leadership in the world is a compelling national priority. In our view, this is precisely the right signal to be sending and we are pleased to offer our support of this timely and important initiative. Before proceeding with our comments concerning specific provisions of the bill, I would like to give the Subcommittee a very brief overview of the U.S. machine tool industry and where it is today. Machine tools are power-driven machines, not hand held, that are used to cut, form or shape metal. They are, in short, the fundamental elements of industrial and military production. The industry is currently experiencing unprecedented strains the relevant economic data in shipments, orders, employment, profits, capital formation and capacity utilization clearly point to a depressed industry. (See Appendix I for an update of the economic status of the machine tool industry.) We believe that these strains cannot safely be assumed to be solely a result of fluctuations in the business cycle. In this regard, the phenomenal influx of imported machine tools has played a significant role in the domestic industry's decline. startling 36 percent of domestic consumption, measured by value. This import share for 1983 represents an increase of more than 30 percent over 1982 levels. NMTBA has filed a petition under the national security provision of the U.S. trade laws, seeking trade relief in the form of temporary quotas upon imports of metal 1 cutting and metal-forming machine tools. The Department of Commerce's decision on the petition is due within the next few weeks. II. R&D INITIATIVES ARE ESSENTIAL IF THE INDUSTRY IS TO RECAPTURE - particularly Thus, The industry is struggling to maintain its competitive edge, both at home and abroad. And like many other industries, the U.S. machine tool industry has been substantially affected by rapid advances in technology and in manufacturing processes with regard to computer assisted design and manufacturing. expenditures for research and development are the lifeblood of the in order to compete effectively in domestic and export markets, the industry must retain the ability to continue and increase its R&D expenditures. machine tool business - Figure 1, which shows the industry's aggregate expenditures for R&D as a percent of total sales in the years 1972 through 1982, indicates that the industry held fairly steady in its R&D expenditures during that period. In fact 1982, the latest year for which complete data are available, shows a rise of just over one percentage point an increase in excess of 22 percent over the - previous year. This reflects the industry's commitment to a strong R&D program. 1Last October, NMTBA, represented by James A. Currie, Sr., President, Erie Press Systems, appeared before this Committee to discuss the state of the U.S. machine tool industry. His testimony included a detailed account of the industry and its petition for trade relief filed under Section 232 of the Trade Expansion Act of 1962. See, generally, U.S. Congress, Senate Committee on Finance, Subcommittee on Economic Growth, Employment and Revenue Sharing, Statement of James A. Currie, Sr., October 3, 1983 (98th Cong., 1st Sess.). However, in the circumstances now facing the industry particularly when taking into account last year's precipitous drop in shipments it is far from clear that this trend will continue. The result will be a vicious circle in which declines in sales and profits will retard technological advances, causing further declines in sales and profits, with the cycle continuing until the industry has fallen irretrievably behind foreign competitors. The risk that the domestic machine tool industry may thus be eclipsed by its foreign competition as other once-strong United States industries already have been obvious importance for the national security, an implication noted by Senator Danforth when he introduced S. 2165 last year. has - The threat that imports pose to the domestic industry is especially ominous because the substantial competitive advantages that imports enjoy are attributable in large part to direct government subsidization or the effects of governmental coordination of machine tool producers. Earlier this month, for example, MITI and Japan's Small Business Agency announced plans to create four subsidizing and financing systems centered around R&D activity; MITI is planning to finance half the costs incurred by businesses engaged in R&D projects in new ceramics, electro-mechanical products and other high-tech fields.2 2Japan Economic Journal, February 14, 1984, at 1. It has been amply documented that direct subsidies to joint industry-government R&D projects are a widely used form of government support in Japan. For an excellent synopsis of R&D subsidies currently available to Japanese machine tool builders, see, "Computer-Aided Manufacturing: the Japanese Challenge," Comments Submitted to the United States International Trade Commission, Investigation No. 332-149, by Cravath, Swain & Moore (attorneys for Cincinnati Milacron), December 14, 1982. 36-078 0-84-25 III. - the element of certainty. THE HIGH TECHNOLOGY RESEARCH AND SCIENTIFIC EDUCATION ACT NMTBA strongly supports Title I of the bill which, in addition to improving the 25 percent R&D tax credit, eliminates the current sunset provision under which the credit is due to expire at the end of 1985, thereby making the credit permanent and adding a crucial element markedly absent from R&D planning which is now underway With many machine tool companies literally at the crossroads, the certainty of a permanent and substantial R&D tax credit would undoubtedly foster more prudent business planning. Certainly we are aware that competitive pressures which the industry faces and the attendant need to invest in R&D will continue, whether or not the R&D tax credit is made permanent. However, a permanent credit significantly enhances the ability of machine tool builders to make necessary R&D investments in a timely fashion during a period in which, competitively speaking, timing is everything. The sooner that certainty can be established, the sooner machine tool builders and others will be able to factor the availability of the credit into both long and short-range planning. Thus, - 3 - we urge the Congress to acton this issue now 3Recent contacts with NMTBA members indicate that many of those companies operating in a profit mode have made use of the credit since its enactment in 1981. It should be noted, however, that a substantial portion of our membership is and has been operating at a loss and therefore has not been in a position to claim the credit. These companies have indicated their intention to utilize the credit if and when their operations resume at profitable levels. My own company has made somewhat limited use of the credit, primarily because of the bookkeeping requirements, which can be rather burdensome to smaller companies. I would welcome the opportunity to work with the Subcommittee in devising a less onerous accounting procedure. for many companies a delay in action of even one year will have significant consequences. In addition, we commend Title I's extension of the R&D tax credit to start-up corporations and research joint ventures comprised of corporations from different lines of businesses. Currently, the credit applies only to those corporate joint ventures which might be termed "intra-industry." Title I's extension of the credit would, for example, make it available to machine tool builders involved in joint ventures with manufacturers of computers, robotics and other advanced materials handling systems. Joint ventures of this type will undoubtedly become more frequent as technology progresses especially in the rapidly growing area of flexible manufacturing systems. Extending the credit in this fashion will benefit the industry and contribute significantly toward the achievement of the bill's primary objective the enhancement of U.S. technological competitiveness. - We understand however, that this extension was not intended to include R&D Limited Partnerships -- a model for joint venture R&D which promotes off balance-sheet, interest-free venture capital funding. While we recognize that the tax incentives already associated with the RDLP model influenced this decision, we urge the Subcommittee to re-visit this assessment. Currently, there are a variety of tax shelters (including the RDLP) available to individual investors these tax shelters are, in effect, competing against one another for investors' dollars. The RDLP is unique in that it is geared specifically toward the promotion of research and product - |