wages. I can do t he same t hing.
But because I have no legacy cost s and I have no pension
o bligat io ns, I can sell t he car for 1,500 bucks cheaper and st ill make a
pro fit .
HEARING COCHAIR BLUMENTHAL: Isn't t hat t he kind o f
co mpet it io n t hat we like here in t he Unit ed St at es?
MR. GERARD: No, I t hink t hat 's t he kind o f compet it ion t hat 's
unfair. How do you get t o t hat compet it ion if yo ur o bligat ion t o get t here
is t o do away wit h your workers' healt h care and pension benefit s. I t hink
t he co mpet it ion we o ught t o like is t he kind t hat says you're not going t o
have an advant age by removing so cial infrast ruct ure from t he co unt ry, and
if you want t o be in t his co unt ry, we're all going t o be in t he healt h care
posit io n, we're all going t o be in t he same pension po sit ion.
You're no t go ing t o get an advant age by exploit ing yo ur workers and
no t pro viding healt h care, not having decent pensions. So I don't t hink
t hat 's t he way America was designed t o compet e. You and I aren't on t he
same wavelengt h about t hat .
54
HEARING COCHAIR BLUMENTHAL: Mr. Trumka.
MR. TRUMKA: I will be very brief because I t hink most everyt hing
t hat needs t o be said has been said. I t hink it is much preferable t o have a
fo reign pro ducer locat e t heir manufact uring pro duct ion facilit ies here t han
it is for us t o locat e our facilit ies elsewhere. The reason I say t hat is most
fo reign invest ment in t his co unt ry we're t old t hat it washes out wit h our
invest ment t hat goes overseasbut most foreign invest ment in t his count ry
is a change of ownership rat her t han in t he invest ment of product ion
capabilit ies and facilit ies and capacit y. So t hem pro ducing here would be
goo d. It 's a good t hing.
However, it could be a lot bet t er because unlike us, t hey don't bring
t heir R&D. They don't bring t heir innovat ive processes over here. They
keep t hem primarily at home. They keep t heir engineers at ho me and send
t he product s o ver here. As a result , t hey buy processes, t hey buy part s
fro m a closed market rat her t han everybody, and we don't get t he real
benefit t hat we sho uld. If t he t rade laws were fair and t hey were enforced
fairly, t here would be a much great er benefit for t hem locat ing here t han
we're current ly receiving.
HEARING COCHAIR BLUMENTHAL: Thank you. We have
Co mmissioner Wessel wit h a quest io n.
HEARING COCHAIR WESSEL: Thank you and t hank you t o all o ur
wit nesses and t o my cochair. While his last st at ement was po sed as a
quest ion and not a view, let me respond t o t he quest ion myself as well,
which is we're no t well served by having our companies cherrypick where
t hey produce and who t hey employ, and pit t ing one wo rker against anot her
eit her by doing it here versus China o r doing it here versus a right t owork
st at e or some o t her place where t hey can find cheaper workers, younger
wo rkers wit h lower pensio n cost s, and find t hat not only are we engaged in
a race t o t he bo t t o m wit h our compet it ors o verseas, but we creat e a
st ruct ure here at home t hat also makes us engaged in a race t o t he bot t om.
Mr. Get t elfinger, I'd like t o underst and a lit t le bit more about t he
co mpet it ive challenge we face. I kno w you were deeply involved in t he
rise o f Japan's aut o indust ry in t he 1980s, and it seems t o me t hat at t hat
t ime Japan which did invest here had t o pay billions of dollars t o creat e it s
o wn infrast ruct ure in t he U.S., it s own dist ribut or net work, et cet era.
Are we facing a dramat ically different problem here t oday in t hat
because t he Chinese aut o pro duct io n is happening wit h joint vent ures, t hat
we're going t o see t ho se co ming in under U.S. name plat es meaning t hat a
GM jo int vent ure car in China is go ing t o be able t o co me int o our
dist ribut io n net wo rk?
MR. GETTELFINGER: DaimlerChrysler has flo at ed t he idea o f
bringing in small vehicle manufact ured in China and I'm sure o t her
manufact urers are t aking a loo k at t hat , so I t hink t hat t hat is a real
55
possibilit y. Again, if yo u just not e where t hese plant s are being locat ed in
China and yo u can see t here's no quest io n abo ut t he excess capacit y t hat 's
going t o exist , t hose vehicles are going t o come here. They're going t o
co me here whet her it 's t hro ugh Malcolm Bricklin and his company, t hey are
going t o co me here. There is no quest ion abo ut it .
Now, t he o t her piece of t his is while t here's unrest in Thailand,
t here's an effort by t he administ rat io n t o negot iat e a free t rade agreement
wit h Thailand which wo uld have a major impact on t he pickup t ruck
market in t his count ry, and Thailand wo uld t hen become a launching pad
fo r o t her co unt ries, but again if you not e, 75 percent o f t he vehicles t hat
are sold in t his count ry are manufact ured by t he Big Three here.
So t hat means we have a number o f vehicles t hat are being impo rt ed
in addit ion t o what is being manufact ured here by t he foreign name plat es.
We canno t , and, look, I don't mind t aking on anybo dy. Go o ut and t alk
about t he aut o plant s as far as t echnology go es, about t he qualit y, about
pro duct ivit y. I'd like t o t ake yo u, just like Congressman Dingell made an
o ffer t o yo u, I'd be glad t o t ake t his Commission t o anyone of t hese
facilit ies.
But we do have some challenges. Leo ment io ned t he legacy cost s
and we're proud t hat a union and a co mpany believes in t aking care of t heir
wo rkforce. We're pleased wit h t hat . Now we are at a bit of a disadvant age
if I'm a fo reign name plat e operat ion and I'm going t o come int o st at es and
st art bidding one st at e against t he ot her on where I'm going t o locat e and
which st at e will give me t he mo st breaks and how lo ng do t hese t ax
incent ives o r what ever it is t hat t hey o ffer t hem last .
That put s us at a bit of a disadvant age, but we're out t here st ruggling
wit h t hem, wit h t hat kind o f compet it ion. The big issue becomes at so me
point in t ime, at some point in t ime, we have t o realize t he U.S. really
doesn't have an indust rial policy and t he co unt ries wit h which we compet e
have policies t o t ake care of t heir workers.
HEARING COCHAIR BLUMENTHAL: Thank you very much.
Chairman Wort zel had a quest ion.
CHAIRMAN WORTZEL: Gent lemen, I appreciat e yo ur being here.
We have heard from you befo re. Yo u do a great jo b arguing for yo ur
wo rkers and advo cat ing t heir posit io ns. I'd be int erest ed if, as a group,
yo ur unions have funded st udies or conduct ed any research on t he safet y o f
Chinese vehicles, of t heir aut o glass? I know we've heard some t est imony
o n part s and t he problems wit h part s.
It seems t o me t hat one of t he majo r argument s against China's
manufact uring is t hat vehicles just kill people, t hey fall apart . Yo u ride
down t he road in China and —t here are people just bleeding all o ver t he
place; vehicles flip, brains fall out o n t he highways. Tho se aren't t he kinds
o f aut o mo biles we want running around t he roads of t he Unit ed St at es. We
56
have enough pro blems.
Very lit t le research has been done o n t hat so rt of t hing, and such
research by your gro up might be a useful way t o prot ect t he healt h and
lives of American cit izens.
MR. GETTELFINGER: We have not done a st udy on t hat . I am
sure t hat t he st andards t hat are required befo re a vehicle can ent er t he
market place here are rigo ro us enough t hat I t hink it would t ake care o f
t hat pro blem. No w what t hey can do in China and get away wit h, t hat 's
so met hing t ot ally different .
But we're t alking about many product s here t hat have not even been
develo ped yet t hat are not even in pro duct ion yet . So o bviously we
co uldn't do a st udy on t ho se.
MR. TRUMKA: We do have st udies o n various indust ries. We
know in t he mining indust ry, fo r inst ance, t he level of healt h and safet y is
so far below t hat of every ot her indust rialized count ry. They kill
t ho usands o f miners every year, 26,000 est imat e last year, because we don't
have goo d st at ist ics. They don't keep goo d reco rds over t here.
In addit io n t o t hat , our 301 pet it ion t hat we filed and was reject ed
t wo years ago out lines t he lack o f healt h and safet y compliance by t he
Chinese and t heir failure t o enfo rce t heir own healt h and safet y rules, and
t hat result s in t he killing and crippling and injuring of hundreds o f
t ho usands o f wo rkers in China and gives t hem a significant advant age.
That is included also in t he 301 pet it ion t hat we just filed, t he lack o f
healt h and safet y concerns. So t hat is submit t ed fo r t he record and you can
t ake an accurat e look at it . 3 and 4
MR. GERARD: We're very much like Rich in t hat we don't and
Ro nwe haven't done any specific st udies but we're aware o f st at ist ics
about wo rkplace accident s and fat alit ies wit h what are very imperfect
records. That record is at rocio us relat ive t o what we would find
accept able anywhere in t he rest o f t he indust rialized wo rld.
But I was list ening carefully t o t he t est imony o f po lit ical panel, and I
t hink it would be appropriat e for t he Commission t o recommend t hat fo r
any manufact ured Chinese good t hat t hey submit all o f t heir specifics, t hey
submit t heir plans, t hey submit t he finished product fo r inspect ion, and we
o ught t o t reat t heir product s like t hey t reat ours, and t hat t heir vehicles
o ught t o co me over here at least a year before a sale for a t horough
inspect ion and safet y t est ing because I don't have t he same degree of t rust
in t he syst em at t he bo rders t hat Ron do es.
I t hink t hat t he degree of piracy, t he degree of fraud, t he degree o f
3
Click here to read the Section 301 petition referenced by Mr. Trumka
4
Click here to read the Executive Summary of Section 301 petition against the
Chinese government referenced by Mr. Trumka
57
pirat ed and less t han adequat e part s t hat will make it int o t hat . I don't
want t o be driving aro und in my Nort h Americanmade car and have so me
Chinese wheel fall off in front of me, and I t hink if t hat 's what 's going on,
we o ught not t o put fait h in t he border inspect ion syst em, but we ought t o
demand t hat we t reat t heir equipment just like t hey t reat o urs.
CHAIRMAN WORTZEL: Thank you.
HEARING COCHAIR BLUMENTHAL: Thank you. Commissio ner
Mullo y.
COMMISSIONER MULLOY: Thank yo u very much, all t hree o f
yo u, for being here, and for your very helpful t est imony. Here's my
underst anding o f what is happening here.
China had a bad t wo cent uries. They used t o be a major cent er o f
t he world, and t hey had a bad t wo cent uries. Their go vernment has a
st rat egy t o move t hem back. President Hu was recent ly at a meet ing in
China of t heir Nat ional Academy of Sciences, and he t alked abo ut China
needs t o move up t he fo od chain t echno lo gically, not t o raise t he st andard
o f living o f peo ple. He said he want ed t hat because t hey need t o, quot e,
"build China's co mprehensive nat io nal power."
Now, Co mmissioner Becker, in his opening st at ement , which was
read here, he not es t hat our companies aren't here, and t hey're act ing as if
China is t heir fut ure. Let me just t ell you we were just in China. We
t raveled around. We had t his dinner in Shanghai, a working dinner wit h
t he represent at ives of a lo t of American companies, and t here were t wo
t hings t hat st ruck me in t hat dinner.
One, represent at ives t here said, quo t e, "t he economic pendulum is
swinging t o China; t wo , t he ot her t hing t hat was very clear is how afraid
t hey are of t he arbit rary t reat ment t hat t he Chinese go vernment can put on
t hem. So it 's like a schizophrenia. They're want ing t o be moving t he
eco nomic power t o China, but yet t hey're afraid of t he Chinese government
because it can t reat t hem rat her arbit rarily. I t hink t hat 's one reason
t hey're not here t oday because if t hey say anyt hing, t hey could be subject
t o arbit rary t reat ment .
Now, Mr. Get t elfinger, on page t hree of yo ur t est imo ny, yo u no t e
t hat t he Unit ed St at es has left t he mult inat ionalist s in charge of our China
policy. I made t hat point in our very first report in 2002. I said o ur
government has subco nt ract ed our China policy t o t he mult inat io nals, and
t he more I underst and what is go ing on here, here's my t ake on it . The
co rpo rat io ns under t heir charge are aft er shareholder value. That 's what
t hey're go ing t o be judged on, shareholder value.
They're not out t here represent ing t he nat ional int erest of t he Unit ed
St at es. So here's what we've got . We've got t hese guys who are
represent ing shareholder value; yet , t hey lobby for policies t hat are
harmful, I t hink, t o t he nat ional int erest s o f t he Unit ed St at es but good for
58
sho rt t erm shareho lder value. And t he more I lo ok at it , and we have
recommended policies o n exchange rat es, on using t he safeguard, and we
can't get t hem implement ed by t he administ rat ion, and I t hink one reason is
because t he co rpo rat io ns focused on shareho lder value have all t hese
lo bbying and law firms and everyone else pushing t his idea t hat t his is all
free t rade, which it isn't .
So it seems t o me we've got t o go back and say how can we
incent ivize a syst em t hat has t he co rporat ions' shareho lder value t ied in
wit h t he American nat io nal int erest , so mehow o r o t her, and I kno w it
wo uld deal wit hyo u have t o go aft er exchange rat e policy, enforcement o f
o ur t rading laws. I t hink t here's need t o loo k at co rporat e governance. I'm
no t quit e sure how. And t ax po licies. But I t hink it 's an int egrat ed syst em,
and what I wo uld ask, do you guys t hink o f it in t hat way, and secondly, do
yo u have t hink t anks out t here working o n t his kind of vision of how t o go
aft er t his problem?
Maybe I'll st art wit h Mr. Trumka and t hen go across quickly.
MR. TRUMKA: Thank you, Commissio ner Mulloy. First of all, we
do. And it 's sort of a schizophrenia t hat t hey have. They get a t riple
whammy, if yo u will. When you look at t he t ot alit y of t he circumst ances,
an employer who mo ves overseas get s a benefit in a number of ways.
First , t hey get benefit ed by t he t ax code here in t he Unit ed St at es. It
act ually rewards t hem for moving jo bs overseas. They escape t he legacy
co st s. And t hen t hey go o verseas or t hey go t o China fro m specifically
here, and t hey have a vest ed int erest in no t seeing t he currency
manipulat ion issue addressed. They have a vest ed int erest in not seeing t he
Chinese live up t o t heir own minimum wage, child labor, prison labo r,
healt h and safet y laws, because t hey benefit t here, and t hey increase t he
amo unt o f mo ney t hey make.
If yo u look at it , t hey t ake t wo or t hree t act s act ively. They act ively
explo it t he business enviro nment t hat 's creat ed by t he U.S. t rade policy, for
which yo u ment io ned t hey lobby hard, t hat encourages t hem t o supply t he
U.S. market fo r highly sophist icat ed manufact urers from low cost facilit ies,
and t hen t hey respond t o t he fo reign government of carrot s and st icks.
If yo u're in o ne of t heir indust ries t hat t hey have t arget ed, which
aut o s is o ne o f t he indust ries t hat China has t arget ed, t hey get federal
funds, t hey get federal help. They suck all of t hat in, and it makes more,
it 's mo re o f a benefit for t hem.
I t hink yo u might be gracious when you say it 's for shareholder
value. I'm no t so sure it always t ranslat es o ut int o shareholder value
because t he shareho lders o f mo st o f t ho se co rporat ions are losing t heir
jo bs. They're losing t heir benefit s. The shareholders of t hose corpo rat ions
are also paying t he price for t he lack of R&D. Their count ry is less secure.
So ult imat ely t hey pay t he price bot h ways. I apolo gize for t he lengt h o f
59
my answer.
HEARING COCHAIR BLUMENTHAL: Thank you.
MR. GERARD: I will segue int o Richard's answer by saying t hat I
t hink you're being overly generous by saying t hat it result s in shareho lder
value. The last t ime I loo ked at it , t he largest single source of invest ment
capit al in America was workers' deferred wages in t he form of pension
plans, and we all kno w what 's happened t o workers' pensions plans as t he
result of t his, so it hasn't t ranslat ed in t hat way.
But I'll t ell yo u t hat I t hink t here is o ne group t hat has benefit ed
subst ant ially from t his deal, and t hat 's America's financial communit y,
Cit ibanks, and t he Go ldman Sachs who are moving money back and fo rt h
and helping t hese deals come t oget her. I t hink t hat you're absolut ely right ,
t hat it 's an int egrat ed respo nse. We've got , as I said in my comment s,
we've go t bad public po licy.
We've got benign neglect . We've got lack of enforcement and we've
got subst ant ial myopia. I don't kno w ho w you can sit t here, no mat t er
what part y you belong t o , and t hink t hat having a $4 t rillion t rade debt is
in any way go ing t o benefit t his count ry, and t he t raject ory go ing like t his.
There's no sign t hat t his t raject ory is going t o change. It 's 720 billion last
year, and we're lo oking for 800 billion t his year. It was 202 o r 220 billion
wit h China last year. We're loo king at 270 billion t his coming year.
That means simply t hat t hey're holding our currencies. They're our
banker, and I know what I'm like when I'm lat e on a payment and when
t hey call up and say pay me Monday, what will happen? The dollar will
plunge, int erest rat es will go up, and t hese so called shareholders will all
t ake it in t he neck again because t ho se shareho lders are our members
who se pensio n funds are being invest ed.
So we need an int egrat ed public policy response. We need a
manufact uring st rat egy. We need an invest ment st rat egy. We've go t t o
st art t o hold corporat io ns account able. A co rporat ion doesn't exist fo r one
st akeholder. A corpo rat ion is an ent it y t hat was creat ed by public policy.
This doesn't happen t o t his degree anywhere else in t he world. There's no
o t her count ry t hat ignores it s manufact uring base t he way America does.
COMMISSIONER MULLOY: Thank yo u very much.
MR. GETTELFINGER: Let me just say t hat in nort hwest Indiana,
t here's a plant , was a plant called Magnequench Int ernat ional.
Magnequench Int ernat io nal is represent ed by t he Unit ed St eel Workers.
They made t he magnet s t hat guided t he smart bombs. That work is no w
being done in China.
We as cit izens when we open a meet ing, we pledge allegiance t o
America. I guess my quest io n is who do co rporat ions pledge t heir
allegiance t o? They're no t willing t o co me here and t est ify fo r reasons
60
yo u've given. I'm no t sure ho w t hey would respo nd t o t hat . We've got
so me very serious issues here.
HEARING COCHAIR BLUMENTHAL: Thank you. Chairman
Bart holomew.
much and t hank you t o all of our wit nesses, bot h fo r your int erest ing
t est imony t o day and for your leadership on behalf of American workers. I
put my own po lit ical affiliat ions o ut t here, but it 's cert ainly been t hrough a
lo t o f your effort s over t he years t hat so many American families have been
able t o live t he American dream, and I t hink as we all move forward
wo rking t o make sure t hat t hat co nt inues, your wo rk cont inues t o be very
impo rt ant .
Mine is a t ho ught as much as a quest ion, and I o ffer it up act ually t o
my co lleagues as much as t o all o f you. It 's relat ing t o t his issue o f ho w
t he past relat es t o t he fut ure, and t he invest ment , t he pot ent ial invest ment
in t his case o f Chinese co mpanies here in t he Unit ed St at es, what t hat
means for American wo rkers. Obviously we know t hat t he Chinese
government has an indust rial policy.
We know t hat t hey have a cent rally cont rolled economy. We kno w
t hat t heir st ruct ure, t heir co rporat e st ruct ure is different and t hat t he
co mpanies t hemselves are oft en eit her co nt rolled by members of t he
Co mmunist Part y or highly influenced by members of t he Co mmunist Part y.
A number of o ur co lleagues up here have raised co ncerns abo ut t hat very
issue when it has co me t o t he Leno vo and so me comput er sales t o t he St at e
Depart ment .
So my quest ions relat ing t o is a possible so lut ion t hat Chinese
co mpanies wo uld st art invest ing here and producing here are t wo fold. We
know t he role t hat t he mult inat ional co rporat io ns have had in det ermining
U.S.China po licy, U.S.based mult inat io nal co rporat ions whose int erest s
t hey have been looking aft er in t erms o f U.S.China policy.
What do es it mean t o our policymakers if t hey have st at e and local
government officials go ing t o t hem on behalf o f Chinese companies because
t he co mpanies are pro ducing in t heir dist rict s and do we want an American
wo rkforce t o ult imat ely end up loo king clo ser like t he workforce it had
been or t he workforce t hat t he Chinese government current ly has? That 's
o ne piece o f it .
The second piece of it is when t here is overcapacit y in China, do we
act ually believe t hat Chineseowned companies producing in t he Unit ed
St at es would be allowed t o sell t heir product o r will t he Chinese
government decide for do mest ic purposes t hat domest ic product io n in
China sho uld be what 's being sold in t he Unit ed St at es?
Tho ught s?
MR. GERARD: I can st art wit h t hat by saying t o yo u t hat in t he
61
st eel indust ry, we've already st art ed t o see it . As I've said, we've filed fo ur
cases under Sect io n 421 at t he ITC. We wo n t hem all. They all have some
degree of st eel in t hem, and t he administ rat io n has unanimously vot ed wit h
China against us fo ur t imes in a ro w.
It 's project ed t hat when t he figures come in for '05 t hat China will
have increased it s export s from 20 million t ons t o 37 millio n t o ns, a 75
percent increase. There was once a co mpany quit e a few years ago I
wasn't an o fficer yet called China St eel t hat t hey came and bo ught a small
st eel mill in t he Unit ed St at es t hat was represent ed by t he St eelworkers.
They didn't like being called China St eel because it was t oo obvio us,
so t hey changed t heir name t o Cit y St eel, and in t he next ro und o f
nego t iat io ns, t hey forced an illegal lo ckout . While we fought t he illegal
lo ckout , t hey dismant led t he plant and shipped it back t o China so t hat I
have no illusions t hat we're dealing wit h a t ot alit arian regime, t hat it s
co mmit ment is t o st rengt hen it s domest ic base, and it s longt erm
co mmit ment is not t o become more democrat ic. We seem t o have forgot t en
Tiananmen Square.
And we seem t o fo rget t hat workers are jailed everyday. We seem t o
fo rget t hat if yo u want t o pract ice your religion, you go t o jail. We seem
t o fo rget t hat t hey have forced abort ion. And we get t he socalled
Christ ian right in t he Congress who get amnesia over t his.
Now, I t hink t hat it 's t remendously impo rt ant t hat t his Commission,
and in so me ways you're our only salvat ion, you're t he o nly group t hat can
co me o ut and issue a public document t hat t ells t he t rut h based on hearings
abo ut what 's going o n in China.
Let me close last ly by saying somebody has t o explain t o me at what
point t his rubber band breaks? At what point can you no longer sust ain a
gro wing t rade deficit ? And it 's no t just like t he money is going
so mewhere. This value t hat we're t ransferring o f our wealt h t o China is
going t o co me back and t hey're going t o buy our asset s. They're buying
o ur t o ll ro ads now. They're going around t he wo rld t rying t o buy oil fro m
Iran. They're go ing t o buy t imber wherever t hey can get it .
They're going t o buy iron ore. They're going t o buy all t he reso urces
and t hey're doing it wit h o ur mo ney. And we're sit t ing here pret ending t hat
t his is inno cuous. When t hey come back and t hey buy American plant s,
will t hey buy General Mo t o rs? And if t hey do, will t heir loyalt y be t o here
o r will it be t o China? If t hey buy U.S. St eel, where will t hat loyalt y be?
And I t hink t hat people need t o get a lit t le bit of a shake.
MR. TRUMKA: First of all, I just want t o make clear t hat one
st rat egic element of China's development is t o build export plat forms
across manufact uring, not import , export s.
The second t hing is, is a designat ion of several indust rial sect ors,
mo st no t ably elect ronics and t elecommunicat ions, and aut omot ive
62
indust ries as pillar indust ries. That 's t heir pillar indust ries. They're no t
going t o do anyt hing t hat hurt s t heir pillar indust ries at home regardless o f
where t hey may locat e st uff. It 's going t o st ay t here.
The t hird t hing I really have t o speak abo ut , and we haven't
emphasized it enough, is t he message t hat t his administ rat ion has sent t o
China and elsewhere by it s t ot al inact ion, by it s abso lut e adamant refusal t o
enforce t he t rade laws t hat we current ly have, let alone do somet hing t o
improve t he t rade laws, has said t o China t hat what t hey're do ing is o kay.
The mockery t hat t hey've made of t he annual review, for inst ance,
t ells t he Chinese t hat what t hey're doing, t hey can cont inue t o do. It 's in
t heir best int erest s. They o nly underst and, I t hink, one t hing. That 's when
yo u come at t hem in a direct po sit ion and say t hat can't happen.
This administ rat ion, our go vernment , has said t o t hem what yo u're
doing is fine, co nt inuing it . Unt il we get a clear concise det ermined policy
and an administ rat ion t hat says no t o nly is t his t he policy of t he Unit ed
St at es, but it shall be enforced, you'll cont inue t o lose more manufact uring,
mo re R&D, and we will cont inue t o lo se our edge when it comes t o met als,
allo ys, compo sit es, R&D and everyt hing t hat goes along wit h it .
So I do n't t hink yo u could relocat e a couple of plant s here and t hink
t hat it would cause t he Chinese go vernment t o abandon it s pillar indust ry
policy and it s export plat form po licy. You have t o underst and t hat t heir
design is t o t ake t ho se market s, not share t hem, t ake t hem.
MR. GETTELFINGER: And I t hink t he fact t hat we have t o uched
o n excess capacit y says clearly what t hey're aft er, but let me just swit ch
fro m China a minut e and go t o Sweden and go over here t o Greenville,
Michigan, a company called Elect rolux, profit able company, good pro duct ,
great relat io nship wit h t he workfo rce, t he 2,500 UAW members t hat wo rk
t here, and t he 200 salaried wo rkers t hat work t here. The government o f
t his st at e offered Elect ro lux $120 million over 20 years t o st ay.
The local co mmunit y offered t hem $30 million. We offered over $30
millio n a year in co ncessions, and t hey simply said we can make more in
Mexico. They're already t alking abo ut leaving Mexico and t hey've just
st art ed pro duct ion t here. So I can't see China being anyt hing but more
rut hless. And again, we're not against t rade. We're for fair t rade.
We're for t hem, t he people of China, having a bet t er st andard o f
living fo r what t hey're doing. We want t hem t o build product s over t here
and sell t hem, but t hat 's where we want t hem t o keep t hem is o ver t here.
HEARING COCHAIR BLUMENTHAL: Thank you. Before I t urn it
o ver t o Commissioner D'Amat o, I just want t o make one st at ement , and
t hat is t hat alt hough I appreciat e t he sincerit y of your remarks, of course,
we have t o remember t hat t his is a bipart isan issue. This was negot iat ed,
PNTR and WTO Accession were all negot iat ed under t he Clint on
administ rat io n, and so I just want t o st at e t hat fo r t he reco rd.
63
MR. GERARD: Two set s of t rait ors rat her t han just one.
HEARING COCHAIR BLUMENTHAL: As t o t he Christ ian right
co mment , of co urse, Senat or Brownback and Represent at ive Smit h have
been leaders in t rying t o get legislat io n effect ed on bo t h of t hose issues.
So I just want ed t o st at e t hat for t he reco rd as well.
MR. GERARD: Can I respo nd t o t hat ? I t hink you're making an
impo rt ant po int , and I'd like t o engage you in it . I t hink it wo uld be
impo rt ant t o have a recommendat ion come from you t hen and from t he
panel abo ut what we do about t hat . I t hink t hat if we have a policy about
abort io n, t hen we ought t o enfo rce it ; right ?
The realit y is t hat if it comes t o a choice bet ween t ho se folkslo ok
at t heir vot ing recordt hey vot ed for PNTR. They knew what was go ing
o n. And I'm no t going t o let t hat just pass.
HEARING COCHAIR BLUMENTHAL: I do n't know if Senat or
Bro wnback did. We'd have t o check t hat . Anyway, Commissio ner
D'Amat o.
COMMISSIONER D'AMATO: Thank you, Mr. Chairman. I'd like
all of you t o comment o n t his. You made a comment abo ut fair t rade.
No w in t erms of t he aut o t rade, it seems t o me we have here somet hing
co ming at us t hat is so big for our economy and for t he Chinese economy,
so wide a range o f o ur manufact uring indust ries, t hat how t he car t rade is
handled just seems t o me we have an opport unit y t o handle it correct ly.
Impo rt ing Chinese cars is no t going t o come in in a wave as far as I
underst and it for a couple of years.
We have an o ppo rt unit y t o fashio n t he kind of policy o n car t rade
t hat would co nform t o t he ingredient s o f t he PNTR agreement which we
bro ught t he Chinese int o, t he WTO mechanisms, t he viabilit y of t rade
policy per se, and speaks t o t he int egrit y of globalizat ion. It 's kind of a
t est ing po int , it seems t o me.
And my quest ion is, should we hold t he car t rade host age t o get t ing
it right in t erms o f enforcing t he principles t hat t he Chinese signed up t o?
Fo r example, if t heir cars t hat are coming in here are going t o be full o f
IPR vio lat ions, subst ant ial IPR vio lat ions, st olen t echnology, not t o say
t hat t he po ssibilit y o f subst andard safet y quest ionsput t hat asidebut just
a quest io n of t heir confo rmit y t o t he principles t hey signed up t o in t his
int ernat io nal t rading syst em. If t ho se cars violat e t ho se principles and we
let t hat t rade pro ceed, does t hat represent a t ipping po int in t erms of t he
viabilit y of t he int ernat io nal t rading syst em or should we use t hat as a
mechanism t o enforce t hat t rading syst em?
In ot her wo rds, do we go t o t he WTO first when we know t hey're
co ming in and bring a case in t erms of t hese violat ions o r do we hold up
t he t rade coming int o t he Unit ed St at es unt il t he Chinese goes t o t he WTO
co mplain and join t he issue t hat way?
64
In ot her wo rds, do yo u t hink t hat we ought t o be using t he car t rade
because it 's so import ant as a mechanism t o finally come t o so me kind of an
underst anding as t o whet her t his int ernat ional t rading syst em is going t o
wo rk o r not wit h regard t o t he Chinese?
MR. GETTELFINGER: First of all, I'm no t sure t hat it would, and
let me t ell yo u why. If you t ake a look at Japan, over t he past 20 years,
t he Japanese government s made numerous co mmit ment s t o eliminat e
barriers t o import s of aut omo t ive pro duct s. Not hing has basically
happened t here.
The dist ribut io n syst em t hat t hey've got set up, t he inspect io n
syst ems, t he develo pment o f t echnical product st andards and numerous
o t her areas keep t heir market basically clo sed. We go t o Ko rea in 1998,
t he U.S.Korean Memo randum of Underst anding. That 's been t he basis o f
o ngo ing t alks about opening t he Korean market no w t o t he aut omot ive
impo rt s. And t hough t here has been some progress made t here, very lit t le.
Ko rea co nt inues t o impose excessive t axes o n impo rt ed vehicles and t hey
basically discriminat e against import s by assessing a t ax t hat 's based on
engine size.
I do believe, t o use Leo's t erm, we're at t he po int where t he rubber
band is going t o break. We are at t hat point , and all we have t o do is go
o ut and buy any kind of a product . We're t alking about aut omo t ive no w,
but go out t o t he WalMart st o re and see where t he product s are coming
fro m.
We're in t ro uble in t his count ry wit hout having an indust rial policy.
I t hink we have t o do so met hing t o keep t hem out . I would hope t hat we
wo uld have t he same st andards as Leo indicat ed awhile ago t hat t hey hold
us t o , t hat we simply hold t hem t o t he same st andards. That 's t he best
t hing we could do.
MR. TRUMKA: I would just add t his, t hat we have t o get it right
because if we lose t his indust ry, and t hey are bent on t aking t his indust ry
fro m uswe have t o realize t hat if we lose t his indust ry, American
manufact uring, American t echnolo gy from co mposit e superalloys, met als
and everyt hing do wn t he line goes. Once t hat happens, t his count ry ceases
t o be a superpo wer. We will cease t o be able t o, one, defend ourselves
wit ho ut t he help of ot hers; t wo , we won't have t he int ernal capabilit y t o
wo rk o urselves out of it .
So I t hink we need t o do , use every t oo l at our dispo sal t o get it
right , every t o ol, every last t ool, every t rade law, everyt hing t hat we can
do at t he WTO, t he IMF, t hrough legislat ion and everyt hing else t o get it
right . We canno t affo rd as a nat io n t o let t his indust ry go t he way of o t her
indust ries t hat have been claimed. It is t oo impo rt ant t o t he manufact uring
sect o r and t he int egrat ion of t hose manufact ured processes.
65
MR. GERARD: I want t o share t he same point of view as my t wo
co lleagues, and t o add t o t hat . Not only would we lose what is a very high
t ech indust ry. An aut o mobile is a high t ech piece of equipment . I'm
always amazed of all t he t hings it can do when yo u're driving down t he
highway. It can all wo rk well fo r a t errific amount o f t ime, but t ake
yo urself back t o t he st eel mill.
It is a high t ech wo rkplace now where you can ro ll st eel wit hin o ne
t en t ho usandt h o f an inch, never t o uched by human hands, aluminum t ires,
glass, plast ic, all o f t hat , t hat wit ho ut t he base of t he aut o indust ry, it
beco mes nonco mpet it ive as well.
And when Ro n t alked about Magnequench, t hat was a St eelworker
facilit y. I can't believe t hat America would let t he guidance syst em in t heir
missiles be made in China. Bridgest one/Firest o ne t ires, Japanese owned
no w. Just last week anno unced t hat it was mo ving it s plant , closing it s
plant subst ant ially in Oklaho ma. Oklahoma offered Bridgest o ne/Firest o ne
$100 millio n over t en years t o keep t heir plant in Oklahoma. Bridgest one/
Firest one said no, we're moving out .
The bipart isan bet rayal o f America on t hese invest ment deals has
sho wn people t he road map o ut of American manufact uring and left us
being a lo w wage indust ry if t hat 's where we end up. My last point about
it , when yo u t alk about what co uld we do, I do n't t hink t hat t hey're act ually
making glass fo r t he aut o indust ry, but t hey are making glassis also t old
t his is t he China price, and if you can't meet t he China price, you do n't get
t o be o n t he shelf at WalMart .
To meet t he China price means t hey've go t t o come back and t ry t o
beat t he hell o ut o f t heir workers, and I underst and it , and if we're a
legit imat e union, we have t o fight back, and we said t o t hem why do n't we
go t o get her t o t he ITC, you know what t heir answer is, if China finds out
we're doing t hat , we won't get not hing on t he shelf at WalMart . Welco me
t o my realit y.
COMMISSIONER D'AMATO: Thank you very much. Just as a
co mment , Mr. Chairman, t hat we have about t wo years befo re t his becomes
t o o lat e in t erms of t he viabilit y o f t his t rading regime wit h regard t o
aut o s. I t hink it 's t he t ipping po int for t he syst em. If we don't get it right ,
I t hink t he syst em go es; t he rubber band breaks. If we do get it right ,
maybe it 's a t urning point for our making t he syst em work fo r t he
principles under which we signed up for it in t he first place.
MR. GERARD: By t he way, if t he Co mmission do es a bit o f
research, yo u co uld find o ut if my research is right . I'm t old t hat our t wo
largest expo rt s t o China are wast e paper and scrap met al. Third largest
expo rt t o China is empt y co nt ainers.
MR. GETTELFINGER: If I may, just real quick, we really don't
have t wo years. We have t wo years on t he Chery and Geely, bringing in
66
t he vehicles, but t he part s, t he part s are coming in, t he companies are
invest ing o ver t here, t hey're required t o go over and do joint vent ures.
They're going t o come in t he backdo or, so t ime is of t he essence.
Thank you.
HEARING COCHAIR BLUMENTHAL: We no w have st at ement s
t hat bo t h Chairman Bart ho lomew and Chairman Wort zel would like t o
make.
COMMISSION VICE CHAIR BARTHOLOMEW: Larry, can I just
CHAIRMAN WORTZEL: Go ahead.
COMMISSION VICE CHAIR BARTHOLOMEW: Just briefly, again,
t hanking you all, and not ing t hat unfort unat ely t he failures in t he U.S.
China policy go back 16 years and t hey are indeed bipart isan and what we
all hope is t hat we can move forward wit h a more sane policy brought t o us
by who mever will do it .
CHAIRMAN WORTZEL: Mr. Gerard, you've asked us in yo ur
t est imony and in yo ur comment s t o address some issues relat ing t o human
right s, forced abo rt ion, and labor co ndit io ns in China. We all deplore
t ho se t hings. I want t o point o ut , ho wever, t hat in it s infinit e wisdo m
Co ngress creat ed t wo commissions. Ours is t he Economic and Securit y
Review Co mmission. The Co ngressional Execut ive Commit t ee o n China
was est ablished wit h a legislat ive mandat e t o lo ok specifically at t ho se
t hree issues yo u raised on human right s. So t he fact t hat you don't see
t ho se t hings reflect ed oft en in o ur repo rt is not because we don't care
about t hem; it 's because we have a specific legislat ive mandat e. I'll t ry and
get yo u in fro nt of t hat o t her commission where yo u can raise t hose
mat t ers
MR. GERARD: I'd love t o be t here, but I also t hink t hat t here's an
eco nomic component t o t hat kind of behavio r. That we've t ried
co llect ively t hro ugh t he Indust rial Union Council, we've t ried, I t hink, t wo
o r t hree t imes now t o demo nst rat e t hat t here's a subst ant ial economic
benefit t hat China receives fro m t hat kind of inhumane t reat ment of it s
cit izens.
CHAIRMAN WORTZEL: I appreciat e it .
HEARING COCHAIR BLUMENTHAL: Thank you all very much for
yo ur o bvio usly very heart felt and sincere t est imo ny. I t hink we've
benefit ed fro m t he exchange and t hank you for t aking t he t ime t o be wit h
us t o day.
MR. GERARD: Thank you.
HEARING COCHAIR BLUMENTHAL: We're going t o t ake a break
fo r abo ut five minut es and t hen reconvene.
67
PANEL III: PERSPECTIVES OF EXPERTS, TRADE ASSOCIATIONS
AND ANALYSTS
HEARING COCHAIR WESSEL: Thank you t o our wit nesses. Our

next panel is composed of t hree expert s who have closely followed t he ups
and downs of t he aut o indust ry and t he part s indust ry. They are Dr. Susan
Helper, an eco nomist from Case West ern Reserve Universit y; Mr. Jo hn
Mo avenzadeh, Execut ive Direct o r o f t he MIT Int ernat io nal Mo t or Vehicle
Pro gram in Philadelphia at t he Universit y of Pennsylvania; and Bruce
Belzo wski, Senior Researcher at t he Office fo r t he St udy of Aut omot ive
Transpo rt at io n at t he Universit y of Michigan in Ann Arbor.
If we can t ake t he panelist s in t he order in which t hey were
int ro duced, we will put your writ t en t est imo ny int o t he record, and if you
co uld limit your comment s t o seven minut es so t hat we can have a good
give and t ake, we'd appreciat e it .
Please.
STATEMENT OF DR. SUSAN HELPER, PROFESSOR OF
ECONOMICS, CASE WESTERN RESERVE UNIVERSITY,
CLEVELAND, OHIO
DR. HELPER: Thanks very much. I'm pleased t o have t his

o ppo rt unit y t o t est ify before t he Commission, and I'll focus my remarks in
t wo areas. First , I'm going t o briefly discuss t he st at e of t he U.S. aut o
part s indust ry focusing on second t ier suppliers and t he ro le of compet it ion
fro m China; and seco nd, I'll pro vide a framewo rk for t hinking about when
such compet it io n is and is not a problem and should be addressed by public
policy.
So t he findings I'm going t o discuss are based o n t wo sources. First ,
I've conduct ed int erviews among aut o suppliers for over 20 years, and t hen
also in 2003 and 2006, I conduct ed surveys wit h t he Michigan
Manufact uring Technolo gy Cent er.
The 2006 result s are hot off t he press. In fact , dat a collect io n is st ill
underway so t hey're preliminary. The firms we surveyed are part of a
nat io nal panel o rganized by t he MMTC, and t hey're primarily small and
mediumsized firms wit h employment less t han 500.
They're secondt ier suppliers and t hey sell largely t o t he aut o
indust ry. Several t rends are apparent in t he dat a. The first is t hat
co mpet it ive pressure from China is very st rong. In a 2003 survey, 87
percent of t he respondent s said t hat t hey had lost work t o firms in lo w
wage nat io ns. In 2006, 57 percent repo rt ed t hat t heir largest cust omers
were relo cat ing more of t heir manufact uring t o China, specifically t o
China.
68
The secondt ier suppliers t hemselves are only beginning t o
experiment wit h o ffsho ring. In t he 2006 survey, we found t hat fewer t han
o net hird o f firms o ffsho re any work t o China at all, and even wit hin t his
gro up, o nly 11 percent o f purchase input s co me from China.
However, t his percent age is growing fast . It 's do ubled in t wo years,
and t he offshoring is no t concent rat ed in what might be t hought of as lo w
skill t asks. For example, a lower percent age o f component assembly is sent
t o China t han are mo re complex t asks such as t o oling build and t est .
So many firms are in t ro uble, but t here's a great dispersion o f
product ivit y even among firms in t he same narro w market segment . Fo r
example, met alwo rking firms, t he mean plant as a valueadded per wo rker
o f $60,000, so t hat 's barely eno ugh t o pay a mo dest wage and reinvest in
equipment , but t he t op t en percent have a valueadded per wo rker of more
t han $160,000.
Which small suppliers do bet t er? Dan Luria analyzed t he same dat a
and is arguing t hat t he most successful companies fo llow a product ion
mo del called "busy lean," t hat t hey use t he full t oo lkit of lean
manufact uring met ho ds in t he cont ext o f high demand t hat permit s
expensive high precisio n machinery t o be kept busy. Keeping busy is you
need t o be able t o design unique product s or processes, not just produce
co mmodit ies t hat can be made by many firms.
Suppliers in t he t o p t en percent of product ivit y are making
sust ainable profit s. We sho uld also no t e t hat t hey also pay higher wages
t han t heir less product ive and less pro fit able count erpart s.
To t urn t o my second point , should we be co ncerned about t he role
o f China in t he U.S. aut o part s indust ry? According t o many econo mist s,
co mpet it io n from China is generally beneficial for t he U.S. Compet it io n, in
t heir view, spurs U.S. firms t o get bet t er and/o r t o focus on areas where
t hey're more co mpet it ive.
However, t here are several inst ances in which U.S. int erest s are not
well served by t he current way t hat compet it ion wit h China is st ruct ured.
So I am act ually an economist , and so I want t o discuss t hree such
inst ances t hat I t hink are quit e import ant .
One is t hat firms oft en choose a lo cat ion of product ion using an
inco rrect account ing framework. Second, t hat t hey don't always consider
t he longt erm consequences of t heir decisions. And t hird, t hat firms o ft en
don't t ake int o account t he so cial cost s of moving t heir supply chains.
So t he acco unt ing framework, many of t he firms I int erviewed or
mo st of t hem, even t he large mult inat io nals, use account ing t echniques t hat
fo cus on account ing for direct labo r cost s, even t hough t hey're quit e a
small percent age o f t ot al co st s. So t ypically direct labor is only five t o 15
percent of t ot al cost s in manufact uring.
And t hey ignore many o t her import ant cost s and t here are some
69
hidden co st s of having suppliers far away, such as dist ract ion of t op
management . So set t ing up a supply chain in China is a very difficult and
t imeconsuming act ivit y. It t akes t ime away from int ro ducing new
pro duct s or processes at ho me. Ot hers, increased risk from long supply
chains. There's increase hando ff cost s bet ween U.S and foreign operat io ns.
In part icular, more difficult communicat io n among pro duct design,
engineering and product io n hinders serendipit ous discovery of new
pro duct s and pro cesses.
The seco nd point abo ut t he longt erm consequences. In many
segment s o f t he aut omo t ive part s indust ry, a McKinsey st udy has found
t hat t he China price is 20 t o 30 percent lower t han t he U.S. price for a
similar co mpo nent , but several fact ors co uld act ually shrink t his different ial
subst ant ially such as exchange rat e fluct uat ions or increased t ransport at io n
co st s due t o increases in price of o il.
If t he different ial shrinks aft er many U.S. firms have gone out o f
business, it may be difficult t o reest ablish t he lost capabilit ies. Even in t he
medium and t he short t erm, t he challenges of dealing wit h a farflung
supply base make it difficult fo r firms t o innovat e in ways t hat require
linked design and pro duct io n processes.
Just t o give one example, one Ohio firm had based it s co mpet it ive
advant age on it s abilit y t o quickly add feat ures t o it s product s. So o ne
example is t hey did a fo cus group and fo und t hat , gee, we could put cup
ho lders in our riding lawn mowers, t hey made a last minut e change, put
t hem in and t hey were a big seller. This kind o f t hing doesn't work when
yo u have a lo ng supply chain t o China. Yo u have t o freeze yo ur designs
much earlier.
HEARING COCHAIR WESSEL: You have about one more minut e.
DR. HELPER: So I want t o say t hen t hat not all t rade wit h China is
bad. Trade wit h China has t he po ssibilit y o f raising t he st andard of living
fo r bo t h Americans and Chinese, and I guess I want t o disagree a lit t le bit
wit h some of t he appro aches t aken by previous comment at ors, t hat t rade
doesn't have t o be a zero sum game.
We could imagine a t rade st ruct ure so t hat bo t h U.S. and Chinese
peo ple benefit , so we should pro mot e policies t hat benefit bot h peo ple,
first , because it 's t he right t hing t o do; second, because it can also increase
t heir demand for our expo rt s. So a similar appro ach used by t he U.S.
Marshall Plan, and so fro m t his point o f view, I'm not sure t hat lo cal
co nt ent regulat ions in China are act ually so much of a big pro blem.
What sho uld we do? A lot o f changes t o t rade laws have been
discussed. I would also suggest government policy t o help companies
achieve t he product ivit y o f t he t op t en percent and also t o educat e
managers abo ut t he hidden co st s o f offshoring.
And just t o co nclude, I t hink our findings suggest t hat devot ing
70
reso urces t o raising laggards t o best pract ice would have at least as great
an effect o n aut o makers' co st s as devot ing resources t o est ablishing a
fo reign supply chain.
[The st at ement follows:] 5
HEARING COCHAIR WESSEL: Thank you. Please.
STATEMENT OF JOHN MOAVENZADEH, EXECUTIVE DIRECTOR
MIT INTERNATIONAL MOTOR VEHICLE PROGRAM,
PHILADELPHIA, PENNSYLVANIA
MR. MOAVENZADEH: I'd like t o t hank t he Co mmission for

