Mr. Shaw, will you please tell us your place of residence, your business, and whom you represent, and if you have a general statement in regard to the pending legislation, H. R. 3022, we will be glad to have that.

STATEMENT OF LUCIEN W. SHAW, ASSISTANT TO THE COMPTROLLER, LOCKHEED AIRCRAFT CORPORATION

Mr. SHAW. My name is Lucien W. Shaw. I live in Los Angeles, Calif. I am assistant to the comptroller of Lockheed Aircraft Corporation and I am here primarily to represent that company. I have also been generally authorized to represent all of the principal manufacturers of aircraft on the Pacific coast, including Boeing Aircraft Co., Consolidated-Vultee Aircraft Corporation, Douglas Co., Inc., North American Aviation, Inc., Northrop Aircraft, Inc., Ryan Aeronautical Co., and Vega Aircraft Corporation, which together manufacture 60 percent of the aircraft manufactured in the United States. These companies are in general agreement with the point of view which I shall here express, but, due to the distance and shortness of time, I have not had the opportunity to obtain their approval of the specific remarks I shall make.

It should also be made clear that all of the foregoing companies have participated in the work of the contract termination committee of the Aeronautical Chamber of Commerce of America and subscribe fully to the views of that committee. The matters presented herein are supplementary to the statements made on behalf of that committee. It is our opinion that the prompt establishment of a proper procedure for termination of war contracts is of the utmost importance. We believe, however, that the problems involved are of the greatest difficulty and must be given thorough consideration so that proper solutions may be worked out. My remarks will be principally devoted to a discussion of these problems, and to give you the background of the way the things work and what we feel to be the difficulties. Mr. HARNESS. Might I make a suggestion at this point? The CHAIRMAN. Yes, sir.

Mr. HARNESS. I think we are all in agreement as to that. The thing we want to know is how they feel on the issue before this committee. The question here is whether to let the War and Navy Department and other agencies handle contract terminations exclusively or to let the General Accounting Office handle them. I think that is what you should devote your time to.

Mr. SHAW. If you will excuse me I am sort of getting wound up and I am going to launch very shortly on a discussion to some extent on matters and methods of operation which will lead me ultimately to that and perhaps give a little light on the question you have in

mind.

Mr. HARNESS. We have been all through this over and over again about the necessity for legislation and the necessity of expediting the settlement of contracts. We are all in agreement on that. We are all in accord on that and the question is, How are we going to do it? The CHAIRMAN. Let the witness proceed a little further.

Mr. SHAW. What I am trying to tell you is some of the kind of problems we are going to run into on this thing and maybe give you light

on how to do it, what is the proper way to do it, and I may even venture to express an opinion on which is the preferable agency to do it.

Mr. SHERIDAN. With reference to the statement the gentleman is reading here, I have read it, and I think we can expedite the hearings by just putting it in the record and let us proceed to any questions the niembers of the committee may want to ask.

The CHAIRMAN. I believe it would be better to let Mr. Shaw approach the subject as he has developed it in his statement. It is not very long.

Mr. SHAW. In view of the fact that a majority of productive capacity in the country is now engaged in war production, termination of the war effort will require profound economic readjustments. If cancelations are general and these readjustments are not made very quickly, the entire economy may well collapse. It is absolutely essential that a contract termination procedure be provided which will operate speedily and efficiently.

This is particularly true with respect to the aircraft industry because of its enormous expansion and weak financial condition, as brought out on behalf of the Aeronautical Chamber of Commerce. On the average, the aircraft manufacturers have sufficient liquid funds to carry on operations for only 5 weeks, and sufficient working capital to carry on business at present levels for only 2 weeks. An 11.6 per cent decline in the value of inventories would wipe out working capital. Obviously, if the settlement of our contracts is not accomplished with the utmost speed-a matter of days or weeks-we will collapse, and with us will fall the thousands and thousands of subcontractors and materialmen who depend on us.

The CHAIRMAN. Mr. Harness stated we were in agreement as tc what the situation was.

Mr. SHAW. That is right.

Industry feels in the position of an innocent bystander almost certain to get hurt in the present controversy concerning jurisdiction. over this matter. We respect the Comptroller General and we respect the armed services. We have to stick to that story and press it. Our only concern is that the enormous task of handling terminations be given to the agency most likely to handle it quickly and that there be no confusion of authority which will result in delays.

