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The reasons are:
Negotiated contracts; standardization; reliability; reliable, continuing source of supply; procurement period; planned production and costs.
Now let me deal with each one in some detail from an NTT perspective: Negotiated contracts.-NTT does not have its own manufacturing capability and must get its equipment from an outside manufacturer. To develop new equipment, NTT works with a small number of local suppliers. It does not open a tender to international competition. Rather, NTT provides manufacturing inputs and financing for the new product design effort and the manufacture of prototype models with a limited number of prequalified local suppliers. NTT, therefore, subsidizes R&D and has a close working relationship with a manufacturer during the development of a new product to insure that performance, cost and reliability goals are met. After the product is designed, close control is maintained over all phases of the manufacturing process including basic materials, manufacturing processes, quality inspection, and testing. NTT works with the manufacturer on all of these areas to insure a successful product. To be sure, manufacturers are only willing to work with NTT at this level provided there is a commitment by NTT to subsequent hardware procurement: In addition, working this close with companies provides NTT with considerable information on costs and proprietary processes. NTT obviously could not work with its chosen manufacturers to develop a new product and then go to a completely open procurement without giving away the new product design in the process. Since NTT designs the equipment to be used in its network, rather than specify operational requirements, they want to procure that particular product and not one that might be functionally equivalent.
Standardization. - NTT achieves standardization, therefore, through the process I just described. It is based on one equipment design produced by several manufacturers with parts and modules fully interchangeable. With this level of standardization, an outside supplier would have to exactly duplicate the Japanese manufacturing processes and devices to provide an acceptable product. This level of standardization is a fundamental NTT policy, and essentially eliminates outside competition.
Reliability. - Reliability is achieved by an adequate product design which includes close NTT control over basic materials, manufacturing processes, quality inspection and testing. Under such a system, it makes it almost impossible for non-Japanese equipment vendors to meet the exact reliability standards set by NTT for its favored manufacturing sources. In fact, most non-Japanese manufacturers probably would not allow NTŤ to evaluate their manufacturing processes to the degree required by NTT.
Reliable continuing source of supply.—Telephone equipment is typically used for 10 to 20 years. Parts, therefore, must be available to repair these devices throughout this period. Standardization of product design and multiple manufacturers for a product provide the best chance of maintaining a long term source of supply. The negotiated contract method used by NTT has been successful in assuring long term supply of parts to support
and expand older equipments. Procurement period. - The procurement period for NTT for a new product is typically six months to delivery of the first production equipments after NTT works with its suppliers to develop a new product. This type of short delivery cycle is only possible through a negotiated contract with a prequalified manufacturer who has participated in the product development process.
Planned production and costs—NTT construction plans project requirements for several years in the future. Production schedules are established and costs are projected over the planning period. Negotiated contracts allow the manufacturers to plan their production schedules to control costs and allow NTT the flexibility to modify these schedules with minimum impact on NTT's construction schedule.
So much for the NTT viewpoint.
Now, I would like to turn to the contrasting viewpoints of the EIA team. The team could find no technical, scientific or commercial basis for not opening NTT purchases to international tender. NTT's operating procedure of developing all products for use by NTT is based on national policy and is not a technical necessity. Technology is used as a vehicle to justify the policy. After all, U.S. companies are quite accustomed to competing with Japanese companies in third country markets and these countries have not encountered the "technical” problems that NTT claims do exist in an open market. A good example of this is the Saudi Arabian national microwave communications network. A western Electric/Rockwell international team was awarded this contract over several international (including Japanese) competitors. The project was successfully completed in 1979 and is the largest such network yet installed in any developing country.
At present, the Japanese have the best of both worlds; a domestic market that is completely closed to foreign competition, thereby giving Japanese firms a strong
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base from which to export and a U.S. market that is completely open. Further, guarantees are provided for Japanese firms in the form of the normal 5 year production cycle that can be assured for any equipment procurement. The Japanese, therefore, are truly subsidized, especially in R&D funding which allows Japanese firms to price their products considerably below U.S. competitors when selling here in the U.S. This is beginning to erode the U.S. market shares of American firms in their own country, without any offsetting benefits. The statistics in the subcommittee's report support this conclusion. During the first half of 1980, the ratio of U.S./ Japan imports to exports in telephone and switching equipment was 26.6 to one in favor of Japan. This ratio has been increasing over the past several years and I do not foresee any improvements in the near future. Quite the contrary, we may expect continued deterioration unless positive actions are taken to open the Japanese market to international competition.