invit ing me t o speak on t his import ant subject . The Int ernat ional Mot or
Vehicle Pro gram is a research conso rt ium focused on t he glo bal aut omot ive
indust ry. Since it s founding at MIT over 25 years ago, IMVP has evolved
int o a net wo rk of pro fessors and researchers based at universit ies around
t he wo rld.
Befo re discussing China, I'd like t o provide some cont ext on t he
o verall globalizat io n o f t he aut o indust ry. American firms were pio neers o f
glo balizat ion. Fo rd opened it s 16t h assembly plant out side of Nort h
America in 1924. Since t he 1960s, when t he aut omo t ive wo rld most ly
co nsist ed o f nat io nal car companies selling vehicles t o nat ional market s,
t here has been a t remendous accelerat ion in t his glo balizat io n pro cess.
In t he 1970s, int ernat io nal t rade in mot or vehicles increased wit h t he
o il shocks. In t he 1980s, foreign direct invest ment in manufact uring
facilit ies increased. In t he 1990s, t he world's aut o makers formed a
co mplex web o f alliances, out right acquisit ions and equit y relat io nships.
Globalizat ion has blurred t he dist inct io n bet ween nat io nal and
fo reign aut o makers. The world's aut o part s suppliers, a crit ical co mponent
o f t he value chain, have also been t ransformed by globalizat io n.
No wadays, vehicle manufact urers sho p at t he global mallt hey source
co mponent s from lo cat io ns around t he globe and regardless of t he
headquart ers lo cat ion of t he supplier. Globalizat ion has been disrupt ive for
several aut o makers and part s suppliers. However, it had generat ed
t remendo us benefit s fo r U.S. consumers.
Following China's accession t o t he WTO in 2001, t he Chinese
indust ry and market have undergone a radical t ransformat ion. The WTO
Agreement co mbined wit h t he lure o f China's huge pot ent ial market spurred
t he global aut omakers t o flood China wit h invest ment as each vehicle
manufact urer sought a Chinese part ner t o fo rm an int ernat ional jo int
5
Click here to the prepared statement of Dr. Susan Helper
71
vent ure.
To day, China is a huge and growing aut omot ive market in t erms o f
t he numbers o f vehicles sold. China emerged last year as t he second
largest aut omo t ive market in t he world, almost six millio n unit s versus
roughly 17 million in t he Unit ed St at es. The Chinese market explo ded in
2002 and 2003 wit h grow rat es surpassing 60 percent .
Just t o put t his in cont ext , growt h rat es in t he U.S., in Japan, and in
West ern Europe have been zero over t he past five years. And t he growt h
seems t o be reemerging recent ly.
The Chinese aut o mot ive indust ry is uniquely fragment ed and
co mplex. Mo st o f t he roughly 120 Chinese aut o mot ive firms have
insignificant volumes. In 2004, t here were o nly 12 Chinese aut omakers
wit h pro duct ion great er t han 100,000 unit s, including many of t he names
we've heard t oday, SAIC, First Aut o mot ive Works, Dong Feng.
These aut o makers have ent ered int o a co mplex web o f part nerships
wit h foreign manufact urers. There are also a few indigenous Chinese
co mpanies who are develo ping cars wit h out t he help of a joint part ner
such as Chery and Geely.
Vehicles so ld fro m t he joint vent ures acco unt for abo ut 80 percent o f
t he Chinese market and mo st of t hese jo int vent ure pro duced vehicles are
so ld under foreign brands such as Fo rd and Buick. In t erms of geography,
t here are six geographic clust ers of t he indust ry in China dist ribut ed acro ss
t he co unt ry so t here's really no "Det roit " o f China.
The role of government , or perhaps I should say government s, is
very significant in t he Chinese aut o indust ry. The cent ral government has
act ively shaped t he develo pment o f t he aut omobile indust ry, which Beijing
views as a pillar indust ry, crit ical t o China's nat ional int erest s. Wit h few
except ions, China's aut omakers are o wned by various government s.
For example, FAW and Do ng Feng are owned by t he cent ral
government . SAIC is o wned by t he Shanghai municipal go vernment , and
even upst art Chery is owned by t he Wuhu municipal government . The
fragment ed st ruct ure of t he Chinese aut omot ive indust ry is largely
at t ribut able t o t he fact t hat government agencies and municipal
government s in China have relat ively independent polit ical po wer and
polit ical influence wit h t he Cent ral Planning Commission.
Despit e t he best effort s of t he cent ral government 's NDRC t o
enco urage co nso lidat io n in t he indust ry, t he policy has most ly failed
because o f t he dist ribut ion of polit ical power in China. In t erms o f
capabilit ies development , Beijing has t ried t o syst emat ically develop t he
upst ream research and development po rt ion of t he aut omo t ive value chain
rat her t han relying purely on manufact uring advant age.
The 2004 policy sought t o cult ivat e t echno lo gy in t he indust ry
t hro ugh t ax breaks for companies act ive in R&D, government funded
72
research cent ers and encouragement of t echnological co operat ion wit h
fo reign aut o makers.
In fact , o ne o f t he key object ives of China's 11t h Five Year Plan is t o
develo p indigeno us t echnological innovat ion capabilit y.
U.S. vehicle manufact urers have benefit ed from t he exploding
Chinese market . Ford was a lat e ent rant t o t he Chinese market , part nering
wit h ChangAn, a former supplier of milit ary equipment based in Chongqing.
Fo rd's first half China sales t his year are up 102 percent . GM st rat egy and
pro gress in China has been remarkable and GM is now t he sales leader in
China. Their first half sales were up 47 percent and t he company made
2005 profit s of approximat ely $327 millio n in China.
All o f t he large t ier one suppliers have also profit ed handsomely
fro m China's explosive gro wt h as t hey have fo llowed t heir cust o mers int o
China, but several smaller suppliers of lowend product s or services have
suffered t o compet e wit h China's lo w wages.
Several o f our IMVP researchers were involved in a project t hat
int erviewed t ier o ne supplier execut ives t o underst and how t hey make
lo cat io n decisions. Several execut ives t old us t hat t hey had felt an int ernal
pressure fro m senior management t o view a China locat ion favorably in
o rder t o achieve t he benchmark China price t hat Sue just t alked about .
HEARING COCHAIR WESSEL: If you could begin t o sum up,
please.
MR. MOAVENZADEH: Yes. Just in t erms of research and
develo pment capabilit y, we've discussed a couple key findings. First ,
Chinese R&D capabilit y is far behind no nChinese co mpet it ors. Second,
t he management capabilit y of t he R&D process is less advanced. And
t hird, a t remendous amount of R&D performed at t he int ernat io nal joint
vent ures is localizat ion.
That is it 's a pro cess o f making changes on t he basic design of a
vehicle so t hat it 's co mpliant wit h local emissions and safet y regulat ion and
cust o mer preferences, et cet era.
So despit e t he best effort s of t he government t o develo p indigeno us
R&D capabilit y, China is st ill heavily dependent on fo reign design and
t echno logical knowhow.
I'll conclude my remarks by addressing t he quest io n o f China as an
expo rt er of vehicles t o t he U.S. I don't see any chance t hat t he Unit ed
St at es will emerge as a significant market fo r Chinese export s over t he next
five t o t en years. There may be a few Chinese cars import ed t o America
t hat fill a special lowend niche, but t hese product s will have t o overcome
t he st ringent U.S. regulat ory st andards, appeal t o sophist icat ed American
co nsumers and develop viable dist ribut io n channels. This is a t all order.
I t hink it 's even more unlikely t hat we'll see highend Chinese
impo rt s over t he next t en years because t he labo r cost advant age for high
73
end vehicles is much lo wer t han for lowend vehicles. On t he o t her hand,
o ver t he lo ng t erm, I don't see any reason why we shouldn't expect Chinese
impo rt s. We've wit nessed a clear pat t ern of increased import s from
Japanese and Korean manufact urers, and in t his sense, t he quest io n is no t
whet her we will see Chinese impo rt s, but when?
Honda last year export ed about 11,000 vehicles t o Europe fro m
China, which is a drop in t he bucket , but it 's st ill a drop. And I'll conclude
wit h t hat . Thank you.
Prepared Statement of John Moavenzadeh, Executive Director
MIT International Motor Vehicle Program, Philadelphia, PA
I would like to thank the Commissioners for inviting me to speak on this important subject. The
International Motor Vehicle Program is an international research consortium focused on the global
automotive industry. Since its founding at the Massachusetts Institute of Technology over 25 years ago,
IMVP has evolved into a network of professors and researchers based at universities around the world. In
preparing my remarks, I coordinated closely with several of our researchers with expertise in China,
especially Eric Thun from Oxford University, Jane Zhao from the University of Kansas, and Jianxi Luo
from MIT.
I would like to discuss five items with the Commission today:
First, I would like to provide some context on the overall globalization of the automobile industry.
Second, I would like to outline the rise of both the Chinese automotive market and the Chinese automotive
industry and explore the impact of this growth on US vehicle manufacturers and automotive suppliers.
Third, I would like to explore China’s automotive industrial policy and the implications for US industry.
Fourth I would like to explore the question of to what degree China’s auto industry has developed
capability to conduct sophisticated research and development.
Finally I would like to address the question of China as a potential export base to the United States and
other countries.
Globalization in the Auto Industry
The automotive sector has undergone a radical transformation over the past several decades. Globalization
has blurred the distinction between national and foreign automakers. American automotive firms were
pioneers in this process of globalization. Ford Motor Company opened their 16 th assembly plant outside of
North America in Port Elizabeth, South Africa, in 1924. Beyond some notable exceptions (such as Ford
and GM’s European operations and Volkswagen’s Latin American operations), the automotive world of
the early 1960’s consisted mostly of national car companies selling vehicles to national markets. In the
1970’s, international trade in motor vehicles increased with the oil shocks. In the 1980’s, foreign direct
investment in manufacturing facilities increased. In the 1990’s, the world’s automakers formed a
complex web of alliances, outright acquisitions, and equity relationships.
This evolution has blurred the distinction between domestic and foreign automakers in all countries,
including America. Ford owns Jaguar, Volvo, and Land Rover and owns a controlling stake in Mazda;
GM owns Saab and Daewoo and has only recently divested equity stakes in several Japanese
manufacturers; and Chrysler is owned by DaimlerChrysler AG, a company based in Germany with 74% of
its capital stock owned by European investors and whose single largest shareholder is the Kuwait
74
Investment Authority. Some of these international relationships are viewed as great successes (e.g.,
RenaultNissan), while others are viewed as failures that destroyed shareholder value (e.g., GMFiat,
FordJaguar).
The world’s component suppliers – a critical component to the automotive value chain – have also
undergone a relentless process of globalization since the 1990’s. We have witnessed the emergence of
“megasuppliers” through merger, acquisition and spinoff. Nowadays, vehicle manufacturers “shop at the
global mall” – that is, they source components from locations around the globe and regardless of the
headquarters location of the supplier. Increasingly, foreign suppliers sell to domestic vehicle
manufacturers and vice versa.
This process of globalization has been disruptive for several automakers and parts suppliers; however, it

has generated tremendous benefits for US consumers. Americans have more vehicle model choices than
ever before. Manufacturing productivity and quality levels have improved and converged among all
automakers. Vehicle prices have fallen in real terms at the same time that significant product
enhancements have occurred (such as advanced safety, environmental and performance features).
The Rise of the Chinese Auto industry
As recently as 1985, the Chinese automotive industry was completely insignificant from a global
perspective (total passenger car production of 5,200). During the early 1980’s, three foreign automakers
were allowed to enter the Chinese market through joint venture agreements with Chinese partners:
American Motor Corporation (subsequently bought by Chrysler), Volkswagen, and Peugeot.
Volkswagen’s China partnership, based in Shanghai, proved to be very successful, whereas the French
and Americans were less successful. Even with these early joint ventures, the Chinese government limited
foreign automakers to a maximum 50% ownership in the joint venture. Chinese import duties on
passenger cars were 260% in 1985.
Following China’s accession to the World Trade Organization in December 2001, the industry and market
have underdone a radical transformation. The WTO agreement combined with the lure of China’s huge
potential market spurred the global automakers to flood China with investment, as each vehicle
manufacturer sought a Chinese partner to form an international joint venture. Chinese import duties on
passenger cars fell from roughly 90% in 1996 to roughly 75% in 2001. With the WTO agreement,
China’s duties were reduced to 25% as of July 1, 2006.
Today, China is a huge and growing automotive market. In terms of the number of vehicles sold, China
emerged last year as the 2 nd largest automotive market in the world (almost 6 million units versus roughly
17 million units in the United States). The Chinese market exploded in 2002 and 2003 with growth rates
surpassing 60% both years. Just to put this in context, let’s consider that the vehicle sales growth rate in
all three mature automotive markets – the United States, Western Europe and Japan – has been essentially
zero over the past five years. There has been some upgrading in terms of the value of vehicles sold, but for
the most part, the developed world markets are mature, replacement markets. After a slight slowdown
around 2004, the torrid growth in the Chinese market continues: passenger car sales increased 47% for
the first half of 2006 over first half 2005.
The Chinese automotive industry is uniquely fragmented and complex. The number of vehicle
manufacturers in China has remained steady – about 120 – for the past fifteen years. Many of these 120
firms have insignificant volumes. In 2004, there were only 12 Chinese automakers with production
capacity greater than 100,000 units. The names are probably familiar to the people in this room and the
people in this city: Shanghai Automotive Industry Corporation (SAIC), First Automotive Works (FAW),
Dongfeng, Beijing Automobile Industrial Corporation (BAIC), are some of the leading Chinese
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automakers. These Chinese automakers have entered into a complex web of partnership arrangements
with the foreign manufacturers. SAIC, for example, has a joint venture with both Volkswagen and
General Motors. There have also been a few socalled independents – indigenous Chinese companies who
are developing cars without the help of a joint venture partner: Chery, Geely, and Great Wall are a few
names that come to mind.
Vehicles sold from the joint ventures account for about 80% of the Chinese market. Further, most of these
jointventure produced vehicles are sold under the foreign brands, such as Ford and Buick. In terms of
geography, there are six geographic clusters of the auto industry in China: Shanghai, Beijing, Changchun,
Chongqing, Wuhan and Guangzhou. There is no “Detroit” of China, although Shanghai is both the
largest and fastest growing automotive center in the country.
Finally, it is worth considering the social and environmental impacts of China’s rapid motorization. The
air quality in several Chinese cities remains among the poorest in the world. The face of the country has
transformed as bicycles have been replaced by cars and a massive road and highway infrastructure project
has been implemented. China is now the world’s second largest consumer of petroleum, and the largest
consumer of coal. The central government is clearly concerned about energy security, and we should all be
concerned about the implications of emissions of CO2 in China as the country continues its remarkable
economic development.
The Role of Government in the Chinese Automotive Industry
The role of government – or perhaps I should say governments – is very significant in the Chinese auto

industry. I would like to highlight three areas in particular:
Industry structure: policy that determines who can be an automaker in China, how many automakers,
where they can sell, etc.
Environmental protection: policy for air quality standards and fuel economy standards
Capability development: policy that aims to develop China’s internal capability to design, build and
market cars and trucks – in other words, to learn how to make cars from foreigners
The central government has actively shaped the development of the automotive industry, which Beijing
views as a “pillar industry” critical to China’s national interest. China’s National Development and
Reform Commission issued its most recent version of the China Automobile Industry Development Policy
in June, 2004. The policy serves as a framework for fostering the automotive industry and addresses issues
such as ownership restrictions, environmental standards, traffic safety, brand strategy, foreign investment,
and energy security. The 2004 industrial policy continued the policy of restricting foreign vehicle
manufacturers to 50% ownership in joint ventures with a maximum of two Chinese partners, but allowed
existing joint ventures to merge or collaborate with domestic companies. Foreign suppliers are not
required to form a joint venture to enter China, but many have chosen to work with a local partner.
With a few exceptions, China’s automakers are owned by various governments. For example, FAW and

Dongfeng are owned by the central government; SAIC is owned by the Shanghai municipal government,
and even upstart Chery is owned by the Wuhu municipal government. The fragmented structure of the
Chinese automotive industry is largely attributable to government policies. First, the protectionist policies
of the preWTO regime made inefficient enterprises profitable. Second, government agencies and
municipal governments in China have relatively independent political power and political influence with
the central planning commission of the central government. It’s not just that the Chinese central
government sought to establish a viable Chinese automotive industry: it is also that an array of municipal
governments and even military agencies of the central government sought to develop a regionally
concentrated automotive industry. Despite the best efforts of the central government’s NDRC to encourage
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consolidation in the industry, the policy has mostly failed because of the distribution of political power in
China. There have been some important acquisitions – most notably FAW acquiring Tianjin Auto Corp.
However, as I noted before, the number of auto companies in China remains well over 100.
One of my IMVP colleagues from MIT, Jianxi Luo, analyzed the performance of the three different types
of automotive firms in China: international joint ventures, domesticbranded vehicles sold by the large
groups, and domestic branded vehicles sold by the independent players. He found that for many
dimensions of performance – ratio of new vehicle models to total production, production value per
employee, capacity utilization –the international joint ventures consistently outperform the domestic firms.
In terms of capabilities development, China has followed an infant industry approach toward the auto
industry – protecting local players until they can compete against the global manufacturers. Specifically,
Beijing has tried to systematically develop the upstream research and development portion of the
automotive value chain, rather than relying purely on manufacturing advantage. The 2004 policy sought
to “cultivate” technology in the industry through tax breaks for companies active in R&D, government
funded research centers and encouragement of technological cooperation with foreign automakers. The
key objectives of China’s 11 th 5year plan relevant to the auto industry include: developing indigenous
technological innovation capability and selfcontrolled intellectual property; reducing overcapacity and
overheated investment; and encouraging energyefficient vehicle technology. In my view, the policy of
promoting technology capability development has largely failed, for reasons I will describe later in my
statement.
Environmental policy has factored prominently into the five year plans and the automotive industrial
policy. For example, the 9 th 5year plan (19962000) included a phase out of leaded gasoline. China
implemented the first serious vehicle emissions standards in 1999. More recently, they adopted the
European emissions standards phased in roughly ten years behind Europe. Presently, China lacks the
capability to fully enforce or implement these standards. China also recently approved fuel economy
standards, which a Pew Center study estimated were more stringent than the US fuel economy standards,
but less stringent than Japan and the EU. Enforcement of the new fuel economy standards also remains to
be seen.
Impact of China on US OEMs and suppliers
What does this remarkable transformation of the Chinese automotive market and automotive industry
mean for the US vehicle manufacturers and suppliers? US vehicle manufacturers have benefited from the
exploding Chinese market. Chrysler, through its acquisition of American Motors, was actually the first
foreign player in China entering back in 1983. Although Beijing Jeep was not a success, DaimlerChrysler
has been developing an aggressive China strategy over the past few years through its joint venture with
BAIC. Ford was a late entrant to the Chinese market, partnering with ChangAn, a former supplier of
military equipment based in Chongqing. At the FordChangAn plant that I visited in May, I was
impressed with the mix of vehicles rolling down the line: Ford Focus, Ford Mondeo, Volvo S40 and
Mazda 3. Ford’s first half China sales this year are up 102% (while their first half US sales are down 4%).
GM’s strategy and progress in China have been remarkable, and GM has now emerged as the sales leader
in China. GM’s first half China sales are up 47% (versus a 12% decline for US sales in the same period).
GM made $327 million in profits from its China operations in 2005.
All of the large tier one suppliers have also profited handsomely from China’s explosive growth as they

have followed their customers into China. I don’t have specific data to demonstrate this, but my opinion is
that some smaller suppliers of lowend products or services have suffered. Several of our IMVP
researchers were involved in a project that included interviews of tier one supplier executives to
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understand how they make production location decisions. Several executives told us that they had felt an
internal pressure from senior management to view a China location favorably, in order to achieve the
benchmark of a “China price”. Such price comparisons frequently highlight big differences in direct labor
costs. One of the other main conclusions of this study is that suppliers frequently underestimate the costs
to relocate production. Production ramp up times were longer and more costly than originally anticipated.
In general, Chinese domestic suppliers are better positioned to supply lowend parts to the Chinese JVs
and vehicle manufacturers, and foreign suppliers are better positioned to supply complex modules and
sophisticated components. Fourin, a Japanesebased research firm that analyzes the Chinese automotive
market, measured the percent of foreign (i.e., nonChinese) penetration into the production of automotive
parts in China. The data for chassisrelated parts are revealing. In 2003, several parts categories were
manufactured entirely by Chinese firms, including wheel bolts, wheel rims, steel wheels, rear axle
housings, axle shafts, etc. The common characteristic of all these parts is that they are lowend
mechanical components. The three parts categories with the highest degree of foreign (nonChinese)
production were suspension systems, brake calipers and ABS systems, which are all more sophisticated
components. The data for enginerelated components reveal the same trend. In 2003, 100% of the engine
managements systems manufactured in China were produced by foreign (nonChinese) firms. These data
focus only on automotive components produced in China, not imported components.
The USChina trade deficit in auto parts has steadily increased to $4.8 billion in 2005. US auto parts
exports to China grew from $225 million in 2000 to $623 million in 2005. Some of the top categories of
parts flowing from the US to China include seats, airbags and gearboxes, which are all more sophisticated
components. US exports to China are dwarfed by auto parts imports from China, which grew from $1.6
billion in 2000 to $5.4 billion in 2005. Some of the top categories of auto parts flowing from China to the
US include radios, brake components and aluminum wheels, which are less sophisticated and/or more
modular components. (Many of the aluminum wheels are aftermarket products.) A closer look at the data
show that a large proportion of this China to US auto parts trade are made by the Chinese operations or
joint ventures of US suppliers, for example, Shanghai Delphi exporting automatic door systems.
The important question that the Commission has posed is: will US part makers that relocate production to
China subsequently export parts back to the United States (thereby possibly eliminating American
manufacturing jobs?) This has already happened to some extent, although it is difficult to quantify. The
follow up question is: to what degree will this trend accelerate? I don’t pretend to have an answer, but I
can provide a framework to think about the question. There are five important factors that I think make it
less likely for a US supplier to import parts from its Chinese joint venture (in order from most immediate
to most distant):
Reduced Chinese import tariffs on automotive parts. Following its WTO commitments, China lowered the
import tariff on auto parts from 25% to 10% in July 2006. This essentially makes it less costly for a US
supplier to maintain production in the US for a given part that is sourced to vehicle manufacturers both in
the US and China.
Transport and shipping costs will continue to increase. Many experts view the longterm trend for oil
prices as upward, adding to total cost for importing parts from China.
Increased modularity in the vehicle architecture. Modularity is essentially a measure of how the vehicle is
arranged into “chunks,” the more chunky the less transaction cost required between the vehicle
manufacturer and the supplier. IMVP has studied the question of modular architectures for years. The
results can be summarized that cars have an inherently integral (nonmodular) architecture. In other
words, cars are not like Dell computers, which can be easily snapped together from smaller modules.
However, the vehicle architecture is likely to become slightly more modular over the next decade. Large
modules (like a vehicle cockpit module) generally need to be supplied locally, so as the modularity trend
continues, US assembly plants will source more parts locally through large modules.
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Chinese labor costs – especially in the industrial centers – will trend upward over time, also making
Chinesesourced parts more expensive
Exchange rate pressure will eventually result in a stronger yuan, which will make Chinesesourced parts
more expensive.
On the other hand, I think there are at least two trends that make it more likely for the US to import parts
from China:
Reduced international transaction costs due to telecommunications and IT. A tremendous amount of
transaction is required between vehicle manufacturers and their suppliers. As technology facilitates this
communication, as language barriers slowly are overcome, this cost will reduce and, therefore, so will the
cost of Chinesesourced parts.
Increased automotive R&D capability in China. As I will discuss next, China has failed to significantly
develop its R&D capability. An advanced R&D capability would reduce the costs developing and even
manufacturing parts, especially sophisticated parts, in China. China’s R&D capability will develop with
time, but the question is how quickly.
Chinese R&D capabilities
One of my IMVP colleagues, Jane Zhao at the University of Kansas, conducted extensive interviews and
survey data from Chinese automakers and suppliers focusing specifically on R&D capability. She had
three key findings from her work:
First, Chinese R&D capability is far behind nonChinese competitors. The automotive development
process, the process of conceiving, designing, engineering, planning a vehicle from concept to customer,
is a highly complex process. The Chinese automakers have not optimized this process to the extent that
their foreign joint venture partners have. It will take time to learn. Further, refining and optimizing the
product development process is the source of vigorous competition among mature automakers – the
vehicle manufacturers that can bring product to the market faster have a significant advantage over their
competitors. Chinese vehicle manufacturers generally have a strong mechanical product development
capability, but are quite weak in highend electronics and software. As discussed, this is consistent with
the foreign trade data for China.
Professor Zhao’s second observation is that the management capability of the R&D process is less
advanced. This is consistent with media reports of a shortage of management talent in certain regions and
industries in China. During her interviews, the R&D manager of a wellknown Chinese automotive
company confessed “we don’t know how to spend our R&D budget.” Recently, there have been some high
profile executive hires of foreign managers in Chinese automotive companies. The most notable of these is
the June 18 announcement that SAIC has hired Phil Murtaugh, a tremendously talented and well
respected manager who used to run GM China. Chery has hired executives from Ford and
DaimlerChrysler. Brilliance hired a former DaimlerChrysler executive to manage its R&D center, while
Geely hired a former Hyundai executive to run its R&D operations. Given the remote locations of some
Chinese automakers and, more importantly, the unique cultural requirements for success in China, it
remains to be seen how successful Chinese companies will be in both attracting and retaining talented
R&D managers of global caliber.
Her third observation is that a tremendous amount of R&D performed at the international joint ventures is
localization, that is, the process of making changes on the basic design of a vehicle so that it is compliant
with local emissions and safety regulation, local fuel quality and availability, and local customer
preference. Although localization can be technically sophisticated, it is not as sophisticated as designing a
full vehicle from concept to customer. Some engineers claimed that they “dumbed down” by working with
the joint ventures (due to focusing more on localization and less on upfront design). Again, this may be
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changing to some extent. I was surprised during my visit in May to PATAC in Shanghai – which is the
R&D joint venture for GM and SAIC – to talk to engineers working on hybridelectric vehicle systems.
The Shanghai municipal government has mandated that 60,000 hybrid vehicles must be sold by 2010.
These Chinese engineers were trying to meet the challenge. Surely they were not leveraging the extensive
research program to develop a dualstage hybrid that GM is investing in partnership with
DaimlerChrysler and BMW, but they are still engaged in advanced engineering. I was also surprised at
the design capability at PATAC. Designers – the clay modelers and CAD modelers that design the
aesthetics of the vehicle (the exterior surfaces, the interiors materials and design) – require creativity and
highlyspecialized talent. GM employs 1200 people at their design centers around the world – and 80 are
located in Shanghai. These are the people responsible for the fact that the Buick Lacrosse sold in China by
Shanghai GM looks strikingly different from the same vehicle sold here in America.
Despite the best efforts of the government to develop indigenous R&D capability, China is still heavily
dependent on foreign design and technological knowhow. The Chinese government’s rationale for
promoting international joint ventures was to develop R&D capability. One idea was that engineers from
the Chinese domestic company would spend a few years working with the joint venture’s R&D center
where they would acquire knowledge. Eventually, the domestic company would hire back the engineer
and his or her acquired knowledge. That has not happened. The backflow from the joint venture to the
home company is much lower than expected due to the high salary differentials between the domestic
companies and their associated joint ventures, which in some cases is a factor of ten.
Although the joint venture model for technology transfer has largely failed, there are emerging
mechanisms for developing China’s automotive R&D capability. Strategic outsourcing to foreign
knowledge centers is now a popular model. Chery has outsourced engineering to AVL (an Austrian high
tech powertrain engineering firm), special noise and vibration testing to Mira (a British engineering and
test firm) and design to Pinanfarina (an Italian design, engineering, and manufacturing house). Chery and
AVL successfully collaborated on a line of new, advanced engines, and Chery gained engine technological
knowhow through the process. Learning is unlikely to happen from pure contractual outsourcing, but
learning from collaborative outsourcing seems to be working. Another new mechanism for developing
China’s R&D capability is simply buying the technology from foreigners. The best example is SAIC’s
stakes in Korean automaker SsangYong and failed British automaker MG Rover.
Chinese Export Potential
I would like to conclude my remarks by addressing the question of China as an exporter of vehicles to the
United States, Europe, and other developed markets. This is certainly a highly contentious and emotional
issue, as manifest by the volume of press generated with every hint that the US may some day face
Chinese imports or – more recently – Chinese transplants.
In a bid to encourage exportation, the Chinese government waives the 50% joint venture requirement for
plants that build vehicles for export only. Exports from China reached about 240,000 units in 2005,
surpassing imports for the first time, but both exports and imports are very small compared to the overall
vehicle market. For the most part, vehicles produced in China are sold to Chinese customers. Most of the
vehicles exported from China last year were destined for the Middle East and Southeast Asia.
I don’t see any chance that the United States will emerge as a significant market for Chinese exports over
the next 510 years. There may be a few Chinese cars imported to America, such as a Chery or a Geely
that fill a special lowend niche, but these products will have to overcome the stringent US regulatory
standards, customer acceptance and develop viable distribution channels. This is a tall order, and the
Chinese have much progress to make. I think it is more unlikely that we will see highend Chinese
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imports over the next ten years, because the labor cost advantage for highend vehicles is much lower than
for lowend vehicles.
For China to emerge as a true threat to America in the automotive domain, they will need to develop R&D
capability on par with America, Germany, Japan and Korea. This is why is focused so much on R&D
capability. Achieving success in America and other key export markets is the ultimate test of an
automaker’s capabilities and a huge symbolic achievement, so this is definitely a high mediumterm
priority for the Chinese OEMs.
On the other hand, over the long term, I don’t see any reason why we shouldn’t expect Chinese imports.
We’ve witnessed a clear pattern of increased imports followed by increased production capacity (the rise
of the transplants) for Japanese, German and Korean manufacturers. In this sense, the question is not
weather we will see Chinese imports but when. Honda last year exported about 11,000 vehicles to Europe
from China, which in automotive terms is a drop in the bucket – but still a drop.
Conclusions
We can view the rise of the Chinese automotive industry and market as a threat or as an opportunity. My
personal view is that American industry is fully capable of competing against the Chinese industry,
despite the large differential in labor rates. There will be some labor intensive work that shifts to China,
but if American industry focuses on creative design, outstanding technology, innovative business models,
and productive working relations between vehicle manufacturers and suppliers, then the opportunities of a
growing Chinese market outweigh the threat of a strengthening Chinese automotive industry.
HEARING COCHAIR WESSEL: Thank you. Mr. Belzowski.
STATEMENT OF BRUCE BELZOWSK I, SENIOR RESEARCHER
OFFICE FOR THE AUTOMOTIVE TRANSPORTATION
ANN ARBOR, MICHIGAN
MR. BELZOWSKI: Thank you again for invit ing me t o speak on
China's impact on t he U.S. aut o and aut o part s indust ries. Even befo re t he
Asian monet ary crash of '97, aut omo t ive manufact urers and t heir suppliers
were designing and implement ing global st rat egies fo r t heir co mpanies.
But since t he opening o f global market s t riggered by t he WTO,
manufact urers have sped up t he pro cess of globalizing t heir companies.
Their suppliers fo llowed suit , and t o day, 42 percent o f t he sales of t he t op
13 glo bal suppliers are o ut side t heir ho me regio n.
Our research o ver t he past 15 years at t he Aut o mot ive Analysis
Division of t he Universit y of Michigan Transport at ion Research Inst it ut e
has fo llowed t his develo pment and t o day we see globalizat ion causing t wo
majo r problems for aut omot ive suppliers in part icular.
The first is our recent supplier globalizat ion research found t hat as
manufact urers globalized t heir operat io ns, t hey expect t heir suppliers t o
fo llo w t hem wherever t hey build a plant . This makes it difficult fo r
suppliers t o develo p t heir own glo bal st rat egies because t hey are const ant ly
building plant s wherever t heir cust omers demand inst ead of st rat egically
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lo cat ing plant s glo bally t o support a variet y of global cust o mers.
The second is t hat manufact urers cont inue t o demand significant
price reduct io ns on t he compo nent s or syst ems t he suppliers develop based
o n glo bal pricing where t he benchmark price for a co mpo nent becomes t he
lo west price t he manufact urer purchasing depart ment s can find anywhere in
t he wo rld.
Manufact urers st ro ngly suggest t hat suppliers consider buying or
building t heir co mpo nent s in t hese lo wcost count ries in order t o mat ch
t hese prices. But what t hese prices do not include, and Sue has t o uched on
so me of t hese, are significant expo rt dut ies and t ransport at io n,
wareho using and o bsolescence cost s t hat suppliers must absorb, not t o
ment io n t he cost o f t raining a co mplet ely new workfo rce bo t h labor and
management and int egrat ing t hem int o t he companies' glo bal syst ems.
These are import ant challenges t hat some suppliers are able t o
o vercome while o t hers find overwhelming. In our recent st udy of t he
aut o mot ive indust ry in China where we examine China's fut ure market
st ruct ure, it s indust ry st ruct ure and it s ext ernal challenges, we discussed
ho w t he previous Five Year Plan and t he aut omo t ive indust ry policy
fo cused o n t he format io n o f joint vent ures bet ween Chinese and foreign
aut o mot ive manufact urers and suppliers in order t o develo p knowledge and
t echno logy t ransfer opport unit ies.
Foreign companies, fearing t hat t hey will creat e t heir next global
co mpet it o rs, have resist ed sharing core t echnology and product
develo pment and R&D pro cesses wit h t heir Chinese part ners. The Chinese
are very aware of t he sit uat ion, as shown in our st udy, where t hey repo rt
pro duct development and R&D as t he only t wo act ivit ies where
co llaborat io n wit h t heir foreign part ners have been unsuccessful.
In order t o remedy t he sit uat ion, t he Chinese aut o expert s in o ur
st udy repo rt t hat t he go vernment and Chinese co mpanies are using four
different ways of reaching t heir desired goal of Chinese innovat ion. They
will first buy co mpanies t hat already have t he experience and learn fro m
t hem. They will hire engineering service firms t o help t hem design and
t each t heir lo cal engineers t he product development and new t echnolo gy
develo pment processes.
They will at t empt cooperat ive development o f noncompet ing,
co mplet ely new product s wit h t heir fo reign part ners. Rick Waggoner fro m
General Mot ors suggest ed t his in t he spring o f '05. And t hey will also
co llaborat e wit h majo r global suppliers who will supply crucial component s
and syst ems fo r t heir vehicles.
Now, t he 11t h Five Year Plan t ries t o direct ly address t his problem
by naming Chinese innovat ion, as John said, as one of t he key areas where
t he go vernment will t ry t o provide suppo rt . The Chinese do not seem t o be
fo cused on int ernal expansion of t he indust rial sect or but rat her see
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st ruct ural upgrading as t he goal o ver t he next five years.
They see five majo r support ing mechanisms t o support t his go al,
many of which have a direct impact o n global suppliers and manufact urers.
They are: accelerat ing est ablishment of t echno logical inno vat ive syst em;
improving t he market environment for t echnical innovat ion; implement ing
policies relat ed t o finance, t axat ion, banking and government procurement
fo r suppo rt ing independent innovat io n; making proper use of global
reso urces of science and t echnology; and st rengt hening t he pro t ect ion o f
int ellect ual pro pert y right s.
Now, t he 11t h Five Year Plan also acknowledges t he need for
readjust ing t he government 's st ance on import s and support s it s
manufact urers and suppliers in, quot e, "going glo bal."
The plan calls for opt imizing t he mix of import and expo rt
co mmodit ies and st riving t o bring abo ut a basic balance of import s and
expo rt s; co nt inuing an act ive and efficient use o f foreign capit al; and
support ing qualified ent erprises in going global and invest ing abroad in
acco rdance wit h common int ernat io nal pract ices.
Just last week China signaled it s willingness t o negot iat e wit h t he
EU, U.S. and Canada o ver Beijing's import policies. China's impo rt market
fo r aut o mot ive component s is abo ut $19 billion.
From t he export perspect ive, according t o China's Minist ry o f
Co mmerce, aut o part s expo rt s last year reached 8.9 billion wit h fo reign
ent erprises and jo int vent ures making up 56.4 percent of t hose export s.
Now, fo r aut o suppliers, Chinese compet it io n is primarily o n less
so phist icat ed component s, t ho ugh t his will change as t hey become more
highly develo ped co unt ries wit h st ro nger R&D depart ment s.
So much of t he compet it ion t oday, as Sue said, is in t he t ier t wo
supply base t hat manufact ures part s and component s for complet e syst ems.
Capacit y will not be an issue when China, India, and Russia develo p as
aut o mot ive eco nomies, t hough t he bat t le over oil will be int ense when t his
co mes t o pass.
HEARING COCHAIR WESSEL: If you could begin t o sum up,
please.
MR. BELZOWSKI: I'm just about t here. In t he meant ime,
co mpet it ion will fo rce so me suppliers, eit her Chinese or fo reign, out o f
business rat her t han add t o t he capacit y because t here are only so many
co mponent s t hat need t o be made t oday.
The 11t h Five Year Plan makes a point of t he need t o st rengt hen
int ellect ual pro pert y right s. Now, t his is a first st ep in act ually enforcing
t hese laws. What is int erest ing is t hat t he focus o f t he plan on Chinese
inno vat io n plays direct ly int o IP enforcement because as soon as t he
Chinese inno vat e and creat e t heir own int ellect ual propert y, t he so oner
t hey will begin pro mo t ing and enfo rcing laws t o prot ect it .
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In t erms o f preserving jobs in t he U.S., t he redirect ing of wo rkers
fro m aut o mo t ive jobs t o day is difficult t o do because so many plant s are
facing clo sure. One o f our recent st udies showed how t he government can
invest in t hese t ypes of jobs in t he area of advanced po wer t rains. It
sho wed how invest ment t ax credit s by t he government t o manufact urers
and suppliers wo uld allow t hem t o t ransit ion t heir int ernal combust ion
engines t o hybrid and advanced diesel engines in t heir current fact o ries and
keep t hese jobs from being perfo rmed o ut side t he U.S.
By developing more high t ech jo bs, t he U.S. can keep ahead of t he
t echno logy curve and keep jobs in t he U.S. The cat ch is t hat once t hese
pro cesses beco me st andardized, t hey t o o beco me t arget s for foreign
co mpet it io n. Only by const ant ly developing new high t echnolo gy
co mponent s or processes do es it seem t hat manufact uring jo bs can remain
in t he U.S.
In conclusio n, China represent s bot h a t hreat and an opport unit y for
U.S. workers and business int erest s respect ively. Workers are t hreat ened
by t he t ransfer of manufact uring jo bs out side t he U.S. and t his includes
Mexico and Canada as well while business sees t he market opport unit ies
t hat count ries such as China represent .
The Chinese in t heir 11t h Five Year Plan are t rying t o move up t he
evolut ionary scale of manufact uring. They st at e t hat t hey want t o develop
t he inno vat io n capabilit y of t heir workers and companies and move away,
act ually mo ve away from low wage manufact uring.
Now, t his may be mo re of a goal t han an act ualit y wit hin t he next
five years, but it sends a message t o t he world where t he government is
aiming t he econo my.
Panel III: Discussion, Questions and Answers
HEARING COCHAIR WESSEL: Thank you. And t hank you t o all