COMPLEXITY OF THE TERMINATION PROBLEM

Because termination settlements must be completed within a period of days or weeks, it is necessary to consider the scope of the problem. Its complexity is truly appalling. It frightens me every time I think about it and I think it will frighten you. Perhaps it has already. For example, 6 of the Pacific coast aircraft companies have a total of 18,800 subcontractors and vendors, or an average of about 3,100 per company. Some of these are, of course, the same firms dealing with more than one of our companies but this probably complicates rather than simplifies the problem. Each of these subcontractors and vendors has a chain of supplies below him-perhaps 5 or 10 on the average. The total commitments to subcontractors and vendors of 6 of these companies are $1,477,000,000, or an average of about $246,000,000 per company. Lockheed and its subsidiary, Vega, for example, have 4,650 subcontractors and

vendors to whom the total commitments are about $312,000,000. Three of the Pacific coast companies have $226,000,000 worth of inventory, an average of about $75,000,000 per company.

Let us see what these figures will mean from a practical standpoint. Take Lockheed and its subsidiary, Vega, and assume a general war contract termination. Immediately we must send out notices to 4,650 separate concerns to whom we have a total commitment of over $300,000,000, compared to our total net worth of about $31,000,000. In many instances, we have hundreds of transactions with these individual suppliers. The mere task of determining what transactions are involved and sending these notices is a tremendous one. Many of these 4,650 concerns have dealings with other prime contractors. All of them have several tiers of subcontractors and suppliers below them. The total number of transactions affected will be astronomical. In addition to our dealings with all of these people, we must examine our $67,000,000 worth of inventory on hand. I want you gentlemen to have a clear picture of what happens to any specific company when the war ends and its contracts are terminated. I should therefore like to go into this one item of inventory in complete detail. I shall not take your time with details on more than one item but I do think we should follow through so far as possible on what actually happens with at least one item. I should like to quote from the testimony of Mr. Ralph Damon, until recently president of Republic Aviation Corporation, given before the Ways and Means Committee on September 16, 1943:

* * * No one in the industry would have been able to carry on production if he had sat down with pencil and paper and calculated to the ounce what he would need to fill contracts already placed. We have had to stock pile all kinds of airplane parts and materials in anticipation of further Government orders. Otherwise, our total production would have been nowhere near its present level. The Nation would have been short of planes and our Army and Navy deficient in means of defense and attack. Because of this, we had no alternative to exercising our judgment-as aircraft builders-in deciding what quantities to purchase of all sorts of materials, even though definite orders covering such inventory accumulations had not been placed. That is going on today. It must go on unless we want the aircraft builders to bog down in their program.

* * *? To us they will

But what are we going to do with these inventories be useless. They will not be adaptable to peacetime aviation. They have been produced, or are in the process of production, to meet the needs of the military type of plane which is called upon to perform a very different function from that performed by the peacetime plane. We shall have no use for them and no place to sell them except in the scrap market. To us they will be merely that; plain scrap, a net loss.

* * *

Some people imagine that our inventories consist mainly of metal in the form of ingots and sheet. Less than 20 percent of our total inventory is of

that type.

*

* *

I believe that earlier one of the members asked what was in the inventory. The common belief is it is mainly piles of aluminum lying around that can be used for one purpose as well as another, for peacetime planes as well as for military planes. That is not true. As a matter of fact, as Mr. Damon stated, less than 20 percent of it is that type of material.

The vast majority consists of semifinished and finished parts which, as I have said, cannot be adapted to peacetime use. The gravity of the situation is, therefore, obvious. * * *

* * *

* *

we are in the position of custodians who, because of the immensity of the pressure of war work, have no clear picture of the amount of Government-owned property in our hands. We cannot tell what proportion of our inventory is actually our own. Nor can we tell exactly how much of

the Government-owned property in our hands has properly been accounted for. For all we know, the Government, at some date after the war, may call upon us to make good the value of deliveries of materials, which at some time in the past have been partly manufactured in readiness for installation, only to be scrapped when plane designs were suddenly changed. Military necessity made such changes imperative, and made it impossible for us to keep a perpetual inventory and a perpetual cost-accounting system. Hundreds of changes in design took place, many of them on planes which were supposed to have been "frozen," and overnight we found ourselves having to scrap large quantities of Government-owned property which, since then, have been lost in the shuffle. That is the price which has to be paid for all-out production on the scale required by our armed forces.

* * *

Mr. DISNEY. What are some of the contingencies that would cause an inventory loss of 8 or 11 percent, as you suggest?

Mr. DAMON. The first and largest one, I would say, covers changes in models. I can recall one example in my organization, where we had to change a lot of special gage aluminum, for which we had no other uses, into stainless steel, because of its proximity to an exhaust manifold. That particular material, in my opinion, will probably end up at so much a pound, as scrap. We are frequently faced with that type of problem.

