Government's Affect on the HPE and HPEC Industries As with other industries, outside forces can affect the vitality of the HPE and HPEC industries in the United States. Two of the most important influencing factors in these industries are the U.S. Government's competing theories concerning retention of domestic capability, specifically its organic production and R&D capabilities, and the cost driven purchasing practices of the Defense Department. The federal government plays a pivotal role in the lives of firms in the HPE and HPEC industries, influencing supply and demand. The availability of cheap imports and post Cold War DoD acquisition initiatives appear to have helped to weaken HSAAP, the largest U.S. supplier of HPES, in the 1990s. U.S. Government Involvement in the HPE and HPEC Industries The federal government is, without question, the largest customer in the U.S. HPE and HPEC markets. The government also acts as a partner, competitor, and regulator. A significant number of private HPEC companies are concerned about the government's role in manufacturing HPECS and in conducting R&D. With reduced demand for these products, private companies view the government's existing HPE and HPEC manufacturing assets as a potential threat. Historically, most of these firms have depended on defense orders to keep their highly specialized manufacturing operations solvent. Without defense orders, many of these firms would have to find new products and markets -- or go out of business. The majority of respondents said that either they have not attempted defense diversification or that their previous attempts have not been successful. The U.S. government owns some of the largest manufacturing facilities in this sector -many of which are operated at a fraction of their capacity. In many instances, these government facilities work as a supplier to U.S. companies fabricating munitions or act as the contractor buying components from industry. Thus, a private contractor might produce a finished warhead, but use government-furnished material in the weapon. Alternatively, a company could produce components for a finished munition, but leave the final assembly to a government-owned plant. Survey participants verified during interviews that there is tension between private companies engaged in supplying HPECs and government-owned HPEC facilities. Some companies argue that the excess federal manufacturing capacity for HPES and HPECS discourages private firms from establishing or expanding their own production capacity. The companies want more of what business remains allocated to them. On the other side, government-owned facilities (especially GOGOS) desire to maintain some production capacity to produce items that private industry may not choose to produce due to low production volumes; and to maintain manufacturing knowledge so it can be a "smart buyer" of munitions. In addition to the tension between private industry and the federal government, the Defense Department is struggling with its role in managing its HPE and HPEC manufacturing base. A long standing U.S. law and a U.S. Army policy letter from 1998 appear to be in conflict regarding the use of government-owned manufacturing assets. U.S. Law and Policy Disconnect - Government's Role in Manufacturing The role of government manufacturing facilities in the munitions industry is not currently a settled matter within the Department of Defense. This issue has received special attention in the last several years. The role of the Arsenal Act, a long-standing U.S. law, has resurfaced to sharpen the debate on the role of U.S. government manufacturing facilities. The Arsenal Act (Title 10 U.S. Code 4532), enacted in 1956, states the following: The Secretary of the Army shall have supplies needed for the Department of the Army made in factories or arsenals owned by the United States, so far as those factories or arsenals can make those supplies on an economical basis. The Secretary may abolish any United States arsenal that he considers In 1998, a new Department of the Army policy appears to disagree with the Arsenal Act. Industrial Base Policy Letter 98-1 is a document that seeks to "achieve efficiency" within the Army owned munitions base. Two points within this policy letter appear to conflict with the Arsenal Act. Those two points are: Rely on the private sector to create and sustain ammunition production assets in response to production and replenishment contracts. To the maximum extent feasible, transition government-owned ammunition Satisfying both documents is a difficult task. The Arsenal Act seeks to keep procurement of munitions within the organic U.S. Government industrial base while Industrial Base Policy Letter 98-1 seeks to transfer the government-owned industrial base to the private sector. As of early 2001, the Army was still composing a make-or-buy policy that will satisfy both documents. U.S. Government R&D Capability Beyond production activities, the federal government also relies on private companies to some extent for research and development of new energetic materials and components. Some survey participants charge that Department of Defense and Department of Energy laboratories compete with private sector R&D efforts. This has become more of an issue since federal R&D budgets have declined in real terms since the end of the Cold War, reducing the amount of government R&D funding available to industry. According to survey respondents, federal labs also have suffered cutbacks in many instances, causing them to keep more projects in house rather than contract R&D work out to industry. The issue the federal government confronts is how to assure that U.S. HPE and HPEC organizations maintain critical scientific and engineering knowledge for the development of explosives and weapons in both the private and public sectors. If the R&D base is allowed to atrophy, there would not be time in a moment of national crisis to train a new generation of scientists, engineers, and production workers. In both R&D and production, companies are confronted with reduced federal support for There is little data to demonstrate that government organizations have altered their operations in a way that is more intrusive in the HPE and HPEC markets or they have tried to monopolize R&D in the HPE and HPEC sectors. It is clear, however, that government and industry officials must devise a balanced strategy, one that maintains the operational and R&D functions of federal facilities while preserving and strengthening the capabilities of the domestic HPE and HPEC industries. U.S. Government Acquisition Practices: HPEs An extremely important issue within the HPE industry is how U.S. Government buyers procure HPEs for weapon systems. With the temporary closure of the HSAAP, defense programs that relied on its output began to qualify overseas HPEs for their systems. Six respondents reported 15 instances in which they imported