t he panelist s and apologize fo r t he brief t ime frames we've given you, but
we do want t o engage in a goo d give and t ake.
I'd like t o ask t he first quest ion abo ut t he hypo t het ical scenario we're
all lo o king at . We heard from President Get t elfinger on t he last panel t hat
t he o verhang of Chinese capacit y may be t wice as much in t erms of demand
wit hin just a mat t er o f years, t hree or four years.
Number o ne, do yo u agree wit h t hose project ions? I believe he said
18 t o 20 millio n built up unit capacit y somet ime around 2010, so mewhere
in t hat range, as opposed t o demand. What happens t o al t hat excess
capacit y? You've t alked abo ut inno vat ion. Several of yo u have t alked
6
Click here to read the prepared statement of Mr. Bruce Belzowski
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abo ut inno vat io n and essent ially we have t o run a lit t le harder and we can
st ay ahead. If we're seeing t he R&D expendit ures fro m some o f o ur part s
manufact urers as well as cont inuing jo int vent ures, are we going t o see an
accelerat io n o f R&D?
Is t his o verhang and t he Chinese desire t o have a st rong econo my
and hire as many people as t hey possibly can going t o simply swamp o ur
market ?
MR. BELZOWSKI: I t hink o n your first point about t he capacit y
issue, I do n't kno w whet her t hose numbers are correct or not . I know t hat
t here is a lot of capacit y t hat 's being built , some of it for expo rt , as Honda
is do ing in China right now. As I said in my remarks, as some of t he o t her
eco nomies develo p, some o f t hat capacit y in China co uld be shipped t o
India o r Russia.
HEARING COCHAIR WESSEL: Will t hat displace any of o ur
pro duct io n eit her regionally or here in t he U.S.? Are we, by China building
up, essent ially diminishing oppo rt unit ies fo r a manufact uring foo t print here
in t he U.S.?
MR. BELZOWSKI: If you're t alking abo ut an export fo ot print , yes,
yes. Right now t he capacit y t hat 's built up in t he U.S. is support ing pret t y
much t he U.S. demand
HEARING COCHAIR WESSEL: Right .
MR. BELZOWSKI: which is 17 million a year, which is t he largest
aut o mot ive eco no my in t he world. That 's why everybody want s t o co me
here. But it also makes it more compet it ive as more capacit y get s built up.
One of t he int erest ing t hings about reducing capacit y, for example,
fro m a China perspect ive, is t hat if t hey really cannot sell enough vehicles
in t heir lo cal market , well, t hey'll just lay people off and people will go
away. They'll reduce shift s. They wo n't have t he social safet y net t hat t he
unions provide fo r t he workers in t he Unit ed St at es.
HEARING COCHAIR WESSEL: I don't know t hat we've seen in
many o f t heir indust riesst eel is one of t hemt hat t hey're soaking up much
o f t he capacit y, but I t hink it 's hard t o see t hat from t he hand t he
government has in t his t hat t hey're going t o accept massive layoffs of t heir
peo ple if t heir capacit y do esn't have an out let .
MR. BELZOWSKI: We shall see.
DR. HELPER: Yes. I t hink one way t o t hink about t his is t hat
demand do esn't have t o be fixed. One could imagine some policies t hat
wo uld act ually lead t his o vercapacit y problem t o be less of an issue. It
seems t o me t he big pro blem in China wit h t he Chinese workers is t hat t hey
creat e supply but t hey don't creat e demand because of t he low pay.
So t hat inst ead if we focus on po licies t hat so rt o f increase t he
buying power of t he Chinese workforce, t hat t hat act ually can have a kind
o f po sit ive sum game. I'm t hinking o f sort of t he Marshall Plan in Europe
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kind o f approach as I ment io ned before. If I may respect fully disagree wit h
my t wo co lleaguesI t hink t here's a danger in t his idea t hat we want t o
ret reat t o t he higher valueadded processes and pro duct s, and just sort o f
in t he lit erat ure o n t his, t here's t wo scho ols of t hought t hat might be
summarized as, o ne, as t he t riage scho ol t hat says t hat we can out source or
o ffsho re t he low skill part s t o keep t he high skill part s.
The ot her schoo l is a kind o f ho llo wing out schoo l t hat says, well,
act ually, if we lo se some o f t he skills in t hese, quot e, "lower skill" areas,
t hese t hings are t ight ly linked, fo r example, product ion and design, and
t hat 's going t o make us, if we lose pro duct io n, we also become less skilled
at design.
I wo rry, I guess, t hat aut os is a highly, what was called a highly
int egral indust ry in which o ne of t he successes o f Toyot a has been it s t ight
linkage bet ween pro duct ion and design, and t hat if we're no t careful, or if
t he co mpanies aren't careful abo ut how t hey do t his sort of offshoring, we
co uld find a great loss of capabilit y.
I'll have some dat a. The dat a t hat I've cit ed will allow us t o act ually
lo o k at t hat fact , but no t yet .
MR. MOAVENZADEH: I t hink t he capacit y quest ion is a very
int erest ing quest ion. I would just say t hat I guess my perspect ive is t o
lo o k at capacit y mo re from a micro level t han from a macro level. So in
t he Unit ed St at es, we've had co nsist ent ly about 20 percent overcapacit y in
t he aut omo t ive indust ry here for a number of years.
Now what 's happening? Some plant s are clo sing, but at t he same
t ime new capacit y is being added in places like Alabama. So it very much
depends on t he part icular manufact urers. It very much depends o n t he
part icular t ypes of vehicles and how popular t hose vehicles are wit h
cust o mers. In China, I t hink because of t he fact t hat we're loo king at an
indust rial st ruct ure o f 120 manufact urers, t here will inherent ly be
t remendo us excess capacit y built int o t he syst em.
It 's no t an efficient syst em. It 's highly fragment ed. So on t he o ne
hand, I t hink t here is t his pressure t o rat io nalize which I believe t he cent ral
government has very much been t rying t o encourage t hat rat ionalizat ion,
t hat consolidat io n in t he Chinese aut o mot ive indust ry, but for reaso ns t hat
I t ried t o point out , because o f t he fragment ed polit ical st ruct ure, t hey
have no t been very successful in do ing so.
On t he ot her hand, you have t his incredible market lure and t hat 's
bringing in t he global aut omakers, and t here is t his great risk t hat we will
see a major, let 's say, capacit y glut in China, similar t o what we saw in
Brazil, you know, 20 years ago where t here was just way, way t oo much
invest ment int o t he Brazilian aut o mot ive sect o r.
COMMISSIONER WESSEL: But if I recall, in t he So ut h American
sit uat ion, t he Brazilian pro duct ion has begun t o serve t he rest of t he
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Merco sur, meaning it 's become an export plat fo rm, if you will, for t he rest
o f t ho se nat io ns. The quest ion is what does it displace for us? If China
gro ws, has excess capacit y, are we go ing t o see any oppo rt unit ies for o ur
fo o t print here?
Commissioner Mulloy.
COMMISSIONER MULLOY: Having expert s like you here is very
impo rt ant for us so t hank yo u for being here. I've been t hinking about t his
quest ion t hat was raised earlier about t he value added in t erms of t he
American economy bet ween a t radit ional American company like Ford or
GM and a t ransplant ed co mpany like Toyo t a and Honda.
Mr. Moavenzadeh, you ment ioned t hat plant s are closing, but t hen
we're opening ot her plant s like in Alabama. I t hink t he ones t hat are
o pening are fo reign plant s.
MR. MOAVENZADEH: That 's right .
COMMISSIONER MULLOY: Can you help me underst and t he value
added in t erms of our eco no mic healt h as a nat ion bet ween a regular
American manufact urer, say Ford and GM, and a t ransplant company? Is
t here a difference in t erms of t he healt h and wealt h of t he American
eco nomy and t he American people bet ween t he sale of a Ho nda car here
and a sale of a GM car here? And let me st art wit h Mr. Belzo wski and t hen
go right do wn. I t hink it 's import ant fo r us t o get t hat .
MR. BELZOWSKI: On t he real economics of t hat , I'm go ing t o
leave t hat t o my eco no mist friend at t he end of t he t able here. But some of
t he issues t hat have t o deal wit h t hat surround t he t ransplant s versus t he
domest ic. An int erest ing one is t he labor issue where mo st of t he
t ransplant if no t almost all t he t ransplant manufact urers are nonunio n
plant s.
What 's int erest ing is t hat t heir wo rkers make almost t he same amo unt
o f mo ney as t he UAW workers make in our domest ic plant s, t ho ugh one
co uld argue, and I've t ried t o argue t his a number of t imes, t hat if t he UAW
did no t exist in t hose plant s, t hose workers wo uld not be making t he kind
o f mo ney t hey're making in t hese t ransplant s. So t hat 's kind of an
int erest ing way of lo oking at it on t he labo r issue in t erms of t ransplant s.
Profit s usually get expat riat ed t o t he home count ry, so in Japan and
Ko rea's case, o r in Germany o r BMW's case go ing back t o t heir home
co unt ry. Now t ho se can be reinvest ed because t hey're mult inat ional
co mpanies. They'll be reinvest ed, so me in t hose plant s. If t he volume
demands it , t ho se will be reinvest ed back int o t hat plant , but no t
necessarily.
They provide jobs, t hey pro vide ext ernal jo bs fo r t he supply base,
and so me of it U.S. supplier, some o f it fo reign suppliers, but U.S.
co mpanies have U.S. and foreign suppliers as well. So I don't know what
t he t radeoff is on t he supplier perspect ive, but I'll hand it off t o John o n
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t hat o ne.
MR. MOAVENZADEH: So I t hink t he answer t o t he quest io n is
t here a difference in value added bet ween a Toyot a invest ment in t he
Unit ed St at es and a Ford invest ment , t he short answer is yes, I t hink t here
is a difference. As Bruce po int ed o ut , profit s Toyot a made, about $10
billio n in profit last year, and presumably we see t his flow back of t hose
pro duct s t o Nagoya, t o Toyot a Cit y.
I'm act ually a lit t le bit skept ical t hat it 's t hat simplist ic t hough. I
t hink t hat so met hing has t o pay fo r t his vast expansio n o f t he Toyot a
Technical Cent er in Ann Arbor, Michigan, and I t hink t hat 's t his
repat riat ion and t hen a second repat riat ion point . So I t hink t hat t here
clearly is a value added coming from t he foreign, what we t hink o f as t he
fo reign brand manufact urers, t heir presence, t heir pro duct ion presence in
t he Unit ed St at es, and increasingly what we've seen is t he foreign brand
manufact urers increasing t heir R&D presence in t he Unit ed St at es.
So right now, t he figure is so mewhere bet ween 5,000 and 6,000
engineers, scient ist s, t echnical people, high valueadded people, who are
wo rking fo r co mpanies like Ho nda, Hyundai, BMW, Toyot a here in t he
Unit ed St at es. And we've seen t hat number increasing over t he years and I
t hink will co nt inue t o increase.
COMMISSIONER MULLOY: Dr. Helper, did you?
DR. HELPER: Yes. No, I just seco nd everyt hing t hat 's been said so
far, and I guess add I t hink one import ant benefit act ually of t he Japanese
manufact urers has been a kind of t eaching effect around diffusing qualit y
co nt ro l met hods, co nt inuous impro vement , et cet era.
So I t hink t here's been a balance. There have been some posit ive
effect s and so me negat ive effect s. One could t hink about po licies t hat
wo uld maximize t he po sit ive, reduce t he negat ive, and so one o f t hem
might be policies t hat allow wo rkers really t o cho ose fairly whet her t hey
want t o be unionized or no t , po licies aro und healt h care, et cet era, t hat
reduce t he so rt of legacy cost s and make it very expensive for a co mpany
t o shrink in t he U.S.
Finally, polit ical pressure t hat I t hink has been in part one of t he
reaso ns t hat Toyot a and Honda have increased t hat part o f t he value chain
t hat t hey add here, t hat t hey do here. So I t hink t hat 's act ually quit e
valuable. In general, I t hink we've t alked a lot about t he foo t loose
mult inat ional, and if we could t hink abo ut po licies, bot h in t he U.S. and in
China, t hat kind of align t he int erest o f t he mult inat ional wit h t he count ries
where t hey do business, t hat t hen so cial welfare, bot h of people in t he U.S.
and in China, can increase.
HEARING COCHAIR WESSEL: Co mmissioner Blument hal.
HEARING COCHAIR BLUMENTHAL: Thank yo u very much. Mr.
Mo avenzadeh, I was impressed by some of your t est imony. Relat ing t o
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Co mmissioner Mulloy's point , it do esn't really seem like t here is a normal
car co mpany anymore. Ford owns Jaguar, Volvo and Land Ro ver and
Mazda. I was very impressed by t he way you described t he sort o f
glo balizat ion effect .
But o ne t hing t hat might help us underst and specifically wit h respect
t o ho w Americans and American workers and America as a count ry is
benefit ing from say, just give us a sense of t he money flow. When you say
t hat t he GM has made $327 million in China operat ions, can you give us a
sense o f how t hat sort of flows back, t o whom t hat flows back, how it
act ually benefit s Americans, if it does at all, and American workers, and I'd
just like t o get a sense of how t hat works?
MR. MOAVENZADEH: Again, I t hink t his is probably a quest ion
t hat Dr. Helper can address bet t er t han me. But I will just say t hat t ransfer
pricing mechanism wit hin mult inat ional co rporat ions is no t oriously opaque
so t hinking about ho w t hat $327 millio n ends up back in let 's say t o t he
benefit of GM employees in t he Unit ed St at es I t hink is a very difficult
quest ion t o answer, ot her t han simply t o say, well, it must have some
benefit because it makes GM a st ronger company in t he larger broader
o verall sense. As we all kno w, GM lost o ver $10 billion last year, so t o be
able t o have so me profit st ream coming fro m t heir aut omot ive operat ions I
t hink makes t he company st ro nger from an o verall corporat e perspect ive.
HEARING COCHAIR BLUMENTHAL: And t hat benefit s
shareholders or?
MR. MOAVENZADEH: It cert ainly benefit s t he shareholders.
HEARING COCHAIR BLUMENTHAL: But not necessarily t he
wo rkers back here?
MR. MOAVENZADEH: I would say indirect ly it does benefit t he
wo rkers back here, but I t hink it 's very difficult t o quant ify t hat quest ion.
Sue.
DR. HELPER: Yes. I guess what I would say is t hat it definit ely
benefit s shareho lders. I t hink t his globalizat ion is one of t he feat ures
leading t o t he increased disparit y in dist ribut io n o f inco me in t he U.S., t hat
shareholders can benefit regardless of where t he company go es. Wo rkers
o n t he ot her hand are kind o f fixed in where t hey can wo rk, and so t he
bargaining power t hat mult inat ionals have of being able t o be much more
fleet of foo t t han wo rkers allo ws I t hink a kind of glo bal reduct io n in
wages for wo rkers.
So some of t he money from t hese profit s presumably goes t o
shareholders who are pensio n funds. So t hat probably offset s some of t he
lo ss of money due t o wage inco me. But I bet t hat it 's not a full
replacement .
HEARING COCHAIR BLUMENTHAL: I underst and it 's beyond t he
capacit y of your t est imo nybut t o zone in on some of t he more speculat ive
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co mment s you made, t he indirect benefit s and t he pension plans, ho w
wo uld we go abo ut do ing t hat ?
DR. HELPER: I t hink o ne t hing you'd want t o look at is t he local
co nt ent , t he U.S. cont ent o f cars so ld in China, which maybe yo u kno w
about , so t here are probably some part s t hat are act ually made in t he U.S.
and export ed t o China. So we'd want t o know about t hat .
We'd want t o know so met hing about I guess where GM's profit s flo w
and who GM's shareholders are and t he ext ent t o which it is act ually
pensio n funds, and t hen I guess yo u also need, and t his would be t he t ough
part as a co unt erfact ual, so what are we co mparing it t o ? Are we
co mparing it t o a sit uat ion in which t here's no invest ment in China?
Especially given t hat right now mo st of t he cars t hat GM pro duces in China
are so ld t o China. If yo u t hink of t his as a new market , t hen it 's maybe all
beneficial.
If we see some o f t hese o vercapacit y issues t hat some of t he
co mmissio ners have ment io ned, in t he fut ure, t here may act ually be a
t radeo ff where o ne mo re car made in China means one car less made in t he
U.S. So I'd be happy t o work wit h you on t hat , but I t hink it 's quit e a
co mplicat ed issue, but quit e an impo rt ant one.
HEARING COCHAIR WESSEL: Co mmissioner Bart holomew.
much and t hank yo u t o all o f our wit nesses for being here t oday. It 's very
int erest ing. One issue I would put o n t he t able, and I t hink t hat Chairman
Wo rt zel might also ask abo ut t his, but remember t he no nconvert abilit y o f
t he Chinese currency probably means t hat repat riat ion of profit s back here
t o t he Unit ed St at es is a rat her complicat ed sit uat io n if it happens at all.
I'd add anot her quest io n t hat sho uld be looked at . What is Ford
doing wit h t he profit t hat it made in China? Is it just plowing t he profit
back int o Chinese fact ories? That pro bably would help answer so me of t he
quest ions.
But act ually I have a different issue, which is I was a lit t le surprised
t hat IPR t heft did no t play a ro le in o r a bigger role or any role at all in
so me o f yo ur t est imo ny. Mr. Belzowski, yo u at least ment ioned IPR, but
we heard when we were in Shanghai t wo weeks ago from a U.S.
businessman, who, of course, wo uld never want t o be cit ed on t his, t hat up
t o 40 percent of Chinese export s are count erfeit ed or knocked off.
We have heard fro m Senat or Levin about t he problem wit h some
brake pads, sparkplug wires. The brake pads he was t alking about are
act ually made out o f woo dchips and compressed grass or compressed wood
o r grass chips o r what ever. There are safet y issues cert ainly t hat go alo ng
wit h t hat . But t here are also so me people who believe t hat you can't loo k
at t he R&D issue in China wit hout loo king at all of t he cost s t hat t hey have
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saved by simply st ealing pat ent s and st ealing plans, st ealing or requiring, o f
co urse, t hat American co mpanies t urn t heir plans over in order t o be able
t o o perat e t here.
So I just would like some sense from you about what ro le yo u t hink
IPR t heft is playing, bot h in aut o part s and ult imat ely in t he aut o indust ry
it self and how we're going t o deal wit h it if it is a problem?
MR. BELZOWSKI: It 's definit ely a serious issue. When we, in t he
st udy t hat we did abo ut China, we were act ually asking t he Chinese
t hemselves what t hey t hought t heir aut omo t ive fut ure was going t o be like.
So t he responses t hat we got were fro m t he Chinese t hemselves.
So we asked t hem about t his issue of int ellect ual pro pert y, and in
general t hey t ried t o sidest ep it a lit t le bit . But basically t hey were saying,
and t here is some t rut h in t his, in developing aut omot ive eco nomies, for
example, in Korea o r in Japan in t he '50s and '60s, t hey call it imit at io n,
and it wasn't unusual at t hat t ime t o see t he Ko reans or t he Japanese
co pying U.S. o r Euro pean designs and pushing t hem off as part of t heir
pro cess.
So t he Chinese see it as part of t heir evo lut ion. They feel t hat t hey
will get over t his. They will st op doing t his and event ually it will work out
o nce t hey are able t o develop t heir own int ellect ual propert y. And t hat 's
why I t hink t hey t ry t o fo cus on t rying t o develop t heir own innovat ion so
t hat t hey do not have t o get t o t his point because I t hink t hey see it as a
real problem in t he fut ure fro m WTO. It just becomes somet hing t hat is
unmanageable if it cont inues in t hat direct ion.
MR. MOAVENZADEH: Yes, I agree wit h t hat , t hat it 's no t
sust ainable, t his st rat egy o f co unt erfeit ing and pirat ing, and I t hank you fo r
point ing o ut t hat t here is a glaring o missio n in my st at ement on IPR, and
t hat 's no t by design; it just happened t hat way.
It cert ainly is an import ant and a real problem. I have found t hat it 's
very difficult t o quant ify, t o find so me reliable dat a. There's an ocean,
t ho ugh, of an anecdot al dat a and I've t alked t o many, many aut omot ive
managers who have enco unt ered t he same exact t ypes o f night mare st ories
t hat you just referred t o .
This issue of reverse engineering like st ealing a car, t aking it apart
and t rying t o figure out ho w t o engineer it , it 's not a very efficient process
and it doesn't act ually lead t o subst ant ial develo pment o f engineering
design capabilit y. So, yes, you can get so rt of a cheap co unt erfeit as we've
seen wit h Chery and Geely and many of t he ot her Chinese aut omakers, but
it 's really difficult t o t hen use t hat as a base fo r developing a sust ainable
co mpet it ive advant age wit h respect t o pro duct develo pment , and product
develo pment , being able t o engineer cars, is a huge different iat o r in t he
aut o mot ive indust ry.
So I guess t here are t wo sides. Yes, it 's a huge problem, but I don't
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see it as a sust ainable problem.
DR. HELPER: Yes. I t hink t hose are really bot h very insight ful
co mment s and I would just add I t hink t he dist inct ion bet ween sort o f
imit at io n t hat builds capabilit y and st ealing t hat deprives people o f
int ellect ual propert y and creat es unsafe product s and doesn't develop
capabilit y is an import ant o ne and one t hat perhaps we should t hink about
ho w t o develop policies t o pro mot e t he o ne wit hout t he ot her.
I'd also just po int out t hat t o so me ext ent , t he U.S. indust rial base is
built o n st olen int ellect ual propert y from t he Slat er t ext ile mills in t he 18t h
cent ury and t he German die pat ent s o f World War I, so t hat we're not
ent irely inno cent on t his, and t hinking about , again, policies t hat promot e
Chinese development , I t hink, is so met hing t hat we should work on,
alt ho ugh not in a way t hat disadvant ages our o wn manufact urers.
COMMISSION VICE CHAIR BARTHOLOMEW: For what it 's
wo rt h, when we were in Beijing prio r t o being in Shanghai, we had a
deput y at t he Minist ry o f Co mmerce deny t hat t here were even int ellect ual
pro pert y t heft s t aking place. So you've got t o t ake a lot o f t hese t hings
wit h a grain of salt .
HEARING COCHAIR WESSEL: Co mmissioner Houst on.
COMMISSIONER HOUSTON: Thank you very much, and I also
t hank my fellow commissio ner, Ms. Bart holomew, for bringing up t he IPR
issue. It 's very, very import ant in t his cont ext as well, and I would argue
t hat o ne of t he reasons t hey want t o have t heir o wn int ellect ual propert y is
so t hat t hey can act ually get ahead in t he world market of t hat which t hey
wo uld have normally st o len, but we'll just have t o see ho w t hat works out .
Dr. Helper, I would like t o credit you for having what I t hink is
pro bably one of t he mo st foundat io nally import ant quo t es of t he day, which
is t hat Chinese wo rkers creat e supply but no t demand. Cert ainly workers
in t he U.S., part icularly in t he aut o indust ry, creat e supply and demand.
I wo uld also like t o hear what you and t he ot her panelist s would
have t o say about a labor econo my/labor behavior quest io n. While we were
in China, I develo ped my own economic t heory called t he "Global
St arbucks Init iat ive," which basically means t hat everyone in t he wo rld
want s t o be able t o afford t o pay $4 fo r a cup of coffee.
There are St arbucks everywhere. They're at t he point now t hat
t hey're acro ss t he st reet from each ot her and we met wit h t he president o f
St arbucks in China who not ed t hat t here would be more St arbucks in t en
years t han t here would be in t he Unit ed St at es. So in order t o creat e t hat
kind o f individual prosperit y, t he prosperit y has t o accrue t o t he individual,
and in China right now fo r t he wo rkers in t he aut omot ive indust ry o r
anywhere else, t hat prosperit y is accruing t o t he Chinese go vernment eit her
direct ly o r t hrough t he jo int vent ures t hat it has.
I would argue t hat here in t he Unit ed St at es we have also some
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exist ing infrast ruct ures t hat a lot of t hat prosperit y accrues t o and we have
infrast ruct ure t hat wo rkers, part icularly in t he aut o indust ry, are beholden
t o fo r a number o f t hings t hat it wo uld be nice if t hey had so me individual
choice for.
In China, you have co erced labor t o a great ext ent and I wo uld guess
in t he aut omot ive indust ry t here as well, bot h t he legit imat e and knocked
o ff product s.
Fro m an econo mic hist o rical st andpoint , is t here a labor t ipping
point ? Inst ead o f receiving below world value wages and cert ainly belo w
U.S. st andard wages, is t here a point where t he laborers in China are going
t o see what 's go ing on in t he rest o f t he wo rld as far as labor cost s go and
st art demanding t hat t hey be paid for mo re?
I realize t hat t he po lit ical infrast ruct ure t here t amps t hat down
co nsiderably, but in your est imat ion, hist orically has t hat happened or can
we ext rapo lat e fro m o t her experiences? If t hat did happen in China, would
t here be any kind of impact o n t he wo rld market and cert ainly as we're
discussing t o day t he aut o workers here in t he Unit ed St at es?
DR. HELPER: Yes. I t hink t hat 's a really impo rt ant quest ion and I
t hink a lo t o f my co lleagues in t he economics pro fessio n t end t o assume
t hat when t he pro duct ivit y o f t he wo rker increases, t hat t hat is going t o
aut o mat ically be reflect ed in wages. That kind of ignores t he effect iveness
o f repressive st ruct ures t hat are current ly in place in China and o t her
co unt ries as well. So I t hink t here's no t hing aut o mat ic about rising
Chinese wages.
We are seeing rises in wages, alt hough it st ill is not co mmensurat e
wit h pro duct ivit y. But I t hink it 's very import ant t hat policies and
inst it ut ions mat t er a t on in whet her t his evolut ion of higher wages will
co nt inue. If we just loo k in t he U.S. for example, unions have been o ne o f
t he pillars, I t hink, o f more equal wage dist ribut ionin t he U.S., unions are
shrinking now.
So t here isn't t his kind of idea t hat always and everywhere wages rise
as pro duct ivit y rises. So t hat I urge t hen t hat some of t hese policies t hat
have been ment ioned around, t o t he ext ent t hat t he U.S. can urge suppo rt
fo r labor right s and demo crat ic right s in China, I t hink t hat 's very
impo rt ant t oward t his evo lut ion cont inuing t o occur.
I'd also say so t hen if t he Chinese people t hen are richer, t hen t hey're
able t o demand mo re. I t hink t hat raises an issue t hat we haven't t alked
about t oo much, which is t he who le environment al issue around cars. I
t hink t hat one of t he t hings t hat t he world indust ry needs t o figure out is a
sust ainable t ransport at ion net work t hat get s people around wit ho ut , yo u
know, t hrowing t oo much carbon int o t he air.
One o f t he t hings t hat we may need t o t hink abo ut is how are we
going t o t ranslat elet 's say t he so rt of go od scenario o f increased demand
93
fro m China happens. How are we going t o t ranslat e t hat int o an
enviro nment ally sust ainable fo rm of demand? I t hink t hat so met imes t hat
co uld act ually be beneficial t o t he U.S. because it requires a lot of R&D t o
t hink abo ut how we're go ing t o redesign pro cesses t o pollut e less.
There may be, in fact , be an opport unit y t here, but again policy is
going t o need t o promot e t hat .
HEARING COCHAIR WESSEL: Co mmissioner Wo rt zel.
MR. BELZOWSKI: Can I weigh in on t hat ?
HEARING COCHAIR WESSEL: Please.
MR. BELZOWSKI: When we were loo king at t he GDP per capit a
fro m 2004 t o 2005, it already has risen wit hin China, which is significant
because t hey act ually have 1.4 billio n people. For any rise in GDP t o beI
t hink is almo st like 500 t o $1,000 per person, just wit hin one year. So it
sho ws you t hat t here really is being t ransferred t o individuals. Of course,
yo u don't know what part s of t he econo my are get t ing it and which ones
aren't . But I t hink t hat really sho ws t hat some o f t his money is flo wing
back t o t he wo rkers.
When yo u t hink abo ut t hat , and t he reason t hat t he manufact urers
and t he suppliers are in China right now, because it has a t wo pronged
o ppo rt unit y, somet hing t hat not all emerging market s have, because
act ually a lot of t imes when manufact urers and supplies go t o emerging
market s, t hey're going t here t o t ake advant age of lo w wages, but t hey're
no t really t here t o t ake advant age of t he market .
Mexico is an example of t his. In China, it has bo t h sides go ing t o
fo r it , so not o nly do you have t he out sourcing opport unit y if yo u really
want t o t ake advant age of it , but you also have t he market t here t hat 's
gro wing. And six millio n vehicles, t he largest , secondlargest co unt ry in
t he world, and t hey have less t han t wo percent of t he people have vehicles,
which is really great fo r t he environment , but from a market perspect ive,
t he manufact urer is saying t his is going t o be a huge market opport unit y for
us. That 's why t hey're all t here.
COMMISSIONER HOUSTON: It 's int erest ing t hat you say t hat
because when we were t here, I t hink we would all remember t hat most of
t he businessmen we t alked abo ut did fo cus more o n t he size o f t he market
t han t he labo r co st s while we were t here.
MR. BELZOWSKI: Right .
HEARING COCHAIR WESSEL: Co mmissioner Wo rt zel.
CHAIRMAN WORTZEL: I'd like t o follow up on what t his market
and t hese pro fit s do fo r t he Unit ed St at es. I kno w profit s from business in
China suppo rt s a globalized corporat ion and I t hink Dr. Helper's argument
t hat if such money flows back int o t he co rporat e coffers and average
Americans or employees in t hat co rporat ion have t hat part icular st ock in
t heir port folio, t hat might help a ret irement plan.
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But bot h of you referred t o t he repat riat ion of profit s, bot h Mr.
Belzo wski and Mr. Moavenzadeh. Is t hat it ?
MR. MOAVENZADEH: Yes, t hat 's right .
CHAIRMAN WORTZEL: Thanks. In every experience t hat we have
had as a co mmission in China, and I have had fo r five years working in
China and more t han 30 years st udying China, when I t alk t o corporat e
managers, corpo rat e execut ives, about repat riat ing capit al, I get a flim
flam answer about ho w t he company go es t o swap market s can get some
mo ney o ut . For t he most part , however, I have yet t o have anybody
document in a place t hat has a closed economy, a clo sed banking syst em,
and a currency t hat do es no t t rade o n t he int ernat io nal market , how yo u
repat riat e or dist ribut e your profit s.
As much as I like China and have enjoyed t he t ime I spent t here, I
don't much care about wo rking t o develop China. Our focus here is on t he
Unit ed St at es. Can yo u help me underst and how we can learn how and
whet her t his capit al co mes out of China and where it goes in a globalized
co rpo rat io n? I haven't heard t hat from you.
MR. BELZOWSKI: From my side, I never said t hat we were going
t o repat riat e pro fit s from China. It 's t he Japanese who repat riat e pro fit s
fro m t he U.S. t o Japan and t he Germans from t he U.S.
CHAIRMAN WORTZEL: Okay. So how are t hey doing it fro m
China?
MR. BELZOWSKI: I do n't know. I have no ideaif yo u had t his
kind o f market and you had t his kind of market o pport unit y, I would
assume yo u would plow it back int o your ownI don't know if t hey're
doing t hisyo u would plo w it back int o your operat io ns t here t o expand
yo ur o perat io ns t here, if t here was t hat kind of market .
CHAIRMAN WORTZEL: Even if t he currency was co nvert ible, yo u
wo uld plo w it back in t here?
MR. BELZOWSKI: Depending on how much yo u already have
invo lved in.
DR. HELPER: Int ernat io nal finance is not my area. First o f all, let
me say t hat I am not a pro ponent of making lo t s of profit s in China and
sending t hem back, t hat 's how we're go ing t o all fund our ret irement s.
But just t o explain what I t hink might be going on in areas you might
lo o k at . It seems I t hink t hat o ne of t he t hings t hat China is t rying t o do
wit h it s policies o n repat riat ion o f t he currency is st abilit y. They don't
want t o have t he so rt of Asian financial crisis wit h speculat ion build up t he
currency and t hen t here's a rush away fro m it as happened in '97.
My sense, and t his co uld be wro ng, so I'm reluct ant t o say it , but I
t hink part o f t heir currency pro blem, part of t heir currency policy, is t hey
act ually need t o buy a lo t of U.S. do llars because t hey need t o keep t he
demand fo r t he U.S. dollar high so t hat t hey can t herefo re suppress demand
95
o r lo wer t he rat e o f t heir renminbi, and so t hat 's go ing t o act ually make
t hem affect t heir policy on t he repat riat ion as well.
MR. MOAVENZADEH: Yes. I would just say it 's a t remendously
co mplex quest io n and I t hink t hat you've helped me t o define one of our
fut ure research t o pics. So t hank you.
CHAIRMAN WORTZEL: Thanks.
HEARING COCHAIR WESSEL: Co mmissioner D'Amat o.
COMMISSIONER D'AMATO: Yes. I want t o get t he quest ion o f
R&D co st s clear in my mind. In t erms of being able t o sell on t he
American market , you seem t o be more sanguine t han I am in t erms of o ur
abilit y t o compet e.
Put t ing aside t he currency different ial, which is 30 or 40 percent , we
believe t here's a subst ant ial cost t hat 's included in American aut os in t erms
o f all t he R&D t hat is no t a co st t o t he Chinese. How do you fact o r t he
R&D different ial int o Chinese abilit y t o penet rat e t he American market
despit e t he fact t hat t hey may not be co ordinat ed? There may be a lot o f
manufact urers, but st ill if a couple o f t hem merged and are able t o t ake
advant age o f American R&D, and not fact or t hat co st int o t heir pro duct ion,
t hen it seems t o me we're t alking about a subst ant ial cost advant age for t he
Chinese t o build a compet it ive posit ion in t he American market .
Have you do ne any work o n t hat ? How do yo u evaluat e t he
impo rt ance o f t hat different ial?
MR. MOAVENZADEH: There's t wo I t hink import ant different ials.
One is t he wage rat e difference and t he ot her is t he R&D capabilit y, and it
seems t o me t hat bot h of t hese are quit e different wit h respect t o lower end
eco nobo x vehicles, if you will, versus higherend luxury t ype vehicles.
I suggest ed in my st at ement t hat I can imagine in a five t o t enyear
t ime frame t hat China will export some lowerend vehicles t o t he U.S.
market if t hey can overcome t he regulat ory hurdles.
For t hese lowerend vehicles, t he lower labor wages in China have
mo re of a compet it ive advant age, t hey're less R&D int ensive in t hat China
has already learned a lo t about manufact uring t he lowerend vehicles
t hro ugh it s experience wit h joint vent ures, t hrough t he reverse engineering
pro cess, but mo re impo rt ant ly t hrough some of t he element s t hat Bruce
t alked about , which is what t hey're really doing now t o effect ively develop
t heir R&D capabilit y.
That is t hings like SAIC buying Ssang Yo ng, which is a Ko rean
manufact urer, basically buying in t he knowledge, or t hings like Chery, an
indigeno us Chinese manufact urer, working wit h AVL, which is an Aust rian
engineering design firm, t o joint ly develop a line of highend sophist icat ed
engines. So t hese t ypes o f mechanisms are ult imat ely going t o improve t he
R&D capabilit y in China, whereas t he original int ent ion of t he jo int vent ure
policy, which was t o do so , largely has been a failure.
96
DR. HELPER: I'd just add t hat I t hink in looking at t he po ssibilit y
o f Chinese export s, we shouldn't forget t hat part s overco me several of t he
hurdles t hat John ment io ned mo re easily.
First , t he cost different ials. When you ship an ent ire car, yo u're
shipping a lot o f air. If you ship part s, t he shipping cost per part is less.
Seco nd, you can fo cus yo ur R&D effort s and just look at a few part s, and
so I would imagine t hat we're going t o see more Chinese part s before we
see Chinese complet ed vehicles.
MR. BELZOWSKI: I t hought o ne of t he int erest ing point s, t he way
t hat t he go vernment has t hings set up no w, is t hat originally t hey demanded
t hat every manufact urer and supplier have a corresponding Chinese
co mpany as a jo int vent ure part ner, but wit hin t he last couple of years,
t hey have changed t hat in t erms for t he supply base. So suppliers can go
int o China now and set up t heir o wn companies wit hout having a Chinese
jo int vent ure, whereas t he manufact urers st ill have t o do t hat .
And t hat really opens up t he world t o t hese manufact urers, t he
suppliers, because t hey can now export wit hout sharing t heir profit s wit h
t heir jo int vent ure part ner, which is one o f t he reasons t hat we said in o ur
report t hat we really don't see t he joint vent ure companies, say t he GM and
SAIC, t he Ford and ChangAn, as export ing vehicles t hat were already
designed in, say, Nort h America o r Germany t o t he Unit ed St at es or
Germany because t hey would end up having t o share t hose profit s wit h
t heir part ners.
That 's why t heir fo cus t ends t o be on t he Chinese market where, if
we're go ing t o sell vehicles here, we'll share t he profit s here as well.
That 's fine wit h us, but we're not go ing t o design a vehicle in Det roit , build
it in China wit h o ne of our joint vent ure part ners, and t hen ship it back t o
t he U.S. and share t he profit s wit h o ur jo int vent ure part ner.
Right no w it seems like a lit t le insulat io n by t he U.S. eco nomy fro m
expo rt s fro m t he joint vent ure co mpanies. Now, t he Chery's and t he
Geely's, which are not joint vent ure co mpanies for t hem t o ship over, t hey
have lower wages, t hey have an advant age t here, and which t hey'll pro bably
t ry t o t ake advant age o f, but t hey really do n't have t he R&D capabilit y t hat
t he global manufact urers have. So t hey're t rying t o cat ch up in a number o f
different ways.
When we asked t he Chinese t hemselves, how lo ng do you t hink it 's
going t o t ake yo u t o be up t o be a worldclass manufact urer/supplier, t he
minimum was t en years, but some said 20 t o 30 years. That 's how far away
t hey t hemselves felt t hey were in t erms o f t heir pro duct development and
R&D capabilit ies. John t alked about t hiswhere just because you have t he
part in fro nt o f yo u, and you reverse engineer it , you didn't have t he
engineering t ime t hat went int o developing t hat , yo u had engineers who
learned and said, do n't do it t his way, we've t ried it t hat way, it do esn't
97
wo rk.
You don't have t ho se people on bo ard and it t akes awhile t o build up
t hat compet ency especially because vehicles are so complicat ed. There's
t ho usands, 20,000 part s in a vehicle, and have t hem wo rking t oget her and
t he increase in complexit y because o f elect ro nics has just made t he whole
vehicle so much more complicat ed t han it used t o be, and it makes it hard
fo r people t o ent er int o t he aut o mot ive indust ry.
Now, it do esn't mean t hey won't , and t he Chinese will be here.
They're coming and t hey will be here. Do n't pret end t hat t hey're not . But
it may t ake a lit t le lo nger t han people t hink.
HEARING COCHAIR WESSEL: Thank you t o our panel. I'd like t o
fo llo w Co mmissio ner Blument hal's request t o underst and more about t he
co mpet it ive model, what we sho uld be lo oking at , st randed cost s, SAG,
incidence of all t hese co st s in t he lo ng t erm, and how we underst and what
t he issues are as we lo ok at our t wo market s. So in t he coming days,
ho pefully, we can get some more advice from t he panel.
DR. HELPER: If I can, I just had one t hought on t hat .
HEARING COCHAIR WESSEL: Yes.
DR. HELPER: I t hink we've ment ioned a number of laws and ho w
t his is a syst emic appro ach t hat is needed, but t hink abo ut bankrupt cy law.
In t he Delphi case and a number o f ot her cases, yo u're allo wed t o sort t o
t ake o nly your U.S. o perat ions bankrupt , int o bankrupt cy, and so I t hink
what happened is Delphi has been able t o use some profit s in t he U.S. t o
fund Chinese o perat ions and so you might call t hat a st randed co st , et
cet era.
HEARING COCHAIR WESSEL: Yes, t hat was my point about
st randed co st s and loo king at SAG and everyt hing else and how t he
incidence of all t hose cost s which have t o go int o a compet it ive model.
COMMISSION VICE CHAIR BARTHOLOMEW: Just ano t her
t ho ught , which is I t hink we lo ok backwards t o t ry t o predict forwards.
We hear about Japan and we hear about Korea, and I t hink t hat one of t he
issues, one o f t he quest ions t hat t he who le China's econo mic growt h and
eco nomic develo pment has really raised is do t he o ld models even apply
anymo re?
I t hink t here was a panel in Washingt on relat ively recent ly about
Ricardo's t heory and whet her t his is just even a paradigm t hat we can use
fo r t hinking about t rade mo ving forward?
This Co mmissio n is unusual, in a sense. It was t he first co mmissio n
t o fo cus o n a bilat eral relat ionship like t his, and I t hink t hat t here are some
fundament al quest ions abo ut ho w bot h t he ext ent , t he size of China and t he
impact t hat it 's having on t he world and will cont inue t o have o n t he world,
and ho w quickly it 's happening.
98
So I'm very int erest ed, Mr. Belzowski, t o hear t hat t he Chinese
t hemselves are saying t en, 20 years. I don't know if you agree wit h t hem,
if yo u t hink t hat t hat 's realist ic or no t , or if t hings are moving more quickly
t han anybo dy expect ed. Or are we moving int o a wo rld t hat we just really
don't underst and and can't predict ?
MR. BELZOWSKI: I agree, t hings are moving much quicker t han
t hey ever have in t he past , and when I do a slide show, I show t he
Indust rial Revolut io n, how long it t o ok for t hat t o develo p, how long it
t o o k fo r Japan t o develop aft er t he Second World War, and what 's
happening in China, and it 's exponent ially fast er.
There are issues surrounding t hat t hat suppo rt it t he use of
informat io n t echno logy, which wasn't available in t he past , and t hat has
sped t hings up in t he aut o indust ry as it is, but it also allows t his newer
indust ry t o mo ve fast er t han it did in t he past .
The free flow o f t rade bet ween count ries, which in t he past pro bably
was no t as o pen, so t here's much more freeflo wing of t rade bet ween t he
co unt ries, a variet y of count ries, and when you t hink about your co mpany
no wadays, you don't t hink about it as here I am in China, I need t o sell in
China. I'm act ually an int ernat ional global company; where can I sell my
pro duct s?
If market s are open, I can sell t hem anywhere in t he wo rld, and it
really makes it more challenging, but it makesit gives t he companies an
o ppo rt unit y t o act ually balance t heir co mpanies' port folios acro ss different
regio ns and co unt ries t hat I do n't t hink in t he past was ever available.
DR. HELPER: I'm involved in some of t he research t hat was
present ed o n t hat panel, and I guess my t ake wo uld almost be t hat perhaps
what we need t o do is, in fact , ret urn t o some o lder mo dels o f t rade. That
t here's been a kind o f t endency of neoclassical economics in t he last , say,
20 years, t hat promo t es kind o f st at ic efficiency. So let 's look at who has
got t he cheapest pro duct now rat her t han loo king at t hings like dynamic
efficiency, how do we build capabilit ies, innovat ion fo r t he long t erm, ho w
do we creat e macroeco nomic st abilit y.
If you t hink about , in fact , some of t he U.S. post World War II
policies where we bot h kind of promot ed domest ic R&D and capabilit y
building and also demo crat ic inst it ut io ns and economic recovery abroad,
t hat t hat might act ually be a go od mo del.
COMMISSION VICE CHAIR BARTHOLOMEW: Wo nderful. I
t hink one o f t he key quest ions t hat yo u ment ioned was t he if market s are
o pen quest ion, which we haven't of course, in t he previous panel, t here
was some t alk about nont ariff barriers and t hings t hat t he Chinese
government is doing t o prot ect it s indust ries and how we deal wit h t ho se.
So t hank yo u all very much.
HEARING COCHAIR WESSEL: Commissioner Mulloy for a quick
99
quest ion.
COMMISSIONER MULLOY: Dr. Helper, you're an econo mist . My
underst anding is t hat a car t hat is made by a t ransplant has more impo rt ed
part s in it t han a car t hat is made by GM o r Ford, and t hat more of t he
higher valueadded part s in a t ransplant are import ed t han it wo uld be in
t he case o f an American made car, and t hat t hat has significance for an
eco nomy. Am I correct in t hat assumpt ion?
DR. HELPER: That 's somet hing t hat is changing. There are act ually
so me car models now made by To yot a and Honda, I believe, t hat have more
lo cal cont ent t han mo dels made by t he U.S. I wo uld also say, yes, I guess
I wo uld go back t o so me o f t he discussion, some of t he point s made by
Bruce, I t hink t he issue is how dowe promo t e longt erm capabilit y
develo pment in t he U.S.
That sort of encouraging, I t hink, foreign co mpanies co me here.
Part icularly, I t hink, t here's a real difference bet ween t he Japanese and t he
Chinese challenge. Somet imes t he Japanese challenge loo ks in ret rospect
quit e easy because, on t he one hand, t he wages quickly became quit e
similar and so it was a co mpet it ion not based so much on wages as on
superior t echnique. That 's t he kind of compet it ion t hat I t hink benefit s
co nsumers.
In t he Chinese case, I t hink t here's mo re difficult y because it is really
a compet it ion based o n low wages, exploit ed labor, poo r regard for t he
enviro nment . So I t hink it 's import ant t o loo k at how do we increase
capabilit y in t he U.S. and skills and t hings like t hat ?
Also t hinking about how t he role of expo rt , demand for our export s
in Japan. So I t hink t hen so me o f t hese issues abo ut no nt ariff barriers
co me back.
COMMISSIONER MULLOY: Thank you.
MR. BELZOWSKI: I t hink t he issue having t o do wit h if yo u're
lo o king at what 's t he value of t he component s t hat are being made by U.S.
suppliers and no nU.S. suppliers, if you lo ok at t he t ransplant s t hemselves,
t hey t end, you look at t he higher value t hings, somet hing like t he engine,
well, t hat t ends t o be made here in t he U.S., and somet imes it 's made
int ernally by t he company it self. It 's no t even out sourcing it , so t hat 's
pro bably t he biggest part of t he vehicle.
The st ampings, t hey t end t o be done by t he companies t hemselves
rat her t han by t heir suppliers. So I t hink t hat t he supply base is not
t here's definit elyand t he Japanese suppliers, for example, t hat fo llo w t heir
manufact urers t o t he U.S., but t hey're emplo ying U.S. workers, and t he
U.S. workers haveand t here are decent wages, so it 's not t hat big a
different ial I t hink as you may t hink.
COMMISSIONER MULLOY: Thank you. That 's very helpful t o me.
Thank yo u.
100
HEARING COCHAIR WESSEL: Thank you. We will break unt il
1:15. I appreciat e all of yo ur help and I loo k fo rward t o seeing everyone
back here short ly.
[Whereupo n, at 12:45 p.m., t he hearing recessed, t o reconvene at
1:20 p.m., t his same day.]
A F T E R N O O N S E S S I O N
[1:20 p.m.]
PANEL IV: NATION SECURITY PERSPECTIVES
HEARING COCHAIR BLUMENTHAL: Welco me back. We are

