2.

Convert production lines from military aerospace to non-military aerospace production. Here, commercial airliners are the alternative. Again, the actual experience with such conversions is not encouraging and even suggests that the cure is worse than the disease.

Thus, General Dynamics in the early 1960's entered the commercial airliner market with the Convair 880, only to lose so much money that the F-111 contract was needed to save the corporation from bankruptcy. Similarly, Lockheed in the early 1970's entered the market with the L-1011, only to drive Rolls Royce into bankruptcy and consequently Lockheed itself into a position in which only government guarantees of bank loans saved it from bankruptcy. Finally, even the extraordinary government effort to save the dubious L-1011 has not solved the problem of Lockheed-Georgia, to say nothing of any eventual problem of LockheedMissiles and Space, which is located in northern California. L-1011 is produced at a third, mainly commercial, Lockheed division, Lockheed-California, which is located in southern California. As for Boeing, at first glance conversion might seem more plausible, since the company is already an established producer of superior commercial aircraft. But Boeing's major candidate for a new commercial airliner would be the SST, which was cancelled by Congress in 1971. And, as the recent controversy over American landing rights for the Anglo-French Concorde indicates, an American SST would face intense opposition from groups

within the American public. (3)

3.

For the

Collapse production lines from ten (counting Northrop) into

a smaller number.

бар

persuasive case can be made that the United

States needs new aerospace systems in only four production sectors

(fighter-bombers and fighters; missile systems, particularly submarine

launched ones; STOL transports; and space systems); in addition, it

needs a capacity to replace or improve units of already existing military transports and commercial airliners. If so, the United States needs only seven or eight major aerospace production lines.

The most attractive candidates for preservation would be Boeing (strong in missile systems and commercial airliners), Lockheed-Missiles and Space (submarine-launched missile systems), McDonnell division (fighter-bombers and fighters), Douglas division (commercial airliners), Rockwell International (space systems), and Northrop (strong in fighters for export). Two other strong possibilities are Grumman and General Dynamics (fighter-bombers and fighters). Grumman, despite its recent troubles with the F-14, has a distinguished reputation for producing superior naval aircraft and space vehicles. And General Dynamics, despite its earlier troubles with the F-111, seems to have produced a fine aircraft in its F-16.

Two other production lines, Lockheed-Georgia and Vought,

have in recent years shrunk considerably in terms of contracts, production volume, and employment.

It might be best not to award any new major

contracts to these two production lines but rather, with the aid of

sub-contracts and repair contracts, to let them decrease in size through

attrition, in an orderly way, and with a minimum of disruption to the corporations and their employees.

4.

s.] (4)

Constrict production lines from $1 billion or more each in annual weapons sales to a smaller amount. Relatedly, a major weapons systems would be shared between production lines, much as, in the case of the F-111, General Dynamics produced most of the airframe, but Grumman produced the rear fuselage. This approach would make it easier for the

Administration or Congress to avoid massive disruptions of a region when an old major contract is phased-out, to re-allocate funds among production lines by more incremental and gradual means, and to "fineIn addition, an American tune" the overall process of defense production. aerospace industry composed of ten or so smaller producers sharing major contracts would preserve all the advantages of competition, including multiple sources of innovation.

Finally, these last two paths for the aerospace industry might have in the next decade U.S.

another advantage in a longer perspective. For

policymakers may see a need to place great emphasis on a variety of PGM's and other new modes of weapons, as opposed to a continued emphasis on aircraft. A smaller and leaner American capacity for airframe production would permit U.S. policymakers to make this transition and to achieve a better defense for America without imposing sudden distress upon particular Americans, upon those airframe companies and employees which have provided us with our national defense in the past.

Senator PROXMIRE. Thank you very much.

Again, I apologize. That is another roll call. I will be back as soon as I can.

[Whereupon, a short recess was taken.]

Senator PROXMIRE. The committee will come to order.

Mr. Gansler, you give all kinds of reasons why the defense industry is less efficient-monopsony, that's one buyer; oligopoly, a few sellers, but I can't see why that any of the reasons you give should necessarily result in consistent overruns and late performances. You did not include those evidences of inefficiency in your testimony of the way the Defense Department operates.