HPEs that HSAAP had a history of manufacturing because the material was not available -- or a cheaper price could be found in another country. It is unclear if all of these programs will return to HSAAP. HSAAP is the only manufacturing facility of its kind in terms of capability and capacity in the U.S. If HSAAP cannot count on retaining U.S. customers, the facility could travel down a rough road in the future. Low demand in peacetime could cause a loss of critical manufacturing experience due to low employment. Without an adequate level of experienced personnel, raising production quickly to meet a national need would be hampered. The acquisition officials who chose HPEs for weapon systems and the rules they followed played a role in HSAAP's troubles in the 1990s. 33 Program Executive Officers (PEOs), project managers, program managers, and product managers (PMs)" are responsible for bringing new weapon systems to life. The product manager oversees one, or several related ammunition round programs and is responsible for the development of the rounds. A project manager or program manager oversees a family of activities that reside under product managers, while the PEO oversees the activities of a group of project/program managers. 33 Product managers, program managers, and project managers are often referred to generically as PMs. The actual title depends on the size of the specific program measured in dollars and people. A PEO or PM has the responsibility to procure the items needed to go into a complete weapon system. In essence, the PEOS and PMs hold the purse strings to their combat systems. As high-ranking officials within the armed services, PEOs give major defense programs the visibility they need to garner support. The PEOs and PMs for combat systems consider many factors when they source components. Examples of the types of factors that are considered include performance, risk management, cost, and industrial base concerns. The term "Best Value" is often used to describe the sum of the factors that go into a procurement decision. Many PMs are not restricted on where they buy their HPEs, so they often buy them from HPE manufacturers rather than from the U.S. Army. Under this scenario, industrial base concerns are a factor. However, industrial base advocates within the armed services and industry believe that frequently the cost of HPEs are considered more important than the industrial base implications of a foreign purchase. There is a strong temptation to make cost a major factor in procurement decisions. There is an increasing trend in weapon systems procurements for contracts to be fixed price rather than cost plus; therefore, cost must become a priority. Under this type of system, the priority for PEOs and PMs is the system they are responsible for while industrial base issues, though considered, are secondary and perhaps minimal. The 1990s saw a drawdown in defense spending, which lowered the volume of HPEs produced by HSAAP. The reduction in volume resulted in much higher prices per pound for HPES, leading PEOS and PMs to look for alternative suppliers for their HPE needs. Foreign sources were qualified for U.S. weapon systems, resulting in a further loss of production for HSAAP. This problem has been exacerbated in recent years because during peacetime, the PEOS and PMs have been influential HPES customers. Currently, the U.S. Army is not buying bulk explosives at high rates because it has stockpiles of certain HPEs that it is reducing. The result is that weapon system program offices buy a large portion of the HPEs that are sold. The Army's Operational Support Command (the overseer/owner of HSAAP and other Army ammunition plants and a subordinate command of the Army Materiel Command [AMC]) does not have a high level of influence over these weapons programs. The PEO and PM chain of command falls under the Army Acquisition Executive and not the Commanding General of AMC. Because of this reporting structure, the PEO and PM community does not have to coordinate its efforts with the Army's industrial base community to a high degree. This issue will most likely become less important due to the new management of HSAAP. Currently, HSAAP supplies the U.S. Army with HPES using fixed prices, which will be in effect for the first five years under its new management. HSAAP also sells HPEs directly to weapons programs at competitive prices. With competitive pricing, there would be far less motivation to go offshore. Royal Ordnance, operator of HSAAP, is currently competing to win back the business it lost in the mid-to late-1990s as current contract cycles end and new ones begin. The arguments for and against the foreign sourcing of munitions and their components have existed for years. U.S. HPE and HPEC manufacturers have expressed their concerns about using foreign-procured ammunition and/or components at the expense of U.S. producers. Legislation passed in 1999 addressed this issue. Section 806 - Procurement of Conventional Ammunition process to Section 806 is a portion of the Strom Thurmond National Defense Authorization Act for Fiscal Year 1999 (Public Law 105-261). Section 806 added a critical review the procurement of munitions and munition components. The section addresses the purchase of ammunition from offshore sources. It states: (a) AUTHORITY - The official in the Department of Defense designated as the (b) REQUIREMENT - The official in the Department of Defense designated as (c) CONVENTIONAL AMMUNITION DEFINED - For purposes of this This statutory language gives the position of the Single Manager for Conventional Ammunition (SMCA)35 the authority to keep the procurement of any ammunition item or component within the national technology and industrial base if the SMCA determines that a foreign procurement would have a detrimental effect of the ammunition base. 36 Every munitions program, regardless of service, must submit a procurement plan to the Army's Deputy for Ammunition for review. If an acquisition causes concern, then the Deputy for Ammunition is to work with the service to find a solution. If a solution cannot be found, then the issue is moved to higher levels within the Army for resolution. The ultimate authority for a decision is the Assistant Secretary of the Army (Acquisition, 34 The definition referred to in part (c) refers to all non-nuclear munitions. 35 The Single Manager for Conventional Ammunition (SMCA) is a position created in 1975 to organize the armed services purchases of ammunition in order to increase efficiencies. The SMCA functions are located in several locations of the U.S. Army, with the day-to-day operations located with the Operational Support Command, formerly the Industrial Operations Command. The majority of the munitions controlled by the SMCA are unguided munitions, items such as small arms, unguided bombs, and tank ammunition. 36 The national technology and industrial base includes Canada. |