going t o st art o ur fo urt h panel o n Nat io nal Securit y Perspect ives. We have
wit h us t oday Dr. Sheila Ronis from t he Walsh College and Vice President
o f t he Nat ional Defense Universit y Foundat ion, who also does a lot of
co nsult ing wit h t he Office o f t he Secret ary of Defense and o t her element s
at t he Pent ago n; as well as Mr. Brian Suma, who is a Program Manager for
t he U.S. Army, who is t racking t he effect s of t he decline in t he civilian and
milit ary supply chain on America's milit ary readiness; and Mr. Randal
Gaereminck, who is t he Deput y Program Execut ive Officer for Gro und
Co mbat Syst ems, and he has worked on all major Army ground combat
syst ems from t he Abrams bat t le t ank t o t he new St riker.
We have a very dist inguished panel t o discuss t he nat ional securit y
perspect ives o f what 's going on wit h our aut o indust ry and aut o part s
indust ry visàvis our t rade relat ionship wit h China. So if we can st art
wit h Dr. Ronis, please go ahead.
STATEMENT OF DR. SHEILA RONIS, DIRECTOR MBA/MS
PROGRAMS, WALSH COLLEGE; VICE PRESIDENT, NATIONAL
DEFENSE UNIVERSITY FOUNDATION, TROY, MICHIGAN
DR. RONIS: t hank you very much for invit ing me here. I'm really
ho no red t o be here t o share some of my ideas as a syst ems scient ist , which
is really ho w I approach most o f t he issues t hat I am asked t o st udy.
Today, t he Unit ed St at es is in an economic war, at least t he way I view it .
Our indust rial base, including t he aut omot ive sect or, is also seriously
ero ding.
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This sit uat io n has nat io nal securit y implicat io ns because we're
dependent o n fo reign count ries for crit ical component s and syst ems and
we're losing our abilit y t o design, engineer and manufact ure pro duct s as
well as cont ro l o ur supply chains.
The defense port ion of t he indust rial base cannot be separat e fro m
t he o verall base. The offshoring o f t he U.S. aut o indust ry alone is
exacerbat ing t he sit uat ion. When it erodes, it t akes mo st of t he defense
capabilit y wit h it .
The Unit ed St at es is dependent on ot her count ries for crit ical aut o
and weapons t echnology. It 's co nceivable t hat at some t ime in t he fut ure, a
government could t ell it s lo cal companies no t t o sell crit ical component s t o
t he Unit ed St at es because t hey do n't agree wit h our foreign po licy.
If we were ever t o have a war wit h China, we co uld experience
difficult y simply by having t hem cut off shipment s t o t he Unit ed St at es and
hurt ing o ur eco nomy wit hout even firing a shot .
The federal government doesn't manage t he count ry's indust rial base
as a syst em, but it needs t o at least underst and syst em behavior. We need
t he Depart ment o f Defense t o underst and it s key weapo n syst em supply
chains do wn t o raw mat erials. In many cases, we're unable t o manufact ure
crit ical milit ary equipment .
This sit uat ion isn't officially document ed or monit ored, but it needs
t o be. Kno wing indust ry averages, I suspect t hat t here is a significant
presence o f Chinese part s in our weapon syst ems t o day, but we don't kno w
where t hey are, and t his risk is significant .
U.S. co rporat io ns increasingly act as large social syst ems wit h a
glo bal fo cus, as t hey sho uld. Ask t he CEOs o f t he Fort une 500 t o describe
t he issues on t heir minds and more t han likely nat ional securit y or t he
disint egrat io n o f t he U.S. indust rial base would not be among t hem.
Under t he American financial and regulat o ry syst em, public
co mpanies are suppo sed t o rank t heir shareholders at t he t op of t he loyalt y
scale except in t imes of emergency. I t hink t oday's sit uat ion may be a
nat io nal emergency. The very abilit y of t he Unit ed St at es t o remain a
superpower is t ruly at st ake. General Mo t ors, Ford, Delphi, No rt hro p
Grumman, Boeing, Lockheed Mart in, t hey all share t he bo t t om of t he
indust rial base.
Globalizat ion and t he int ense pressure applied by Wall St reet t o U.S.
co mpanies encourages indiscriminat e co st cut t ing, a measure t hat
frequent ly works in t he short t erm, but can be disast ro us in t he lo ng t erm.
The cheaper, cheaper, cheaper ment alit y somet imes sacrifices longt erm
gains by forcing a company t o o ffshore wo rk in lo wwage count ries such as
China in t he near t erm.
These decisions can come back t o haunt a company when t he wo rk
acquired is of inferior qualit y, a crit ical core compet ency o f t he co mpany is
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lo st o r st olen, when int ellect ual propert y complet ely disappears or t he
accessibilit y o f an essent ial it em is put in jeopardy.
There are many st ories t hat we know in t he aut o indust ry, but rarely
will anyone co me forward fo r fear of Wall St reet reprisals and cert ainly for
fear o f lo sing cust o mer confidence.
Global purchasing o rganizat io ns in indust ry as well as t he milit ary
are no t sufficient ly lo oking at t he risks of po t ent ial disrupt ion because o f
fo reign sales or supply lines. They t end t o be rewarded for get t ing
everyt hing less expensively and not hing else. Just look at t he result s of t he
brief longsho reman sit uat ion a few years back on t he West Co ast and t he
billio ns o f do llars it co st t his nat ion per day.
You will hear fro m my colleagues in t he Depart ment of Defense right
here who are expert s in t he Diminishing Manufact uring So urces and
Mat erial Sho rt ages, o r DMSMS, co mmunit y. Mission capable syst ems and
readiness are put at risk when DMSMS issues are left unresolved.
What isn't underst ood is t he realit y t hat t he aut o indust ry affect s
DMSMS because t he indust rial infrast ruct ure t hat support s t he Depart ment
o f Defense is shared by t he aut o indust ry. When a t ier supplier t o t he aut o
indust ry goes under, whet her it is a machine t ool co mpany or in
microelect ro nics, it reduces DoD's abilit y t o funct ion whet her we say so or
no t .
I t hink we might as well say so . When government R&D invest ment
in an indust ry det erio rat es, it 's only a mat t er of t ime befo re an indust ry is
in t ro uble. Manufact uring R&D by t he federal government has almost
disappeared. Yo ung people no lo nger view wo rking in manufact uring as a
possible career so we're losing our abilit y t o t rain t he next generat io n o f
scient ist s and engineers.
We're losing crit ical t o defense indust ries from shipbuilding t o
machine t oo ls, high performance explo sives and explosive co mpo nent s,
cart ridge and propellant act uat ed devices, welding and even t he nuclear
indust ry. All of t hese indust ries share t he bo t t o m of t he base wit h t he aut o
indust ry, and t hat is what has become a nat ional securit y issue.
We need t o maint ain a capabilit y t o be glo bally compet it ive in bot h
pro duct and process innovat ion. We must regain our manufact uring
pro wess and leadership. We need t o reinvigorat e t he Manufact uring
Ext ension Part nership Program at NIST.
We need t o priorit ize t ho se t echnologies t hat are crit ical t o regaining
and t hen maint aining leadership and compet it ive advant age in t he overall
indust rial base so China does not beco me t he world's leader in t echnolo gies
we need t o be a superpower.
China is rapidly beco ming t he manufact uring capit al of t he world.
Fo r example, Chinese o fficials have very publicly st at ed t hat t hey want t o
beco me t he foundry capit al of t he world and have a worldwide monopoly
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o n cast part s. They have a plan t o win. And we don't .
We need t o increase our invest ment in R&D t o produce t he leading
edge knowledge, capabilit ies and pat ent s t he co unt ry must have t o remain
an economic, diplo mat ic and milit ary superpo wer. We must increase
funding t o t he nat ional laborat ories acro ss t he bo ard, especially at t he
Depart ment s of Energy, Commerce and Defense.
We need t o ret hink o ur t rade, offset and CFIUS policies t o
enco urage t he maint enance of high valueadded jobs inside t he count ry.
And we need t o refo rm t hose nat ional syst ems t hat are keeping our indust ry
unco mpet it ive including pension and healt h care part icularly in t he aut o
indust ry.
The bankrupt cy o f Delphi is only t he first of many do minoes t o fall if
no t hing changes. CFIUS must be complet ely ret hought . Having General
Mo t o rs under t he cont rol o f foreigners is not t he answer. Many fo reign
ent it ies buy U.S. asset s, not t o use t hem, but t o dismant le t hem. Even
Daimler's t akeo ver o f Chrysler removed serious capabilit ies t o Germany,
t ho ugh, o f course, no one will go on t he record wit h specifics.
Coo perat ion bet ween go vernment and indust ry is essent ial. Unless
we loo k at t he indust rial base as a syst em, we don't even see t he problem
o r t he po ssible milit ary implicat ions. We're also no t even asking whet her
o r no t a U.S.owned indust rial base mat t ers, and we need t o explo re t his
issue as a nat ion.
The Whit e House, Congress, and t he ent ire spect rum of t he agencies
and depart ment s o f t he federal go vernment need t o underst and t hese issues.
I applaud your effort s because unless somet hing changes, t he U.S. will
cease t o be superpower and soo n.
Thank you for list ening and I lo ok forward t o your quest ions.
Prepared Statement of Dr. Sheila Ronis, Director, MBA/MS Programs,

Walsh College; Vice President, National Defense University
Foundation, Troy, Michigan
Erosion of the U.S. Industrial Base and its National Security Implications
Mr. Chairman, members of the Commission, ladies and gentlemen. I’m honored to be here to share the
outcome of my many years of systems scientific research on both the auto industry as well as the military
industrial base. The U.S. industrial base including the automotive sector is eroding, and this situation has
enormous national security implications. It has made the United States so dependent on foreign countries
for critical components and systems that it may have lost its ability to control its supply chains. The
defense portion of the industrial base cannot be separated from the overall base. The offshoring of the U.S.
auto industry alone is exacerbating this situation – the auto industry has such an enormous footprint on
the overall U.S. industrial base, that when it erodes, it will take a great deal of defense capability with it.
The United States has also become dependent on countries such as China, India, Japan, Russia, France
and Germany for critical auto and weapons technology. It is conceivable that at some time in the future a
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government could tell its local suppliers not to sell critical components to the United States because they
do not agree with U.S. foreign policy. If we were ever to have a war with China, we could experience
difficulties simply by having them cut off all shipments to the United States and hurting our economy
without even firing a shot.
The federal government, and in particular, the Department of Defense, does not manage the country’s
industrial base as a “system,” but it needs to at least understand system characteristics. We need DoD to
understand its key weapon system supply chains down to raw materials. In many cases, the United States
is unable to manufacture critical military equipment. This situation is not officially documented and
monitored, but it needs to be. Knowing industry averages, I suspect that there is a significant presence of
Chinese parts in our weapon systems, but we do not know where they are. This risk is significant. China
is becoming the manufacturing capital of the world.
U.S. government agencies are fiefdoms that rarely compare notes to see how their collective policies might
affect a company or an industry. Interagency cooperation is among many things that need to change in the
future.
U.S. corporations increasingly act as large social systems with a global focus. But ask the CEOs of the
Fortune 500 to describe the issues on their minds and, more than likely, national security or the
disintegration of the U.S. industrial base would not be among them. Under the American financial and
regulatory system, public companies are supposed to rank their shareholders at the top of the loyalty scale,
except in times of emergency. A new vision of national security is needed that includes cooperation
between government and industry and includes the economic element of national power merging with
diplomacy and defense. National security requires a healthy marketbased economy, with a strong
industrial base of globally competitive industries continuously improving quality and productivity
including the auto industry in its entirety.
The very ability of the United States to remain a superpower is at stake.
Offshoring the auto industry could make the U.S. military industrial base in the United States completely
unable to comply with American preference legislation because the erosion of the auto industrial base also
erodes defense. General Motors, Ford, Delphi, NorthropGrumman, Boeing, Lockheed Martin – they all
share the bottom of the industrial base.
The United States cannot sustain the kind of growth it has enjoyed for the last several decades if the
industrial base continues to steadily erode. Increasingly, a number of U.S. companies in specific industries
find it impossible to compete in world markets. This is of particular concern for the industrial base that
supplies the U.S. military, automotive and aerospace.
According to Alan Tonelson of the U.S. Business and Industry Council, import penetration rate data is a
critical metric that the U.S. Government needs to track, but does not. According to Tonelson and Peter
Kim in a Washington Times article, “in recent years most industries producing goods in the United States
have been steadily losing their home market – the world’s biggest, most important and most competitive –
to products from overseas. In other words, numerous U.S. industries are facing the kind of import tide
that has pushed General Motors and Ford dangerously close to receivership. Moreover, this weakness
shows up in socalled smokestack and hightech industries alike. Unless this rising import penetration is
reversed, the nation’s longtime global industrial leadership and all the benefits it has generated will be
irretrievably lost.”
The import penetration data that USBIC has looked at by NAICS industry codes indicates that the import
penetration has steadily increased across the board for many industries and dangerously fast from 1997 to
2004. From 1997 to 2004, the import penetration of aircraft (traditionally an American manufacturing
powerhouse) increased from 15.24% percent to 24.51 percent. Aircraft engines and engine parts suffered a
greater increase—from 39.99 percent to 51.62 percent.
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In the same 8year period, import penetration rates for relays and industrial controls increased from 24.07
percent to 46.0 percent, for analytical laboratory instruments from 29.88 percent to 44.67 percent, for
metalcutting machine tools from 58.56 percent to 72.03 percent, for metalforming machine tools from
62.72 percent to 88.97 percent, for special dies and tools from 7.70 percent to 12.53 percent and for
turbine and turbine generator sets from 25.42 percent to 49.39 percent. Speed changers, high speed drives
and gears, from 38.53 percent to 63.10 percent.
Many of these specific increases in import penetration over the eight year period are stunning for such a
short period of time.
USBIC has written extensively on these trends and I would encourage the Commission to look at their
body of work.
Globalization and the intense pressure applied by Wall Street to U.S. companies encourages
indiscriminant cost cutting, a measure that frequently works in the short term, but often creates losses in
the long term.
The “better, faster, cheaper” mentality sometimes sacrifices longterm gains by forcing a company to
offshore work to lowwage countries in the near term. These decisions can come back to haunt a company.
This is especially the case when the work acquired is of inferior quality, a critical core competency of the
company is lost or the accessibility of an essential item is put in jeopardy. Many stories are known in the
auto industry, but rarely will anyone come forward with their story for fear their customer will demand
increased or costly inspections.
The United States does not have control over foreign shipping. Enemies can easily disrupt the economy
just by sinking ships that feed the industrial base and consumer culture. The United States is vulnerable
because of its dependence on foreign parts, services and fuel to maintain economic growth, not to mention
military capability.
Global purchasing organizations in industry and the military are not sufficiently looking at the risks of
potential disruption of supply lines. They tend to be rewarded for getting commodities less expensively,
and nothing else.
In a global economy, the rules of engagement are different. Just look at the results of the brief
longshoremen’s strike a few years back on the West Coast and the billions of dollars per day that it cost
the nation.
A Specific Military Issue
The Defense Department’s Diminishing Manufacturing Sources and Material Shortages (DMSMS)
program, monitors spare part shortages regardless of cause.
DMSMS is the loss or impending loss of manufacturers or suppliers of critical items and raw materials
due to production discontinuance. DMSMS can be caused by rapid changes in item or material
technology, uneconomical production requirements, foreign source competition, federal environmental or
safety requirements, and limited availability or increasing cost of items and raw materials used in the
manufacturing process.
The problem is further complicated by a reduction in the industrial base dedicated to production of
military equipment. In fact, the Defense Department now accounts for less than onehalf of 1 percent of
total microelectronic component sales, for example. In addition, aging fleets of ships and aircraft have lost
their original supplierbase of constituent mechanical, hydraulic and other components.
The DMSMS database is an example of how badly the industrial base is deteriorating. According to the
Government Industry Data Exchange Program (GIDEP), in 2002, “1,523 manufacturers reported 253,832
DMSMS parts.
According to the Air Force DMSMS Guide, “In today’s hightech Air Force, the ultimate performance of
aircraft, missiles, and numerous other weapon systems depends on a multitude of important and often
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complex components. When one of these components (e.g. a microcircuit) becomes obsolete or
unavailable, the impact can extend throughout the weapon system affecting cost and system readiness.”
The services are all trying to “lessen or eliminate the risks caused by parts nonavailability before the
weapon system is adversely affected.”
The commercial manufacturers increasingly lose interest in supporting the military market because it is so
small. Many manufacturing companies find that it is not economically feasible to support very small
volumes over long periods of time.
All the services have DMSMS issues.
As an example for the DMSMS effort at the Air Force Research Laboratory at WrightPatterson AFB,
“DMSMS impacts every weapon system in the inventory – past, present and future….”
The Air Force has said that DMSMS is driven by many factors but one reason is the extended weapon
system’s life in the Air Force inventory. For example, B52s may be used more than 94 years, C130s,
more than 79 years, C135s, more than 86 years and the F15, more than 51 years. None of these planes
was designed to fly that long.
So, mission capable systems and readiness are put at risk if DMSMS issues are left unresolved. What is
not always understood is the reality that the auto industry affects DMSMS at DoD because the industrial
infrastructure that supports the Department of Defense is shared by the auto industry. When a tier
supplier to the automobile industry goes under whether it is a machine tool company or in micro
electronics, it reduces DoD’s ability to function and solve its DMSMS problems.
Manufacturing
When government R&D investment in an industry deteriorates, it is only a matter of time before an
industry is in trouble. Manufacturing R&D by the federal government is declining. According to
Manufacturing News, “in the mid 1990s, the government was spending $1.5 billion on manufacturing
related R&D, including such programs as Technologies Enabling Agile Manufacturing at the Energy
Department and $500 million in electronics manufacturing programs at DARPA. Both of those programs
have been discontinued.”
Shipbuilding and Repair
In May 2001, the U.S. Department of Commerce’s Office of Strategic Industries and Economic Security,
in partnership with the Carderock Division of the Naval Surface Warfare Center, completed a threeyear
national security assessment of the U.S. shipbuilding and repair industry. Some of the findings were
disconcerting though related to both DMSMS and the auto industry.
According to the study, employment in the industry has “dropped sharply since the early 1980s, when
total private employment was close to 180,000 workers. Survey estimates indicated that employment
would decline to about 83,500 in 2000.” In addition, “orders for U.S. warships have declined 60 percent
during the 10 years since the end of the Cold War.”
Young people no longer view working in a shipyard as a viable way to make a living. Consequently,
according to DOC, “survey responses indicate that labor shortages have reduced profits, impacted
construction costs, and delayed project completion for most shipyards.”
According to the study, the basis for U.S. shipbuilding superiority has been the research and development
expertise that currently resides in Navy’s laboratories, acquisition commands, and certain shipbuilders
and universities. “Collectively, these organizations have conceived and designed most of the stateofthe
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art hull, mechanical, electrical, power projection, air defense and undersea warfare capabilities that are
operational today. With reduced research and development budgets, some of that capability now is
becoming fragmented.” Many lower tier companies supply to both the auto industry and shipbuilding, but
the auto industry is much larger.
This situation in shipbuilding also exists in other industries, such as machine tools, the high performance
explosives and explosive components industry, cartridge and propellant actuated device sector and
welding and all of these industries share the bottom of the base with the auto industry.
We need to maintain a capability to be globally competitive in product and process innovation – we must
regain our manufacturing prowess and leadership. We cannot become a country that manufactures little.
We need to reinvigorate the Manufacturing Extension Partnership program at the National Institute of
Standards and Technology.
We need to prioritize those technologies that are critical to regaining and then maintaining leadership and
competitive advantage in the overall industrial base so China does not become the world’s leader in
technologies we need to be a superpower. China is becoming the manufacturing capital of the world. A
small example is that Chinese officials have publicly stated they want to become the foundry capital of the
world to have a worldwide monopoly on cast parts. The Casting Emissions Reduction Program (CERP)
of the U.S. Army is an excellent example of ways that Congress can provide mechanisms for industry and
the military to work together to stem the erosion of the industrial base to everyone’s benefit.
We need to increase our investment in R&D to produce the leading edge knowledge, capabilities and
patents the country must have to remain an economic and military superpower. This means we must
increase funding to the national laboratories not only from Energy, Commerce and Defense but across the
board.
We also need to rethink our trade, offset and CFIUS policies to encourage the maintenance of high value
added jobs inside the country and we need to reform those national systems that are keeping our industry
uncompetitive including pension and health care, particularly in the auto industry. The bankruptcy of
Delphi is only the first of many dominos to fall if we don’t do something dramatic about this situation.
CFIUS must be completely rethought. Having General Motors under the control of foreigners is not the
answer. Many foreign entities buy U.S. assets not to use them, but to dismantle them. Even Daimler’s
takeover of Chrysler removed serious capabilities to Germany, though no one will go on the record with
specifics.
The Department of Defense regularly implies that the U.S. industrial base is healthy. DoD does not take
into consideration all the systems that compose their piece of the industrial base, nor how their systems
interact with others such as autos.
Cooperation between government and industry is essential because there are elements of the U.S.
industrial base that are disintegrating, and are putting the national security of the United States at risk.
Unless we look at the industrial base as a system, we do not even see the problem or the possible military
implications. We also are not even asking whether or not a U.S. “owned” industrial base matters, and we
must explore this issue as a nation.
The White House, Congress and the entire spectrum of the agencies and departments of the federal
government need to understand these issues. At the moment they do not. Unless something changes, the
U.S. may cease to be a superpower.
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Thank you for listening, and I look forward to your questions. 7
HEARING COCHAIR BLUMENTHAL: Thank you very much, Dr.

Ro nis. Mr. Suma.
STATEMENT OF BRIAN SUMA, U.S. ARMY, TACOM, MANAGER
ARMY DMSMS INFO SYSTEM, WARREN, MICHIGAN
MR. SUMA: Good day, members of t he Commission, ladies and
gent lemen. I'd like t o t hank you for t his o pport unit y t o address t he
Co mmission on our small part in support ing t he warfight er.
I current ly manage a Diminishing Manufact uring Sources and
Mat erial Sho rt ages, which we use t he acro nym DMSMS, or DMSMS,
knowledge management syst em fo r t he Army kno wn as t he Army DMSMS
Ident ificat ion, No t ificat ion and Flagging Operat io n, good old Army
acronyms. This syst em current ly support s t he Army and t he Depart ment o f
Defense DMSMS programs.
The basic definit io n o f a DMSMS issue is a loss o r impending loss o f
manufact urers o f it ems or suppliers o r it ems or raw mat erials. DMSMS
issues can o ccur at any point in t he life cycle of an acquisit ion program.
Current Office of t he Secret ary o f Defense policies on DMSMS are
co nt ained in Do D 4140.1R, t he DoD Supply Chain Mat erial Management
Regulat ion.
These current po licies prescribe t hat DoD co mpo nent s, i.e., t he
Army, Navy, Air Fo rce, et cet era, shall pro act ively t ake t imely and
effect ive act io ns t o ident ify and minimize t he DMSMS impact o n Do D
acquisit ions and logist ics suppo rt effo rt s.
Minimizing DMSMS impact is import ant in t hat a DMSMS issue can
int errupt t he manufact ure, fabricat ion, pro duct io n o r repair of any it em
required by warfight ers from a majo r end it em do wn t hrough t he
co mponent s and subassemblies t o t he individual part s, and even t o t he
specific processes, raw mat erials and chemicals required.
If you can't find it , can't get it , or can't suppo rt fielding or repairing
it , yo u have a DMSMS issue and t he warfight er has a problem.
The go al o f t he current Army DMSMS INFO syst em is t o support t he
Army's resolut io n of DMSMS issues. It aims t o pro vide a knowledge
management approach t o resolving DMSMS issues and t o be a reposit ory
o f DMSMS case dat a. We pro vide a comprehensive and coo rdinat ed
pro gram t hat support s efficient and effect ive resolut ions of o bsolescence,
no navailabilit y and single so urce problems t hat affect t he Army.
As we have developed and used t his syst em over t he last few years,
7
Click here to read supplemental material submitted by Dr. Sheila Ronis on issues
to be considered by the Commission.
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we have seen a marked decrease of domest ic sources of manufact uring and
pro cessing and of suppliers of it ems, chemicals and mat erials t hat suppo rt
o ur aut omot ive needs and ot her areas where t he Army has requirement s.
For our purposes, a domest ic so urce is a source t hat is locat ed in t he
U.S. or it s t errit ories and pro vides it ems or mat erials comprised o f U.S.
co nt ent only. Availabilit y of do mest ic sources is crit ical in assuring t he
Army's needs are met in a t imely manner. Several legal aut horit ies are
predicat ed on availabilit y and use of domest ic so urces.
The services have addit ional leverage in o bt aining it ems fro m
domest ic sources under t he Defense Product io n Act of 1950.
Under Tit le I of t he DPA, t he president is aut horized t o implement
t he Defense Prio rit ies Allocat io n Syst em when necessary t o require
preferent ial accept ance and perfo rmance of cont ract s or o rders suppo rt ing
cert ain approved nat ional defense and energy programs, and t o allocat e
mat erials, services and facilit ies in such a manner as t o promo t e t hose
appro ved pro grams.
Addit io nal prio rit ies aut horit y is found in Sect io n 18 of t he Select ive
Service Act . I wo n't go int o t hat at t his po int .
Obviously, t he DPA and t he DPAS apply only t o domest ic so urces
which po int out t he risk incurred by t he erosion of domest ic suppliers. As
t he number of domest ic suppliers decreases, so t oo does t he pool o f
domest ic manufact uring capacit y and capabilit y t hat can be reliably called
upo n t o support t he milit ary and t he nat ion. Inst ead, we find ourselves
relying on sources which may be respo nsive t o foreign nat ional int erest s
and no t our o wn.
Ano t her piece of import ant lit igat ion regarding DMSMS is t he so
called "Berry Amendment ." The Berry Amendment only applies t o Do D.
As implement ed in t he Defense Federal Acquisit ion Regulat io n Supplement ,
o r DFARS, it generally rest rict s DoD's expendit ure o f funds for supplies
co nsist ing in who le or in part o f cert ain art icles and it ems, including
t ext iles and cert ain met als, not gro wn or produced in t he U.S. or it s
possessio ns.
Accordingly, we have seen increased use of component s o f non
domest ic origin in Do D syst ems in vio lat ion of t he Berry Amendment .
It is generally DoD policy t o use commercial o fft heshelf it ems in
acquisit ion wherever feasible. As t he milit ary select s more COTS it ems, it
beco mes increasingly more resource int ensive t o det ermine t he lineage o f
an it em. That is it becomes mo re challenging t o t rack what it is made o f
and where it is made.
This, o f co urse, affect s availabilit y, obsolescence and compat ibilit y
wit h exist ing syst ems. This is quit e evident in t he aut o mo t ive sect o r where
t here is significant use o f assemblies and black boxes in t he indust ry
pro duced by t hird t ier or belo w subcont ract o rs.
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It is also evident in recent report s from t he Defense Cont ract ing
Management Agency, DCMA, of pot ent ial vio lat ions o f t he Berry
Amendment and o f t he increased concern o ver count erfeit part s and lack o f
dat a o n how an it em was act ually creat ed and where t he it em will be used.
It is our experience t hat t he suppliers t hat DoD and Army used for
pro curement and sust ainment have sizable nondefense businesses t hat
make up t heir product mix. For example, under t he t racked and wheeled
sect o rs, t here are a host of suppliers support ing bot h t he aut omot ive and
Do D pro grams, providing part s such as engines, t ransmissions, axles,
wheels, t ires, brakes, et cet era. Almost every one of t hese corpo rat ions
needs t o have a sizable civilian pro duct io n base in order t o eit her remain
pro fit able o r maint ain t heir revenues high enough t o support t heir size.
It is my observat ion t hat t he risk inherent in diminishing sources,
whet her t hey be aut o part s, semico nduct ors, or machine t oo l suppliers, or
t o o l and die manufact urers, is ever increasing. This is affect ing our abilit y
t o t ap int o domest ic sources of pro duct io n especially in t he event of a
nat io nal emergency.
I can also st at e t hat I have received numerous inquiries from local
aut o mot ive suppliers looking for milit ary wo rk, due t o decreased orders
fro m t he aut omo t ive indust ry as well as t he lo ss of milit ary suppliers, due
t o t heir lo ss o f co mmercial wo rk. We are also wit nessing part ners bet ween
t he o rganic, milit ary, and privat e, co mmercial, sect ors t o enable t he
preservat io n o f t he U.S. indust rial base as a whole.
At TACOM LCMC, we cont inuo usly wit ness numerous DMSMS
issues t hat emanat e direct ly fro m t he loss of domest ic manufact uring
capabilit y, many of which are direct ly relat ed t o t he aut omot ive part s
indust ry.
Finally, I wo uld like t o t hank t he Commission for t his o ppo rt unit y t o
make you aware of our mission and co ncerns, and as a member o f t he Army
Mat eriel Co mmand's ResearchDevelo pment and Engineering Command
TankAut o mot ive Research Develo pment , I t hank yo u fo r helping us t o
support t he warfight er.
HEARING COCHAIR BLUMENTHAL: Thank you very much and

o ver t o yo u, Mr. Gaereminck.
STATEMENT OF RANDAL GAEREMINCK , ASSOCIATE DIRECTOR
ENGINEERING, TANK AUTOMOTIVE AND ARMAMENTS, R&D
AND ENGINEERING CENTER (TARDEC), WARREN, MICHIGAN
8
Click here to read the prepared statement of Mr. Brian Suma.
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MR. GAEREMINCK: I do not have a prepared st at ement . I'm
Associat e Direct o r for Engineering, and Brian works on one of my t eams,
so we collabo rat ed on t he prepared t est imo ny, but I do want t o make o ne
point . We ment io ned t he acronym TACOM and TARDEC. TARDEC is t he
R&D arm o n t he campus, but as TACOM, we collect ively manage about
3,200 pieces of equipment . A lot of folks refer t o us as "t he Tank Plant ,"
being as we had a t ank plant t here years ago, which we don't build
anymo re. TACOM manages t anks, t rucks, t railers, const ruct io n equipment ,
wat ercraft , mat erial handling, foo d and feeding, anyt hing yo u see wit h
wheels, t rack, anyt hing on t he ground. You t urn on CNN at night ,
TACOM manages it unless it flies in t he sky.
We manage a lot o f cont ract s, a lot of suppliers. TACOM do esn't
build anyt hing. We rely on t he indust rial base. So it plays co mplet ely t o
what my co lleagues here say.
Panel IV: Discussion, Questions and Answers
HEARING COCHAIR BLUMENTHAL: t hank you very much t o all

