rather than safety. They try out new developments first, so commercial planes always derive some benefit from military designs." Mr. Raymond is unable to estimate the amount his company saved through military-sponsored research in developing the DC-8, but notes: "If we hadn't had the military experience, we couldn't have built it at all." Besides reaping both direct and indirect benefits from Government R. & D. projects, companies involved in these projects say the work allows them to maintain larger scientific and engineering staffs than they otherwise would be able to afford. They also find that working for Uncle Sam gives them access to reports on the progress of others in their industry; these reports yield vital technical information. Observing that "civilian fallout from military R. & D. work is a hard thing to measure, a Raytheon Manufacturing Co. official declares: "We always benefit from military R. & D. inasmuch as it permits us to maintain a large and wellrounded scientific and engineering staff. From their research efforts, we derive a breadth and depth of technical knowledge that we would not be able to achieve solely from commercial R. & D." Raytheon's development of radar for the Navy during World War II, with the resulting growth of a staff skilled in radar principles, is probably a classic example of Government-sponsored R. & D. enhancing a company's profit capabilities. "Today, we're a leading producer of commercial ship radar, the basic know-how for which we gained from the Navy work,” an official of the Waltham, Mass., concern says. The commercial work is in addition to the radar Raytheon turns out for the military, he adds. A MIXED BLESSING Companies at work on Government R. & D. programs and sharing technical information with other concerns engaged in like tasks say this exchange proves a mixed blessing. "These reports enable us to save a great deal of money and effort by not duplicating something another company has done already," says the president of a company which develops and manufactures semiconductors. But this executive comments that "technical information sharing is one of the prices a company pays for being engaged in Government R. & D." And he offers an example of how some electronics companies got a boost from the Government research work done by one of their competitors. Backed by a military contract, a young, small east coast concern "did a whizbang job of developing a silicon power rectifier," a piece of electronic hardware that converts alternating electrical current to direct current. "The minute they were out with this thing, others in the industry who had not been able to develop the rectifier on their own got a copy of the Government report and gleaned vital clues on how to produce the device," he says. The result was that a number of companies had the rectifier on the market at least a year sooner than they would if they had had to develop it entirely on their own. In this case the company's development was not patentable, and there was nothing to prevent other companies from using the information learned through the Government report in producing their own versions. A QUICKER EVALUATION A company doing military-sponsored research often gets an earlier evaluation of how its work is going than it would if the research was aimed only for commercial markets, companies say. "You get a good, early calibration of where your R. & D. stands in military work, not years later as is often the case in commercial research," contends Roy L. Ash, executive vice president of Litton Industries, Inc., Beverly Hills, Calif., electronics concern, whose military development and production currently accounts for about 45 percent of total volume. "When competing in the commercial market, you often spend several years in the laboratory conceiving and developing a product, and then you take time to develop a market program and to test it, before you finally get around to putting the decision of your success up to the public," notes Mr. Ash. "But when you're selling to the military, they're interested in technological improvements just over the horizon-the best brainwork to this point. The Government," Mr. Ash adds, "is able to provide an early evaluation of your R. & D. effort." Small companies often sing the loudest praise of Government R. & D. They say that with the aid of Uncle Sam's research money they're able to investigate fields that would be too expensive for them to look into with just their own resources. COULDN'T AFFORD THE RESEARCH "A company our size couldn't afford to be in this basis research if it weren't for Government contracts," says Ralph F. Redemske, vice president of Servomechanisms, Inc., Hawthorne, Calif., developer and producer of electromechanical systems and components whose sales totaled about $17 million last year. Mr. Redemske is speaking specifically of the company's investigation of thermoelectric power-the conversion of heat into electricity-under Navy sponsorship since 1957. The research, being carried