In the telecommunications industry today, there are only about five major U.S. microwave suppliers (WECO, GTE-Lenkurt, Harris-Farinon, Raytheon and Rockwell). I do not believe that continued unrestricted penetration of the U.S. market by Japanese companies using subsidized pricing policies is in the long-term national security or competitive interests of the U.S. I continue to believe, as I mentioned previously, that an open market, free enterprise system is the only way to assure, over the long-term, a high quality product at the lowest possible price. If our domestic market share is eroded and panese companies are able to entrench themselves in the U.S. market, because of existing policies both in Japan and the U.S., long-term adverse economic consequences can be anticipated in such areas as pricing, employment, and technological advancement. Certainly domestic U.S. policy should not contribute to the ease with which the Japanese penetrate our market. For example, we recently lost an order to NEC for a small microwave system, the financing for which is being sought from low interest loans provided by the rural electrification administration. While we have been subject to aggressive Japanese pricing policies, this is the first instance of which I am aware that financing for the purchase of foreign competitive equipment was being sought from an agency of the U.S. Government. Even today, there is no way a total microwave product can be manufactured strictly from U.S. built components. For example, traveling wave tubes and certain semi-conductors used in microwave production can only be procured from non-U.S. sources. Such a situation has serious implications from a national security viewpoint. We need a national strategy that supports a strong industrial base to assure increased productivity and continued economic growth. For example, to counter the subsidized financing and R&D provided to Japanese industry, we as a country must develop programs (e.g., tax incentives) that stimulate both capital formation and continued R&D. This is especially important since, in the U.S., the government (particularly DOD) receives many of the benefits of R&D that is financed and undertaken by private industry.
By calendar year end 1980, the office of the trade representative must decide whether to strike some sort of compromise with Japan which will either include or exclude them from the Government procurement code. Even if NTT were to be included in the Government procurement code, we must be sure that NTT could not utilize other barriers (i.e., specifications, terms and conditions of the procurement) to effectively exclude foreign suppliers.
Efforts of the electronics industries, such as the EIA sponsored visit to Japan, in addition to other efforts with the STR to open the NTT market, have met with little success and, to my knowledge, the dialogue thus far has not had any appreciable impact on Japanese procurement practices.
A year ago when this subject came up at the hearings on the MTN package, the special trade representative, Ambassador Robert Strauss, rejected a Japanese NTT offer which excluded telecommunications equipment saying that NTT must open up or the U.S. market will close, but we will have reciprocity one way or the other. Representative Jones has suggested introducing such a reciprocity measure to the communications act revision bill. I personally support these efforts for reciprocity. I strongly believe in free trade rather than no trade, but it cannot be a one way street.
Let me conclude my remarks by stating that I strongly endorse and advocate quick House action on H.R. 7436, the Export Trading Companies Act of 1980. I strongly suggest that the DISC incentive currently in the bill remain there. It is my belief that export trading companies will not be widely formed if the DISC incentive is not accorded them.
Japan, currently, has a $3.5 to $4 billion trade surplus in electronic products with the U.S. If we cannot achieve this reciprocity-full and complete reciprocity—then the statements of Ambassador Strauss and members of this committee to close our U.S. market should not simply be a hollow threat, but a firm action understood by all as to our commitment to insisting on open and fair trade. Thank you.
STATEMENT OF JOHN MORGAN, ASSISTANT TO EXECUTIVE
VICE PRESIDENT, LEGISLATIVE AND GOVERNMENT AGEN. CIES, COMMUNICATIONS WORKERS OF AMERICA
Mr. MORGAN. I am John Morgan, assistant to executive vice president, legislative and government agencies, Communications Workers of America, which represents more than one-half million American men and women in the telecommunications industry, plus others who are employed by public agencies, and so forth. We are well beyond the telecommunications industry.