o f yo u. All very rich and alarming t est imony. I would like t o t ry t o t ry t o
get a lit t le mo re co ncret e in t he sense o f when you lo ok at let 's say a
St riker o r a t ank o r somet hing t hat you can see a real direct co nnect ion t o
t he aut omot ive indust ry, do we have any idea ho w much t oday t hose
co mponent s are Chinese made?
DR. RONIS: I have an idea. I have no dat a. I have discussed wit h
t he Deput y Under Secret ary of Defense for Indust rial Policy t he fact t hat
indust ry averages are probably t en t o 15 percent in anyt hing manufact ured
in t he Unit ed St at es t o day, and t hey have said our abilit y t o monit or t his
o nly goes do wn t o abo ut t he t hird t ier t ops. We can't go any deeper
because it becomes foreign so quickly, and we can't ask.
And I said, I t hink you really need t o t ry t o ask more. Because, t he
Berry Amendment t ends t o be enforced do wn t o t ier t wo, maybe t ier t hree,
but rarely below t hat , and I t hink what 's happened is we do n't know t he
answer, and DoD privat ely, of course, would admit t hey don't know t he
answer.
I've been in so me discussions wit h t hem since I made a
recommendat io n t o t he Small Business Commit t ee in March saying t hey
need t o have a program where t hey st art finding out t he answers because
what if we have t o fight t hese peo ple one day, how are we going t o do t hat
wit ho ut any weapon syst ems because it doesn't t ake much t o t ake down t he
syst em?
HEARING COCHAIR BLUMENTHAL: On t hat quest ion, what are
yo u or any of you mo st concerned about , say we need t o surge in any one
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o f t hese ground co mbat vehicles and China want s t o make o ur life difficult ,
even if we're no t fight ing t hem direct ly, but say we need t hem in current
o perat ions? What are you most concerned abo ut right now if yo u could
t hink of your night mare scenario t hat China can do t o cause us real
pro blems in t erms of disrupt ing our supply chain?
MR. GAEREMINCK: I do n't know if it 's as much as disrupt ing o ur
supply chain, but o ur indust rial base has been shrinking for years. We
build vehicles t o day t o a peacet ime Army. We're at war t o day, but we're
recap, reset t ing at a t remendous pace, but we're not ramping up product io n
as we did in previous wars, in Wo rld War II.
So if we had t o ramp up t o t hat kind of capabilit y, I don't see t he
capabilit y t hat we could do it in t he U.S.
HEARING COCHAIR BLUMENTHAL: Do you have somet hing t o
add?
DR. RONIS: I'd like t o add a lit t le bit t o t hat . The ot her t hing I
don't kno w t hat we're t hinking t hrough is t he very fact t hat almost all
glo bal shipping is no t in U.S. hands, and much of it is in t he hands o f t he
Asians. Increasingly t he Chinese t hemselves are buying shipping lines.
And because our consumer eco nomy and our just int ime delivery syst ems
in almo st every manufact uring area is dependent o n t hose shipping lines, it
doesn't t ake much t o simply st op bringing in crit ical part s.
It doesn't have t o be a high t ech part t o be crit ical. It can be a lo w
t ech part , but wit ho ut it t he who le weapon syst em is of no value. In a
pro ject I did for t he U.S. Marine Co rps no t t oo long ago in Jacksonville,
Flo rida, I saw t heir bo ne yard filled wit h weapon syst ems. I said why are
t hey in t he bo ne yard, and t hey said, well, because we can't get t he part s.
So we've put mult imillio n do llar weapon syst ems int o a bone yard so t hat
we can supply t he st uff coming back from Iraq wit h part s.
I'm sorry, but t hat has t o be amongst t he mo st inefficient way of
ramping up because we're not even invest ing in low volume t echno logies t o
manufact ure part s.
HEARING COCHAIR BLUMENTHAL: So t he reason we can't get
t he part s is we can't make t hem here; is t hat right ?
DR. RONIS: The original people who made t hose part s are o ut o f
business or go ne.
HEARING COCHAIR BLUMENTHAL: And we have t o buy t hem
fro m o verseas somewhere o r?
DR. RONIS: Or t ry and find a way t o make t hem, but we don't have
t he mechanisms in place yet t o do t hat .
HEARING COCHAIR BLUMENTHAL: Thank you very much. I
t hink Co mmissioner Wessel had a quest ion.
HEARING COCHAIR WESSEL: Let me follo w up on t hat because
it 's except ionally t roubling. If we had t o expand a gro undbased presence
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at t his point t he it ems are in t he bone yard and we don't have t he abilit y t o
service t hem. Has what 's happened wit h t he aut o indust ry, which is why
we're here abo ut t oday, but even more bro adly, are we at a crit ical po int in
t erms o f t he abilit y t o so urce our milit ary needs?
MR. GAEREMINCK: If I go back hist orically, post World War II,
defense was an influencing part ner and indust rial base. Today, we're not .
We've been at relat ive peacet ime for so long t hat t he defense indust rial
base, as my colleague said, t he milit ary doesn't influence it anymore.
So , from my perspect ive, if we had t o ramp up considerably, we go
t o t he indust rial base, privat e sect or, t o ramp up for part s, fo r capabilit y,
fo r plant s, for facilit ies, and we're all seeing it shrink around us and
disappear.
MR. SUMA: We can t alk about our o ld numbers. One of t he
numbers t hat has been around for a bunch of years is t hat in t he elect ronics
indust ry, which is in a majo r mo ve offsho re, t he Army or t he DoD’s t ot al
use is less t han o nehalf o f one percent of t hat business.
We no longer have a real say in which way t hey're going t o go .
What we have t o do is rely o n what 's t here and t hen eit her as it has been
bro ught up before, we t ry t o reverse engineer and/or find anot her source or
in so me ot her way t ry t o co me up wit h t hat part because t he indust ry has
said, you're no t enough business for us t o worry about . So t rying t o come
up wit h t he source for t ho se it ems is a big problem.
A long t ime ago t here was a big co nt ro versy about grade 8 bolt s, just
going t o buy bolt s, t hat we got shipment s o f bad bolt s in t hat were sent t o
a supplier here who said t hey had got t en t he part s and t hat t hey were good
part s. We bought from an American supplier. He bo ught t hem in t he
Pacific Rim.
We ended up wit h a lot o f bad vehicles t hat were do wn because
t ransmissions suddenly came out o f vehicles, engines were breaking, and
t hat ’s because t hese bo lt s were not up t o t he st andard, and t his was just a
st andard, yo u know, bolt it em.
There's been a bunch of st uff just recent ly on t he Berry Amendment
relat ed t o mat erials in our elect ronics it ems and ot her it ems, especially
assemblies t hat are being put in at t he t hird, fourt h, fift h, sixt h, sevent h
level t iers, vendors are put t ing t hese it ems in, and t he manufact urer we're
buying from has no idea what 's in t here at t hat level and where t hey got it .
HEARING COCHAIR WESSEL: So you have no abilit y t o
disaggregat e a syst em and look at , because we're no w do ing commercial
o fft heshelf, t o be able t o det ermine sourcing pat t erns and have any
co nfidence in eit her where it 's being sourced or at t imes t he qualit y of t he
pro duct t hat 's being delivered t o t he milit ary; is t hat correct ?
MR. SUMA: Fo r so me it ems and some syst ems. Again, it 's based
o n, at t he level t hat you're looking at , like if you're t alking aviat io n, t here's
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pro bably a lot more t han t here is on what goes int o a t railer.
HEARING COCHAIR WESSEL: Are you t rying t o as I underst and
t he DMSMS report s, t o disaggregat e and do a bet t er job of underst anding
o r are you just hamst rung because of t he way we're now procuring t he
it ems?
MR. SUMA: We make a co ncert ed effort t o find every source o f
informat io n we can about an it em or t he pieces of it em o n t he piece o f
equipment and t hen t ry t o ident ify where t hat is go ing and where t hat
indust ry is go ing and where t hat t echnology is going because a lot of t imes
if yo u don't find out no w where t he engineering and t echno logy is, when
yo u act ually need it , t here's no t going t o be anybody t here.
And t hat 's been a big problem. We buy when we need it , and a lot o f
t imes t hat may be t wo years from where we're at no w, and in t hose t wo
years, t hat company is no longer t here and when we need t hem. So we're
t rying t o ident ify sooner what 's going away and what 's not available so t hat
when we do need t hem, t here's somebody out t here, or we t ry t o hold on t o
a t echnolo gy t hat we need t hat we ant icipat e is go ing t o be a problem.
HEARING COCHAIR WESSEL: Are you brought in under t he
CFIUS pro cess? In any t ransact ion, is t here a DMSMS compo nent t o lo ok
at t his? Magnequench was raised earlier t o day, but , going t o current
t ransact ions as well, or is t hat it doesn't always t rigger a CFIUS review?
Where do you fit in t hat pro cess?
MR. SUMA: At o ur level we're a lit t le fart her down in t hat process.
At t he DoD level, t here is ano t her group t hat handles st uff at t hat level,
and at each o f t he individual service commands, t here's so meone t hat
co vers t hat it em. DMSMS, as we like t o say, is one small part o f t he
indust rial base. We're basically t he ones t hat are looking fo r t he hit s;
we’re lo oking fo r t he st uff t hat 's happening right no w t hat 's going t o cause
a pro blem. One o f t he examples we like t o use is wat ching t hat plant go
down t he Mississippi because of t he floods, we go “t here goes o ur plant ,”
we’ve got t o do somet hing because t hat was o ur source for t hat part , t hat
it em, t hat t ype o f t hing.
We're t rying t o get on t op of t hose problems, t he react ive, also
t rying t o get int o t he pro act ive. But handling t hose react ive issues t hat are
o ut t here everyday, t he guy t hat suddenly shut s do wn his small firm, we use
a small business fo r t his it em, and he suddenly has a heart at t ack, and his
wife says, “I do n't want t o keep t he business going, we're selling it !”
We've also had cases where t hey won t he lot t ery and everybody quit , what
do yo u do about t hat ?
You’ve got t o get t hat informat io n o ut t o everybody as quick as
possible so t hat we can t ry t o find anot her source, and t he pro blem get s t o
be is, as we get less and less sources, it beco mes mo re and more t ime
dependent . We need t o be ahead of t ime in order t o find so mebo dy t hat
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can do it for us, because if we're suddenly looking for so met hing, a lot o f
t hese it ems, you t alk a major engine effo rt , it may be a year t o get t he
mat erials t hat you need t o make t hat .
So if t he manufact urer is gone, even if we get t he mat erials, we no w
have t o find anot her so urce t o make it , it 's probably go ing t o t ake ano t her
year from t here. So when you're t alking t wo years before we can get
so met hing t o t he warfight er, he's no t going t o wait .
HEARING COCHAIR BLUMENTHAL: Co mmissioner Mulloy.
COMMISSIONER MULLOY: Dr. Ronis, you have o n page t wo o f
yo ur t est imo ny a point t hat I was t alking about t his mo rning about t he
shareholder value, and you make t he point t hat t he CEOs of t he
co rpo rat io ns are fo cused on shareholder value and you say t hat t hey're no t
t hinking about t he disint egrat ion of t he U.S. indust rial base.
But peo ple who are concerned wit h t he wellbeing of t he Unit ed
St at es and t he nat ional securit y of t he Unit ed St at es have t o be t hinking
about t he det eriorat ion of o ur indust rial base and what it means bot h for
o ur nat io nal securit y and o ur st andard of living.
DR. RONIS: I couldn't agree wit h yo u more.
COMMISSIONER MULLOY: I underst and what goes o n in t hat t he
co rpo rat io ns are caught in a syst em where t hey're judged on shareholder
value and t heir st o ck goes up. Of course, t he CEO's compensat ion is t ied
t o shareholder value, so t hey have an int erest personally in increasing
shareholder value, and no t t hinking about t hese ot her issues.
But t hen yo u get int o public officials in t he Unit ed St at es
government . Why do you t hink in t he int eragency debat es, t hinking about
t rade policy, indust rialbased policy, CFIUS, why is it t hat DoD is not
playing a bigger ro le in making t hese issues t hat you're t alking about more
int o t he t rade policy debat es and underst anding o f what t his means for o ur
co unt ry when we have a current account deficit of $800 billion and
gro wing annually? And t hen I'd ask t he Do D wit nesses.
DR. RONIS: I wish I knew t he answer t o t hat , but all I can t ell yo u
is it has been my observat ion t hat po lit ics plays mo re of a role t han t he
lo ngt erm int erest s of t he nat ion, and t hat is very difficult fo r me t o sit
here and say t o yo u.
I have wat ched t he Depart ment of Defense acquisit ion st rat egy
basically reward peo ple for get t ing anyt hing on t he planet as long as it was
no t illegal, flagrant ly, t hough it might be okay if it wasn't flagrant , as lo ng
as it was cheaper. We do need t o provide our warfight ers t he very best
t hat t he world offers t hem because our adversaries will, in fact , have t hat .
What we do n't know ho w t o do as a count ry is figure o ut how t o
pro vide a free t rade enviro nment fo r all companies, whet her t hey are in t he
defense indust ry or no t , wit ho ut dest roying our o wn base. Every o t her
co unt ry on t he planet has figured t hat out except us, and so we have been
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very arrogant , I t hink, in o ur approach t o t hinking no t hing is going t o t ake
us down as a co unt ry. I t hink so me of t hat is in t he Pent agon. There is a
lo t o f arro gance in t he Pent agon, and yet t hey are my great est friends and
my great est suppo rt ers, but I worry t hat we as a nat ion have no mechanism
t o do grand st rat egy.
We never look at all o f t he element s of nat ional power and st ep back
and say what really is in t he longt erm best int erest of t he count ry, and
acquisit ion st rat egy inside t he Pent ago n is very much bounded by what
Co ngress permit s t hem t o do or no t do, and t he int eragency process frankly
fro m my point of view, as a st udent of it , is quit e broken.
CFIUS is just one of many t hings t hat need t o be complet ely
reloo ked at . It 's chaired by Treasury. Treasury has never denied a foreign
invest ment . Are you kidding? They lo ve it , but t hen t he foreigner comes
in and what do t hey do? They just t ake us o ut and t hat is unfo rt unat ely t oo
o ft en t he case.
COMMISSIONER MULLOY: Do you gent lemen have anyt hing?
MR. GAEREMINCK: I wo uldn't want t o comment on Army or Do D
leadership t hinking. But what I can say is t he last co uple of years, Army,
in part icular, has been focused on so me lo ft y issues. One, BRAC, base
realignment . TACOM was even pot ent ially a t arget ; all bases were a
t arget . And no w we're at war. So , I've seen workload go up in t he past
co uple of years. Our fo cus is o n t he soldier fight ing t he dayt oday war so
we're do ing what ever we can. I see our senior leadership, t o o, suppo rt ing
us all t hey can wit h t he necessary resources because t he Army is
st ruct ured, financially we're st ruct ured for peacet ime.
Our budget s are peacet ime. Our so ldiers t rained during peacet ime.
So t his is, when we're at war, it 's an increased rampedup pace for us, and
t hat 's our fo cus, our o nly focus.
COMMISSIONER MULLOY: Thank yo u.
DR. RONIS: Can I add one more t hing?
HEARING COCHAIR BLUMENTHAL: Go ahead.
DR. RONIS: Because he ment ioned BRAC, t o give you an example
o f o ne of my co ncerns, t his issue of t he people in China saying we expect
t o be t he manufact uring capit al of t he world, we're going t o st art wit h just
fo undries and cast part s. Well, we are almo st always "BRACing" lowt ech
bases such as Rock Island Arsenal. They are our last organic fo undry o t her
t han our nuclear hulls on t he east coast and t hey make all of o ur
Ho wit zers. I wo uld hat e t o be dependent on China for our Howit zers when
we have t o be at war wit h t hem.
much and t hank yo u t o t his panel. Dr. Ronis, in part icular, I have t o say in
a lot o f ways you've made me and pro bably some of t he ot hers of us
speechless, which is not an easy t hing t o do , but it seems t o me t hat
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everyt hing t hat needs t o be said yo u've said.
The quest io n is why are people no t paying at t ent io n and what can we
do t o t ry t o make people realize t he ext ent of t his problem and it s
co nsequences for us?
If I can just t ie it in. Ten years ago, we st art ed experiencing so me
changes in o ur defense indust rial base and in our manufact uring base. Of
co urse, t he past t en years has seen China moving on t o t he st age in a scale
t hat I t hink has been hard fo r some people t o comprehend. Could you
specifically t alk t o t he part icular challenges t hat you t hink t hat China poses
t o us in t hese issues?
DR. RONIS: Indulge me just for a few minut es. Let me explain why
I t hink people do n't pay at t ent ion. They don't pay at t ent ion because t his
co unt ry is not very st rat egic in almost anyt hing t hat it do es. We are a
react ive mo de people. So me of t he spont aneit y of t he American peo ple,
so me o f t he best charact erist ics of America are served by t hat .
On t he ot her hand, we have t o learn ho w t o t ake a lo ngt erm view.
That 's very hard. Our Fo unding Fat hers co uld no t have possibly
underst oo d t he kind of nat ion t hat we would inherit in t he 21st cent ury,
and we have no mechanism in t he int eragency process, even at t he nat io nal
securit y level, t o do longt erm st rat egy.
The clo sest we come are places like t he Office o f Net Assessment at
OSD. Occasio nally, t he Depart ment of Energy will put out a fo recast for
50 years, but by and large we don't have what I call t he nat io nal st rat egy
cent er where we inside, and I wo uld prefer it be in Congress, not in t he
execut ive branch, we act ually have people who every single year have t o
lo o k o ut 20 t o 50 years, year in, year out and say t hat policy isn't going t o
wo rk.
But part o f it is t hat we don't look at t he second, t hird, and fourt h
o rder effect s of any one single decisio n inside t he Congress or how it 's
going t o int errelat e wit h all t he o t her decisions because we never see t he
big pict ure, and ot her co unt ries t ry and look at least at t heir big pict ure,
where t hey want t o be 20 t o 50 years hence, and map o ut a st rat egy t o get
t here t hat is int egrat ed.
Can you do t hat wit hin our federal go vernment syst em? Absolut ely.
But t he Congress has t o want t o .
Now, in t erms of t he specific challenges wit h China, we have t o
underst and t hat t he eco nomy and t he economic piece, t he diplomacy, and
t he diplomat ic piece, and t he milit ary piece are all int erdependent element s
o f o ne syst em. Yo u can't pull t hem apart anymore t han you can pull apart
t he defense port io n of t he U.S. indust rial base or it s aut omot ive
co mponent s. The so oner we underst and t his int erdependence, t he soo ner
we're going t o be able t o develop viable public policy.
HEARING COCHAIR BLUMENTHAL: Thank you. I will ask
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anot her quest ion o r I'm go ing t o st art calling on commissio ners here.
Commissioner Bro o kes.
COMMISSIONER BROOKES: Thank you.
DR. RONIS: Challenge me. Tell me why I'm wrong.
COMMISSIONER BROOKES: I'm not t elling you you're wrong, but
I was reading t hrough yo ur t est imo ny, and I appreciat e what yo u've writ t en
o ut here, and it 's very co ncept ual. I want ed t o know, perhaps add a lit t le
bit more flesh t o t he skelet on you've given us here and giving us some
specifics. If t he defense indust rial base were t o keep you up at night or
co ncerns abo ut it , and it might
DR. RONIS: It do es.
COMMISSIONER BROOKES: give us, if you can, some real
specifics. In t he securit y enviro nment we're living in t o day, t hat t he
policymakers in Washingt o n sho uld have a hard t ime sleeping about , like,
fo r inst ance bolt s o n o ur Humvees in Iraq or st rat egic syst em or somet hing
where because you did hit t hat o ne t hing t hat really caught me, is you said
t hat yo u believe t hat t en t o 15 percent of t he general manufact uringt his is
general manufact uring, no t milit aryis of foreign origin.
DR. RONIS: Yes.
COMMISSIONER BROOKES: So what t hings keep you up at night ?
I'm pressing yo u here fo r a lit t le bit more specifics. What weapo n syst ems
do yo u t hink are at risk, significant weapo n syst ems, and I'll o pen t his up
t o t he panel if t hey have anyt hing t hat t hey're really very concerned about ?
So we can give an example ot her t han t his sort o f concept ual framework
because a lot o f it is not in specifics and t hat kind o f bot hers me because
yo u always want t o back up somet hing wit h t his is t he concept and t his is
an example of it ot her t han t hese weapon syst ems t hat are going t o fly for
94 years or what ever, and I cert ainly wo uldn't want t o fly in one of t hose
planes.
Thank you.
DR. RONIS: Clearly, some of t he issues of having new equipment t o
o ur warfight er are amongst t hem. I'll give you one example t hat cert ainly
bo t hers me. I wrot e an art icle called "Transfo rmat ional Recapit alizat ion"
t hat was published in Defense AT&L a couple o f years ago. I said, t he Air
Fo rce is t elling us t hey don't have eno ugh mo ney for new airplanes.
They don't have eno ugh money for t he C17s, fo r example, t hat t hey
know t hey need t o deploy, all of t he t hings t hat t hey need for global
lo gist ics using t hat aircraft . And I said, well, here's an example where
indust ry and government sho uld be wo rking t oget her specifically. We
have, and t he Air Fo rce has act ually invest ed some mo ney in looking at
st udies, t he fact t hat t here is emerging a need for a co mmercial C17 use
fo r a variet y o f different indust ries around t he world.
How abo ut if we t ake t he first t en C17s t hat were made, sell t hem
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t o indust ry, and plow t hat money back int o t he Treasury t o buy t he new
st uff, so t he guy who is going out t o Iraq has a new C17, not an old C17?
I do n't t hink t his is rocket science, but t his is so met hing t hat is very
doable. All we need is some co ngressional language. This is an example o f
so met hing I t hink we sho uld be do ing or co nsidering.
But we have t o get o ut of our box in t erms of t hat sort o f t hing.
Things t hat keep me up at night , t ho ugh, really have a lot t o do wit h t he
co vert Chinese respo nse t o many, many t hings in t hat yes, we're go ing t o
be willing t o t alk about import issues wit h regard t o China part s wit h t he
EU and t he U.S. and Japan and t hat 's a great way for t hem t o say, yes, o f
co urse, we're go ing t o deal wit h it but not now. I t hink it 's t hat sort o f
t hing t hat really makes me nervous.
I wo uld lo ok at import penet rat io n rat es. In my formal t est imony,
no t what I said, because you only give me a few minut es, I act ually gave
yo u some very specific areas where import , t he federal government doesn't
even monit o r impo rt penet rat ion rat es, and yet t hey're alarmingly, you
know, t hey're moving at an accelerat ed pace. This is scary t o me.
COMMISSIONER BROOKES: Can our wit nesses from t he Army
give us any specifics in t erms o f weapon syst ems now t hat have a
significant port io n of t heir cont ent t hat are of fo reign origin? And I'm no t
even sure what percent age wo uld make it significant ? I suppose at what
percent age? But can you give us any examples o f t hings t hat yo u're
part icularly concerned abo ut in t erms of U.S. weapo n syst ems t hat might be
held host age t o fo reign supply chains?
MR. SUMA: I can address o ne t hat has been addressed out side in
anot her forum so it 's open. There's a chemical called liquid polysulfide.
It 's used t o hold airplanes t oget her. It 's used also t o hold glass, ballist ic
glass t oget her. It 's also used in aut omobiles t o hold fenders on. There was
o nly o ne company in t he Unit ed St at es t hat was st ill making it . It was
bo ught up by a French co mpany who basically said if you want t his
chemical any mo re buy it from o ur Japanese subsidiary.
That has been an issue. That was t aken by t he SAE Commit t ee on
Adhesives up t o Congress complaining what are we going t o do about
ho lding on t o t hese t ypes of mat erials which cont ro ls all of t hese
indust ries?
COMMISSIONER BROOKES: What weapon syst ems does t hat
affect ? Can yo u name so me?
MR. SUMA: No .
COMMISSIONER BROOKES: Is t hat because it 's classified or yo u
don't know? If it 's classified, I'm no t asking you t o divulge. I do n't want
yo u t o divulge classified informat ion. We can go back and look at t hese
t hings back in Washingt o n, but I'm asking you whet her you don't know o r
whet her it 's classified informat ion?
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MR. SUMA: It 's used in a lot o f Army equipment .
COMMISSIONER BROOKES: It 's used in a lot o f Army equipment .
MR. SUMA: And a lot of ot her service equipment .
COMMISSIONER BROOKES: Okay.
MR. SUMA: Anybody who has got airplanes is probably using it .
COMMISSIONER BROOKES: But you alluded t o t he fact t hat t here
are probably o t her t hings t hat t he Commission should loo k int o in a
classified enviro nment back in Washingt on t hat you cannot divulge here at
t he wit ness t able?
MR. SUMA: Yes, t here's
COMMISSIONER BROOKES: Okay. If we should go back and do
so me mo re homewo rk, t hat 's fine.
MR. SUMA: Yes There's been a couple t hat have been in t he press
lat ely t hat we
COMMISSIONER BROOKES: I don't want yo u t o go any furt her in
t hat obvio usly, but I just want ed t o know if t here are t hings yo u t hink we
sho uld perhaps look at ? That t here might be ot her t hings o ut t here in t he
classified environment which are not in t he public environment t hat we may
want t o lo ok at ?
HEARING COCHAIR BLUMENTHAL: Perhaps we can act ually
fo llo w up.
COMMISSIONER BROOKES: Yes, t hat 's what I mean. We can
fo llo w up. We have clearances. We can go t o a secure facilit y and get
briefings, but it 's go o d for us t o know t hat we might want t o do t hat .
MR. SUMA: Yes. A lot o f t he st uff I deal wit h is considered
pro curement sensit ive.
COMMISSIONER BROOKES: So it is classified.
MR. SUMA: Yes.
COMMISSIONER BROOKES: Okay.
MR. SUMA: Because if I t alk abo ut it , abo ut what o ne manufact urer
is giving ano t her, t hat has an effect o n o t her manufact urers and who's
doing what .
COMMISSIONER BROOKES: No, I underst and complet ely.
MR. SUMA: So I t ried t o co uch my remarks t o st uff t hat has
already been out in t he environment t hat 's everywhere and I t hink t hose are
enough t o get you st art ed on t he kind o f t hings t hat are going on.
COMMISSIONER BROOKES: Yes, I'm not t rying t o press yo u t o
divulge anyt hing yo u shouldn't . Thank you.
HEARING COCHAIR BLUMENTHAL: We had Chairman Wo rt zel
and t hen Co mmissioner Ho ust on.
CHAIRMAN WORTZEL: Mr. Suma, Mr. Gaereminck, yo u described
a syst em in t he U.S. t hat can only replace worn o ut it ems or manufact ure at
very low levels; enough t o keep a basic fo rce funct io ning, t raining, and
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perhaps minimally in combat .
You've paint ed a pict ure t hat says t hat because t he Unit ed St at es
defense indust rial base has changed significant ly, we no longer have a
surge capacit y. If we went int o a majo r war, we are left wit h a onet ime
use milit ary. When it get s broken or runs o ut of equipment , we canno t
rebuild it . Is it your view t hat in t he event of a majo r war, t he Unit ed
St at es co uld not sust ain a large force on t he bat t lefield because in crit ical
areas, we do n't have an indust rial base left and because we are relying o n
o t her count ries t hat we might be at war wit h?
And t hen for Dr. Ronis, I would be very int erest ed if you could give
us examples of t he co unt ries t hat have t his 50 year or 25 year st rat egic
plan t hat you advised t hat t he Unit ed St at es should emulat e?
MR. GAEREMINCK: Yes, I wo uldn't want t o speculat e o n o ur
indust rial base from my perch at Tank Aut omot ive Co mmand. I t hink t hat
wo uld have t o be addressed levels above me in t he Pent agon.
CHAIRMAN WORTZEL: That 's t he pict ure I got fro m your
t est imony. Yo u said we can't surge. Yo u can barely supply t he forces in
t he field.
MR. GAEREMINCK: Yes, for t ho se t hat we deal wit h in t he
aut o mot ive sect or, we have limit ed capabilit y. Current ly, being in t he
engagement we're at t oday, we go t o our arsenals and depot s, which as Dr.
Ro nis ment ioned, we've "BRACed" t hose over t he course of t ime.
Our depot s are working at capacit y t oday. Now t hey've got t o ext ra
shift s. They're working at capacit y. In fact , we're subcont ract ing back out
t o indust ry because we don't have t he capabilit y t o just refurbish t he
vehicles, so we're doing what 's called a reset /recap. We're bringing t he
vehicles back t o zero miles. We're bringing our exist ing old vehicles back
t o zero miles.
Our abilit y t o ramp up and pro duce newwe can't do t hat t oday.
Humvee, for example, we're at maximum product ion on t he Humvee, up
armo red Humvee, so what we're doing is t he vehicles, as t he unit s rot at e
o ut o f Iraq, we're t aking t he o ld vehicles back and we put t hem t hro ugh a
recap/reset , bringing all vehicles back t o zero miles.
So we end up at t he end
CHAIRMAN WORTZEL: That 's given current capacit y?
MR. GAEREMINCK: In t he current capacit y, what we end up wit h
is a brand new old vehicle.
CHAIRMAN WORTZEL: Right .
MR. GAEREMINCK: No new t echnolo gy.
CHAIRMAN WORTZEL: But are you saying t hat t he Unit ed St at es
as a nat ion is no lo nger capable of t he so rt of war effort and surge t hat we
had t o have in World War II?
MR. GAEREMINCK: I don't believe we have t hat capabilit y.
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CHAIRMAN WORTZEL: Yo u do not ?
MR. GAEREMINCK: No .
DR. RONIS: I don't believe it eit her.
CHAIRMAN WORTZEL: And could not reconst it ut e it ?
MR. GAEREMINCK: Yes. Not at t he magnit ude we did in Wo rld
War II. It may
DR. RONIS: Oh, I t hink we could do it at t he magnit ude we did it in
Wo rld War II t o day. But wit hin five years, when t he baby boo mer
generat io n ret ires, we will not . We do not have t he next generat ion.
CHAIRMAN WORTZEL: And what 's t he effect of t he baby boo mer
generat io n ret iring on t hat ?
DR. RONIS: All t he kno wledge in t heir heads will be gone because
we didn't have enough of a sust ainable indust ry t o ent ice young people t o
co me int o it .
CHAIRMAN WORTZEL: Can you give us examples o f count ries
t hat have t his longt erm st rat egic plan t o build or increase t his capacit y?
DR. RONIS: I t hink probably t here are many. I would be very
caut io us, t hough, o t her t han perhaps Japan's t o publicly say who t hey are.
I t end t o get my informat ion t hro ugh peo ple, so met imes even in o ur
int elligence communit y who find out abo ut t hem. But you got t o be very
careful because t hey are amo ngst t he most guarded secret s o f t hose
nat io ns, and I don't kno w t hat I want t hem t o know t hat I know.
CHAIRMAN WORTZEL: So t hese are secret st rat egies?
DR. RONIS: Oh, yes.
CHAIRMAN WORTZEL: And we don't have a secret st rat egy?
DR. RONIS: I don't t hink we have any st rat egy, sir.
HEARING COCHAIR BLUMENTHAL: Co mmissioner Houst on.
COMMISSIONER HOUSTON: I'm going t o go home and hide under
t he bed when I get back.
DR. RONIS: No, you’ve go t t o go back and fight . That 's t he idea.
COMMISSIONER HOUSTON: Absolut ely. I cannot express enough
o ur appreciat ion fo r t he t hree o f yo u being here t o day. This is a
co mplet ely undiscussed issue in Washingt on, D.C., and cert ainly crit ically
impo rt ant . I do n't want t o go back over anyt hing t hat you’ve discussed
already because your info rmat ion has just been st art ling and superb, but I
do have just o ne easy t echnical quest ion.
The buzzword, o f course, is "jo int ness," and in your est imat io n, is
t here jo int ness in what you're do ing? If t here is a nonflying widget t hat
t he Army, t he Navy, t he Air Fo rce all needed at t he same t ime, is t here
jo int ness in t he purchasing? Is t here joint ness in t he decision t o purchase
o r where you're go ing, all t hat kind of t hing? And does t hat help yo u in
any way as far as purchasing in mass quant it y go es?
MR. GAEREMINCK: I'll st art off saying it do es. 25 years ago when
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I st art ed at TACOM, we managed a large po rt io n o f t he co mpo nent s for t he
3,000 plus vehicles. Over t he course of t ime, we went joint . Most of o ur
seco ndary it ems are reso urced o ut t o DLA. Defense Logist ics Agency
pro bably buysI'm no t sure what t he numbers arebut more t han 60, 70
percent of t he second, t hird t ier t ype supplies. So t hey go out and buy
t hem, and t hey buy t hem joint for all t he services. So we've absolut ely
gone joint in recent years.
When an issue becomes an DMSMS issue, Brian manages t he Army
DMSMS INFO syst em, but t hat feeds int o t he joint syst em, so when a
manufact urer goes belly up o n a part icular widget circuit board, t he project
manager no t ifies us, we lo ad it t o t he INFO syst em and it goes out t o t he
GIDEP syst em, t he go vernment info rmat ion syst em, lo oking fo r an
alt ernat ive source, so one of t he sist er services may have t hat circuit card
t hat we need. So we loo k t o t hat pro cess first .
MR. SUMA: Yes. The DMSMS co mmunit y wit hin t he services is
very joint . We are very t ight gro up of individuals fro m each of t he services
t hat get t oget her on a fairly regular basis, if not in person, over phones o r
VTCs or what ever, t o discuss t hese issues.
We all have our individual syst ems because we all t alk individual
languages, shall we say, bet ween t he services, but t hey all connect int o one
cent ral repo sit o ry which we are in t he process o f expanding t o t ry t o get
t hat info rmat ion and t o bring it more int o bearing acro ss t he different
pro grams because we do st ill find some inst ances of where t hings are kept
t o o ne group and ano t her group is int erest ed and if we had known, we
co uld have made t hings bet t er.
So we're t rying t o do t hat . And we're using t hat showing cost
avoidance and cost savings t ype issues, which are always good t o get t he
services t o t alk t o each ot her on. So, whenever we can, we show so me
co st savings o r co st avoidance.
COMMISSIONER HOUSTON: Can I just add on t o t hat fo r one
seco nd?
HEARING COCHAIR BLUMENTHAL: Sure.
COMMISSIONER HOUSTON: I'm also curious as far as CFIUS
goes. Are you called t o t est ify? Do t hey look t o yo u at all? Do t hey kno w
yo u're t here on t hese CFIUSbased issues? And as cert ainly CFIUS is
going t hro ugh a review, which will ho pefully lead t o a revamp, do you have
any input on t hat as well?
MR. GAEREMINCK: I've never heard t hat t erm before.
DR. RONIS: It 's Commit t ee for Foreign Invest ment in t he Unit ed
St at es.
COMMISSIONER HOUSTON: That answers t he quest ion.
DR. RONIS: That 's what CFIUS st ands for.
MR. GAEREMINCK: No , haven't heard of it .
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DR. RONIS: I'm afraid I'm t he one who regularly int eract s wit h t he
Depart ment o f Defense peo ple who are on t he CFIUS commit t ee, but t hey
have an uphill climb because so met hing like a crit ical indust ry for t he
aut o mobile t hat may or may not be direct ly used in a weapon syst em is just
aut o mat ically not considered. It 's like, well, t hat 's not our problem
because eco no mic securit y is not perceived as nat ional securit y. And t hat 's
a major deficiency.
MR. SUMA: No w some of our dat a do es go t o t he indust rial base
peo ple who t ake t hat informat ion up, but direct ly we don't deal wit h t hem.
COMMISSIONER BROOKES: I have o ne mo re quest ion. I kno w
we're get t ing t o t he end of t his. Mr. Suma, you're t he right person—please
walk us t hrough a decision t ree o n t erms of when yo u've ident ified a
disappearing capacit y, indust rial capacit y, t hat you need? So in o t her
wo rds, I guess yo u probably go t o t he ot her services, you st art ed t his so rt
o f t hing, and ho w do you go t hro ugh t hat ? Can you walk us t hrough t hat
quickly?
MR. SUMA: I'll t ry t o walk t hrough t he general one. There's a
variet y o f different ways yo u can go depending on where you're at in t he
life cycle and what ever. But t he st andard o ne or say t he most react ive one,
t he o ne t hat really becomes t he issue t hat somebody has t o t ake care o f
t o day, is we'll get a not ice t hat t he manufact urer says he's not going t o
make it anymo re, o r we've had a t urndown on t he bid, and t hey st at e
t hey're not go ing t o bid. We also put out a bid and we got no body
respo nding. We put t hat int o t he syst em.
When we get t hat part , we t ry t o ident ify where t hat part go es, all
t he syst ems t hat 's affect ed by t hat it em, and if t hat 's a cert ain gro uping o f
indust ry, t hen we t ry t o go o ut and t hen we send out message t raffic
t hro ugh GIDEP, which is t he Government Indust ry Dat a Exchange
Pro gram, saying we have an urgent dat a request or a so urce of supply need,
and we send t hat info rmat ion out t o t hem, and t ry t o get from t he indust rial
base t hat is defense o rient at ed first if t here's any response.
We also do checks t hrough t he different publicat ions t hat are out
t here t o t ry t o ident ify any source t hat might be in t he commercial sit e, and
t hen we t ake t hat informat io n, and once we get t hat informat ion, we supply
all t hat informat ion t o t he weapon syst em or t he it em manager or t he
pro duct io n person responsible fo r t hat area, and say, “here's what we’ve
fo und out ,” “yo u have a problem,” “here's what we kno w about it ,” “here's
who 's available,” and “now it 's up t o you t o decide how you're go ing t o
reso lve t hat .”
COMMISSIONER BROOKES: And t here's no different iat ion in t hat
decision t ree bet ween foreign providers or domest ic providers?
MR. SUMA: No ne at all. It 's just what ever t he Army needs, fro m
my perspect ive, what ever t he Army needs. If it 's not available, I need t o
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let somebody kno w t hat t hat it em isn't t here, and it 's not just , as we say,
no t just part s, but processes, mat erials, chemicals, what ever, what ever it is
t hat 's going t o st op t hat warfight er fro m get t ing what he needs.
COMMISSIONER BROOKES: I assume t here is some preference for
domest ic as oppo sed t o foreign, if t here's an opt ion? Is t hat in law or is
t hat a policy?
MR. SUMA: We t ry t o go domest ic if it 's available, but t he problem
is t hat some of t hese it ems, t here is no do mest ic sources.
COMMISSIONER BROOKES: But t here is a preference? There is
MR. SUMA: Wit h t he Berry Amendment , t here is definit ely. On
t hese cert ain areas we have t o. Befo re we can do anyt hing, we have t o t ry
and get t he domest ic so urces. And seco nd of all, we are t rying t o get as
many do mest ic sources as we can because, as I said in my remarks, t he
DPAS pro gram gives us some leverage back t o t hat manufact urer t o say,
when he says he's going t o quit making it , say, well, yo u need t o make it
fo r us fo r anot her six mont hs unt il we can find anot her source or we can
redesign o r we can replace o r what ever we have t o do, t hat issue.
So it gives us some t ime t o get t he problem fixed before it 's gone.
The problem we run int o a lot of t imes is, is by t he t ime we find out , it 's all
gone. And t here's no source and t hen we're int o redesign, reengineering,
all kinds of issues, t rying t o solve t hat problem.
HEARING COCHAIR BLUMENTHAL: Thank you. I'm going t o
give t he last wo rd t o Chairman Bart holomew.
COMMISSION VICE CHAIR BARTHOLOMEW: Thank yo u again.
This has been very illuminat ing, and I t hink you've given us so much t o
t hink about . But it seems t o me t hat one o f t he issues t hat we are facing
no w is not only t he ext ent t o which we have lo st and cont inue t o lose o ur
manufact uring base and t he speed wit h which it 's happening, but when we
sat acro ss t he t able fro m our foes during t he Cold War, t hey weren't t he
peo ple who were t aking o ur product ion capabilit y.
We were not worried abo ut t he So viet Union being able t o
manufact ure co mponent s fo r o ur weapons t hat we would no longer be able
t o get , and while I am not sit t ing here saying t hat China is a fo e, t he
pot ent ial of it becoming o ne raises a whole host of concerns t hat I t hink it
behoo ves all o f us t o look at much more seriously.
We're going t o t ake a five minut e break and t hen reconvene.
PANEL V: PERSPECTIVES OF PARTS MANUFACTURERS
HEARING COCHAIR BLUMENTHAL: We'd like t o welcome o ur
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fift h panel t o get perspect ives of part s manufact urers and we have wit h us
t o day Mr. Terrence Keat ing, t he Chief Execut ive Officer of Accuride
Co rpo rat ion of Evansville, Indiana, as well as Mr. Larry Dent on, President
o f DURA Aut o mot ive Syst ems o r Ro chest er Hills, Michigan. These t wo
are o n t he fro nt lines of t he glo bal compet it ion and we're very much
lo o king forward t o yo ur t est imony.
So if we can t urn t o Mr. Keat ing.
STATEMENT OF TERRENCE J. K EATING, CHIEF EXECUTIVE
OFFICER, ACCURIDE CORPORATION, EVANSVILLE, INDIANA
MR. KEATING: Thank you very much. First , t hanks t o t he

Co mmission for allo wing me t o co me and speak t oday. Briefly, I just
want ed t o ment ion what Accuride is. It 's a $1.4 billio n co mmercial
co mponent manufact urer fo r t he commercial vehicle indust ry. It has 17
plant sit es, 4,800 emplo yees, and we operat e t ot ally wit hin NAFTA, which
is part of my co ncern because my issues deal wit h t he Chinese expo rt ing
pro duct int o t he NAFTA area and t he implicat io ns of t hat .
In our business, I t hink it 's fair t o say we have known t hat we have
t o fo cus on efficiency t o compet e against low co st count ries worldwide if
we're go ing t o be effect ive and our invest ment in t hat has allowed Accuride
t o have very lo w co st labo r and as a result my issues wit h China are no t
labo r based. I can co mpet e wit h t hem, I believe, all day lo ng o n a labo r
co st basis.
Just an example of some of t he t hings we've doneone of our plant s
in Kent ucky, we've raised t he out put by 20 percent while we've reduced t he
emplo yment by 50 percent , and we operat e at worldclass met rics on all
o ur o perat ing met rics. But t hat 's no t enough against t he Chinese t hreat
and let me explain some o f t he t hings t hat are unleveling t he playing field.
First , t he currency valuat ion. I t hink t hat 's a t opic we're all very
well aware of, est imat ed t o be bet ween 20 and 40 percent . Eit her o f t hose
numbers wo uld so lve my co mpet it ive t hreat issue.
The cost of st eel in China fo r what ever reasonlo t s of folks have
different opinions as t o what causes it but it 's $200 cheaper t han t he co st
o f st eel in t he U.S. That 's 33 percent lower in t hat market place. Our
pro duct sI'll get int o t hat in a bit about ho w t hat affect s our business.
The inabilit y t o import cheaper st eel. I can't get my hands on t hat
st eel because we have penalt y t ariffs in place prot ect ing t he U.S. st eel
indust ry. While we have penalt y t ariffs in place on st eel, we do n't have any
t ype o f t ariff st ruct ure on st eel wheels t hat would prevent t hem t o come in.
I'll t alk about t hat a lit t le bit more as I get int o it .
Chinese operat e wit h expo rt incent ives t hat amount t o 17 percent ,
which I t hink unlevels t he playing field even more and I'm not sure t hat 's
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legal wit hin WTO.
And t hen I want t o t alk about int ellect ual propert y right s as t hey
pert ain t o our product line. One of t he issues I was asked t o address was
Chinese growt h and it s impact on our business and it 's primarily in
co mmodit y prices. St eel has gone up 60 percent over t he last t wo years, an
$86 millio n impact on our corpo rat io n.
Aluminum has gone up 62 percent , a $36 million impact on our
co rpo rat io n. And scrap met als have gone up 115 percent , and t hat 's a $56
millio n impact t o our corporat io n.
When we t hink about t hese commodit y prices or passing t hose
t hro ugh t o U.S. OEM manufact urers, original equipment manufact urers, for
co mmercial vehicles, we've do ne abo ut $150 million wort h of commodit y
co st passt hro ugh over t he past t wo years. What t hat has done has caused
o ur OEM cust omers t o look worldwide at whet her bet t er prices are
available in o t her lo cales.
One of t ho se cert ainly is China where t hey're finding cheaper prices,
having t o do wit h t he currency valuat ion and t he Chinese government is
reluct ant t o let t he currency float effect ively, t he fact t hat Chinese
manufact urers can acquire st eel at prices far below o ur prices and t herefore
o ffset and gain a compet it ive advant age. That same st eel cost , as I t alked
about earlier, is not available t o us because we cannot import t hat st eel
effect ively.
When we t alk about t ariffs on st eel wheels, I'm really not an
advo cat e of t ariff st ruct ures t hat wo uld prevent import s int o o ur count ry,
but t ariffs on st eel wheels are 2.5 percent . 75 percent of t he cost base o f
t he st eel wheel is st eel. So in effect what t hey're doing is we're allow t he
Chinese government t o use t heir policy of employing more people, do
higher value add, and bring t he st eel in anyway, losing bot h t he st eel jobs
and t he manufact uring jo bs as a result of t hat .
When I t hink abo ut t he ot her major t ruck manufact urers or
co mmercial vehicle manufact uring areas in t he world, cert ainly Brazil is
about 100,000 vehicle market , Europe is abo ut a 250,000 vehicle market .
Bo t h prot ect t heir indust ries on t he st eel side and st eel wheel side, by a 14
t o 18 percent dut y o n t hat pro duct , which is equivalent t o t heir st eel
pro t ect io n. So I t hink what t hey have is a balanced indust rial approach t o
ho w t hey're going t o deal wit h t his issue from China o r o t her count ries.
I want t o t alk fo r a moment about int ellect ual propert y right s. Last
January, I was at an HDMA convent ion in Las Vegas, and t hey had a
Chinese supplier displaying product at a t rade show and t hat Chinese
supplier had a product o ut t hat was a brake drum t hat was exact ly t he same
as t he pro duct made wit hin one of my co mpanies, Gunit e Corporat ion, had
t he brand name Gunit e, had t hat name cast int o t he product and had
abso lut ely no aut horit y fro m my company t o do so.
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So not only were t hey copying; t hey were direct ly copying bot h
pro duct and brand and bringing it int o o ur market place. We frequent ly find
t ho se product s in o ur warrant y claims area of t hat company t rying t o so rt
t ho se out as we do our best t o t ry and figure out what t he impact is o f
t heir penet rat io n int o our market .
These product s are eroding U.S. market share and will effect ively
ero de jobs as t hey cont inue t o grow in penet rat ion in t he market . The
warrant y claim cost s I ment ioned, t here's a fair amount o f cost wit hin o ur
co mpany t o sort t hose product s out , t o different iat e t hem, t o t ry and
underst and t hem, and t ry and deal wit h t his issue wit hin our business.
The o t her t hing t hat 's been t alked abo ut a couple t imes t o day
already, t he U.S. has very st rict st andards relat ing t o pro duct s t hat are
used on highway in t he Unit ed St at es, especially when it deals wit h safet y
issues like wheels, brakes, brake pads, as you ment ioned. We've t est ed
t hese product s and we would find t hem co ming up far short t o t he NTSA
st andards as far as put t ing t hat pro duct o n U.S. highway.
Wheel product s go t hrough t est ing, as I ment io ned, and t here's a fair
amo unt of co st behind t hat which my Chinese compet it o rs who copy o ur
brands don't have t o deal wit h.
I t hink t he combined impact of t his is t o make t he U.S. highways
unsafe, add t o our warrant y co st s, creat e a fair amount of ill will when
t hese product s fail under o ur brand name wit h our cust omer base, and t he
lo st jo bs asso ciat ed wit h lo st market share.
Let me get back t o t he issues t hat are affect ing my business, t he st eel
co st s, t he t ariffs, t hose t ype of t hings. As we look at t hat , I do n't
underst and how t hose t ariffs are going t o go away any t ime so on. I don't
see ho w we're going t o get cont rol o f t he Chinese government t o bring
t heir st eel co st s up t o world levels. So my company is looking very
serio usly at invest ing in China, building manufact uring facilit ies for st eel
wheels and brake drums in t he Chinese market .
That 's part o f my responsibilit y t o my cust omers t o o ffer t hem t he
lo west pricing available in t he world, but also responsibilit y t o
shareholders t o co nt inue t o keep t he market share we have and cont inue t o
make a profit . I t hink it 's impo rt ant t o not e t hat I'm not t alking about
mo ving t o China because of labor co st s.
I'm moving t o China because, I t hink, of a manipulat ed commodit y
co st , manipulat ed by a number of different sources as we go forward. But
at t he end of t he day, t he impact is no less significant .
I t hink in o ur own invest igat ion of lo cat ing in China, we found t hat
t he Chinese government int ends t o maint ain t hese lower st eel cost s fo r at
least five years. That 's a long enough period for us t o put a plant in place,
expo rt t o t he Unit ed St at es fo r several years, and t hen st art producing in
China for China as we go fo rward from t here. But t here are some job
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lo sses asso ciat ed wit h t hat as we t hink abo ut t hat .
I t hink speaking o n behalf of t he ot her U.S. manufact urers, if I can, I
t hink we can compet e wit h t he Chinese from a labor co st perspect ive. We
can aut omat e. We can get t hat cost do wn t o where t he t ransport at ion cost s
will more t han offset t hat . But we have t o deal wit h t he t rade law issues,
t he currency issues, and t he int ellect ual right s issue.
My fear is t hat in t aking act io n t hrough government sources, t hat
act io n will co me lat er t han we can possibly live wit h. The jobs will be lost
and I do ubt t hat t he environment creat ed by any laws we change wo uld
bring t he jobs back. So I t hink t he need t o move and act is now on so
many front s.
As I said, I've t alked about a number of different issues t hat o ur
co mpany faces, and co llect ively t hey creat e a very unlevel playing field,
o ne in which we find very hard t o co mpet e wit h t he folks coming int o o ur
market place. We are co mpet ing wit h t hem. We haven't lost significant
share yet , but it 's coming.
Thank you.
Prepared Statement of Terrence J. K eating, Chief Executive Officer,

Accuride Corporation, Evansville, Indiana
Company Overview
Accuride Corporation is a $1.4 billion component supplier to the commercial vehicle market primarily
serving original equipment manufacturers and the aftermarket within the NAFTA region. We operate 17
manufacturing locations within North America employing over 4,800 associates. Our facilities are
located in Indiana (2), Illinois (1), Wisconsin (1), Ohio (1), Pennsylvania (1), Virginia (1), Alabama (1),
Tennessee (2), Texas (2), Kentucky (1), California (1), Washington (1), Mexico (1), and Canada (1).
Accuride is headquartered in Evansville, Indiana, and incorporated in Delaware.
Our company operates metal processing businesses involved in basic industries utilizing forging, casting,
metal forming, metal machining, and assembly operations to produce products for commercial vehicles.
We find ourselves facing enormous changes to the competitive landscape, which are driven, in large part,
by impacts from Chinese producers, the Chinese government, the US Government, and the extreme
growth of the Chinese economy.
In an effort offset these changes to the competitive landscape and to remain competitive in the industry,

which we operate, Accuride has consistently invested significant dollar amounts into automating our
facilities to reduce our operating costs. The result of these investments has been our ability to lower direct
labor expense to less than 6% of our total product cost in several of our plant operations. We are very
proud of this achievement; however, it falls far short of creating an effective barrier to entry of Chinese
competition.
The predominant issue we face, unlike most industries, is not labor cost based. Our issue relates to the
significant undervaluation of Chinese currency, the widening gap between Chinese steel costs vs. the US
market, the impact of China’s rapid expansion, export incentives to Chinese manufacturers, Intellectual
Property Rights Protection, and the current US tariff policies.
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Before addressing the specifics of the business impact, I would like to expound upon the significance of
our investment efforts and the positive results that have been achieved. First, I would like to highlight our
steel wheel manufacturing plant in Henderson, Kentucky. Over the past 10 years, the facility has been
implementing initiatives to improve its competitive position by reducing its labor cost per wheel
manufactured while achieving and maintaining worldclass performance metrics. Over this period of time
the facility has made significant investment in automation, trained its employees heavily, and focused its
management team very effectively. The results are that the facility has grown output by 20 percent while
significantly increasing efficiency and decreasing cost per unit. The facility’s ontime delivery to its
customers is 100 percent, the quality rating is world class with below 50 parts per million (PPM), and the
safety record is running near perfect and has for several years. Most would agree these are impressive
numbers, as the performance result in the Henderson facility being deemed the most productive heavy
wheel manufacturing plant in the world. However, it is ironic that the most productive facility is not the
lowest cost facility. The reason steel price in the United States.
Labor cost advantages in the Chinese market are significant and would be an issue had it not been for our
aggressive investment in automation and the transportation costs from China to the US. However, the
protection offered by our investment in US automation is no longer providing an effective barrier to entry.
The issue now rests with steel cost and US tariff issues. Steel cost, which comprises roughly 75 percent of
the product cost of a steel wheel produced in the US, was at parity in September 2005. Since that time,
the price of hot rolled coil steel in China has reduced significantly while US steel prices have risen. The
effect of these price movements is that Chinese steel is now 33 percent cheaper (FOB Port of Export) than
steel sold in North America. If all factors were equal, we could simply import Chinese steel and offset a
significant portion of this difference. The fact is, all things are not equal.
Existing US duties on Chinese steel equate to between 30 and 50 percent, making it impossible to
economically import steel from China. This duty effectively creates a price support for the US steel
industry which, when coupled with our extremely low steel wheel duty of 2.5 percent, results in the
unintended consequence of creating an incentive for US commercial vehicle builders to purchase steel
wheel products from China. As a result, displacement occurs in both steel jobs and wheel manufacturing
jobs from the US economy. Unfortunately, this situation primarily has a negative impact on the US
market alone, since our duties on steel wheels are the lowest of any major economy in the world and the
only economy where such a disparity exists between steel and steel components.
It is important to point out that our steel purchasing power in the world market is significant in that we
purchase 350,000 tons of steel per year to support our wheel making operations alone. However, if
current business economics related to the Chinese market do not shift, that number is significantly at risk
going forward. It is important that I underscore the fact that the number is at risk not because of steel coil
imports but because of the import of products with significant steel content.
I think it can be argued that several years ago the US economy was facing a recession in industrial
production and the demands for antidumping duties from the US steel industry for many people seemed
appropriate. In today’s healthy and growing US economy the effect of the current tariffs to, on the one
hand, restrict competitive steel exports from China and on the other hand, encourage and support the
import of Chinese steel products which take away US manufacturing jobs.
The undervaluation of China’s currency creates the third significant issue regarding the competitive
landscape with Chinese products. Until recently, China has had its currency pegged to the dollar but
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since allowing it to “float” we have seen very little movement. While I am not in a position to debate the
current undervaluation of Chinese currency, a number of experts estimate the Chinese currency is under
valued by 30 to 40 percent. This undervaluation has allowed Chinese firms to compete with Accuride
despite the significant barriers to entry formed by Accuride’s improved plant efficiency and transportation
costs from China.
In addition to these very significant competitive issues there are additional remaining issues. The first of
these adds to the competitive disadvantage of US products when competing with Chinese products
exported to the US. Products produced in China for export have the added advantage a value added tax
rebate reducing costs related to export production in that country by roughly 17 percent.
The second is related to the very rapid growth of the Chinese market and the resulting increase in their

imports of scrap metals to support both their steel making operations and their casting operations. Scrap
exports to China have risen by approximately 350 percent in just the past 5 years. This of course occurs
as the US economy is coming out of an industrial recession in 2001 and 2002. The scrap metal market in
the US (Cast Scrap) has risen by approximately 115 percent from 2000 to 2005 to record price of
$300/ton, a record high by more than $100/ton. In our foundry operations we use 350,000 tons of scrap
materials annually. As you can quickly understand our operating costs have risen by $56 million since
2000. This cost must be passed through to our customers resulting in higher commercial vehicle prices
and therefore import pressures in their markets also. These scrap prices have also had a negative impact
on the world steel pricing since this material is also used in several steel making operations. In this same
time frame, US steel prices for hot rolled coil steel have risen from $300/ton in 2000 to $540/ton in the
first quarter of this year. These costs are expected to continue to rise to $600/ton by late 2006 based on
current projections.
The third remaining area of concern is the protection of our intellectual property rights. This concern
manifests itself in several areas of our business. First, there is the direct copying of our products and the
theft of our brand name. I attended a conference held by the Heavy Duty Manufacturers Association in
January of this year and found a Chinese company advertising a duplicate product of my company’s’
brake drum including the design, part number, and the use of our “Gunite” brand name. As US
companies have shifted production to China, a number of them including Accuride are forced to compete
against duplicate products due to China’s ineffective protection of intellectual property rights. It is
important to understand that the product may be a duplicate in style but the quality of some of the
imported product falls far short of the standards required to protect the safety of the American motorist.
The warranty claims, filed as a result of these knockoff products, are creating a negative economic and
safety impact. This is in addition to the resources needed to identify and segregate the counterfeit product.
It is very difficult to estimate the negative impact of these knockoff products in lost market share,
damage of brand name and overall value, but it is fair to say it is very significant.
In summary, the impact of the aforementioned key issues to our US businesses is that our costs are rising
rapidly due to raw material cost increases. As we pass these costs through, we put our customers into the
position of searching for lower cost alternatives overseas. Because of the steel market price imbalance, the
very low tariff on steel wheel products from China, the currency valuation issue, and export incentives we
are now facing significant competitive pressure from Chinese suppliers who enjoy all these advantages.
In addition to these pressures, we are significantly increasing our sourcing to low cost countries to
favorably alter our manufacturing cost in an effort to remain competitive due to the scrap metal impact on
our foundry businesses.
The situation for Accuride’s wheel business is such that we are forced to look seriously at relocating part
of our manufacturing base to China to retain and grow market share going forward. I want to make it
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clear that we are looking to make investment into China to manufacture products not because of labor
costs, but instead because of commodity cost manipulation through duties, because of currency
manipulation by the Chinese that has gone unrecognized by our government, and because of the
incentives offered in the form of valueadded tax rebates. Our evaluation of this investment will also look
at the Chinese market for longterm growth opportunities for our company. The impact however could be
to displace US manufacturing jobs to China. The impact will be to reduce steel making jobs, foundry jobs,
machining jobs, manufacturing and assembly jobs. This will lead to the elimination of whitecollar jobs
as they too are displaced into China.
Let me make it clear that, as CEO of a large manufacturing company, I am not in favor of tariff trade
barriers as a way to keep US manufacturing competitive. I believe that as manufacturing executives, it is
our role to keep US manufacturing competitive through investment and aggressive management. In
speaking on behalf of other US manufacturers, we can effectively compete with foreign competition on a
level playing field. However, in return, it is expected that our government and the government of our
employees initiate the proper action to ensure that a level playing field is created and maintained.
Without a level playing field, US industry and ultimately the US workforce is at risk. We therefore
request that action be taken to remove burdensome tariffs or in the alternative provide tariffs that are
consistent and do not favor one industry over another.
HEARING COCHAIR BLUMENTHAL: Thank you very much, Mr.