Mr. GANSLER. I was trying to distinguish and I did in my text two areas to be considered. One being structural, and that is why you bring in the oligopoly and monopolistic characteristics; the other being the way in which the Government does business, the procedural part of it, and it is in that area that I believe the point you are making of the discussion that you had with Mr. Church, the "buy-in" and that sort of thing takes place, that is, the way in which business is done. They are obviously interrelated, they are not in any way independent phenomena, but the fact that it is an oligopoly situation might or might not necessarily result in inefficiency. You might through oligopoly competition have an efficient system.

Senator PROXMIRE. You might have inefficiency. I am not talking only about inefficiency, I am talking about overruns. You might have an inefficiency with the original fixed price that might be too high, at least Congress would then be on notice it is going to cost this much to produce the C-5A, and produce a B-1 bomber. What we have had has been enormous and consistent overruns where the coming in on target is very rare and then very late delivery is common.

I don't see why that should be characteristic of an oligopoly.

Mr. GANSLER. Well, in fact, it is not just even characteristic of Defense.

Senator PROXMIRE. Pretty characteristic of Defense.

Mr. GANSLER. Not a unique characteristic. What I mean is other Government projects in the civil sector have characteristically had the same large overruns and lateness. What I am trying to say, it is not a unique characteristic necessarily to Defense. One could do the same analysis on the way that the system works in terms of the budget process, the reviews, the competitions, and then the changes and so forth that get added into it.

Senator PROXMIRE. Would you disagree with the notion that it would be possible to achieve a pretty consistent performance coming in on price target if the Defense Department cracked down when defense contractors were above the overruns so we didn't find a way of paying them off?

Mr. GANSLER. If other things changed at the same time. I don't believe that uniquely you can just say starting tomorrow any overruns on a fixed price system have to stop. You have to also change

Senator PROXMIRE. Isn't that a big part of it, though?

Mr. GANSLER. It is certainly a significant part of it. It is not unique. In other words, right now one of the ways in which that money is gotten back is through the changes, the constant changes that come

into the programs. There have to be ways to essentially prevent the system from allowing itself to have built in escape clauses, if you will.

Senator PROXMIRE. How would you respond to Dr. Kurth's argument that we produce obsolete, inefficient, unnecessary weapons systems, if I understand it, in part, perhaps in large part, simply to keep defense contractors open, busy, or at least in some cases alive?

Mr. GANSLER. The recent cases that occur to me instantly are those in which the Congress has extended——

Senator PROXMIRE. He gave some examples.

Mr. GANSLER. I understand that, in terms of the recent programs, the first and most obvious case is that in which lines have been kept open for a number of years at a relatively high cost level when the Department of Defense didn't request them, but Congress inserted significant dollars into the budget. There have been a few select cases in the past, I can think of major weapons systems, where there has been continuous controversy. I think some of the examples that he gave are perfect examples of that, say, C-5, AWACS, the B-1. Those are programs where there has been continuous controversy throughout their history, both within the Department of Defense and within the Congress, as to whether or not they were "cost effective."

Now, it is in that environment in which the other considerations of creating jobs and of the stimulus to the economy and so forth become major considerations.

Senator PROXMIRE. His allegation, to take an example, because we are not buying the B-1 bomber the contractor will get another contract, might get another contract.

Do you think there is an element of that, a big element of that involved, or do you think that is—

Mr. GANSLER. It has historically been verified, and the basis for it. is the only thing that one can question. In other words, is it because someone says if we don't give company X a contract they will go out of business, or is it because, in fact, that is combined with the fact that that company does try very hard to win? Now, by trying very hard, it is a combination of a technological effort, putting all your very best people on winning the next contract. Because you don't have any other contracts you have to put those best people on making the price extremely attractive, even to the extent perhaps of a "buy-in" on the initial part of it because that is not the part to which you have to make your full financial commitment. A company that is supposedly “lean and hungry" makes a very attractive proposal. It is not simply because they do not have business, that they are getting awards, the source selection process would not allow that to happen, I believe. What does happen is that they have the combination of needing the business and making a very attractive proposal because they need the business. The company that just "bought in" last time can't afford to make it look that attractive, can't afford to put its very best people on because they are trying to satisfy their prior commitment and they are not that interested.

Senator PROXMIRE. I don't think anybody-correct me if I am wrong-says there is anything wrong with a hungry company going in and making a lower bid if they can produce. That is the name of the game and that is to everybody's interest. What we are arguing