on at the company's Santa Barbara, Calif., facility, is now at the rate of $100,000 a year, according to Mr. Redemske. Government research contractors, both big and small, insist that the direct profits from an R. & D. contract are not what prompt them to vie for the work. "There's not much profit in Government R. & D. work, especially when you develop just one of something," says an official of Packard-Bell Electronics Corp., Santa Monica, Calif. "But you learn how to make something new, advancing the state of the art, which very often leads to commercial or Government production contracts. Very often the gleam in an eye in your lab is going to produce a hum in your production line-regardless of who finances it." Litton Industries' Mr. Ash also discounts the profits directly resulting from such work. "Litton isn't in this work to sell its engineering services for a fee," he says. "We look at it from the standpoint that for every dollar of engineering we do, there's $10 or $15 or $20 worth of future product sold." A SMALLER PROFIT Mr. Ash says that cost-plus-fixed-fee work, typically associated with military R. & D. yields a pretax profit of 6 or 7 percent of sales, lower than the 10-percent profit he says is generally associated with military fixed-price production contracts. "The possible profit you can make from an R. & D. contract is so small that going out for that alone is hardly worthwhile," asserts Dr. James Carter, research adviser of Aerojet-General Corp., Azusa, Calif., subsidiary of General Tire & Rubber Co. "Of course, there's always the possibility of the research contract leading to military production or commercial application," he adds. Although he won't forecast when any of them might reach the market, AerojetGeneral has several commercial applications from some of its military research in the works, Dr. Carter says. One project: Adapting nitromethane as a commercial explosive. "Under a Navy contract, some years ago we did a great deal of investigation of nitromethane as a monopropellant-for missiles-one that would be a fuel and an oxidizer at the same time," Dr. Carter recalls. "However, it proved to be either too hazardous as a fuel or to have combustion difficulties." Aided by its fuel study, Aerojet-General has ironed out some of the problems and now is working with petroleum companies studying the use of nitromethane in seismic oil exploration and also as the agent for underground explosions to step up the yield from low-producing wells. "It's much safer than nitroglycerine," claims Dr. Carter, "and because it's a liquid it's easier to place than solid explosives in a number of applications." A SUBSTANTIAL PORTION Although Government R. & D. contracts may offer lower profits than that which companies usually pursue, the dollar amount of the work often is much greater than what they themselves put into research, and accounts for a substantial portion of their total sales volume. For example, Lockheed in 1958 had volume of $962,679,211, which included $323,900,000 of Government research and development contracts. In the same period Lockheed spent $25.2 million on its own research and development program. This year the aircraft and missile maker expects to do $400 million of Government-sponsored R. & D. while digging down in its own pocket for about $12 million. "In an industry with a rapidly expanding technology like ours," says Lockheed's Dr. Lipp, "a strong R. & D. program is a necessary foundation for virtually all of Lockheed's sales." Despite the chance of a hefty production contract or profitable commercial application, companies note that Government R. & D. contracts in some cases have some major disadvantages. For one thing, they say a company's patent position is sometimes damaged by work it does under Government contracts. They also say that nonmilitary projects often are delayed by work on military R. & D. jobs, which usually are on a rush basis, and that Government research wants often are too specialized to do a company's commercial market much good. Another reason is that companies doing big Government R. & D. projects are, of course, at the mercy of the Federal Government; sudden cutbacks as the result of budget problems or other reasons often have a severe impact. A classic example was the cancellation in 1957 of R. & D. work being done by North American Aviation, Inc., on the Navaho missile. The work had started in 1950 and by the time it was canceled some $700 million had been poured into it. North American had to lay off 12,000 people when the project was dropped. Space age concerns, in particular, are upset these days by the regulations of the youthful National Aeronautics and Space Administration regarding patent rights. Just last month a delegation representing some of these contractors trouped to Washington to urge that the agency revamp its rules. ALL RIGHTS CLAIMED Critics Terms of the 1958 law which created NASA to oversee the U.S. space programs seem to give the Federal Government the right to claim all