We use thousands of round-head rivets and brassiere-type-head rivets. With our desire for excellence in performance, we have gone to a countersunk-head rivet, so that we have relatively little usage for the other kind. We are changing our standards from time to time as we find new and better alloys; some * We are changing from new ones, incidentally, since Pearl Harbor.

ordinary hose to bullet proof hose. We have many problems of that kind.

* *

Now, the point of all of that quotation from Mr. Damon's testimony is simply this: One might assume we have exact knowledge of just what is in our inventories, the total number of items and the total of dollars' worth, and so on. The fact is because of the exigencies of war no aircraft company for years has been able to make an actual decent inventory of what it has. We try to keep a running account of the inventory by the spot-checking method and continuing record but we all have a very strong suspicion that the amount of inventory is very greatly overstated and all of that is going to come home to roost at the war's end, when we are faced with the termination situation. We are going to have to verify what the amount of the inventory is and we may find some of it is not there. We will have some very difficult questions of judgment that some individual will have to exercise in order to decide who shall be reimbursed for what has been spent during the war years.

Mr. SPARKMAN. How, then, are you going to be able to make an estimate upon which the Government can safely advance 75 or 90 percent of the settlement?

Mr. SHAW. Well, that problem concerns me as deeply as I have observed this morning that it does you. The best answer that I can give you is that we will have to make some kind of estimate based on the records in our books. If time proves that estimate is not right I can only hope that there is enough of a cushion to absorb the difference which may ultimately be ascertained. I fully recognize your view on it and you have the interest and the duty to protect the Government. I think that must be done. We are in a confused state of mind on this thing. We recognize your problem, but at the same time we also recognize that if we do not receive a very large payment of some kind, quickly, we are going to collapse. It is a question of balancing two needs against each other. The difficulty you speak of is very definitely in the picture. No question about it. We cannot thrust it aside. It is one of the things that must be watched in this picture.

88467-43-pt. 2-14

The CHAIRMAN. Mr. Shaw, will you yield to me just a moment? Of course you know if the sun is shining bright and you start up the street you are likely to leave your raincoat at home. If it is threatening to rain you take it along with you. What has your industry done particularly to try to have available definite figures on the amount of inventory on hand; the part belonging to the Government; and the part belonging to industry; the part paid for, and the part still unpaid for? How far have you gone on that?

Mr. SHAW. Mr. Chairman, we have done practically nothing. The reason is simply this: we are building airplanes and that has taken more time than we have available. As a matter of fact I am stealing time to be here-from other matters that I should be doing which are more closely related to building airplanes. That is true in the entire industry. We are, as you well know, short of manpower at executive levels and we have not yet grappled with this problem except in a primary way. Certainly we are barely commencing to make any headway on the sort of things you are asking about. The answer to the question is that we have been too busy building airplanes and have done nothing of that sort. That is another thing that worries

us.

The CHAIRMAN. The Army keeps telling us we have a long hard fight ahead of us and you are making the planes they and must have. If this war lasts another 12 months couldn't you set up some kind of system in your own plants so as to be able to give promptly and quickly to the contracting officer of the War Department and the Comptroller General the facts?

Mr. SHAW. I think we will have to make some headway on that. If we do not make headway, truly we are going to collapse when the war is over, because it is only if we are reasonably well ready to do the job when terminations do come that we have the slightest possibility of solving the problem. We are, in various companies, starting to grapple with that problem. I might say, though, we now recognize it ourselves. The Army has been placing a lot of emphasis on that very recently and is requesting us to establish permanent inventories. keep thinking of this problem and we are beginning to learn that the present procedure won't cure itself. We are now trying to educate the subcontractors, and so forth. So I think some headway on that will be made. As I say, if it is not made, there is no question we will expire at a very early date after the war is over.

We

Mr. HARNESS. You are concerned, then, about the ability of the industry to make an estimate of the amount of money they have coming from the Government?

Mr. SHAW. I would not be honest if I said no. I certainly am. I think we can do it on the basis of book figures on a basis which will be reasonable. If the payment is not 100 percent I think the margin which will be left will be sufficient to take up the slack if we overshoot the mark.

Mr. HARNESS. Would you say 75 percent would be reasonable?

Mr. SHAW. I would say from the standpoint of you gentlemen it would be very reasonable and the thing that is worrying me is that it does sound like a reasonable figure. I am frank to say, however, that 75 percent to our industry is just a waste of time and is not worth talking about because we cannot possible live on the limited