lower risk approach. Had we lost the competition, the production revenue and production jobs would have been lost to the United Kingdom.

R&D CREDIT: CRITICAL TO LSI OPTICAL GYROSCOPIC RESEARCH AND DEVELOPMENT

A further example of the criticality of research and development to all LSI Instrument Division employees is its relationship to our gyroscopic products. Mechanical gyroscopic products presently account for approximately $40 million in revenue per year at the Instrument Division.

Our competitors-Thomson CSF of France, for example-are developing optical gyros that ultimately will be lower cost and more reliable than mechanical gyros. The LSI Instrument Division is currently spending over $750,000 per year in optical gyro research. It is imperative that we accelerate this level to meet our competition in the future. If we fail, a substantial number of jobs currently dedicated to mechanical gyros could be lost when our customers select an advanced optical gyro in future years. Many of our jobs could go to foreign competitors. We don't want that to happen.

CONCLUSION

In conclusion, Lear Siegler strongly urges the United States Congress to make the Research and Development tax credit permanent. This action would continue to encourage United States business to invest in research and development in order to protect our existing jobs, create new U.S. jobs and provide a continuing incentive to business to continue to create innovative products. This public policy will help the U.S. restore its role as a technological leader in the world community.

LEAR SIEGLER, INC., Lansing, MI, August 14, 1984.

Hon. CHARLES RANGEL,

House of Representatives,
Rayburn HOB, Washington, DC.

DEAR REPRESENTATIVE RANGEL: Lear Siegler, Inc. appreciated the opportunity you and the U.S. House Ways & Means Oversight Subcommittee provided to testify on behalf of the Research and Development Committee.

The Research and Development Tax Credit is an investment in the future in the truest sense. The R&D Credit does provide Lear Siegler, Inc. and other employers with a leveraged, dynamic source of capital to undertake more research and development.

In our testimony, August 2nd, Dr. Thomas Perfitt, V.P., Research LSI Instrument Division and I emphasized that the LSI Flight Management Computer System was developed, in part with funds spurred by the R&D Credit. The LSI FMCS provides tangible evidence of how the U.S. Congressional intent for the Credit is being fulfilled:

(1) Stimulating innovative products.

(2) Improving U.S. productivity and economic growth, thereby replacing tax revenues invested in R&D.

(3) Increasing U.S. international competitive capabilities.

(4) Creating more, new challenging jobs for our people.

(5) Restoring the technological leadership of this nation in the world community. We look forward to working with you, the Commitee, other Members and the U.S. Senate to make permanent this excellent public policy set forth in the Federal Research & Development Tax Credit.

Sincerely,

R.F. VANDER VEEN, Manager, Government Operations.

Mr. VANDER VEEN. To provide a precise example of what I am talking about in terms of a product that you will like to hear about, Dr. Tom Perfitt is here today. He is the vice president, research and development, LSI Instrument Division. He would like to talk to you about a product which addresses several of the key goals that this committee and this Congress had when they wrote the credit.

Mr. PERFITT. Yes, Mr. Chairman. The division I am from is probably one of the highest technological divisions of Lear Siegler, and our business is electronics and reference systems for airplanes and military vehicles and commercial aircraft. I would like to touch on a couple of products just as examples that use, and I think effectively use the tax credit.

The first one that used it is the Siegler, Inc., flight management computer system [FMCS]. I think it satisfied a number of criteria, and I will go through those criteria. The LSI FMCS is a device, a digital computer, and its software, the program that makes it smart, and displays that go on the new Boeing 737 aircraft. Boeing has a new model coming up called the 737-300. This aircraft is in competition, of course, with the government-subsidized Airbus Industries of Europe. The LSI computer can fly the aircraft automatically, from takeoff, to touchdown.

The LSI FMCS allows the pilot to communicate with the ground controllers and sit back and manage the aircraft, but the computer is actually flying the whole aircraft. In the process of flying it, it does some things from a scientific nature that came out of development. The FMCS optimizes fuel, by flying the aircraft at the best altitude and best speed.

The significant thing on this, I believe, is what it is doing to the aircraft. It is increasing the productivity of the 737 in two ways. One, it is cutting the fuel consumption, improving the fuel efficiency by between 5 and 15 percent, depending upon the configuration of the aircraft and the route structure, and so forth, a substantial saving in fuel.

And the biggest thing, it is improving the productivity of the aircraft by reducing the pilot workload and potentially permitting the three-man crew to be reduced to two. So that is a couple of ways the LSI FMCS increases productivity. The LSI FMCS also provides international competition not only for our product but for the Boeing aircraft. For example, against the international competitors, it is a substantial reduction of the pilot workload.