Keat ing. Mr. Dent on.
STATEMENT OF LARRY DENTON, CHAIRMAN AND CEO
DURA AUTOMOTIVE SYSTEMS, ROCHESTER HILLS, MICHIGAN
MR. DENTON: Chairman Wort zel, Vice Chairman Bart ho lomew,

Co mmissioners Becker, Blument hal, t he ent ire Review Co mmission, I
appreciat e t he opport unit y t o t est ify t oday o n t he impact of China's policy
o n t he U.S. aut o part s indust ry. I personally have worked in t his indust ry
fo r 34 years, bot h as an OEM for 24 and presiding over t wo leading
aut o mot ive suppliers for t he past t en.
I'm a product of Det ro it . My parent s worked in t he aut o indust ry
and my grandparent s worked in t he aut o indust ry. I act ually was born in
t he cit y of Det roit .
The impact t hat China has o n t he U.S. aut o part s business co nt inues
t o gro w at t errific rat es each year. I believe t hat t here is immediat e need
fo r act ion t o ensure fair and compet it ive playing field t hat benefit s U.S.
and Chinese aut o suppliers alike.
To day, I'd like t o offer my view on t he current uneven co mpet it ive
landscape and how t his is increasingly impact ing t he business of DURA
aut o mot ive syst ems and t he fut ure jobs in t he Unit ed St at es.
Let me first provide an overview of DURA Aut omot ive Syst ems.
DURA is a global aut omo t ive supplier based here in Michigan. Our
revenue last year was $2.4 billio n. We support bo t h t he aut omot ive and
t he recreat ional vehicle market s. We employ nearly 16,000 workers
wo rldwide and we have operat ions in 14 count ries including China,
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Mexico, Brazil, t he Czech Republic and Romania.
I'm going t o reference a handful of chart s t odayI brought Sean wit h
me t o help flip t hemt o illust rat e my main messages. The first point is o n
t his chart heret he st rat egies fo r geographic posit ioning are based on a
simple principle we call mult igeographic flexibilit y. In simple t erms, we
posit io n o ur manufact uring foo t print t o have t he flexibilit y t o offer suppo rt
near o ur cust o mers around t he world.
We suppo rt t hese manufact uring facilit ies wit h global t echnology and
develo pment cent ers which are cent ralized. We design t he facilit ies t o
supply t he do mest ic market s t hey serve. Based on logist ics, equipment
ut ilizat ion and capit al cost s, we are posit ioned t o manufact ure pro duct for
expo rt , but primarily we manufact ure for t he regio n t hat we're in.
As we expand wit h our cust omers in new regions, we st rive t o gain
o ur compet it ive fair share o f t hat part icular market . Let me give you a
quick easy example. If I have $50 a car in one regio n, t hen I expect my
t eam t o deliver $50 a car of product in anot her.
In t he Unit ed St at es t oday, we have 27 fact ories and we emplo y
6,200 peo ple including our manufact uring and research and development
jo bs. Our primary product s are safet y and performance based, and include
driver and seat ing cont rol syst ems, complex glass assemblies, chassis
co mponent s, aut omo t ive cable syst ems, light weight body and door
st ruct ures.
Our product s range fro m sophist icat ed elect ro nic and soft ware
co nt ro l syst ems t o some as simple as a st amped jack assembly t hat we
manufact ure in t he Unit ed St at es in But ler, Indiana. Many of our product s
are so co mpact t hat t hey can easily be shipped aro und t he wo rld.
We ant icipat e t hat China's impact on each of t hese businesses will
co nt inue t o grow and it 's of dire import ance t hat we est ablish appropriat e
policies and enfo rcement mechanisms t o ensure fair and balanced t rade.
Now, t wo years ago, I spo ke publicly at one of t he largest and well
known aut o manufact uring conferences held in Traverse Cit y, Michigan,
t hat probably earned me t he privilege t o speak t oday. My t opics included
government co llaborat io n wit h indust ry t o ensure fair t rade and a
sust ainable posit io n for U.S. manufact uring.
One area I fo cused on was t he import ance of est ablishing a float ing
Chinese currency and t he role t hat t hat plays in fair t rade. Let 's t ake a
lo o k at t his chart which I displayed in t he Traverse Cit y co nference. It
sho ws t he change in exchange rat es bet ween t he currencies around t he
wo rld relat ive t o t he U.S. dollar.
The first chart was a period bet ween 2002 and 2004. As you can
see, t he U.S. dollar weakened 27 percent against t he Aust ralian do llar and
euro, 20 percent against t he pound, 16 percent against t he Canadian dollar,
but t he Chinese yuan was a big zero .
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Let me show yo u t he change since t hat period, now t hat ano t her t wo
years have gone by. The Aust ralian do llar, t he euro, t he Canadian dollar
co nt inue t o move and st rengt hen against t he U.S. dollar. The pound now is
act ually 21 percent . Even t he Russian ruble increased against t he dollar 12
percent . Yet t he Chinese yuan is up t o a st erling t hree percent .
To day DURA is co mpet ing for business t hat will st art product ion in
t hree t o five years. So t he wins and lo sses of o ur new o rders from t oday's
co mpet it ive imbalance will impact o ur manufact uring employment levels
no t just t oday but pro bably st ronger in 2009, 2010, 2011. Those are t he
vehicles we're supplying part s and designing for t oday.
Wit h t he Chinese government incent ives for Chinese manufact urers
t o export goods, t he art ificial currency exchange rat es bet ween t he yuan
and t he dollar, t he U.S. manufact urers are at a significant disadvant age
versus Chinese suppliers.
In t he past t wo years, Chinese bids for aut o part s orders have driven
cust o mer price t arget s t o levels below our cost s in some product s. It 's in
t he newspapers. It 's called meet t he Chinese price. Here's an example o f
an aut omot ive cable part . We make a lo t of cable fo r driver's cont rols.
These go on parking brakes and shift ers. But t o illust rat e, t his example,
yo u can see o ur selling price was $4.50 for a t ypical aut omot ive cable o f
which we have a pro fit o f 35 cent s, somet hing kind of unheard o f t oday.
The Chinese landed selling price is $3.70, o f which of t he 3.70, 55
cent s is fo r logist ics. If we were t o balance t he currency at t he appropriat e
level, maybe just pick t he level o f t he Aust ralian dollar or t he pound or t he
euro, t he 30 percent , guess what ? The price is t he same, 4.50 t o 4.50.
The U.S. suppliers have t wo alt ernat ives t o react t o t hese market
co ndit ions. First , relocat e assembly jobs t o lower cost regions. The
seco nd is t o reduce pricing and pro fit levels by meet ing t he Chinese price
and reducing profit levels is not a sust ainable st rat egy because it t akes
away from our abilit y t o invest in new capit al and research and
develo pment .
So t he first cho ice is our most likely event . We must be posit ioned
t o have fair and free t rade. Advocat ing a fair float ing currency fo r t he
Chinese yuan was my main message here t o day. But it 's t he essence of t he
capit alist ic syst em.
But t here are ot her fact ors where our po licy appears t o be designed
t o furt her disadvant age U.S. aut o part s manufact urers. Terry ment ioned
o ne. The U.S. places t ariffs on t he impo rt of fo reign st eel. It has creat ed
an unfair playing field driving domest ic st eel pricing t o all t ime levels.
DURA buys $130 millio n wo rt h of st eel. Compet ing part s
manufact urers in China can purchase t he st eel at lower pricing levels and
impo rt t he finished product int o t he U.S. t arifffree. So we get t he st eel
anyway. It just co mes in a part and we get t he hit o f jobs. When you
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co mbine t his disadvant age wit h t he currency issue, you get what I call a
doublewhammy. In my view, if t he U.S. want s t o spread capit alism and
free t rade, we sho uld st art by demo nst rat ing wit h removal of t he t ariffs.
Chairmen Becker and Blument hal, I want t o t hank you and t he ent ire
Co mmission for providing me t his o ppo rt unit y. I look forward t o your
quest ions.
[The st at ement follows:] 9 and 10
Panel V: Discussion, Questions and Answers
HEARING COCHAIR BLUMENTHAL: Thank you very much t o

bo t h o f you. Mr. Keat ing, you ment ioned some of t he t hings t hat I t hink
t hat t he U.S. go vernment co uld have policies t hat act ually wo uld help out
wit h such as IPR and currency. Bot h o f you ment io ned currency. Tariffs
o n st eel is ano t her one. But I'm wondering if you can answer t his?
The cheaper co mmo dit ies in China, which you said, Mr. Keat ing, is
o ne o f t he reaso ns yo u're needing t o go over t here, is t hat so met hing we
can do somet hing about as a go vernment or is it , how much of it is just t he
fact t hat t he Chinese market fo r t hese co mmo dit ies is so big? Is t here
so met hing t hat t he U.S. government can act ually t aket hey're t he ones I
co uld underst and t he U.S. government could t ake act ion on, but maybe you
can explain t he cheaper commo dit ies quest ion a lit t le bit more.
MR. KEATING: Current ly, t here is an 17 percent incent ive for
expo rt s coming o ut o f China, t he U.S. go vernment could, in fact , do
so met hing about . I t hink t he ot her cost st ruct ure issue is behind st eel.
There's been a lot in t he press in t he last few days abo ut whet her China is
co nt ro lling prices in t hat indust ry, whet her t hey're forgiving debt , t hat t ype
o f t hing. I really couldn't art iculat e on t he issues wit hin China t hat are
co nt ro lling t heir st eel co st s t o t hat level.
But I do kno w t hat if we go t o a nont ariff st ruct ure, t he price will
level out worldwide.
HEARING COCHAIR BLUMENTHAL: Nont ariff st ruct ures here?
MR. KEATING: Tariff st ruct ures int o t he U.S. t hat will eliminat e
t he $200 different ial, whet her China raises t heir co st s o r whet her t he effect
o f allowing Chinese st eel int o t he U.S. t hat would lower U.S. st eel cost s,
eit her way, it wo uld level t he playing field from my perspect ive.
HEARING COCHAIR BLUMENTHAL: Do you have a comment o n
t hat , Mr. Dent on?
MR. DENTON: Personally, I'm against t ariffs. I don't t hink t hat
ever levels t he playing field. I t hink capit alism works in a free market and
9
Click here to read the prepared statement of Mr. Larry Denton
10
Click here to view the slide presentation of Mr. Larry Denton
136
a free market means t hat yo ur currency has t o move based on t he
pro duct ivit y o f t he nat ion, and we've got a sit uat ion here where t he
currency is abso lut ely pegged and not moving regardless of t he
ast ro no mical growt h t hat t hey've had in t hat co unt ry.
HEARING COCHAIR BLUMENTHAL: Act ually Chairman Wort zel
had t he first quest ion.
CHAIRMAN WORTZEL: Thank you. We have sat t hrough
t est imony by dozens o f eco nomist s and financial market managers, and t his
is t he clearest example and explanat ion o f t he effect of t ariffs and yuan
pricing t hat I've ever seen. I hope you can get it t o Washingt o n, D.C. and
sho w it t o Schumer and Graham. It will reinforce t heir argument .
MR. DENTON: Thanks.
CHAIRMAN WORTZEL: Some of what Mr. Suma said earlier
reso nat ed wit h me. He t alked about t he problem o f qualit y cont rol in bo lt s
t hat were suppo sed t o high qualit y st eel. Let 's assume t hey came from a
large co unt ry wit h a big wall t hat 's o n t he Pacific Rim. You t alked about
t he problem of t hese brake sho es and o t her aut omo t ive part s t hat are
co ming in.
First o f all, how did t hese count erfeit part s came in? Did t hey come
in by sea? Were t hey cont ainer shipped? Did t hey come t hro ugh U.S.
port s? Did U.S. Cust o ms help you at all t o ident ify t he fact t hat t here were
huge quant it ies o f fake aut o part s coming in wit h your name and brand and
even numbers on t hem o ut of China?
As corpo rat ion or as an indust ry, in general, do you work wit h
privat e securit y firms t o check on fake st uff ent ering t he supply chain out
o f China o r o t her places in t he world?
Does yo ur indust ry have a qualit y cont rol t est ing mechanism t hat yo u
use t o spot check product s you manufact ure or buy fro m China? Do yo u
rout inely check t o see t he qualit y of t he bolt , t he st eel, or t he brake shoe?
Finally, if yo u decided t o t ransfer manufact uring t o China, how
wo uld you ensure t hat t he product yo u're put t ing out t here is using
adequat e mat erials?
I'm really asking a series of quest ions t hat t alk about t he whole
supply chain out o f China and ho w t hey affect safet y and securit y here in
MR. KEATING: Let me t ry and t ake t hose in order. First o f all, t he
pro duct is co ming in by cargo co nt ainer. Init ially U.S. Cust o ms did no t
cat ch it because t hey were t ot ally unaware as t o whet her or not we had a
manufact uring locat io n in China.
Once t hey were aware of it , t hey're helping us find t hat product as it
co mes in. We do use privat e invest igat or firms t o go out and find out
which dist ribut ors in No rt h America are, in fact , handling t his product . Of
co urse, it 's difficult t o t ell since it looks exact ly t he same as ours and
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carries t he brand name. So we have some difficult y in get t ing t o t he
bo t t o m o f t hat .
As far as going t o China and spo t checking product qualit y,
cert ainly, if we're buying any product from China, we would make sure t he
qualit y cont ro l st andards are t here before t hat product left China, but if
we're making in China, one of t he t hings t hey want very much is for us t o
bring o ur processes t o China, which would allo w t hem t o make about a t en
percent light erweight wheel, lower pro cessing cost s, higher qualit y levels.
And, of course, we have t he same issue t hat everyone has wit h
respect t o int ellect ual propert y. If you t ake it over t here, you're going t o
be co mpet ing against it very quickly, but I kno w t hat wheel t echnolo gy
isn't ro cket science and it 's cert ainly no t somet hing t hat is t op secret , and
if we do n't t ake it t here, someo ne will, so our issue is t o get over and get
invo lved, no t o nly in t he pot ent ial t o export at current st eel cost s, but t he
idea also t hat t he commercial vehicle market in China is going t o double or
t riple over t he next six o r seven years as t he aut omot ive indust ry is, and we
want t o be part o f t hat gro wt h as we go forward also.
So t here are several reasons t o do it , but t hat pro duct would be
assured t o be running t o t he process co nt rols t hat we operat e as a co mpany
because we're going t o have o ur brand name on it . We would pro t ect t hat
very selfishly.
Okay.
HEARING COCHAIR BLUMENTHAL: Chairman Wessel.
HEARING COCHAIR WESSEL: Let me follo w up if I could o n
Chairman Wo rt zel's quest io n because I t hink it opens up an import ant area
and I t hink Commissio ner D'Amat o raised earlier t his morning t he quest ion
o f ho w do es t his pro duct co me int o t he count ry and what can we do abo ut
it ? We've all t alked about an IPR case and t he quest io n of t aking it t o t he
WTO. The fact is we can t ake unilat eral act ion against pirat ed and
co unt erfeit product s. The law exist s now t hat t hey can be co nfiscat ed at
t he bo rder and t hat yo u can seek compensat io n wit hout having t o go t o t he
WTO.
When your privat e invest igat o rs find t his pro duct , are yo u able t o
find o ut who t he import er of record is? Is Cust oms assist ing yo u in any o f
t hat work? Somebody here has t o impo rt it as reco rd. The pier’s dat a base
has a list of every bill of lading and where it 's going t o, what it s
dest inat ion?
It seems t o me t hat if we put liabilit y on t hose import ers o f reco rd
who are bringing t he product in wit h clear knowledge t hat it 's not a valid
part , t hat we might be able t o have a bet t er enfo rcement mechanism t han
we current ly do . Can you give us a lit t le more informat io n abo ut how you
find o ut how t his is get t ing in, et cet era, et cet era?
MR. KEATING: We first find out who, in fact , is handling t he
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pro duct and selling it .
HEARING COCHAIR WESSEL: So t he ret ail dist ribut or.
MR. KEATING: Yes. And t hen we go int o legal act io ns wit h t hat
co mpany. We usually find out t he import er o f record and wo rk wit h U.S.
Cust o ms t o st op t hat act ivit y at t he border and t hen we're back int o China
t rying t o st op t he act ual manufact urer of t he product .
HEARING COCHAIR WESSEL: But what are you doing t o t he
impo rt er of reco rd? Do t hey just get off scot free? What do t hey say? Do
t hey say we didn't kno w? How do t hey react ?
MR. KEATING: Basically I didn't know. We have not t aken any
kind o f pro secut io n act io n t o wards t hem at t his point .
HEARING COCHAIR WESSEL: Do t hey have any ongoing dut y t o
mo nit o r t he co nt inuing sale? I assume t hat many of t hese import ers are
fairly large import ers of reco rd and pro bably are dealing wit h a lo t of o t her
pirat ed part s. Is t he go vernment assist ing you in any way t here?
MR. KEATING: Only t hrough Cust o ms. I have not asked fo r any
o t her assist ance. If t here is ot her assist ance available, I would appreciat e
knowing about it .
HEARING COCHAIR WESSEL: But when you say Cust oms, yo u
mean for ident ifying just yo ur pro duct t hat may be coming in again?
MR. KEATING: That 's co rrect .
HEARING COCHAIR WESSEL: Is t he indust ry do ing anyt hing t o
say we're going t o monit or t his import er of record? I guess we share yo ur
frust rat io n, what can we do about t his? The law is pret t y clear; if product
is coming in, it can be confiscat ed at t he border.
MR. KEATING: Right .
HEARING COCHAIR WESSEL: If somebo dy is ordering t hat
pro duct wit h knowledge, t hey sho uld be liable as well.
MR. KEATING: I agree. Proving t hat knowledge is a difficult t hing
t o do t hough.
HEARING COCHAIR WESSEL: Is t he aut o part s indust ry doing a
lo t more in t hat area?
MR. KEATING: The HDMA is working very focused
HEARING COCHAIR WESSEL: I'm sorry. What 's t he?
MR. KEATING: Heavy Dut y Manufact urers Associat ion is working
o n t his issue, count erfeit ing overall. It 's a big issue for all t he member
co mpanies wit hin t hat organizat ion. We're all collect ively t rying t o put
pressure o n impo rt ers of record and t he U.S. government t o get t his whole
pro cess slo wed or st opped.
HEARING COCHAIR WESSEL: And where do you t hink Cust oms
places t his in t erms o f prio rit y? How has t heir respo nsiveness been t o you?
MR. KEATING: Verbally it 's been fine. I can't t ell what act io n
t hey're doing behind t he scenes. They're not finding a lot of t he product ,
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but t hen t hey've go t a massive jo b given all t he product coming t hrough
port s t oday.
HEARING COCHAIR WESSEL: And from a business perspect ive,
yo u have t o do warrant y service
MR. KEATING: Exact ly.
HEARING COCHAIR WESSEL: because it 's your name t hat 's out
t here?
MR. KEATING: It also is one o f my bet t er invest igat ive areas t o
find o ut where t he product is coming from. If I can t hen t race it back t o
t he cust o mer who sent t he product back, I can find out where t hey bought
it po ssibly and get back t o t he dist ribut or. So most of t he invest igat ion is
int ernal t o t he co mpany.
HEARING COCHAIR WESSEL: Thank you.
Mullo y.
COMMISSIONER MULLOY: Congressman Kildee submit t ed some
t est imonyhe and Co ngressman Upt on. This is a Democrat and
Republicanchairing t he Ho use Aut o mot ive Caucus, and t hey ment io ned
t he exchange rat e issue. The ot her issue t hey say is China in 2003
acco unt ed for 60 percent o f all count erfeit ed product s co ming int o t he
co unt ry. So t his is a China issue as well.
Earlier in o ur hearing t oday, Mr. Belzowski t est ified t hat we need t o
make an example of companies t hat , quot e, "knowingly purchase and
dist ribut e count erfeit component s in t his count ry."
Since I t hink t his is bot h a public healt h and a public safet y mat t er,
t hese co unt erfeit go o ds co ming in. Would you gent lemen t hink t hat t he
law should be st rengt hened, t hat we should put criminal penalt ies o n people
who are involved, kno wingly bringing in t hese co unt erfeit goods int o t he
co unt ry?
MR. KEATING: Yes, I would support t hat .
COMMISSIONER MULLOY: What about you, Mr. Dent on?
MR. DENTON: Yes, I would support it personally. The order o f
pro gressio n from OEM, from a t ier one perspect ive, most of our product s
are life o f t he product . What you no rmally see from China is t hey co me in
first wit h t he replacement product because t hey know t here's an ease o f
ent ry t here.
It 's very difficult t o sell illegal pro duct t o t he OEM. They have
qualifying t est s and so fort h. So I do n't perso nally see t hat in our business,
and we make a shift er, when you buy a car, yo u expect t o have t he same
shift er for t he life o f t he car. So we don't see it t here. What we see is
t hat , you know, people manufact ure shift ers and ship t hem here at
ridiculo usly lo w price o r we hear you need t o meet t his Chinese price t o
co nt inue your business. It 's a different sit uat io n fo r us.
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COMMISSIONER MULLOY: You bot h t alked very much about t he
exchange rat e issue, and I agree, I t hink it 's a huge problem. I was reading
about a recent meet ing of t he NAM, t he Nat io nal Associat io n o f
Manufact urers, and t he big split t hat t oo k place in t his meet ing bet ween t he
mult inat ionals who don't feel t he same concern about
MR. DENTON: The OEMs, yes.
COMMISSIONER MULLOY: and t he smaller co mpanies who say
it 's killing us, can yo u help me underst and why t he mult inat ionals have a
different perspect ive o n t his issue
MR. DENTON: Yes.
COMMISSIONER MULLOY: t han t he guys who are making t hings
in t he Unit ed St at es.
MR. DENTON: It 's real simple. They're go ing t o wait five years t o
t he Chinese car comes and t hen you'll st art t o hear it .
COMMISSIONER MULLOY: Yes, but why? Why do t he
mult inat ionals have different perspect ive?
MR. DENTON: Because t here are no Chinese cars in t he Unit ed
St at es t oday, so t hey do n't have direct co mpet it ion. In fact , t hey're able t o
use t his for leverage in lowering prices so it works t o t heir advant age for
no w.
MR. KEATING: I t hink what I would add t o t hat , t he mult inat ionals
are lo oking t o invest in China, so if yo u change t he co st of invest ing in
China, t hen t hey're against t hat at t he present t ime, whereas we're seeing
t hem more as a co mpet it ive t hreat , and t he issue is working against t he
NAFTA market fo r pro duct s coming int o t his market . It 's t wo different
areas of int erest .
COMMISSIONER MULLOY: You bot h t hink t his exchange rat e
issue and t he fact it 's so unbalanced is kind of a really a nat io nal problem
fo r t he Unit ed St at es?
MR. KEATING: We've already seen an example of what it is. I
ment io ned t hat t he st eel is 30 percent cheaper in China.
COMMISSIONER MULLOY: Yes.
MR. KEATING: Fix t hat problem and it 's not .
MR. DENTON: Let me give you anot her simple example. See t hese
glasses here, t hey're made in China, I have t o use t hem t o read now. I buy
t hem from st reet vendors in China. I like t o nego t iat e. So you go t here
and, o f co urse, if I'm in China, I'll t ry t o buy t en at a t ime. But rat her, you
know, my negot iat ion t echniques in t he rest of t he world has always been
at t he 11t hI don't want t o give t his awaybut at t he 11t h hour, I'll say,
o kay, I'll pay yo u in U.S. dollars, and I'll demand anot her t en percent
down.
When I t ried t his t he last t ime I was in China, t he st reet vendor
lo o ked at me and said I don't want t he dollar. He even kno ws which is
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mo re valuable. But so meho w we're missing it here.
COMMISSIONER MULLOY: So t his get s int o t he issue of is t here
so met hing o perat ing in t he mult inat ionals and t heir focus on shareholder
value makes t hem different from t he nat ional int erest t hat you guys
perceive? Just give me yo ur comment s on t hat .
MR. DENTON: Say t hat again, please.
COMMISSIONER MULLOY: Here's my view, and I just want t o
check it against yo u who are out t here in t he business world. The
mult inat ionals are so fo cused on share value and t he CEO's compensat ion
which is t ied t o shareho lder value, t hat t hey t end t o lo se t he fo cus on t he
nat io nal int erest because t hey're so focused on t he int erest of t he
shareholder value, and t hat t his t hen makes t hem lose sight of t he nat ional
int erest which you guys who st ill make st uff here are much more sensit ive
t o .
Is t hat a realist ic underst anding of what is going on here?
MR. KEATING: I t hink it 's a fair st at ement of what I see. First o f
all, mult inat io nals because o f t he very t erm are go ing t o have
manufact uring lo cat ions around t he wo rld. They're no t going t o have a
specific nat io nal int erest o f any magnit ude because t hey've got t o wo rry
about keeping everyt hing in balance bet ween all t he co unt ries aro und t he
wo rld.
I t hink shareholder value, I ment ioned it in mine, I'm very fo cused on
shareholder value, but my market is NAFTA, and t he issue I have is China
t rying t o move product s wit h I t hink an unequal playing field int o t his
market place. So I'm very nat ionally focused right no w.
MR. DENTON: I don't know if I complet ely agree. We're a
mult inat ional global company so I could manufact ure t he product in China
and ship it here. This is go ing t o change quickly. This year it 's pro ject ed
t he Det roit aut o sho w will have 20 percent Chinese part icipat ion. If t hat
st art s t o happen in a big way, just like t he mult inat io nals t oday co mplain
about t he value o f t he yenI didn't put t he yen up t hereversus t he dollar,
t hey'll st art t o complain against t he yuan.
But for t oday, t hey don't see t ho se vehicles coming in, and what t hey
do see is t he abilit y t o lower t heir co st s. I don't know if it 's shareholder
value as much as survival now in t he U.S. aut o indust ry. Everybo dy has
t heir back against t he wall and we're loo king at what t o do t o survive, and
I'm not so cert ain people have t aken a four or five year view. We're
lo o king at what we need t o survive for t he next six mont hs t o a year.
So I t hink t hat ment alit y is t here, and t hat China t o t hem t oday helps
t he six t o 12mont h po sit io n, but I t hink it 's going t o be a real issue for
everyo ne lat er o n.
The ot her po int I want t o make because I'm no t cert ain it was clear
fro m my t ext , t here are t wo effect s t hat go on here. To st ay in t his
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business, t he model life of a vehicle is five years, so very simple mat h, 20
percent of all yo ur business goes away every year as an aut o supplier. So
yo u've go t t o go out t here and get 20 percent of your business t o break
even four o r five years fro m t o day. The o rders I sell t oday we make for
'010, '09, '011 t ype of t ime frame.
I do n't believe U.S. aut o part s manufact urers are get t ing t hat t ype o f
o rder boo k. So what we're seeing t oday is just t he t ip o f t he iceberg t o
what 's going t o happen in '09, '010, and '011, and t hose aren't published
result s. No o ne wit h a public company is going t o st and up and say I'm
going t o be 20 percent smaller in '010 in t he Unit ed St at es. It 's just not a
st at ement t hat 's public.
COMMISSIONER MULLOY: Thank you very much fo r yo ur
t est imony.
HEARING COCHAIR BLUMENTHAL: Thank you. We're going t o
mo ve on t o Commissio ner Houst on, but first we're going t o assume t hat all
t ho se glasses you bought in China are not knockoffs.
MR. DENTON: I'll sell you some if you happen t o have any yuan in
yo ur po cket .
COMMISSIONER HOUSTON: Mr. Keat ing, you bro ught up t he
point about warrant y issues, and I've act ually asked t his quest ion before o f
panelist s, and t he answer I t hink is no , but I'd like t o hear it from yo ur
perspect ive.
On t he liabilit y issue, I go t o Joe's Garage, and I get a new wheel,
and as I drive ho me, it falls off my car, I crash int o t he wall, and I get hurt .
It is proven so meho w t hat t his is yo ur part , but no t really. Yo u kno w yo u
can prove t hat it really came from China, t hat it 's a pirat ed wheel, it 's no t
really your wheel, but t he t rial lawyer chasing my ambulance do wn t he
st reet t ells me I can come sue yo u anyway, even t hough yo u didn't produce
t he wheel.
Is t hat t rue? Is t here any st at ut ory liabilit y pro t ect io n fo r you as a
manufact urer against any damage t hat might o ccur because of a knocked
o ff or a pirat ed pro duct t hat has your name on it ?
MR. KEATING: I t hink it would be up t o us t o prove t hat we did
no t manufact ure if it we were able t o do so because if we can't , we do have
liabilit y.
COMMISSIONER HOUSTON: Assuming t hat you can't , let 's say
yo u can pro ve t hat t his is not your part t hat came out of your plant , t hat it
came out o f so mewhere in China or anywhere else in t he world, do you
have liabilit y pro t ect ion so mehow?
MR. KEATING: I don't see t hat I would, but I can't answer t hat
because I'm not a lawyer.
COMMISSIONER HOUSTON: Is t hat a fear t hat you have, t hat t his
at some po int could happen?
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MR. KEATING: My fear is t hat we would not be able t o ident ify t he
pro duct . They're get t ing very good at copying. If you put t he product s I
ment io ned side by side on t he floor, t here wouldn't be anybody in t his roo m
including myself t hat co uld t ell you which o ne I made.
COMMISSIONER HOUSTON: And t he qualit y is t he same or
different ?
MR. KEATING: No, t he qualit y of t he mat erial inside is different ,
very different , and t hey just look t he same. We define t he difference by
met allurgical t est ing.
COMMISSIONER HOUSTON: Right . So t hen hypot het ically yo u
co uld pro ve t hat it was yours?
MR. KEATING: I count on t he fact t hat we can t ell t hat it 's not our
pro duct .
COMMISSIONER HOUSTON: Yes.
HEARING COCHAIR BLUMENTHAL: Anyone else? Thank you
very much fo r a very educat ional and insight ful t est imo ny.
We're going t o t ake five minut es unt il we st art wit h o ur last panel at
3:15. Thank you.
PANEL VI: PERSPECTIVES OF TOOL AND DIE MANUFACTURERS
HEARING COCHAIR WESSEL: Thank you t o our last t wo

wit nesses. It has been a lo ng day and we appreciat e your being here and
yo ur perseverance. Bo t h of yo u have been in t he audience for so me t ime.
For o ur last panel t o day, we have t he o wners of t wo familyheld
businesses from Michigan. As we will hear, t he specialt y t oo l and die
making is one of highly skilled art isans who learned t heir craft over years
o f wo rk. Their skills are crit ical in manufact uring many aut o part s as well
as in t he aerospace and defense indust ries.
Laurie Moncrieff is President o f Schmald To ol and Die in Flint ,
Michigan. Mark Schmidt is President o f At las Tool, Incorpo rat ed, o f
Ro seville, Michigan. We will pro ceed in t he order int ro duced—you will be
permit t ed seven minut es for your oral t est imo ny. Yo ur comment s will be
made part of t he reco rd, and we loo k forward t o your t est imony.
STATEMENT OF LAURIE SCHMALD MONCRIEFF, PRESIDENT

SCHMALD TOOL AND DIE, INC., FLINT, MICHIGAN
MS. MONCRIEFF: Our company was act ually founded in Burt on,
Michigan, which is right by Flint , in 1948.
Our init ial o perat io ns were focused on General Mo t ors' t oo ling needs
in Flint , and I'd like t o add on behalf of Mark and I t hat t hey always say
144
t hat t hey save t he best for last , and we hope we were wort h t he wait .
Every product t hat is manufact ured is formed by a t ool, die or mold.
The selfsufficiency of U.S. manufact uring rest s squarely o n t he shoulders
o f a st ro ng domest ic t o o ling indust ry. The majorit y are small familyowned
businesses wit h appro ximat ely 27 employees. The aut o indust ry account s
fo r mo re t han half of U.S. t o oling consumpt io n.
Over 28 percent o f t he count ry's t o olmakers have shut t heir doors in
t he past few years. Michigan has over 900 t ool and die businesses, t he
largest co ncent rat ion in t he U.S. Co mpanies are facing fierce foreign
co mpet it io n as t he OEMs are purchasing part s, t o ols, dies and mo lds in
China for as much as 35 percent less.
U.S. t oo l co mpanies are paid on t he average 55 t o $65 per hour for
an ext remely capit alint ensive business. Compare t hat t o a comput er t ech
wit h a screwdriver charging a hundred plus an hour. The squeeze is no t
just coming from t he aut o mot ive manufact urers t hemselves, but is also
being mimicked t hrougho ut t he t iers. Many part suppliers expect t he t oo l
and die company t o supply a t oo l t hat is built t o st amp high volumes and
needs lit t le maint enance and expect t o pay t he same price t hey get fro m
China.
The Chinese build t ools t hat require mo re maint enance as labor is
cheap in t heir co unt ry and in many inst ances do not use robust st eels.
They supply a cheaper t o ol t hat can be built for less, yet cust o mers put
t heir prices against ours.
Also, in many inst ances, payment t erms are different . Chinese
co mpanies require t hat t he t o ol be paid for many t imes in full prior t o
shipment from China. In co nt rast , t he U.S. t oo l sho ps are forced t o wait
mo nt hs or years t o get paid. Besides all t he o t her subsidies discussed
t o day, I'd like t o point o ut t hat t he Chinese government pays for
appro ximat ely t wo t hirds of t heir companies' equipment .
China's st rat egy has been t o keep t he currency low, boost it s expo rt s
and ho ld do wn impo rt s and peg t heir currency. Companies t hat relocat e t o
China can benefit fro m currency manipulat ion and t hat subsidy wit h lo w
labo r cost s, and Chinese product s become irresist ible. An invest ment in
t he co unt ry becomes ext remely at t ract ive.
The very policies and pract ices t hat benefit large manufact urers are
dest ro ying small companies like mine. The government and t he
mult inat ional companies seem t o view small companies and t he labo r force
as an expendable co mmo dit y.
Pat ent s are no t prevalent in our indust ry, but we have experienced
selling aut o mo t ive inst rument clust ers t o Sout heast Asia. These cust omers
buy just one. Once a big part of our business, we have lo st t hat ent ire
market t o our o verseas compet it ors. They are draining our knowledge t o
develo p t heir own market .
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The result of t he 322 hearing before t he ITC in Oct ober of '02 for
o ur indust ry was t hat t he government will help us export . They do no t
want our pro duct s. Their goal is t o make t heir own. One of our cust omers
also experienced t he t heft of t heir product when t heir Chinese t oo l source
built a set o f t ools fo r t he cust o mer and one for t hemselves. The cost o f
int ellect ual propert y t heft , as previo usly discussed, is ast ronomical and
gro wing.
Since t he early '90s, foreign aut o makers began t o lo cat e t heir
pro duct io n plant s here in t he U.S., predominant ly in t he Sout h.
Thankfully, o ur companies develo ped some cont ract s wit h t he t ransplant s,
but t he ITC report s t hat t ransplant vehicle manufact urers t end t o impo rt
t o o ls, dies and mo lds from t heir co unt ry. NAM not ed t hat 36 percent o f
co mpanies have jobs t hat go unfilled due t o t he lack of qualified applicant s.
The problem will only get worse as baby boomers ret ire. The
massive closure o f die shops has been a det errent t o younger workers
ent ering t his field. Many of t he companies t hat have clo sed co uld no t
affo rd t o t rain t heir employees in t he new skill set s, t hus, many job
applicant s are no t qualified.
Our indust ry needs employees wit h experience but also comput er and
advanced manufact uring skills. Training inst it ut ions cannot afford t o
purchase t he equipment required t o t rain and lo cat ing qualified inst ruct o rs
is difficult . Mo st t ool and die sho ps st o pped t raining years ago because
t he aut o mot ive companies would ent ice t heir employees t o leave as soon as
t he apprent ices were t rained.
Frequent layoffs and high t urnovers have also added more t raining
co st s. Fewer vocat io nal scho ols and high schools t rain in machining, which
leaves t he new generat ion much less prepared in core skills t han t heir
predecesso rs. In 1997, China est ablished Mold Cit y t o t rain in mo ld design
manufact uring and o t her act ivit ies relat ed t o indust rial molds.
China's indust ry is benefit ing great ly from t he st at erun educat ional
syst em. Technical scho ols in China t rain hundreds of st udent s on advanced
machinery and comput ers. Universit ies fo cus on t ool and die research and
o t her advanced t raining and design.
Many o f our U.S. manufact uring hardware and soft ware companies
have donat ed equipment t o t he Chinese universit ies. If in fact our count ry
is go ing t o open t he flo odgat es t o t rade, we need t o be willing t o assist
U.S. companies in t raining our employees t o be t he best in t he world.
We are t he only indust rialized count ry t hat do es not have a
manufact uring policy or plan on how t o compet e. I recent ly read a copy of
India's manufact uring plan and it appears as t hough t hey have figured out
everyt hing t hat t he U.S. has fo rgot t en.
It 's t ime t o t ake st eps t o revit alize manufact uring. Congress and t he
administ rat io n must act against China's WTO vio lat ions and currency
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manipulat ion if we want manufact uring t o survive. Our count ry is
o bvio usly viewing China as a big po t ent ial market , but it is deplo rable t o
develo p market s at t he expense o f t he rest o f t he supply chain wit h
virt ually no plan o n how t o preserve jobs.
We are no t asking fo r prot ect io nist t rade policies but a level playing
field. We need t o lo ok at t he effect s t hat t rade policies are having on o ur
co unt ry, not just t he effect it has on t he st ock market . Through my
invo lvement in t he Unit ed To oling Co alit io n and a variet y of lo cal and
nat io nal organizat ions, I am wo rking wit h ot her shops on how we can
survive.
It is my o pinio n t hat our government is t he one t hat has been
co mplacent , t urning t heir blind eye t o China. They need t o cat ch up wit h
t he rest of us in t he manufact uring t hat have been fight ing fo r o ur lives and
get t heir house in order.
Excuse me. I t urned t he page t o o fast . The decline of our indust ry
does not just have adverse econo mic impact s, but also has grave nat ional
securit y implicat ions. In t he short t erm, const it uent s need t o urge t heir
co ngressmen t o suppo rt H.R. 1498 t o bring t rade cases against count ries
like China t hat manipulat e currency, and we need t o discourage support o f
t he Oman, Sout h Korea and Peru t rade agreement s unt il we are ready t o
enforce t he exist ing o nes.
We also need t o insist t hat permanent mo st favored nat ion t reat ment
no t be grant ed t o Viet nam, which is coming up for vot e short ly. I
appreciat e t he o ppo rt unit y t o t est ify befo re t his commit t ee, and I'm happy
t o answer any quest io ns.
Thank you.
Prepared Statement of Laurie Schmald Moncrieff, President