For the last 2 years CWA and its Japanese counterpart telecommunications union, known as Zendentsu, have been engaged in discussions more or less collateral with the official negotiations of our Governments. From our point of view, we have urged our Japanese colleagues to use their persuasive powers on their Government to accept a procurement code and resolve this major and very highly exposed, highly emotional issue so that we can all get about the business of putting international trade into much better order.
The link between CWA and the Zendentsu organization is a common and longtime membership in the organization known as PTTI, Postal Telegraph and Telephone International, which is a worldwide organization of free trade unions in communications in the non-Communist world. During some of our early meetings, the very early meetings, with the Zendentsu group we ran into the same sort of arguments that Tom Campabosso just mentioned, the matter of reliability, the matter of standards, the matter of compatibility, all of which had been thoroughly rejected about a dozen years beforehand by the Federal Communications Commission. Yet the Japanese were still using such tired arguments to avoid confronting this issue on procurement.
In our meeting last December we pressed our Japanese colleagues to do all they could to help conclude the procurement code in June. We stressed that the key benefit would be to have the matter behind us before the political party conventions. We believed our mutual interests could be best served by keeping this important aspect of trade out of our domestic politics.
Chairman Vanik just a few moments ago, I believe, raised the same point in different terms.
Unfortunately, last spring the Japanese Government fell, and so we sensed the inability to resume our trade unionist' talks and had to wait until the situation settled down. We are going to be meeting again next month, unionist and unionist going at this matter. We have encountered the closed circuit procurement of NTT. Because of the size of its annual purchasing, about $3 billion, NTT is both vital in substance and symbol. A realistic and open policy of procurement there would certainly help to symbolize that the Government of Japan is willing to live with international trade policy which goes two ways.
We believe such moves would be essential to the direction of trade for many years to come. We hope that Japan will act promptly. The total of U.S. imports, $56 million plus, for the first half of 1980 in telecommunications goods, may be a somewhat misleading figure, Mr. Chairman, because we do not know whether these are wholesale prices at the factory or whether they include customs, insurance, freight, and various stateside costs. We would like to know considerably more about those figures.
The Japanese Government has been resistant to opening up NTT for outside tender. One argument regularly used, and we encounter it quite often, is that A.T. & T. has its own "special relationship’ with Western Electric Co., a wholly owned subsidiary. But the Japanese negotiators are also aware of pending proceedings at the Federal Communications Commission--two dockets which would put the U.S. Government very squarely into the A.T. & T. procurement process, in our view.
The FCC is intending to force A.T. & T. to go beyond Western Electric for telecommunications goods. We do not yet have the FCC order setting out the issues for that proceeding so we don't know how far it will go.
In our view this change in A.T. & T. purchasing policies is an analog to Government procurement, but with a twist that may turn out to be detrimental to American equipment makers and their American employees.
We note with regret that during the mid 1970's four Western Electric manufacturing plants were closed down with layoffs exceeding 30,000—and it was painful for us. So we are skeptical about the prospective benefit that may flow from the new FCC proceeding, essentially if the end result of that FCC order would be to force the purchase of goods either made abroad or in U.S. based branches of foreign companies.
Mr. Chairman, let me close by commending the efforts of Ambassador Askew in holding firm on the NTT issue. We know that there will be intensified pressures to sign off as December 31 comes closer, simply to clear the deck and move on to other things. We would be unable to support our country's access to the code which does not lead to a reciprocity of access in the real meaning of the term.
If our negotiators are unable to reach an agreement on a realistic Government procurement code we should all reconcile ourselves to rejecting it. In our view noagreement is better than a substandard one.
[The prepared statement follows:)
STATEMENT OF JOHN MORGAN, ASSISTANT TO EXECUTIVE VICE PRESIDENTLEGISLATIVE AND GOVERNMENT AGENCIES, COMMUNICATIONS WORKERS OF AMERICA
Mr. Chairman, thank you for asking me to appear today on trade issues. My organization, the Communications Workers of America, represents more than onehalf million American men and women in the telecommunications industry. Many of these members of our union-perhaps 200,000—are employed in jobs involving the manufacture, supply and repair of equipment.
Through the several advisory committees established pursuant to the 1974 trade legislation, we have been involved in watching the flow of trade in telecommunications equipment as affected by the MTN. We have been most interested in two “Codes” included in the MTN-Standards and Government Procurement. In telecommunications, these codes are distinguishable but of necessity interrelated.