rights-commercial as well as military-to any invention resulting from a NASA contract. of the legislation say this is contrary to the usual practice under Armed Forces procurement provisions, where a company developing a device under a Government contract retains its commercial patent rights. Contractors complain that besides retaining both commercial and military rights, NASA regulations define a contract so broadly that a subcontractor or supplier to a firm at work on a NASA project, though he has no direct contractual relationship with the Government agency, surrenders any chance to have a device patented if it's a space age item. The NASA patent rules "will restrict creative effort on the part of private industry," warns Robert Lent, director of marketing for Statham Instruments, Inc., of Los Angeles, developer and manufacturer of transducers, electromechanical devices that convert physical information to electrical impulses and transmit the impulses to electronic data handling equipment. Mr. Lent claims the rules assume rockets and missiles won't be used in commercial way. He complains the rules recently caused Statham to pass up an order. "A buyer for a major company that had taken a NASA R. & D. contract came to us and wanted transducers off the shelf. But because his firm was working on a NASA contract, I would have jeopardized the patent position of our transducers in accepting the order," Mr. Lent contends. He turned down the sale, and the buyer went to another supplier, the marketing director adds glumly. A NASA official in Washington, citing the agency's provisions that allow the NASA administrator to waive the Government's patent rights, says it's not NASA's intention to apply the rules as severely as some industrial critics fear. Industry's objections to the patent provisions "are currently being considered," he says. "There will be changes," he predicts, "but how far they'll go we can't say." EXHIBIT NO. XVII(F) Excerpts from Final Report of House Small Business Committee (H. Rept. 2970, 84th Cong., 2d sess.). A RESOLUTION CREATING A SELECT COMMITTEE JANUARY 3, 1957.-Committed to the Committee of the Whole House on the State of the Union and ordered to be printed UNITED STATES GOVERNMENT PRINTING OFFICE WASHINGTON: 1957 CHAPTER VI. GOVERNMENT SUBSIDIES FOR RESEARCH AND INDUSTRIAL ADVANCEMENT In the technological revolution which American industry is presently undergoing, Government research and development expenditures may well prove to be the kiss of death for independent small business. The Government is the biggest buyer of research With the Government currently paying for almost two-thirds of all research and development, the disproportionate subsidy to bigness is contributing immeasurably to an already dangerous degree of industrial concentration. Concerned about the long-range implications of the military procurement program which is geared to deal with big business, this committee has been especially distressed by the ominous shadow which is cast on the future with the monopoly of technology by big business. Last year, in a supplemental statement to a subcommittee report on the Small Business Administration, the Honorable Joe L. Evins reiterated these fears. In that statement he stressed the potential danger to healthy competitive relationships which comes with the selective treatment which allows some firms to forge ahead of others in Government financed research.1 Because the Department of Defense is by far the biggest spender of research funds, its program is by far the most crucial in its economic effects. It spends at least 85 percent of all Federal funds which are spent for research, and almost all these funds go to private business firms. Persistently, this committee has sought information on the scope and pattern of Government research and development expenditures, in order to appraise that program and evaluate its impact on small business. There is a statistical vacuum.-This matter of statistics was raised by our chairman in hearings before the Banking and Currency Committee on the extension of the Small Business Administration.2 The SBA Administrator was asked what proportion of the Government's research and development contracts go to small business. The extent of the Administrator's information was that he believed the Navy was cooperative in trying to place some contracts with small business. Subsequently, at our chairman's request, Mr. Barnes supplied a letter from the Assistant Secretary of Defense (Supply and Logistics) which provided some additional information. That letter gave the total and the small-business share of research and development contracts for the Air Force in 1954 and for the Navy for part of 1955. The letter further stated that: 1 Subcommittee No. 2, Preliminary Report on the Small Business Administration and Related Activities, July 1, 1955, p. 20. Hearings before the Committee on Banking and Currency, House of Representatives, Extension of the Small Business Act of 1953, May 1, 1955, pp. 76, ff. |