Schmald Tool and Die, Inc., Flint, Michigan
Good afternoon. I am Laurie Moncrieff, thirdgeneration owner of Schmald Tool & Die, Inc., located in
Burton, Michigan. My grandfather established Schmald Tool & Die more than sixty years ago. Our
initial operations were focused on General Motors (GM) tooling needs in Flint. Today, our employment is
currently at 30, and our primary focus is the production of dies, molds and other precision tools utilized to
produce parts, as well as machinery. We service the tooling and machining needs for such vital industries
sectors as automotive, medical, electronics, and home products.
I serve on the boards of the Genesee Regional Chamber of Commerce, the Michigan Manufacturers
Technology Center, the Michigan Chamber, the Mott Foundation, and the Mott Community College M
TEC Center, and am active in the National Tooling and Machining Association (NTMA).
As a supplier to the U.S. auto and auto transplant industry, I appreciate the opportunity to discuss China’s
impact on the U.S automakers and the devastating effect it has had on the tool and die industry across the
country and especially in Michigan.
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Overview of Tool & Die Industry
In the face of intense global competition and rising costs, I am very concerned about the state of
manufacturing in this country and particularly for the tool and die industry. Every product that is
manufactured is formed by a tool, die, or mold made by our industry. Manufacturing companies like mine
contribute more to the economy than just employment and spending. The selfsufficiency of the U.S.
manufacturing sector rests squarely on the shoulders of a strong domestic tooling industry.
Our $40 billion industry employs 200,000 workers in 11,000 companies across the nation (Bureau of
Labor Statistics data 2005). Tool and die makers are some of the bestpaid workers in the country,
making approximately $47,000 per year. The majority of our operations are small, familyowned
businesses with an average of 27 workers. In fact, ninety percent of all tool and die shops employ less
than 50 people.
According to the International Trade Commission (ITC) report on the competitive conditions of tools,
dies, and industrial molds, the largest single user for tooling products is the motor vehicle industry, which
accounts for more than onehalf of all tooling consumed in the United States
We are facing challenges as never before. Nearly three million manufacturing jobs have been lost since
2000. Nationwide, the National Tooling & Machining Association estimates that 28 percent of the
country's toolmakers have shut their doors since 1998. The estimate by Plane Moran is that by the end of
the decade, China’s expansion in tool and die could cause the loss of over 900,000 industrial jobs in the
U.S.
Michigan Tool & Die Industry
Because of its close ties to the U.S. auto industry, Michigan is still the largest tool and die state in the
country with approximately 900 operations. Sixty out of Michigan’s 83 counties have some tooling
presence, with the majority of shops are located within the Grand Rapids and Detroit metropolitan areas.
As of January 2005, there were only 39,000 toolanddie workers in Michigan compared to 2000, when
there were more than 57,000 workers. (Michigan Labor Market Information Office). At this rate, foreign
competition and technological change could eventually kill half of all Michigan toolanddie jobs just as
the state has lost half of its manufacturing operations since 1998.
Why this huge loss of tool and die jobs? There is a direct correlation to the loss of autorelated jobs in
Michigan and the loss of tool and die employment. Critical industries supplying the auto industry tool
and die shops, forging shops, foundries, and machine shops are all facing tremendous foreign
competition. The original equipment manufacturers (OEMs) are purchasing parts, tools, dies, and molds
at cost savings of at least 35 percent (or more) compared to domestic suppliers. Customers are paying tool
and die companies somewhere in the range of $55.00$65.00/hour for their services. Compare that to an
auto repair shop or a computer tech charging $100.00+/hour. Tool and die companies pay much higher
wages and are very capital intensive. The squeeze is not just coming from the automotive manufacturers
themselves, but is also being mimicked throughout the tiers creating a nowin situation for the entire
supply chain.
Many parts suppliers expect the tool and die companies to supply a “Class A Tool” (a tool that is
essentially built to enable them to stamp millions of parts and requires little maintenance), but demand to
pay as much as 35% less, or the same price they would be charged for a tool from China. The problem is
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that with U.S. wages, administrative costs, the high investment in equipment and the exorbitant cost of
doing business in the U.S., there is no margin for the U.S. supplier of the tool.
We have seen the tools that some of our customers are bringing in from overseas and we are certain that if
we were allowed to build to the same standards, we could be competitive. However we are not given the
opportunity. We have asked if we could change our standards to match that of our overseas competitors
and were told “no way”. The Chinese build tools that require more maintenance (as labor is not an issue
in China), and in many instances do not utilize the robust steels that are used in U.S. tooling, thus they are
selling a cheaper product, or a tool that could be built for significantly less.
Factor in the subsidization of the Chinese government paying for twothirds of equipment used in their
shops, no environmental standards, and low wages, it is clearly not a level playing field. Also in many
instances, payment terms are different. Chinese companies require as much as 90%, if not 100% of the
tool to be paid for before prior to shipment from China. In contrast, the U.S. tool shops are forced to wait
months and in some instances years, if ever, to get paid on their tools. Bigger businesses are essentially
forcing small businesses to carry their debt.
As component industries and design work follow assembly lines to China, key elements of the U.S.
industrial base are beginning to erode. American plasticmolding and machinetool industries have
shrunk dramatically. When our industry companies go to make their sales calls, they find their traditional
customers have gone out of business, moved to another country—most likely China—or are unwilling to
make the new investment in sophisticated and productive equipment.
One small die shop in Portage, Michigan lost 30% of its business due to the recent outsourcing of the Big
Three automakers to China. The owner estimates that labor costs in China are onetenth as much as those
in the United States.
This is a huge National Security risk as the tool and die industry is the same industry that provides the
means to produce defense parts. The Department of Defense has been aware that there are production
issues regarding obsolete components and subsystems. Only recently is there a growing realization that
there is a problem with heavy manufacturing. The Defense Department is a relatively small buyer in the
scheme of things and does not buy tools and dies every day, therefore it is only until they need to buy
replacement parts do they realize they can no longer purchase critical components and tooling in the
United States. The majority of metal castings needed in the U.S. come from China and other third world
countries.
With the unrest we are seeing in the Middle East and problems with North Korea this does not lend for a
good nights sleep in my opinion. As was pointed out in The commissions 2005 summary “The U.S.
Treasury Department has identified a Chinese bank alleged to be involved in money laundering related to
activities that could be financing North Korea’s nuclear weapons program”. In other words we are
helping fund North Korea’s nuclear weapons program by growing China’s economy, and if we needed
replacement parts for our tanks I’m sure China would be glad to oblige.
China and Impact on U.S. Auto Industry
Today, the largest investments made by the automotive industry have been by General Motors (GM). GM
reports that it has approximately 13,000 employees in China and operates seven joint ventures and two
wholly owned foreign enterprises. It has participated in investment of over $2 billion in China. Last year,
GM announced that it “expects to increase its original equipment parts purchases from China… from
$200 million in 2003 to $4 billion in 2009.” By 2009, GM expects to spend around $10 billion on
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sourcing for its China production.
While China’s economy continues to prosper with low cost exports and major foreign investment in its
automotive sector, the U.S. assembly and auto parts industries have been hit hard. Earlier this year, GM
and Ford announced that they would be eliminating 60,000 jobs and at least 28 plant shutdowns across the
country. Flint, Michigan, once the epicenter of General Motors' manufacturing operations, is a mere
shadow of the boomtown it used to be thirty years ago. In the early 1990s, over 50,000 Flint residents
were employed in the manufacturing sector. Current government statistics peg the number of
manufacturing jobs at 22,000 – a decrease of 50 percent in fifteen years.
China is now a major supplier of automotive parts in the United States. The majority of the nameplate
automotive manufacturers and parts suppliers have set up operations in China, and parts from those
operations are increasingly being exported to the U.S. for assembly plants or for suppliers that integrate
standard parts and components into customized modules for final assembly.
It is obvious that China’s economic strategy over the past decade has been to keep the value of its currency
low, boosting its exports and holding down imports. It is indisputable that there is no free market for the
yuan. Despite rapid economic growth, rising productivity, soaring exports, and huge foreign investment
inflows – all factors that would normally cause a currency to appreciate – China has kept its currency
pegged at approximately 8.25 yuan to the dollar since 1994. This is a critical factor in the huge U.S. trade
deficit with China, $220.077 billion in 2005, and in the relocation of so many large domestic
manufacturing enterprises overseas.
Companies relocating to China can benefit from the currency manipulation that is, in reality, a
tremendous subsidy. When this subsidy is added to the very substantial differential in labor costs between
our two nations, Chinese products become irresistible, and it makes investment in Chinese manufacturing
extremely attractive. The very policies and practices that benefit large manufacturers are destroying small
companies. It as if our government, and the multinational companies, view small companies as a rather
expendable commodity.
It is interesting to note, by the way, that in India’s “National Strategy for Manufacturing” published
earlier this year, the Indian government speaks to the point that manufacturing is essential to growing
their economy. The report states that by increasing manufacturing in India, it will also allow them to
grow their service sector. In addition, the report highlights the fact that “the small and medium industries
form the backbone of the Manufacturing Sector not only in their country but even developed countries,
ensuring the competitiveness of the small scale sector is important as it would help in overall growth of
the manufacturing sector and also the National Economy.” Somehow our government has forgotten this
important lesson that we learned during the boom times of our industrial revolution.
Although in the tool and die industry we have very few patented products, we have experienced Asian
companies buying automotive instrument cluster molds from us, that were at one time a large portion of
our business. In every instance these clients would purchase one mold. They would reverse engineer the
mold and never buy another. We have lost all of that business today to overseas . Although this is not an
example of truly stealing intellectual property from a legal stand point, they are no doubt draining our
knowledge to develop their own market. The Commerce Department needs to stop trying to convince us
that we will eventually export to these countries… they do not want to buy from us they want to make
them in their country.
We also had a customer that decided to purchase tooling for a new product from China, and the Chinese
tool source built a set of tools for their customer and set for them. When the new product was rolled out
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on the retail shelf there were two identical products side by side. One produced by the U.S. company that
held the patent, and one by the Chinese tool source. I’ll bet you can’t guess which one was the cheapest!
Both the USA Today study as well as the American Society for Industrial Security estimates that the cost
of intellectual property and trade secret theft was in excess of $59 billion in 2001, and will exceed $250
billion by the end of the decade.
The domestic tool and die sector, as a subset of the auto industry, has felt the pain of China’s
manufacturing boom, low labor costs, and currency manipulation. In 2002, China machine tool sales
passed the United States in the process of becoming the largest consumer of machine tools in the world
China’s machine tool consumption continues to be 60 percent above that of the United States. At my
company, our sales to Delphi and GM have decreased from 95% of my business to 1%, in the last several
years.
To combat the loss of work from the Big Three, many tool and die shops such as mine, have gotten a
shortterm boost by repairing work that was outsourced overseas. In many instances though, the cost to
fix the problems went well beyond the original price the customer thought it would save. Many of us are
traveling to Southern states to develop new clients to fill the void in automotive work, but this is extremely
costly and time consuming. Companies that are still supplying the current U.S. Automotive Industry are
being squeezed to the extent that there is virtually no margin. The new big business model in the U.S. is
clearly pay Chinese wages and charge U.S. prices. That philosophy is destroying the supply chain. The
multinationals are out to please Wall Street, while the silent majority is struggling to survive. This is very
short term thinking.
Impact of Transplant Motor Vehicle Manufacturers
Since the early 1990’s, we have seen a huge shift in the structure of the U.S. automotive industry. Foreign
automakers, or “transplants,” began to locate their production and assembly plants here in the United
States. With the downsizing and closure of domestic assembly plants primarily in Michigan and Ohio,
foreign plants are continuing to open in other locations, such as Kentucky, Tennessee, the Carolinas, and
Alabama. Thankfully, our company has developed some contracts with the transplants and in fact, are
now are doing work for Toyota, Honda, BMW, Hyundai and Mercedes. However, this has not been the
case for many of my competitors. They point to the fact that many of the Japanese transplants receive
tooling from Japanese based companies, so U.S. companies don't receive the parts business or machining
business. In fact, the ITC report on the competitive conditions of tool, dies, and molds noted that
transplant motor vehicle manufacturers tend to import tools, dies and molds from their home country,
displacing work from North American companies.
Survival: Importance of Training and Investment
A study by the National Association of Manufacturers (NAM) noted that 36 percent of companies have
jobs that go unfilled due to the lack of qualified applicants. The problem will only get worse as a seasoned
workforce of baby boomers retire with relatively few workers in the pipeline to replace them. If the
current trends continue, experts estimate that the U.S. will face a shortage of roughly 13 million qualified
employees by 2020.
The massive closure of tool and die shops in the state of Michigan has been a real deterrent to younger
workers entering this field. This shortage means that we are not able to train the next generation of the
skilled workforce in order to compete and survive. Dave Martin of AccuMold Inc. in Portage, Michigan
said the average age of his worker is now fortyfive. Just five years ago, the average age was thirty. Many
of the companies that have closed have not changed the way they do business, nor have they trained their
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employees in the new skill sets, thus the majority of employees we see apply for employment are not
qualified.
We need employees who have years of experience in the industry, but also who possess a strong
mechanical and mathematical aptitude, as well as computer skills to utilize simulation software, 3D
design software, and are knowledgeable in CNC programming. It is a challenge. Unfortunately it is cost
prohibitive for the majority of training institutions to have the types of equipment required in a high
technologically advanced job shop and there are great challenges in finding those that possess the
necessary skill sets to train. Unless you are working in the field and keeping up with the latest technology
you are falling behind. We find a tremendous gap between what is being trained today and the skills that
are required to survive.
Tool and Die companies years ago used to teach the trade in house but many companies found that as they
trained apprentices large automotive companies would entice those employees to leave for better wages. It
became too expensive for small shops to pay to train for their customers. Some estimates are that training
costs in our trade have increased by as much as 30% from 19992001. Also, the highs and lows of the
industry are unlike anything we’ve seen in the past. It has always been a feast and famine business.
However, we are feeling peaks and valleys like never seen before, and coupled with the slim margins,
companies are now forced to do more and frequent deep layoffs to survive.
When you add the current turnover experienced, and the costs of continually training and retraining new
employees it has been devastating to many companies. Vocational schools and high schools that trained
in machining in the past have dropped courses due to budgets cuts which leaves the new generation of
employees much less prepared in core skills than their predecessors.
China has made a point of assisting in education and supporting the industry, according to the ITC report
from 2002. In 1997 during the 9 th FiveYear Plan, the Chinese Ministry of Light Industry and Yuyao
Municipal People’s Government, jointly established Mold City. Its purpose was to build a large industrial
area for mold design, manufacturing, training and other activities related to industrial molds. The project
began with a$115 million investment and an additional $48.9 million followed in 2000.
The Chinese tool and die industry benefits greatly from China’s extensive staterun educational system.
Many technical schools in China are well equipped with advanced machinery and computer systems.
Universities focus on tool and die research and development and offer advanced training in design. The
National Die and Mold CAD engineering research center at Shanghai Jiao Tong University is very well
known.
The schools in China are training hundreds in the trade. China understands that it is imperative to grow
and retain the industry that enables them to produce products. As a matter of fact due to the recent bid a
U.S. firm made to purchase a large Chinese equipment manufacturer, which China is trying to block
incidentally, a new policy document was published by the Chinese calling for special government
protection and support for machinery and capitalequipment industries “that affect economic security and
national defense”.
If in fact our country is going to open the flood gates to trade we had better step up our game to compete
and be willing to assist U.S. companies in training our employees to be the best in the world, just as China
is doing. The United States, including our government has become complacent, and I have heard
statements uttered from our government on how Americans are the best in the world, they’ll find new
jobs, invent new products. Americans are resilient and will survive this economic transition. I do not
agree if policies continue to be stacked against us. When is our government going to acknowledge the
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loss of jobs and lowering of the wages that are occurring in our country? We are the only industrialized
country that does not have a “Manufacturing Policy” or plan of how to compete.
Conclusion
It’s time to take steps to revitalize manufacturing. Congress and the Administration must take action
against China’s WTO violations and currency manipulation if we want manufacturing to survive in this
country. It is obvious that with lopsided trade policies, surging prices for raw materials and relentless
competition from China and other lowcost markets, small manufacturers have been squeezed.
The Bureau of Labor Statistics found that out of a net loss of 27,000 manufacturers’ establishments from
20012204, 90% were companies or individual plants employing fewer than 250. This whole issue boils
down to the Chinese market that had 27 million cars on the road in 2004 and could reach 130 million in
the next 15 years. But it is deplorable to develop markets at the expense of the rest of the supply chain
and with virtually no plan how to preserve jobs in the United States. We are not asking for protectionist
trade policies, but rather a level playing field and an honest look at the affects that trade policies are
having on our country, not just the affect that it has on the stock market. Large manufacturers are
benefiting from the very policies and practices that harm small companies. This phenomenon has divided
U.S.based manufacturers in an unprecedented way as is evidenced in the recent debate over China
currency manipulation legislation at the National Association of Manufacturers.
Through my involvement in the United Tooling Coalition and a variety of local and national
organizations, I am working with other tool and die shops on ways we can survive in this everchanging
global economy. Our industry is taking steps to revitalize manufacturing in this country, but we cannot
succeed if the government turns a blind eye to China’s unfair trade practices. Multinationals need to
realize that someday if China shuts the doors on their products, they may have a tough time finding the
skill sets that they need to manufacture in the U.S. Small and mediumsized manufacturers need help to
compete. It is time to wake up in the U.S. and take a hard look at the realities of the impact that China is
having on our country. The decline of our industry does not just have adverse economic impacts but also
has grave National Security implications.
I appreciate the opportunity to testify before this Commission and am happy to answer any questions.
HEARING COCHAIR WESSEL: Mr. Schmidt .
STATEMENT OF MARK SCHMIDT, PRESIDENT
ATLAS TOOL, INC., ROSEVILLE, MICHIGAN
MR. SCHMIDT: Thank you. At las Too l, Incorporat ed was founded
in Roseville, Michigan in 1962 by my lat e fat her. We have 265 peo ple and
we are a leader in t he manufact ure of aut o mot ive st amping dies. We also
pro vide prot ot ype part s and cont ract machining.
Almost everyone here has ridden in a vehicle wit h part s made by dies
fro m At las Tool. Over 95 percent of our employees are highly skilled. Our
specialized abilit y t o apply high t echnolo gy has also led us t o become a
machining subcont ract or for some no t able government project s such as t he
F22 Jo int St rike Fo rce Fight er and all of t he major ro t at ional part s of t he
space shut t le main engine. So met imes t oo l and die is rocket science.
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We are also a leader in t he applicat io n of new t echnolo gy t o o ur
indust ry. We are current ly working on research project s wit h t he Cent er
fo r Aut omot ive Research, NISTATP, t he Universit y of Michigan, t he
Aut o St eel Part nership and vario us so ft ware manufact uring co mpanies.
I want t o give you a lit t le bit o f an o verview of t he import ance of t he
die indust ry befo re we t alk about China. The modern t ool and die indust ry
is based o n t he applicat ion of high t echnology.
In t he last 20 years, many manufact uring inno vat io ns and
t echno logies have been int roduced and incorporat ed by our indust ry such
as co mput er aided manufact uring, design and engineering; elect rical
discharge machining; laser cut t ing of sheet met al part s; co mput er aided
so lid model design of t ools; comput erized simulat ion of sheet met al
fo rmabilit y; and whit e light scanning, which t akes t hreedimensio nal
pict ures o f solid object s.
The abilit y t o produce advanced t o oling is vit ally import ant t o t he
eco nomy of t he Unit ed St at es. Tools, dies and molds are used t o produce
virt ually every manufact ured product . The met hod and execut ion o f
t o o ling co nt rols t he cost , qualit y and efficiency of t he product ion process.
A capable t ool and die indust ry gives t he Unit ed St at es an incredible
advant age in t he abilit y t o efficient ly manufact ure a wide variet y o f
pro duct s. When t he Second World War st art ed, we t ooled up t he Arsenal
o f Democracy wit h unbelievable speed. We were not able t o do t his
because of an abundance of cheap labor. Our accomplishment s were based
o n t he wealt h of knowledge t o apply civilian t oo l and die manufact uring
co ncept s t o milit ary hardware.
Recent ly, while on vacat io n, I t oured a plant where o ld or damaged
Bradley fight ing vehicles are rebuilt . People in t he t ooling indust ry
so met imes t ake o dd vacat io ns. But not surprisingly most of t he
management peo ple I met had previously worked in t he t oo l and die
indust ry, and t he jo bs t hey were performing in t hat part icular plant were
o nes we co uld also do in our plant . The t oo l and die indust ry also provides
excellent employment o ppo rt unit ies. Proficiency in t he t oo l and die t rade
t akes o ver t en years t o acquire.
Training begins wit h four t o six years of o nt hejo b t raining and in
o ur co mpany over 90 credit hours of college classes. To ol and die
emplo yees somet imes cont inue t heir educat ion and receive associat es or
bachelors degrees in engineering. In fact , many manufact uring engineers
and managers have t o ol and die backgrounds. Because of t heir rigo ro us
t raining and unique skills, die makers are usually well compensat ed. I
perso nally believe t heir int ense t raining and t he rarit y of t heir skills
just ifies t heir income.
The t oo l and die indust ry is faced wit h o vercapacit y result ing in
severely depressed pricing. One of t he main reaso ns for t his o vercapacit y
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is increased foreign compet it io n and o ur cust omers' desire for t he lowest
available price.
The highest levels o f t ool and die knowledge t oday are based in t he
Unit ed St at es, Canada, West ern Europe and Japan. These count ries are no t
a co mpet it ive t hreat since t heir cost s are very similar t o ours and local
co mpanies usually have an advant age because of bet t er underst anding t heir
cust o mer and shipping cost s.
Many nat io ns, especially in Asia, want t o ent er t his relat ively
exclusive club because t hey realize it 's import ant for t heir fut ure and t hey
have a lo ngt erm co ordinat ed st rat egy.
Unfort unat ely, in our indust ry, lo w init ial cost s do not t ransfer int o
t he lo w t o t al co st s. Our indust ry has had many cases o f t ools and dies
made in Asia, which were built improperly which had t o be fixed at an
expense far great er t han any money t hat wo uld have been saved. However,
st ill t hese low bids have eroded our pricing st ruct ure of t he U.S. t o ol and
die co mpanies and make it nearly impo ssible for us t o be profit able.
Mo re specifically, t he t hreat imposed by China. The Chinese
government has t arget ed invest ment in it s t o ol and die indust ry in recent
years. The majorit y of China's major t oo l and die plant s did not exist t en
years ago. Many econo mist s and indust ry expert s claim t hat t he Chinese
government has subsidized t his growt h by providing capit al equipment and
plant facilit ies at lit t le or no cost t o t hese new companies.
I'm not an expert on t his so I'll let o t hers speak t o t hat point . I do ,
ho wever, know t hat t hese plant s are equipped wit h modern t oo ls and have
a large number o f emplo yees who earn ridiculously low wages by American
st andards. They also do not enjo y t he benefit s t hat American employees
enjo y.
At t he present t ime, t he skill and t echnology in China is far behind
t hat o f t he Unit ed St at es and ot her majo r t ool pro ducing co mpanies. A
Chinese die sho p wo uld employ t hree t o five t imes as many people t o
pro duce o ur annual volume o f wo rk. But t his inefficiency can easily be
hidden by t heir subdollar an hour wage rat es.
In fact , I was t o ld by a former official of t he Chinese government
t hat t hey want t o pro mo t e excess employment in t he t o ol and die indust ry
so t hat t hey have mo re skilled jo bs and more t rained people for t he fut ure.
The Chinese are wo rking diligent ly t o learn and I feel t heir main means o f
learning is t o fo rm part nerships wit h high t ech co mpanies.
Our company has been encouraged t o do t his by so me of our
cust o mers. I fear, however, t he Chinese companies will abandon t heir
part ners and replace t hem in t he market place as soon as t hey have learned
enough from t hem. For t his reason, At las Too l has avoided seeking
part nerships wit h lo wwage count ries.
Many eco nomist s also believe t here is a currency manipulat io n
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pro blem. Again, I leave t his t o t he expert s. I t hink t hat in t he fut ure,
Chinese wages will cert ainly increase quicker t han wages in t he rest of t he
wo rld. This coupled wit h t heir labo r inefficiency could some day make
t heir t ools mo re expensive t han o urs.
It is imperat ive for t he Unit ed St at es t o have a healt hy t ool and die
indust ry. Our posit ion as a hight ech manufact uring count ry depends on it .
The loss of t o o l and die emplo yment would also be det riment al and I
believe t he Chinese are current ly working and planning t o become a
dominant fo rce t o t ake o ver t his indust ry.
When t hat happens, we will be powerless t o cont rol our own t o oling
and product io n co st s and we will be complet ely at t heir mercy. The t oo l
and die indust ry is a t echnological leverage point fo r American
manufact uring co mpet it iveness.
I t hank yo u fo r t he opport unit y t o t est ify t oday. I welco me any
quest ions yo u have and I appreciat e your indulgence in let t ing me go a
minut e over. I'm sorry abo ut t hat , but I t end t o be longwinded.
MR. SCHMIDT: Please feel free t o cont act me sho uld any quest io ns
co me up at a lat er dat e.
Prepared Statement of Mark Schmidt, President
Atlas Tool, Inc., Roseville, Michigan
Company History and Brief Overview
Atlas Tool, Inc. was founded in Roseville, Michigan in 1962 by my late father. We have 265 people and
we are a leader in the manufacture of automotive stamping dies. We also provide prototype parts and
contract machining. Typically, it requires between three and six different dies to complete a part.
Almost everyone has been in a vehicle with parts made by dies from Atlas Tool. We are considered a
leader in the application of new technology. Over 95% of our employees are highly skilled in the specific
disciplines used by our industry.
Our specialized ability to apply hightechnology has also led us to become a machining subcontractor for
some notable government projects. We machined large turbines for the “F22” Joint Strike Force Fighter,
and all of the major rotational parts of the Space Shuttle Main Engine.
We are currently working on research projects with the Center for Automotive Research, NIST Advanced
Technology Program, the University of Michigan, the AutoSteel Partnership, an equipment
manufacturer, and four software development companies. In every year since 2001, our industry has faced
extreme overcapacity and severely depressed prices. Some of the reasons for overcapacity will be
addressed later in this testimony.
The Importance of the Domestic Tool and Die Industry
The modern tool & die industry is based on the application of high technology. In the last 20 years, the
tool and die industry was at the forefront of many widelyused new manufacturing technologies. Some of
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these technologies are: Computer Aided Design, Manufacturing, and Engineering (CAD/CAM/CAE);
electrical discharge machining which cuts steel with an electric arc; laser cutting of sheet metal; computer
aided solidmodel design of tools; computerized simulation of sheetmetal formability; and “whitelight”
scanning technology which takes 3dimensional pictures of solid objects.
The ability to produce advanced tooling is vitally important to the economy of the United States. Tools,
dies and molds are used to produce virtually every manufactured product. The method and execution of
the tooling controls the cost, quality and efficiency of the production process. The North American Tool
& Die industry is especially adept at this type of process development.
A capable tool & die industry gives the United States an incredible advantage in the ability to efficiently
manufacture a wide variety of products. When the Second World War started, we tooled up the “Arsenal
of Democracy” with unbelievable speed. We were not able to do this because of an abundance of cheap
labor. Our accomplishments were based on the wealth of our knowledge to apply civilian tool & die
manufacturing concepts to military hardware.
Recently, while on vacation, I toured a plant where old or damaged Bradley Fighting Vehicles are rebuilt.
They are made I found the plant had assimilated and organized the most appropriate technologies into
their process. Not surprisingly, most of the management people I met had previously worked in the tool &
die industry.
The tool & die industry is also provides excellent employment opportunities. Proficiency in the tool and
die trade takes over 10 years to acquire. Training begins with four to six years of onthejob training and
over 90 credit hours of college classes. Tool and die employees sometimes continue their education and
receive associates or bachelor’s degrees in engineering. In fact, many manufacturing engineers and
managers have tool & die backgrounds.
Because of their rigorous training and unique skills, diemakers are usually well compensated. Their
earning potential is often greater than that of a bank executive. While a diemaker’s earning potential may
surprise many people, I personally feel that their intense training and the rarity of their skills justifies their
income.
Tool and Die Industry Today
The tooling industry today is faced with overcapacity resulting in severely depressed pricing. One of the
main reasons for this overcapacity is increased foreign competition, and our customer’s desire for the
lowest price.
The highest levels of tool & die knowledge and technology today are found in the United States, Canada,
Western Europe, and Japan. Companies in these areas compete very closely since they all have similar
cost structures, but local companies usually have an advantage because of the costs and delays due to long
distance shipping. Also, tool makers in each region are more familiar with their local customers’ specific
needs. . The U.S. competes well tool & die companies in these advanced regions.
Many nations, especially some in Asia, want to enter the relatively exclusive club of tool & die excellence.
They realize the importance of a worldclass tooling industry to their economy, and they recognize that
they will need a longterm, coordinated strategy. Although they possess lower technology and experience,
this is more than compensated by their wages. Our company’s customers have been impressed with their
low bids, and are encouraging their tool & die suppliers to develop partnerships with companies in low
wage regions.
Unfortunately, in our low bids do not often translate into low total tooling costs. This is due to mistakes
made by inexperienced companies. Many of the tools placed in lowwage countries have performed
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poorly. The US tool & die industry has worked to repair tools improperly made by socalled “lowcost”
countries. The need for these repairs has often been much more costly that the amount which was saved
by the low initial bid. There are also costs of delayed vehicle launches, increased tool maintenance and
lower productivity.
Some of the companies that have suffered the most from these problems have made policies requiring
their tools to be made in North America. A study currently in progress by the Center for Automotive
Research in Ann Arbor, Michigan has estimated that placing work with low initial bids results in life
cycle costs which are actually 3843% higher than work which is placed in a collaborative manner with
high performing suppliers.
Most customers however remain enamored with the promise of low prices made by bidders from lowwage
countries. Another facet of this problem is fragmentation in our customers’ organizations. The
Purchasing Department employees may receive large bonuses for the cheap initial placement of work.
Costs due to poorly built tools are often suffered by Manufacturing, Engineering and Sales Departments.
These low bids have eroded the pricing structure of US tool & die companies, and make it nearly
impossible for us to be profitable.
The Threat Imposed by China
The Chinese government has targeted investment in its tool & die industry in recent years. The
majority of China’s tool & die plants did not exist 10 years ago. Many economists and industry analysts
claim that the Chinese Government has subsidized this growth by providing capital equipment and plant
facilities at no cost to these new companies. I am not an expert on this, so I will let others speak to this
point. I do know however that these plants are equipped with modern machine tools and have large
numbers of employees. These employees earn wages that are ridiculously low by American standards.
They also lack almost all of the benefits American employees enjoy.
At the present time the skill and technology in China is far behind that of the major tool
producing countries. I spoke with a man who was formerly employed by the Chinese Ministry of
Machinery and Tooling. After visiting our company, he said that a Chinese die shop would employ three
to five times as many people to produce our annual volume of work. This inefficiency is easily hidden by
the less than dollaranhour Chinese wages, there no motivation for them to improve labor utilization. In
fact this former official told me that the Chinese government wants to promote excess tool & die
employment to provide more skilled jobs.
The Chinese are working diligently to learn. Their main means of learning is to form partnerships with
hightech companies to learn their methods. I fear however that Chinese companies will abandon their
partners as soon as they have learned enough from them. They will then use their new knowledge and
low wages to replace their former partner in the marketplace. Again, I am not an expert in this area, but I
am certain that many others can testify to this point. This is why Atlas Tool has avoided seeking
partnerships with lowwage countries.
Many economists also believe that China is manipulating its currency to gain price advantages. Again,
this is not my field of expertise, but if it could be stopped, our pricecompetitiveness would benefit.
In the future Chinese wages will certainly increase much quicker than in developed countries. This,
coupled with their labor inefficiency, could make Chinese tools much more expensive than those currently
produced in the US.
Conclusion
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It is imperative for the United States to have a healthy tool & die industry. Our position as a hightech
manufacturing society depends on our ability to efficiently produce products of all types. The tool & die
industry provides this expertise. Without a worldclass tool & die industry, we will lose our
manufacturing advantage. We would also suffer a great loss to our ability to produce the equipment
necessary to defend our country.
The loss of tool & die employment is also detrimental to our economy. Tool & die employees are highly
trained, skilled people who are compensated accordingly. Without a healthy tool & die industry, hundreds
of thousands of people would be forced to seek lesser employment.
I believe that the Chinese are currently planning to become a dominant force in the worldwide tool & die
industry. They can use their current lowwage advantages to drive companies in other countries out of
business. When this happens they can dramatically increase their prices because they will have little
effective competition.
In the future their wages will increase much faster than ours, and their tools will be more expensive than
those currently produced here. Unfortunately the domestic industry may be gone in the time it takes for
this to happen.
If China is allowed to dominate the tooling industry, the United States will be powerless to control our
tooling and production costs. Also, China will use its new tool & die skills to benefit its own industries
rather than ours.
The tool & die industry is a technological leverage point for manufacturing competitiveness. As
representatives of our government and guardians of America’s future, I ask you to take all appropriate
steps to keep this essential industry alive.
I thank you for the opportunity to testify today, and I welcome any questions you may have. Please feel