For the last 2 years, CWA and its Japanese counterpart telecommunications union, Zendentsu, have been engaging in discussions more or less collateral with the official negotiations of our governments. On a union-to-union basis, we have been educating one another on the trade situation as it is developing. From our vantage point, we have urged our respected Japanese colleagues to use their persuasive powers on their government, to accept the Government Procurement Code and resolve this major and very highly exposed and emotional issue, so that we all can set about our business of putting real order into international trade.
The link between CWA and Zendenstu is our common and long-time membership in PTTI-Postal, Telegraph and Telephone International-the worldwide organization of free communications trade unions in the non-Communist world. In our meeting last December, we pressed on Japanese colleagues to do all they could to help conclude the procurement code by the end of June, well in advance of the December 31 deadline. We stressed that the key benefit of such a course would be to have this matter behind us before our political party conventions. We believed our mutual interests would be best served by keeping this important aspect of trade out of our domestic politics. Unfortunately, the Japanese Government fell last spring, and we sensed the inability to resume our trade unionists' talks unitl the situation in Japan had settled down. We plan to meet again next month.
Our discussions have centered arount Nippon Telephone and Telegraph Public Corporation's procurement policies. Several times in the last 2 years, Mr. Chairman, your subcommittee and the Joint Economic Committee have addressed United States-Japan trade, with considerable stress on the NTT telecommunications entity. Repeatedly, these congressional studies have shown that the "closed circuit” procurement of NTT is a major impediment to concluding the procurement code. Because of the size of its annual purchasing-about $3 billion-NTT is vital both in substance and symbol. An open and realistic procurement policy in NTT would help to symbolize that Japan is willing to live with international trade policy which goes two ways. We believe such moves would be essential to the direction of trade for years to come. We believe the United States and Japan need each other in an improved trade relationship. We hope that Japan will act promptly, and not repeat a much-criticized action.
In 1978, Japan suspended its auto tariffs; but by that time, the Japanese automotive industry had become so advanced that the tariff nullification was devoid of meaning. To ČWA, this attitude does not help to cement relationships between ations, but instead hardens protectionist attitudes.
The figures in you subcommittee's recent report show rather sizable increases of the telecommunications equipment from Japan, both in imports and negative trade balance. We certainly are alarmed over the 60-percent increase in the negative balance of trade, when comparing the first halves of 1979 and 1980.
The total of imports, $56,476,000 for the first half of 1980, could be a misleading figure. In our several years of following these trade statistics, we have been cautioned that such figures may be quite low; one well known consultant estimated for us that the actual market value of the goods can be three to four times the Bureau of the Census figures. This would be the case if the value of the goods, that is, the $5642 million, represented the invoice price ex works. To the ex works prices must be added “CIF” plus various stateside markups. Thus, that $56,476,000 in goods could mean U.S. market prices of $160 million to $220 million. Let me leave this point by saying we would welcome more detail on these figures.
The Japanese Government has been resistant to open up NTT for outside tender. One of the arguments regularly used is that American Telephone & Telegraph Co. has its own special relationship" with Western Electric Co., its wholly owned subsidiary. However, the Japanese negotiators are aware of pending proceedings at the Federal Communications Commission-originally Docket 19129 and not CC Docket 80-53—which would put the U.S. Government squarely in the AT&T procurement process. The FCC intends to require AT&T to go beyond Western Electric for telecommunications goods; since the FCC's order setting out the issues for CC Docket 80—53 has not been adopted, it is impossible to estimate how much "open tender” would be required in AT&T. In our view, this proposed change of AT&T purchasing policy is an analog of “government procurement,” but with a twist that may turn out to be highly detrimental to American equipment makers and their American employees. We do not want to see Americans lose their jobs in telecommunications manufacturing as a direct result of U.S. Government intervention in what has been up to the present a matter of corporate management decision. We are greatly concerned because Western Electric Co., permanently closed four manufacturing plants in the mid-1979's; the layoffs exceeded 33,000.
We are at this point rather skeptical about the prospective benefits to flow from the CC Docket 80–53 proceeding, especially if the end result of the FCC's order is to force the purchase of goods made abroad or in U.S.-based branches of foreign companies.