I think an interesting thing that came about in this product was the final competition on this computer to fly the aircraft, the flight management computer systems. The final competition occurred between Smith's Industries, which is a company very similar to our division, located in England, the United Kingdom. We were selected by the Boeing Co. to supply the FMCS even though we were slightly higher in cost, because we had less risk, and the reason we had less risk is we had done a sufficient amount of research and development that demonstrated that the concept was reasonably feasible.

So we were awarded the contract to do both the development and production. Had we not done that, we would have lost both the production jobs and the development jobs to the United Kingdom.

It is very tangible. It is an example, but I think it illustrates what benefit this tax credit is having.

In terms of stimulating new jobs, of course, there are about 200 engineers working on the development of the LSI FMCS. We are just starting production, and there is a substantial amount of production, people producing the device in Michigan represented by the United Auto Workers.

Mr. PICKLE. Would you have produced that digital computer if you had not had the credit?

Mr. PERFITT. That is a difficult question to answer as everyone has said. We probably would have done something. I think the credit encouraged us to do more, and I can illustrate this again by what Rich was alluding to in terms of our budgeting process. We have to return so much money to corporate to satisfy our stockholders and the investment community, and that is why we are in business, of course. And there then would be a chunk of money left

over.

Now, that chunk of money is modified by how much we are going to have to pay our corporate headquarters for loaning money, how much money they are going to give us back in taxes. So the tax credit changes that total amount of money that we invest into research and development. We have a large list of good ideas. We have dismissed the bad ideas, and generally there are insufficient funds within this pot of money to fund even the good ideas.

So I can say that the tax credit was a major influence, but I cannot say that it is black and white, that had we not had the credit, we would not have done the development, or that it was directly responsible. But it was an influence.

Mr. PICKLE. It may be difficult for each of you to say clearly in black and white whether you would or would not have done it. I am sure it helps. But we have got to be certain that it is enough of an incentive that you would do an extra amount of R&D that you might not have done otherwise.

Mr. Vander Veen, what did your firm claim for R&D credits for, let's say, 1982, 1983, and 1984?

Mr. VANDER VEEN. Approximately $700,000 in 1982, about $800,000 in 1983, and this year about $945,000 as the credit.

Mr. PICKLE. Now, another firm, Apple, testified they used upward of $4 million or $5 million.

Mr. VANDER VEEN. Actually, we are slightly smaller, but we are so diversified that-we are so spread out. We produce windshields and we produce ironing boards, and we do not do much research in the ironing board industry. We are proud to lead the market there, but there are some divisions that do not do much research. Actually, one of the problems is that a number of divisions will be very research intensive and one of the divisions will have no research, therefore, the total base period will not grow larger than the previous 3 years, but then that the credit itself, while we have been able to claim a credit, has got to continue to expand further research expenditures.

Mr. PICKLE. Well, I can see why in your case you would have more diversity.

Mr. VANDER VEEN. We have 400 different product lines.

Mr. PICKLE. I want to repeat for you gentlemen a question about which we probably will get in touch with you in writing.

We would like to know whether your firm claims the research tax credit, for what years, and for what amount; and secondly, the specific types of research activities for which your firm claimed credit.

Third, we want to know whether the research was related to basic research, improvement of an existing product, or the development of a new product.

There may be other information along these lines that you would want to submit or want to clarify, and I can understand that. So we hope you will get this information to us as quickly as possible. [The following was subsequently received:]

So that the Subcommittee can more fully evaluate the impact and effect of the research tax credit, Congressman Rangel requests that each witness provide the following information by September 17, 1984:

(1) Whether your firm and/or association members claimed the research tax credit. If so,

(a) for what year(s), and

(b) in what amount(s).

(2) The specific types of research activities for which your firm claimed the credit and whether the research related to basic research, applied research, improvement of an existing product, or development of a new product.

(3) The final product or process to be affected or created.

(4) If the credit had not been available,

(a) the specific product or experimental activity that would not have been undertaken,

(b) whether such activities would have been deferred to the future or never undertaken, and

(c) the resulting amount of reduction in overall research spending.

(5) The research and experimentation activity which was undertaken primarily because of the tax benefits available under the credit.

(6) The amount and types of expenditures reported as "qualified" expenditures in claiming the credit but not included as research costs in reports made to the SEC. (7) If the credit is made permanent, how this would affect your firm's long-term research budgeting and planning.

(8) If the definition of qualified research expenditures is narrowed to include basic and applied research activities, but not development expenditures, how this would affect your firm's research activities.

The benefits of the R&D Credit on a permanent basis will be returned to R&D projects, encouraging technological growth, increased productivity and new, challenging jobs for our people.

The federal Research & Development Tax Credit is excellent public policy because it represents the comprehensive commitment by the United States to restore the technological leadership of this nation in the world community. Lear Siegler, Inc. urges that the U.S. Congress act to make permanent the R&D Credit.

Sincerely,

Lear Siegler, Inc.
R. F. Vander Veen