free to contact me in my office if you need any further information.
Panel VI: Discussion, Questions and Answers
HEARING COCHAIR WESSEL: We will do so and t hank yo u. If
yo u co uld give me somewhat of a pict ure o f bot h of your companies?
What 's t he average age of yo ur workforce? Are new people coming in?
Yo u t alked about t he apprent iceship pro gram and how, I guess, t he Big
Three had st olen some o f t ho se employees. Wit h t heir downsizing, are t hey
giving t hem back now and is t here any work for t hem? As a familyowned
business, yo u're not subject t o t he same market pressures, alt ho ugh clearly
yo u have banks and o t her financial pressures.
How do es t hat figure in? If you could t alk a bit about yo ur
businesses and how you may be somewhat different t han ot hers?
MS. MONCRIEFF: Act ually t hat 's not a t rue st at ement t hat we don't
have financial pressures.
HEARING COCHAIR WESSEL: No, I meant from st o ckho lders.
Yo u may have family st o ckholders.
MS. MONCRIEFF: I purchased t he company fro m my fat her for
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$1.3 million six years ago. So I was no t a gift ed child.
HEARING COCHAIR WESSEL: Underst and.
HEARING COCHAIR BLUMENTHAL: You seem very gift ed
act ually.
HEARING COCHAIR WESSEL: I meant t he
MS. MONCRIEFF: So, no, act ually I t hink we have more financial
pressures because t he larger t he company t he mo re t hey are able t o
wit hst and all t he pressures t hat we're feeling now out t here in t he market .
I mean bigger co mpanies can absorb it more so t han we can.
HEARING COCHAIR WESSEL: But in t erms of how you do ret urn
o n invest ment , underst anding it 's your invest ment , but are you able t o look
a lit t le longert erm? Are yo u subject t o capit al co nst raint s?
MS. MONCRIEFF: Oh, yes, all of us in o ur indust ry. It 's everybody
in t he indust ry. I t hink a year ago t he average profit was a half a percent
in t o o l and die. It 's t hat bad. People are eit her breaking even or losing
mo ney in t he indust ry, and t he pro blem, as I see it , and I've had fo ur
co mpanies call me in t he last four mont hs, including someone's mot her,
who said her exhusband and t wo sons had 160 emplo yees, t hey're down t o
t he t hree o f t hem. And t hey can't afford t o be in business. They have next
t o no business and t hey do n't even know how t o get o ut of business
because t hey didn't plan for t heir fut ures.
What I've found, and it 's been ast ounding t o me, I didn't come fro m
t he t o ol and die indust ryI have an engineering degree; I wo rked for
Fo rt une 500 companieswhat I found is t hat years and years ago, t he t oo l
and die indust ry was a very lucrat ive business, and I can look at my fat her.
He was a second generat ion, and excuse me, Mark, if yo u're seco nd gen,
but he did not plan and make invest ment s. Their t ho ught in t he back o f
t heir minds was t hat we have t his t rade, t his invaluable t rade, we have t his
equipment , yo u know, and our cust omers just love us. 95 percent of my
business was GM direct when I bought t he company. It 's now one percent .
So t hey banked o n t he fact t hat t hat business would keep walking in
t he doo r, and when t hey go t ready t o ret ire, t hey would sell t he co mpany.
The o nly t hing t hey have now, t oo l and die owners, you have skilled
emplo yees, you have a building and equipment , and you have cust omers.
The equipment is changing so fast t hat mo st of t he equipment most t hose
co mpanies o wn is wo rt hless.
They wo uld get auct ion o r gavel price. If t hey go out of business,
t heir emplo yees go find ano t her job ormany of my emplo yees act ually as I
went t hro ugh a t ransit io n phase left and t hey go int o insurance, t hey
beco me t ruck drivers. They've been so disillusioned in t his business t hat a
lo t of t radesmen get out of it .
But in ot her words, t hey've worked and built up t his company t hat 's
pret t y much wort hless and t hey didn't plan for t he fut ure. There's a lo t of
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dest it ut e t oo l and die o wners out t here from what I've seen and have
perso nally t alked t o.
HEARING COCHAIR WESSEL: If we had t o ramp up product io n
fo r what ever reaso nlet 's t alk about a conflict would yo u be able t o find
t he skilled peo ple t o bring in and do t he work t hat needed t o be do ne?
Again, what age are we loo king at ? Are we at risk not only because of t he
financial pressures, but because of t he downsizing of t he indust ry, of losing
capacit y t hat we can't ramp up wit h a surge need?
MR. SCHMIDT: I'm going t o go back t o yo ur last quest ion.
We are in quit e a different posit io n. Being a familyowned business, yo u
are correct in yo ur assumpt ion. We are immune t o t he short t erm
pressures. I have an engineering degree and an MBA and I don't use t he
MBA so much, especially not t he finance part .
But we are lo o king at t he long t erm. We're not looking at quart erly
pro fit s. It 's one of t he reasons we're st aying out of China is because we
want t o survive in t he long t erm. Unt il 2001, fro m 1962 unt il 2001, nearly
40 years, o ur company had never had a lo sing year. We didn't have a lot o f
years where t he ret urn was very great , but we had consist ent ret urns o f
usually t he single digit s and t he percent age point s on sales, almost always
t he single digit s.
Since 2001, we haven't made any money. In 2001, we had 350
emplo yees. Today we have 265. We have never in our hist ory unt il even
including t oday laid anyo ne off. We've kept people employed and done
what ever we could t o st ay busy. So we have cont ract ed and not replaced
peo ple t hat leave our indust ry because t hey want a different pro fession,
t hey ret ire, for so me o t her reason t hey don't work out . We have just
o rganically co nt ract ed t o t his point .
But we consider t he losses we've suffered since t hen t o be an
impo rt ant invest ment in our peo ple which are our mo st import ant reso urce.
Our average age is increasing dramat ically because we haven't hired any
peo ple, and unfo rt unat ely our co st s are increasing t oo, because generally in
o ur t rade, newer peo ple st art wit h lo wer wages and learn from t he o t her
peo ple.
we don't have t hat many newer people. So t he ot her people's wages
keep going up. Training is no t a pro blem for us. We do our own t raining;
we prefer t o do our own t raining. We do n't want people t hat are t rained in
o t her places because we have special met hods t o do t hings and we want
peo ple t o learn o ur way.
HEARING COCHAIR WESSEL: Commissio ner Blument hal.
HEARING COCHAIR BLUMENTHAL: t hank you very much. I
have t wo separat e quest ions, one for each of you. One t o Mr. Schmidt . I
act ually do n't t hink it 's so st range t o visit a Bradley vehicle.
I would do t hat on my vacat ion.
161
MR. SCHMIDT: On your vacat ion?
HEARING COCHAIR BLUMENTHAL: Yes. That 's I guess if
yo u're in t he policy field, you t ake st range vacat ions as well. You said
earlier in yo ur t est imo ny t hat yo u machined large t urbines for t he F22, yo u
lo o ked at t he Bradleys and saw t hat a lot of t hem were t oo l and die
indust ry.
The employees who had shift ed, if I underst o od yo u co rrect lyI
don't know if you heard t he t est imony earlier.
MR. SCHMIDT: Yes.
HEARING COCHAIR BLUMENTHAL: Okay. Do you share t hat
assessment ? The F22 is o bviously somet hing we're building in t he fut ure.
Is t hat somet hing t hat we have t he capacit y t o do cont inue at t he st at ed
aspirat ions o f t he Defense Depart ment ?
MR. SCHMIDT: That 's difficult for me t o speak t o. We o nly made
a few part s o n t he F22, maybe about five or six of t he majo r large t urbine
rot o rs. And we don't make t hem on product io n basis. A company wit h a
different skills
HEARING COCHAIR BLUMENTHAL: Right .
MR. SCHMIDT: different priorit ies makes t hem o n pro duct io n.
We made t he preproduct io n samples for t hat t hat t hey basedand t hen
t hey t ake our dat a, o ur informat ion, and t hen give it t o a product ion
o rient ed co mpany t hat produces t hose, and I don't know what t heir
capacit y is t o produce t ho se part s.
We o nly can produce very few o f t hem. We are no t t he company t hat
co uld do product io n of t he F22.
HEARING COCHAIR BLUMENTHAL: Take t he Bradleys; you say
t hat basically t he t ool and die wo rkers are really a dying breed, if what I
MR. SCHMIDT: Yes.
HEARING COCHAIR BLUMENTHAL: so is t hat somet hing t hat
say Bradleys are somet hing we're going t o need looking out .
MR. SCHMIDT: I do n't kno w how yo u'd make t hem wit ho ut a t o o l
and die indust ry.
HEARING COCHAIR BLUMENTHAL: So t his is a very immediat e
pro blem in t he sense t hat yo u can't
MR. SCHMIDT: I believe it is.
HEARING COCHAIR BLUMENTHAL: you need t o t rain t oo l and
die makers t oday in o rder t o keep making Bradleys in t he fut ure?
MR. SCHMIDT: I'm involved in a symposium t hat 's host ed by t he
Cent er for Aut omot ive Research in Traverse Cit y, Michigan in August .
That symposium has t he t it le "Will There Be a Domest ic To ol and Die
Indust ry Ten Years Fro m No w?"
HEARING COCHAIR BLUMENTHAL: And if t here is no t o ol and
die indust ry, t here are no Bradleys?
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MR. SCHMIDT: t he consensus is probably not .
MS. MONCRIEFF: Yes. The t ool and die indust ry, we make t he
t o o ls so t he st ampers can make t he part s.
HEARING COCHAIR BLUMENTHAL: Right .
MS. MONCRIEFF: So we're furt her down t he t ier yet , and t he
furt her do wn t he t ier, t he bigger t he squeeze.
HEARING COCHAIR BLUMENTHAL: I'm focusing on defense
it emsbut do you t hink t hat wit hout t he t oo l and die peo ple t rained in
t hese skills, ho w will we co nt inue t o make Bradleys?
MR. SCHMIDT: I don't know. If you look at t he 1920s in t he
Unit ed St at es, t he eco nomy was bo oming. People were making lo t s o f
cars, all kinds of t hings. Nobody was making t anks. Nobody was making
dest ro yers. Nobody was making fight er planes or bombers. No one was
doing any of t ho se t hings. The government didn't t o pay for a dormant
indust ry fo r product s t hey didn't need.
A lo t of peo ple were invo lved in making cars. Then in t he lat e 1930s
and early 1940s, peo ple st art ed t o need t hese t hings, and t hey t ook t he
same skills, t he same people, t hey knew how t o weld, t hey knew ho w t o
t o o l t hings, t hey knew how t o put t hings t oget her. Just moving somet hing
t hat 's huge is a special skill. Yo u cannot t ake an unt rained person and
mo ve somet hing t hat weighs 80,000 po unds, just moving it . You have t o
know what yo u're do ing just t o mo ve so met hing like t hat . And t hat 's just
an example o f one of t he skills t hat you need.
But being able t o weld and machine and all of t he different
disciplines t hat t hat t akes, we convert ed immediat ely t o t hat product ion
during t he war as an indust ry and t hen immediat ely aft erward away from it
t o civilian pro duct io n, but again using t he same skills.
HEARING COCHAIR BLUMENTHAL: And we're current ly at war,
but you've seen no at t empt t o t hink about how t o ramp up in case we need
t o in t erms o f producing t hese part icular vehicles; is t hat correct ?
MR. SCHMIDT: I don't know t hat we need t o ramp up product io n
o f milit ary hardware at t his t ime. That 's not an issue for me. It doesn't
seem t o be needed. It 's just a risk in case somet imes we do. I can't t ell
yo u if t hat 's needed o r no t , but what I want t o impress o n you, it isn't just
defense. If we lo se t he t ool and die indust ry, we lose our expert ise in
being able t o make t hings.
If we are not go o d at making t hings, t hat has serious consequences.
That means we're going t o be a secondrat e manufact uring co unt ry. We
can't compet e on t he basis o f low wages. And if we can't compet e because
we can make t hings bet t erDURA can compet e fairly well, as Mr. Dent on
point ed o ut , wit h t he Chinese. They're fairly close t o t he Chinese in co st
and he feels currency manipulat ion is t he o nly difference.
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The reason for t hat is DURA employees make a lot more in t he
Unit ed St at es t han Chinese emplo yees do , but t he reason for t hat is t hat
DURA emplo yees in t he Unit ed St at es know how t o make t hings a lo t
bet t er. And if t he American t oo l and die indust ry disappears, we will have
t o go t o China t o get our t o ols and dies and be happy wit h what ever t hey
give us at what ever price t hey charge us.
Keep in mind when t hey have a mono poly t hey might be cheap
no wt hey wo n't be cheap t hen. Sorry.
Mullo y.
COMMISSIONER MULLOY: Thank yo u very much for being here,
bo t h of yo u. Ms. Moncrieff, you ment io ned t hat you had worked for a
Fo rt une 500. What yo u're t elling us is enormously import ant t o t he
nat io nal int erest , it wo uld seem t o me.
Do you t wo sit t here and wo nder why policymakers in Washingt o n
don't pay mo re at t ent ion t o t his pro blem? Ms. Moncrieff, yo u t ell us in
yo ur t est imony o n page five, it 's as if our government and t he mult inat ional
co mpanies view small co mpanies as a rat her expendable commodit y.
But what you're t elling us, t his may be expendable co mmodit y, but
it 's an eno rmous import ance and it 's really no t expendable in t erms of o ur
nat io nal int erest .
You've been in a Fort une 500why do you t hink t hat t hose guys are
driving t his policy o f mo ving our indust rial base across t he Pacific Ocean
int o China? What is your t ake on what 's go ing on here, bot h of you?
MS. MONCRIEFF: I do n't t hink t he t ool and die indust ry has
enough lobbyist s, perio d. They list en t o t he squeaky wheel and t hose t hat
co nt ribut e t o t heir campaigns.
COMMISSIONER MULLOY: What was t hat ?
MS. MONCRIEFF: The small businesses can't afford t o affect
co ngressmen. They can't cont ribut e t o t heir campaigns, and we don't have
lo bbyist s.
MR. SCHMIDT: Because we are by nat ure small. I t hink t here is a
diversit y o f focus where larger mult inat ional companies are ext remely
fo cused o n short t erm profit s because t hat 's ho w t heir shares are valued.
We are not fo cused on short t erm pro fit s because we are family
o wned companies. We can t end t o t ake t he longer view. I t hink in t he
lo ng t erm, t his will be very det riment al, but a lot of our cust omers and o ur
cust o mers' cust omers are scrambling right now.
COMMISSIONER MULLOY: I t hink you guys are absolut ely right ,
and I t hink what goes on is t he mult inat ional is fo cused on t he short t erm
pro fit and t heir shareho lders. They have t he money t o hire t he lo bbying
firms, t he law firms, t he academics who publish all t hese papers abo ut t he
benefit s of free t rade, and t hen we go t an $800 billion current account
164
deficit , moving t o ward a t rillion.
The real st ory is hidden down where you're t elling us what is going
o n here, but you can't get it up int o t he policymaker level t o make t hem
underst and what is really going on here. I just urge you t o get aft er yo ur
lo cal congressman and senat or because t hey will, I t hink, underst and t his
st uff.
MS. MONCRIEFF: My congressman is Dale Kildee. He's t he only
o ne t hat 's never vot ed fo r a free t rade agreement in Congress.
COMMISSIONER MULLOY: He submit t ed t est imony.
MS. MONCRIEFF: Yes.
COMMISSIONER MULLOY: And he not ed Congressman Upt on so
it 's a bipart isan issue. It 's not just a o nepart y issue. It 's a bipart isan issue
t o get aft er t his t ype o f pro blem.
MS. MONCRIEFF: Part of t he problem, t oo but I've been t o
Washingt on many, many t imes. I've t est ified many, many t imes. when I
have brought a group t o Washingt on, we act ually had a guest speaker from
t he administ rat ion and U.S. Treasury Depart ment , and he basically said t hat
currency manipulat io n is no t going on in China.
I also had someone from t he Co mmerce Depart ment , someone very
high up in t he Commerce Depart ment who quit recent ly when Bush was
reelect ed. But he was in t he meet ing, t elling us all business is go od, it 's all
goo d, he almost got railroaded o ut of t he room, and t hen basically admit t ed
t o us aft er some of us chased him up t he hall t hat business is really bad.
We know it 's bad.
COMMISSIONER MULLOY: That wo uldn't be t he Under Secret ary
fo r Int ernat io nal Trade; wo uld it ?
MS. MONCRIEFF: I did not say t hat . St rike t hat .
COMMISSIONER MULLOY: Mr. Schmidt .
MR. SCHMIDT: I'd like t o pose t o you a rhet orical quest ion. If t he
t o o l and die indust ry isn't t hat impo rt ant because it 's all small and most ly
familyowned companies, why would t he Chinese be int erest ed in building a
t remendo us number o f new manufact uring plant s when t here is not yet any
demand fo r t hem?
In most eco nomies, capacit y fo llo ws demand. Here we see a clear
case of where capacit y not only of plant s but of workers is preceding
demand, where somebody who used t o wo rk in Chinese Minist ry o f
Machinery and To oling t old me t hat t hey want t o have many more
emplo yees t han t hey need because t hey figure in t he lo ng run it 's going t o
be go o d for t heir count ry.
They're seeing so met hing we aren't , and I agree wit h t he speakers
who were saying befo re t hat we lack a longert ermDr. Ronis ment ioned
t hat in defense, we lack a longert erm focus. But in so ciet y, we lack a
lo ngert erm fo cus, not only our go vernment but our consumers, our
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co mpanies. Everyone want s a short t erm focus.
COMMISSIONER MULLOY: Thank yo u very much.
HEARING COCHAIR WESSEL: Co mmissioner Broo ks.
COMMISSIONER BROOKES: We're focusing on China and t hat
makes sense obviously since we're t he U.S.China Commissionbut , Ms.
Mo ncrieff, yo u ment ioned t hat you wereI don't know if it was a cavalier
remark or off t he cufft hat you opposed cert ain free t rade agreement s wit h
cert ain co unt ries. Is t hat because t here's a t hreat t o your indust ry or is it a
principled t hing? Is t here a t hreat t o t he t o ol and die indust ry beyo nd
China?
Are we t alking about India? Are we t alking about Viet nam? Where
else are we t alking about besides China?
MS. MONCRIEFF: I just t hink we need t o send t he message t hat
we're not going t o have any more free t rade agreement s unt il we can
enforce t he o nes t hat we have in place, fro m t hat st andpoint . If we could
get and enforce t he t rade agreement s, st op t he currency manipulat io n, if
t he government reco gnized t hat we have problems wit h manipulat ion o f
currency and t he ot her issues t hat have been bro ught up t o t hem, t hen when
we st art ed addressing t hose problems and co ming up wit h great solut io ns, I
t hink t he U.S. could be co mpet it ive. It 's just it 's so st acked against us.
COMMISSIONER BROOKES: Is t here any o t her fo reign
co mpet it io n t o t he indust ry besides China?
MS. MONCRIEFF: Brazil.
COMMISSIONER BROOKES: Brazil?
MS. MONCRIEFF: Yes, t here are. Brazil, Japan, Europe. They
bring in t o olingGermany. There are t o ols t hat co me int o t he Unit ed
St at es fro m t here. Yo u could read t he ITC report , t he 2002 322 hearing
t hat o ut lines all t he co unt ries t hat we compet e against . There's a number
o f t hem. But China right no w is t he biggest t hreat .
MR. SCHMIDT: China is t he o ne t hat worries me t he most . I'm
co nvinced we can compet e very effect ively wit h Europe. We can compet e
very effect ively wit h Japan. The only way t hat Japan has been able t o
co mpet e wit h us lat ely is because t hey will source work t o China and get
mo st o f t he work do ne in China and t ouch it up and fix it up in Japan and
send it here. That 's t he only way because t hings made in Japan versus t he
Unit ed St at es, t heir co st s are similar t o ours.
They pay t heir people similar t o what we do, but t he co st o f
co o rdinat ing t oo l building in Japan is expensive. And as Dr. Helper
ment io ned, t here are advant ages t o being local. For example, we worked
wit h Fo rd Mot o r Co mpany on t he development o f part s for t he F150
t ruck. We worked very closely wit h t he product designer. The init ial
co ncept for so me of t he part s were no t manufact urable.
We helped him change it int o somet hing t hat worked and st ill was
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pleasing t o him. This is a very common process. But difficult t o do over
t he o cean. So if you're compet ing wit h people t hat have similar cost s, t he
lo cal companies have t he advant age. The ot her companies just plain lack
o ur expert ise so t hey might be effect ive co mpet ing in niches t hat aren't as
sensit ive, t hat are lo wer t echno lo gy niches of our indust ry, and t hat has
happened.
Po rt ugal for a t ime was very act ive in producing small inexpensive
mo lds, but t hat 's waned mo st ly now. Those are short t erm in nat ure. And
I t hink we can handle t hose t hreat s. China wo rries me because I t hink
we're being t arget ed and it 's a concent rat ed effort t o eliminat e us from t his
indust ry.
HEARING COCHAIR WESSEL: Co mmissioner Houst on.
COMMISSIONER HOUSTON: Yes, I t hink you're right . I'm sure
we are being t arget ed in t his area as well as many ot hers from China, but I
have a quest ion. It fo llo ws up a lit t le bit on what Co mmissioner Brookes
was asking. There are a lo t o f pressures on your indust ry t hat are causing
t he 28 percent o f t he t oo lmakers closing t he doo r since 1998, as Ms.
Mo ncrieff ment io ned.
I wo uld guess t hat t here are domest ic and int ernat ional pressures.
Do mest ic, so me of t hemI'm just guessingI don't know yo ur indust ry
so me indust ries deciding t o inso urce and do it inhouse, and also I would
guess t he est at e t ax has t aken a very heavy t oo l on your business as it has
wit h so many businesses in t he U.S.
if each o f yo u were t o make a pie o f t ho se pressures t hat have caused
such a decline in yo ur indust ry here, I don't need t o know where all t he
o t her lit t le pieces of t he pie are, but how much of t hat would you say bot h
fro m t he do mest ic and t he int ernat ional pressures in t ot al, how much o f
t hat is China? Ho w much do yo u see of t hat pie being China? Is it five
percent , t en percent , 90 percent ?
MS. MONCRIEFF: it 's hard t o pinpoint . We're get t ing pricing
pressures and t o say t hat it 's all coming fro m ChinaI t hink part of it , t oo ,
in our indust ryI t hink China is a majo r fact o rbut t here's a lot o f
businesses o ut t here. The indust ry has shift ed in it s t echnolo gy and some
co mpanies have no t shift ed wit h it it 's a race t o t he bo t t om. Everybody
just keeps cut t ing t heir prices, cut t ing t heir prices, cut t ing t heir prices, just
t o st ay in business.So we're kind of cut t ing each o t her at t he same t ime,
t o o . There is some of t hat going on. What percent age is what , I really
can't speak t o. All we know is we're get t ing t remendous pricing pressures.
To be paid t he hourly rat e t hat we're get t ing paid wit h t he invest ment s
t hat we have in our buildings and o ur equipment and t he wage level t hat we
pay, it 's no t sust ainable, period. It 's just not .
MR. SCHMIDT: I don't consider t he est at e t ax t o be a burden o n
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o ur business. I feel t hat it is my job and it 's incumbent on me t o creat e
mo re value in t he business so t hat we can pay t hat est at e t ax. I do no t
co nsider t hat as a problem. The majo r problem in our indust ry, as Laurie
point ed out , is t he pricing, t he ero sion o f pricing, and it 's due t o a couple
o f fact ors.
China is t he driving force behind t hat , but a port ion of t he pricing
ero sio n is t he race t o t he bot t om t hing. There are companies in o ur
indust ry t hat have no t adapt ed t he newest t echnologies, t hat in previous
t imes every no w and t hen our indust ry would go t hrough a t echnological
change. The co mpanies t hat didn't keep up wit h t hat change wo uld whit her
and die or t hey'd get on board. I'm sure Dr. Helper would say t hat t hat 's a
healt hy t hing fo r an eco nomy and I agree wit h t hat .
But t he fact t hat we have t hese t wo fact ors happening at t he same
t ime makes it worse, and t he overemphasis on price, it 's act ually perverse
no w in t hat so me of t he lowert ech companies are bidding ext remely lo w
prices, and t hey're t he first ones t o part ner wit h Chinese companies because
t hey're no longer able t o co mpet e o n t heir own. And t hat 's happened in o ur
indust ry. So me of our co mpet it ors have part nered wit h Chinese companies
quit e frankly because t hey're no longer viable in making t ools on t heir own,
but wit h t he Chinese capit al influx and wit h t he Chinese cheap labo r
advant age, suddenly t hey can quo t e cheap prices, but t hey are lower in
t echno logy.
COMMISSIONER MULLOY: Are t hey making t hem here or t here?
MR. SCHMIDT: They are making t hem t here wit h some of our
knowledge and being fixed and repaired here.
MS. MONCRIEFF: There are some companies bringing t he det ails
o r t he gut s o f t he t ool o ver fro m China and o t her co unt ries, Korea, and
t hen t hey are assembled in t he U.S. also.
MR. SCHMIDT: But in a mat t er of four or five years, t hose
co mpanies will be gone. This is a very bad st rat egy because once t he
Chinese are est ablished in t he market place, t hey will make sure t hey t ake
st eps t o beco me known wit h t he cust o mers, t hey develo p t he skills, t hey
will abandon t he empt y shells of t heir part ners, which really will be empt y
shells because t hey're no t producing anyt hing here anymo re.
COMMISSION VICE CHAIR BARTHOLOMEW: But , Mr. Schmidt ,
do yo u t hink t hat your co lleagues who have t aken t hat st rat egy reco gnize
t hat t hat 's what 's going t o happen and t hey're just so rt o f
MR. SCHMIDT: It do esn't mat t er; t hey're dying. This is t he only
way t o prolo ng t heir life.
COMMISSION VICE CHAIR BARTHOLOMEW: This is t he only
t hing t hat prolo ngs t heir life. And are t hey t hen meanwhile making o t her
plans abo ut what t hey're going t o do wit h t heir
MR. SCHMIDT: I assume t hey're making plans t o invest t heir
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earnings in ot her indust ries.
COMMISSION VICE CHAIR BARTHOLOMEW: Thank you bot h
very much. This is for us one of t he benefit s of get t ing out of Washingt o n
is t o hear fro m t ho se of you who are dealing wit h t hese challenges and
t rying t o maint ain yo ur wo rkforces here.
One of t he t hings t hat we always find helpful is suggest ions as t o
what we can do. Obvio usly, t hings like currency valuat io n, t here are a
number o f people who are fight ing on t hat front , so far not successfully.
But if t here are ot her t hings we can do t o help part icularly small and
mediumsized businesseswe've been concerned t hat small and medium
sized businesses don't have access t o so me of t he t rade remedies t hat t he
big co mpanies do because you don't have t he kind of deep pocket s, where
yo u can ent er int o a long process, especially when you know t hat t he ITC
might rule o ne t hing and no t hing ends up happening.
What can t he federal government do t o help you? What is it t hat you
wo uld be encouraging in t erms o f st eps t hat can be t aken t o help you
survive for t he healt h o f o ur nat ional economy?
MS. MONCRIEFF: Again, t rade policies, we need t o enforce t hem.
We need t o make sure t hat China plays by t he rules and we have a level
playing field. I t hink t hat 's just huge, t he currency manipulat ion t hing, and
I t hink t raining is a huge issue.
There's so me grant programs o ut t here. We act ually got a grant in
Genesee Co unt y, but t oo oft en co mmunit ies like t hat focus on t he st uff
t hat 's easy. They're t raining in ret ail and you know all t hese t ouchyfeely
t hings t hat are easy t o t rain in. It 's difficult t o put t oget her t raining
cent ers in an indust ry like ours. So a lot o f people just shy away from t hat .
There are so me good t raining cent ers in t he U.S. We're act ually
wo rking o n t rying t o mimic some of t hose and t rying t o enco urage t he
int erest t here in do ing t hat .
COMMISSION VICE CHAIR BARTHOLOMEW: Mr. Schmidt ,
suggest ions?
MR. SCHMIDT: If t here is a currency manipulat ion, if you could
st o p t hat , t hat wo uld be great ly appreciat ed.
COMMISSION VICE CHAIR BARTHOLOMEW: We've t ried.
MR. SCHMIDT: That cert ainly wo uld be helpful. I'm again not t he
expert on how t hat is occurring or how t hat mechanism works.
Int ernat ional currency fluct uat io ns is not my field of expert ise. If we are
co mpet ing against co mpanies t hat are subsidized by fo reign count ries, if we
are co mpet ing, t o me t hat seems t remendously unfair. If we can st o p t hat
kind o f co mpet it ion, t hat also wo uld be appreciat ed.
Just having yo u kno w our plight and what it co uld do t o t he rest o f
t he co unt ry. I do want yo u t o underst and t hat t ool and die is a leverage
point for t he rest of manufact uring. If you give away t he part t hat shows
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yo u how t o make t hings well, ho w can yo u just ify making t hings at all aft er
yo u can no lo nger make t hem well?
HEARING COCHAIR WESSEL: Co mmissioner Blument hal.
HEARING COCHAIR BLUMENTHAL: Yes, I have a followup t o
t hat , which is let 's say we did manage t o have success on t he t rade policy
fro nt and we really were o n a level playing field and we really had a free
market in t he sense t hat currency wasn't being manipulat ed and IPR
vio lat ions were being enfo rced, and we made sure t hat o t her companies
t hat didn't subsidize unfairly do you, bot h of you, believe t hat t he t oo l
and die indust ry in t he Unit ed St at es wo uld survive on free market forces
alo ne or would we need also t o engage in a subsidizat ion or indust rial
policy in t he Unit ed St at es?
MR. SCHMIDT: I'm against subsidizat io n on principle. It 's no t a
lo ngt erm po licy t hat 's viable fo r our count ry. We can't survive as beggars
get t ing hando ut s. If we can't pro duce value for t he American economy, if
we're unable t o do t hat , t hen we should shift o ur resources t o somet hing
else, but I t hink t hat we can.
There's one mo re piece t hat Dr. Helper ment ions t hat concerns me. I
t hink we can co mpet e very effect ively. Normally, wit h an economy
gro wing as rapidly as China's, you wo uld expect wages t o increase equally
rapidly. When it happened in Brazil, t hey had 100 percent a year inflat ion.
Yo u wo uld be expect ing t hat level of inflat io n in China.
It 's not happening. If it did happen and was allowed t o happen
nat urally, and you remo ved all t hese ot her barriers such as subsidizat ion,
currency manipulat io n, t hings like t hat , I t hink we can compet e ext remely
well because we can make a lot bet t er t o ols t hat are lot more product ive
fo r o ur cust omers.
By t he way, we are having some success in get t ing our cust omers t o
realize t hat . One o f o ur cust omers recent ly sourced a large program wit h
us even t hough it was a 20 percent cost disadvant age, but t hat was just t he
t ipping po int fo r t hem. If it had been 22 percent , we'd have lost it .
HEARING COCHAIR BLUMENTHAL: How about you, Ms.
Mo ncrieff.
MS. MONCRIEFF: I agree. I t hink our indust ry co uld compet e if it
were a level playing field. The only t hing t hat I t hink would be helpful, I
know t he go vernment invest ed in t hese MTCs all overwell, t he MTC paid
fo r t he building. And, you know, t he building doesn't do any go od in and
o f it self.
COMMISSION VICE CHAIR BARTHOLOMEW: MTC st anding
fo r?
MS. MONCRIEFF: The Manufact urers' Technology Cent ers. We
have one wit h Dale Kildee's name o n it , as a mat t er o f fact , in Flint , and
t hey put up a beaut iful building, but t hey have no equipment . As a mat t er
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o f fact , I donat ed so me old equipment t o t he building, but it 's old
equipment .
HEARING COCHAIR BLUMENTHAL: So besides t he level playing
field, you would encourage go vernment invest ment in t raining in t hese
cent ers?
MS. MONCRIEFF: They assist in t raining programs in ot her areas.
I t hink t hat t hat wo uld be an area of focus t hat would be helpful because
it 's so co st prohibit ive for voc eds and high schools and universit ies and
co lleges t o pay fo r t he equipment .
HEARING COCHAIR WESSEL: Co mmissioner Broo kes.
COMMISSIONER BROOKES: One of t he t hings t hat has always
made t he American eco no my co mpet it ive even t o day wit h higher fuel prices
and t hings is inno vat io n. How t echno logy driven is your indust ry and ho w
o ft en, wit h t he co mput er t o day, a PC, we're seeing changes about every six
mo nt hs. It 's probably fast er t han t hat . What kind of changes are we seeing
in yo ur indust ry in t erms of t echnology or is it rat her st at ic?
MS. MONCRIEFF: Can I answer t hat part of t he quest ion at least in
relat ive t erms in my company? I bought t he company in '97. We had five
co mput ers. I've go t 35 now and we've got predominant ly all CNC
machines, co mput er numerically co nt rolled. We run simulat ion so ft ware.
We buy CT Unigraphics, which are very cost ly by t he way, and of course
Unigraphics gives seat s of Unigraphics t o Chinese universit ies who pirat e
t ho se seat s. So t hat 's t he kinds of t hings. It 's a huge t echnological
advance in our indust ry. We're doing t hings very different , and I t hink t he
co mpanies t hat aren't do ing t hings very different are t he ones t hat are
already gone and are get t ing ready t o leave here pret t y sho rt ly.
If yo u aren't int o t he t echnologically advanced equipment at t his
point , you're pret t y much done.
MR. SCHMIDT: I t hink t hat 's t he key t o survival amo ng American
co mpanies and has cert ainly been t he secret t o our success. It 's o ne of t he
reaso ns I ment io ned all t he research pro ject s were invo lved wit h current ly.
Just some recent examples: t he manufact ure o f st yrofo am cast ing pat t erns,
so met hing we need t o make cast ings. We make it o ut of st yro fo am and you
bury t he st yro foam in sand. To make enough cast ing pat t erns t o supply our
co mpany t o o k t wo o f o ur suppliers appro ximat ely 33 people. Through
advances in t echno logy and a co mplet ely different met ho d t o make it t hat 's
based on comput er met ho ds and solid mo deling, we current ly make all o f
o ur o wn cast ing pat t erns wit h eight people.
That 's just o ne example. We are const ant ly applying various
port io ns o f t echnology t o o ur indust ry. Right now we're focused on
pro ject s t hat allo w us t o process highst rengt h st eel more effect ively
because t hat 's in demand by our cust omers. Project s t hat allow us t o
simulat e more accurat ely. We know what a t o ol will do before we build it
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no w, whereas previo usly it was mo st ly guesswo rk and art . Now, we've
t aken t hat art and brought it int o t he realm o f science.
We aren't done wit h t hat t ransit ion yet , but we're pret t y close. We're
no t very close wit h highst rengt h st eel yet . We have t o close t hat gap.
That 's just an example.
I could give you several more examples, but t he successful t oo l and
die co mpany now sho uld be applying all of t hose t hings, and t here are so me
t hat should disappear. They're using old t echno logy. There's no way t hey
can compet e wit h us.
HEARING COCHAIR WESSEL: Co mmissioner Bart holomew.
COMMISSION VICE CHAIR BARTHOLOMEW: Thank you. And
again t hank you t o bo t h of you. it 's impressive t o hear also about your
co mmit ment t o yo ur wo rkforce and your companies.
On t he issue of t raining, I underst and t hat t raining yo ur current
wo rkforce helps make you more co mpet it ive, which is o bviously one of t he
keys. but how do yo u bring young peo ple int o a t rade or a profession t o
t rain t hem if t hey don't believe t hat t here's going t o be a fut ure in t hat
t rade or professio n in t he first place?
So , Ms. Mo ncrieff, when you're t alking about t hese t raining cent ers,
who is it t hat wo uld be t rained in t hose t raining cent ers and how do you
creat e an enviro nment t hat several people have said t o day a lot o f t he
peo ple wit h t he skills and experience t hat we need are on t he verge o f
ret iring?
MS. MONCRIEFF: There's a great example o f a t raining pro gram in
Meadville, Pennsylvania. It 's called Precision Manufact urers Inst it ut e and
act ually t hey just got a grant from t he federal government recent ly. That 's
an example. They act ually have co me up wit h some creat ive ideas t o work
wit h machinery manufact urers who sho wcase t heir machinery on t heir floor
so t hey get t he machines and t hen when people want t o look at buying
machines, t hey go int o t heir t raining floo r and look at t he machines. The
pro blem is t hose machines rot at e oft en.
That cent er act ually st art ed wit h a model t hat I've had conversat io ns
wit h a lo cal universit y about , and t hat is t hey were go ing t o scrap t heir
machining t raining program all t oget her. They said, it 's just slo w, we can't
affo rd t he equipment , we do n't want t o t ie up t he space anymore. So we
have been in discussio ns abo ut t hem leasing t he machinery I'm not running
at night , which is how act ually t his PMI st art ed. If yo u could get enough
peo ple t o loo k at t he model and st art looking at using it t raining cost s
have increased from 1991 t o 2001 by 30 percent .
COMMISSION VICE CHAIR BARTHOLOMEW: And would yo u
find t hat t he people who you are aiming t he t raining at are young people
who are heading int o t heir work life o r o lder people who have lost t heir
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jo bs because of o t her changes in t he indust ry?
MS. MONCRIEFF: I act ually resurrect ed our apprent iceship t raining
pro gram, and I t ried t o bring in a co uple young kids every ot her year at
least and always have a couple o f apprent ices all t he t ime, and t hey go t o
Mo t t College at night and t hen work fo r me during t he day. So we t ried t o
fo st er t hat inhouse t raining. We do t he same t hing. It 's just very cost ly.
COMMISSION VICE CHAIR BARTHOLOMEW: But t he issue is
co st , not an inabilit y t o find peo ple who want t o be t rained?
MS. MONCRIEFF: As long as you keep bringing kids in, and again
it 's co st ly, but I've made a co mmit ment t o always keep bringing t hese
yo ung kids in, and just keep t raining, t raining, t raining.
A lot o f fo lks, t hough, have cut t hat out a lo ng t ime ago because it 's
just so cost prohibit ive. That 's t he only way we've been able t o survive.
MR. SCHMIDT: We don't have enough work right no w t o just ify
adding o t her people, but we've suffered for it , because we've always had a
diversit y o f skill levels. Because we don't have anybody at t he beginning
o f t hat spect rum, we have t oo many peo ple as an average t hat are t o o high
o n t he skill level so o ur ho urly co st goes up.
In t erms of mo t ivat ing people int o t his indust ry, in t he past , it was
easy because yo ur earnings pot ent ial was a lot bet t er t han unskilled labo r.
Yo ur employment pot ent ial was a lot bet t er because people knew in t his
area yo u could apply your skills t o ot her indust ry.
I used t o wo rk for a machine t ool co mpany. They loved t o hire die
makers because t hey know, oh, a die maker can do our st uff. He's not a
machine builder, but we know t hat we can do our st uff, and t here's cross
t raining. Even t he carpent ry indust ry, oh, get t he die maker, he'll kno w
ho w t o use t o ols, he knows ho w t o put t hings t o get her, he'll be able t o do
so met hing.
COMMISSION VICE CHAIR BARTHOLOMEW: So we're also , t o
go back t o o ne o f t he earlier panelist s, lo sing surge capacit y t oo because
we are lo sing people wit h t echnical skills who can do ot her t echnical t hings
if necessary in a sit uat io n where we were confront ed wit h needing t o scale
up?
MR. SCHMIDT: When business is slow, some of o ur emplo yees go
get engineering degrees. So me laid off employees in our indust rywe
don't have any at our companybut in our indust ry, it 's no t uncommon fo r
t hem t o go t o scho ol
COMMISSION VICE CHAIR BARTHOLOMEW: Right . Now some
peo ple, of co urse, wo uld argue t hat t hey are moving t hemselves up t he
eco nomic food chain by doing t hat , and t hat it is sort of t he t rickle up of
o ur economy changing.
MR. SCHMIDT: That part is a go od t hing, but t here are only so
many o f t ho se opport unit ies. And if yo u're not making anyt hing, how many
173
engineers are you go ing t o need?
COMMISSION VICE CHAIR BARTHOLOMEW: Yes, good po int .
HEARING COCHAIR WESSEL: Thank you. We appreciat e yo ur
part icipat io n. Ho pefully yo u'll have a bet t er day in Washingt on wit h some
o f your current represent at io n o ut here as well as raising t he nat ional
impo rt ance o f t his issue.
OPEN MICROPHONE SESSION
HEARING COCHAIR WESSEL: Mr. St okes, if yo u're prepared,

we'll move right int o yo ur abilit y t o present some comment s t o us and we
lo o k fo rward t o t hem.
MR. STOKES: I do have a special request . I t hink t hat I'm t he only
o ne fro m t he public side t his aft ernoo n, and what I have t o say I believe is
o f great impo rt ance t o t his Commission, and t herefore I would ask six
minut es inst ead of t he t hree, if t he Commissio n would indulge.
HEARING COCHAIR WESSEL: Yes.
MR. STOKES: I am publisher of eMot io n!Report s.com. We are an
aut o mot ive and aero space indust ries' research and analysis sit e t hat t arget s
pro fessio nals wit hin t he academic, media, corporat e and government
sect o rs. We've also creat ed an environment wherein whit e papers and
o t her scholarly works can be present ed t o a broadened, yet st ill defined,
audience, papers like "Super Glo balism: St rat egies for Maint aining a
Ro bust Indust rial Base Through Technolo gical, Policy and Process
Impro vement ."
I'm here t o day t o fo llo w up on Dr. Ronis' comment s about ano t her
chilling fact o f our current exist ence, and t his has t o do wit h a set o f
circumst ances t hat calls fo r t he immediat e implement at io n of act ionable
plans t o mit igat e U.S. indust rial base glo bal supply chain vulnerabilit ies as
represent ed by t he fact t hat no oceanborne shipping is in U.S. hands, but
wit h China and So ut h Ko rea.
As of t his moment , General Mot ors and Fo rd and ot her core
co mponent s of t he U.S. indust rial base are at t he mercy o f Chinese and
Sout h Ko rean whim. That is t o say t hey are capable of inst ant ly disrupt ing
and divert ing t he glo bal supply chain in t he event of Sino American
disco rd. To night , GM and Ford could have t heir supply chains disrupt ed.
So I want ed t he Commission t o kno w, and I t hink t hat you'll be
pleased t o know, t hat my co lleagues in indust ry and go vernment have been
quit e busy o ver t he past five years bringing t oget her t he int ellect ual
reso urces t o craft archit ect ure fo r infrast ruct ure for a new American
co nt ro lled heavylift indust ry ut ilizing commercial versions o f t he Boeing
C17 Globemast er III Airlift er along wit h t he development of st rat egies
174
designed t o mit igat e U.S. indust rial base glo bal supply chain vulnerabilit ies
as represent ed by t he fact t hat t here is no U.S. owned oceanborne
t ransport at ion.
And we plan t o do t his t hrough permanent air augment at ion of t he
U.S. indust rial base global supply chain. Heavylift is t he movement of t he
goo ds via air t hat are t oo large or out sized t o fit in any door of any 747 or
similar size freight er aircraft , it ems like o il derricks, DA class bulldozers,
helico pt ers, sat ellit es.
Boeing developed 14 years ago dat a t hat suggest ed t he emergence o f
a new subset of t he ad ho c o ppo rt unist ic air cargo indust ry, heavy and
o ut sized o r t he home heavy and out sized market .
Despit e Bo eing's enco uraging exist ing air cargo operat ors t o wo rk
wit h t hem t o explo it t his dat a ut ilizing proposed co mmercial versio ns o f
t he superlat ive C17, t here were no t akers. The Russians and t he
Ukrainians immediat ely seized t he init iat ive t hrough t he massive AN124.
They now cont ro l t his indust ry so much so t hat t he U.S. milit ary
makes up airlift sho rt falls wit h t he AN124. This is unaccept able.
Co nsidering t he const raint s of t o day, t he very short st ory is t hat wit hin a
24mo nt h period fro m t oday, we will not only cont rol t he U.S. heavylift
indust ry but most of t he world. In place at t his mo ment is a 30year
business plan and 17 case st udies co nduct ed by t he Air Fo rce, Boeing, and
privat e sect or support and wit h privat e sect or support wit h t he largest
co rpo rat io ns in t he wo rld inclusive of ExxonMobil.
The combined value of t hese let project s around t he world is in
excess of 400 billio n, and t hat 's just t he st udy subject s. The t ot al value
wo rldwide in ident ified and unident ified project s exceeds one t rillio n.
Mo st o f t hese project s are in absolut ely aust ere locat ions such as
Sakhalin Island, Russia, and whose supply chain logist ics' requirement s can
o nly be serviced by t he commercial variant of t he C17, t he BC17, because
o f it s ext raordinary aero at hlet icism, t he abilit y t o t ake off and land wit h
87 t o ns aboard and under 4,000 feet , t he abilit y t o t ake off and land wit h
22 t o ns aboard and under 1,310 feet .
In 90 days, we will name t hree glo bal air operat ions epicent ers in t he
U.S., Europe and Asia; t wo special suppo rt operat ions cent ers in t wo
st at es; o ne global administ rat io n epicent er in t he U.S.; and t he lead
invest ment bank t o bring t oget her a syndicat e consort ium for t he up t o
$3.6 billio n privat e placement in each geographic lo cale for a t o t al o f 10.8
billio n.
We will ut ilize bo t h used and new C17s. Our business plan works
fo r bo t h. Ho wever, what is urgent ly needed is co ngressional language,
o riginally present ed in t he April 29, 2005 version of H.R. 1815, t hat allo ws
t he Air Force t o resell first generat ion C17s, money which t hro ugh t he
t ransformat ional recapit alizat io n init iat ive ment ioned by Dr. Ronis flo ws
175
back.
In short , t he Air Fo rce budget is recapit alized t hro ugh t his resale
creat ing new vist as and efficient use of funds.
Gent lemen and ladies of t his august Commissio n, we submit t hat t his
represent s no less t han a new indust ry and one which accomplishes t hree
t hings simult aneo usly: one, it perpet uat es and revit alizes a st eadily eroding
U.S. indust rial base; t wo, mit igat es U.S. indust rial base glo bal supply chain
vulnerabilit ies as represent ed by t he fact t hat no o ceanborne shipping is in
U.S. hands but in t hose of t he Chinese and Sout h Koreans; t hree,
est ablishes a new Americancont rolled heavylift indust ry t aking it from t he
Russians via commercial versio ns o f t he Bo eing C17 Globemast er, and o f
co urse keeping Lo ng Beach open.
I believe we are on t he cusp o f a new indust rial economic era t hat
reassert s American dominance by invest ing in and capit alizing on o ur
t radit ional st rengt hs. We must not fail in t his init iat ive, as it may well
represent t he ult imat e means by which we can neut ralize indust rialbase
ero sio n.
We would ask yo ur assist ance in obt aining t he necessary
co ngressio nal language aut ho rizing C17 resale, an init iat ive t hat I st art ed
wit h Senat ors Warner, Levin and Lieberman, who have been ext rao rdinarily
helpful in keeping t he C17 alive.
I t hank you fo r your t ime.
HEARING COCHAIR WESSEL: Thank you for your comment s. We
will cert ainly be making t hem part of t he record, and as we evaluat e what
we have heard t o day and prepare o ur annual report in t he coming weeks,
we will loo k carefully at what you've said. Thank you.
COMMISSIONER HOUSTON: I know yo ur name is Mr. St okes, but
I missed yo ur affiliat io n.
MR. STOKES: My name is Myron St okes. I said
eMo t ion!Report s.com is t he sit e. That is an aut omo t ive and aerospace
indust ries' research and analysis sit e and it has been one of t he primary
means by which we embarked on an educat ional process wit h an indust ry
and go vernment relat ive t o t he heavylift init iat ive and of co urse we had as
a co re missio n t he perpet uat ion and revit alizat ion of t he U.S. indust rial
base.
MR. STOKES: Thank you.
HEARING COCHAIR WESSEL: And t hank everyone for t heir
part icipat io n t o day and we are adjo urned. Thank you.
[Whereupo n, at 4:25 p.m., t he hearing was adjourned.]
176
ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD
St at ement of Jennifer M. Granholm, Governor of Michigan 11
***
Statement of Dale E. Kildee, a U.S. Congressman from the State of Michigan
I am very pleased that the U.S.China Economic & Security Review Commission is holding a
hearing on the important topic of China’s impact on the U.S. automotive and automotive parts
industries. This issue is very important to our nation and particularly to Michigan where the
struggles of our domestic automotive and automotive parts industries have been felt the hardest. I
regret not being able to join you in person today, but appreciate the opportunity to submit this
statement for the record.
It is very clear that our harmful and unbalanced trade policies have hurt our domestic automotive
industries and workers. This could not be more obvious than with our relationship with China.
The most clear example of this is China’s currency manipulation which has been devastating to the
U.S. automotive industry. As CoChairman of the Congressional House Automotive Caucus along
with Representative Fred Upton, we have held briefings, written letters and taken other actions to
11
Click here to read a statement by Governor Jennifer M. Granholm
177
press the Administration to address China’s currency manipulation. Yet despite all the evidence to
the contrary, the Bush Administration continues to tell us that China is not manipulating their
currency.
Another major issue is intellectual property theft by Chinese companies that directly threaten U.S.
automotive suppliers. Last year, the Federal Trade Commission estimated that the domestic
automotive supplier industry loses approximately $12 billion in global sales annually due to
intellectual property theft. This theft and the counterfeit and pirated automotive parts that it
produces undermine U.S. and foreign safety standards and put customers at risk. In 2003, China
accounted for 66% of all imported counterfeit products seized by U.S. Customs and Border
Protection. Yet despite the lost dollars for U.S. manufacturers and the public safety risks, just as
with the currency manipulation, our government has failed to address this issue in a meaningful
manner.
Another issue, which is just beginning to make its way onto the radar screens of Congress, is the
Chinese automotive manufacturing industry. Currently, two Chinese manufacturers have
announced plans to begin selling cheap, Chinesemade cars in the U.S. in the very near future.
However, China has a 25 percent tariff on Americanmade cars while the U.S. tariff on Chinese
cars is 2.5 percent. For this reason, I joined Representative Walter Jones in introducing the Unfair
Chinese Automotive Tariff Equalization Act that would prevent imports of passenger cars from
China until the U.S. and Chinese tariffs on these items are equal. I believe this legislation is vital to
ensuring that our domestic automotive manufacturers and workers have a fair playing field to
compete on.
Lastly, it is very important to note that our trade policies and their effect on the U.S. automotive
industry and its workers do not occur in a vacuum. While certainly our policies with China have
played a harmful role, it is our overall trade policy that has hurt the U.S. automotive industry and
workers the most. Our harmful and unbalanced trade policies have been devastating to our
workers, small businesses, farmers, the environment and the economy. We are facing record trade
deficits and an increasing pace of the outsourcing of American jobs. Our trade policies encourage
the closing down of American factories and moving them overseas, usually to a country where
wages are low and the standard of living is lower. Our trade policies are clearly flawed, yet
Congress recently narrowly passed CAFTA and the Administration is currently negotiating more
FTAs. We need to revisit American trade policy and stop entering into harmful and unbalanced
Free Trade Agreements.
We need to call a ‘timeout’ on our headlong rush into free trade agreements and revisit our trade
policies. For this reason, I introduced legislation, H.R. 4407, which would prohibit the U.S. from
entering into any bilateral or regional trade agreement for a period of two years. H.R. 4407 would
also immediately terminate any current negotiations. While I understand that in our current
Congress it is unlikely this bill will be given consideration, this is a debate we must have if we are to
end trade policies that further increase our race to the bottom.
178

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CHINA’S IMPACT ON THE U.S.

Opening statement of Vice Chairman Carolyn Bartholomew………………… 6

Statement of Sander Levin, a U.S. Congressman from the State of Michigan…. 11

PANEL III: PERSPECTIVES OF EXPERTS, TRADE ASSOCIATIONS, AND

The Commission met at Universit y of Michigan, Dearborn Campus

COMMISSION VICE CHAIR BARTHOLOMEW: Thank you,

HEARING COCHAIR BLUMENTHAL: Thank yo u very much and

America’s auto industry holds a special place in manufacturing and in our economy. The production of

COMMISSION VICE CHAIR BARTHOLOMEW: Congressman

HEARING COCHAIR BLUMENTHAL: Thank you very much,

MR. DINGELL: Mr. Chairman, and bot h cochairmen, Chairman

SENATOR STABENOW: Thank you, Mr. Chairman, and t hank yo u

MR. McCOTTER: Thanks. Chairman Henry Hyde has a wonderful

OPENING STATEMENT OF COMMISSIONER GEORGE BECK ER

HEARING COCHAIR WESSEL: In deference t o t he members o f

HEARING COCHAIR BLUMENTHAL: Thank you. Thank you very

MR. GETTELFINGER: Thank yo u very much, and t o t he men and

HEARING COCHAIR BLUMENTHAL: Thank you very much for

We have more than 175,000 members whose products make it into the domestic auto industry. If China

HEARING COCHAIR BLUMENTHAL: Thank you very much, Mr.

MR. TRUMKA: Thank yo u, Mr. Chairman, and I also want t o

HEARING COCHAIR BLUMENTHAL: Thank yo u very much t o all

HEARING COCHAIR WESSEL: Thank you t o our wit nesses. Our

DR. HELPER: Thanks very much. I'm pleased t o have t his

MR. MOAVENZADEH: I'd like t o t hank t he Co mmission for

This process of globalization has been disruptive for several automakers and parts suppliers; however, it

The role of government – or perhaps I should say governments – is very significant in the Chinese auto

With a few exceptions, China’s automakers are owned by various governments. For example, FAW and

All of the large tier one suppliers have also profited handsomely from China’s explosive growth as they

HEARING COCHAIR WESSEL: Thank you. And t hank you t o all

HEARING COCHAIR BLUMENTHAL: Welco me back. We are

Prepared Statement of Dr. Sheila Ronis, Director, MBA/MS Programs,

HEARING COCHAIR BLUMENTHAL: Thank you very much, Dr.

HEARING COCHAIR BLUMENTHAL: Thank you very much and

HEARING COCHAIR BLUMENTHAL: t hank you very much t o all

HEARING COCHAIR BLUMENTHAL: We'd like t o welcome o ur

MR. KEATING: Thank you very much. First , t hanks t o t he

Prepared Statement of Terrence J. K eating, Chief Executive Officer,

In an effort offset these changes to the competitive landscape and to remain competitive in the industry,

The second is related to the very rapid growth of the Chinese market and the resulting increase in their

HEARING COCHAIR BLUMENTHAL: Thank you very much, Mr.

MR. DENTON: Chairman Wort zel, Vice Chairman Bart ho lomew,

HEARING COCHAIR BLUMENTHAL: Thank you very much t o

HEARING COCHAIR WESSEL: Thank you t o our last t wo

STATEMENT OF LAURIE SCHMALD MONCRIEFF, PRESIDENT

Prepared Statement of Laurie Schmald Moncrieff, President

I thank you for the opportunity to testify today, and I welcome any questions you may have. Please feel

HEARING COCHAIR WESSEL: Mr. St okes, if yo u're prepared,

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