explosive extended range artillery round. A U.S. firm, which was part of a team manufacturing such a round for the U.S. military, approached the Canadian government and asked to make a bid for their needs. This firm was told that it could not bid on the item. The U.S firm asked for assistance from the Department of Defense, which in turn contacted the Canadian government. In the end, the U.S company was allowed to bid; however, a paper design from another country was selected as the winner.

Canada also requires defense trade offsets from U.S. defense contractors. Canada has one of the more aggressive programs in the world, requiring that 100 percent of the value of the contract be represented in the offset program. In other words, if the value of the contract is $10 million dollars, then the contractor must create $10 million of benefit for the Canadian economy through technology transfer, subcontracting, or other forms of compensation. Almost all Canadian government-mandated-offsets are commercial in nature (economic development) and have little to do with the defense item being purchased. The United States does not have such a policy toward Canadian companies. In 1996, the U.S. Department of Defense and the Canadian Department of National Defense signed a Memorandum of Understanding regarding defense procurement. The agreement was to assure equal treatment for U.S. and Canadian companies. Unfortunately, it appears that since this agreement, little has changed in the level of access for U.S. munitions companies in Canada.

Surge Capability - Bottlenecks to Operating at Full Production

With the demise of the Soviet Union, the need for defense manufacturers to mobilize and increase their production in a time of crisis has dissipated. However, shortages of defense items have occurred since the end of the Cold War. An example of such a phenomenon was the near-exhaustion of the Conventional Air-Launched Cruise Missile (CALCM) supply during the Kosovo conflict. Numerous other items required priority ratings to increase production levels. The ability to increase production rapidly is still important to the U.S. industrial base and national security.

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Considering this continued need, BXA asked HPE and HPEC firms to identify the top three factors that would prevent them from operating at full production capacity. Survey participants cited the availability of raw materials as the most frequent obstacle to achieving and maintaining full production (See Table 16 below). However, in terms of cost, the most serious problem in increasing production rapidly and sustaining it could be

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The Bureau of the Census defines full production capacity as the maximum level of production that an establishment could reasonably expect to attain under normal operating conditions. In estimating full production, firms are asked to consider the following: (1) Assume only the machinery and equipment that is in place and ready to operate will be utilized. Do not consider facilities or equipment that would require extensive reconditioning before they can be made operational. (2) Assume normal downtime, maintenance, repair and cleanup. (3) Assume number of shifts and hours of plant operations under normal conditions are not higher than that attained by a given plant any time during the past five years. (4) Assume overtime pay, availability of labor, materials, utilities, etc., are not limiting factors. (5) Assume a product mix that was typical or representative of production during the last quarter. If the plant is subject to considerable short-run variation assume the product mix of the current period. (6) Do not assume increased use of productive facilities outside the plant for services (such as contracting out subassembly work) in excess of the proportion that would be normal during the last quarter.

Number of
Mentions

Bottleneck

Table 16: Top Five Bottlenecks to Full Capacity Production

Average Number of
Average Cost to Correct Weeks to Correct

#One firm reported a multimillion-dollar cost for correcting the bottleneck, which raised the average significantly. *One firm reported a multimillion-dollar cost for correcting the bottleneck, which raised the average significantly.

the availability of finished materials, components, and machinery, where long-lead times may be encountered.

According to survey respondents, almost as important as the availability of raw materials and other critical materials is the availability of technical expertise across a range of disciplines. Other potential limits on increasing production include labor training costs and the availability of general labor.

Closed/Mothballed Plants and Restart Requirements

According to survey participants, the challenges confronting companies and the Defense Department in ramping up production in a national emergency could be substantial. The mean time needed to restart facilities judged to be capable of being restarted is almost one year.

Why such a long time for restart? BXA's survey shows that not all manufacturing organizations spend funds to keep inactive production lines in operating condition. Only six of the 33 surveyed organizations indicated that they maintain idle equipment. The mean cost across the five respondents that provided expense data was approximately $175,300 per year.

The extent of HPE and HPEC production unit retirements in the United States from 1995 to 1999 was substantial. Slack demand was cited as the chief reason for eight organizations closing eleven operations, the majority being production lines rather than entire facilities. The mean percentage of capacity shut down per firm was 34.7 percent."

Six of the eleven closings occurred in 1995. Thirty-six percent of these 11 companies said that their production lines or plants could not be restarted.

Diversification in the HPE and HPEC Industries

One way defense companies have chosen to keep themselves viable during low periods of defense spending is to diversify their operations. Companies enter into commercial markets to lessen their dependence on defense orders.

Of the 26 defense diversification question respondents, half stated that they were successful while the other half had discouraging experiences with diversification not attempted it at all.

-- or had

Respondents with positive diversification experiences have moved into markets such as automobile air bags and cartridge- and propellant-actuated devices. Several governmentowned contractor-operated (GOCOS) facilities have diversified by working with the Armament Retooling Manufacturing Support (ARMS) program. This program provides incentives for commercial businesses to relocate to the grounds of GOCO ammunition plants.

The majority of firms that had discouraging experiences or that did not attempt diversification said that their processes, equipment, and/or facilities are optimized for military products and are not compatible with civilian activities. This is especially true for GOCOS, whose facilities are built for high-volume munitions work. One GOCO participant stated that manufacturing commercial products efficiently was difficult because its facilities had too many small buildings spread too far apart.

Shortages Experienced by U.S. Munitions Manufacturers - 1995-99

Even in peacetime, munitions manufacturers encounter significant, if not disruptive, shortages of critical materials and components. Fifteen respondents to BXA's survey disclosed that they experienced twenty-six shortages of necessary production process materials between 1995 and 1999.

The most frequent shortage involved specific HPES or HPES in general (10 mentions). Lead azide, which is used as an initiating explosive in munitions, was the material most frequently cited as at times being difficult to obtain.

U.S. HPE organizations have responded to such HPE shortfalls by either finding and qualifying another source, or purchasing the material from available U.S. government stocks. Survey respondents reported shortages for 17 other materials as well. Examples of these shortages include chemicals for HPE manufacturing and metal parts for HPECs. These were one-of-a-kind events, however, that were not a problem for these industries. All but one of the shortages was solved, usually by making design changes to products, or by finding new vendors for the materials.

Recycling of HPES - Future Opportunity and Challenges

The recycling of explosives is a possibility that could greatly affect the HPE industry. If an economical way of recycling HPES extracted from munitions and rocket motors can be found, then a new and potentially large supply would be available. The concept of recycling materials could solicit support from many sides.

U.S. Government policy is making use of recycled materials a more important part of its procurement practices. Executive Order 13101, signed by President Clinton in September 1998, states "each executive agency shall incorporate waste prevention and recycling in the agency's daily operations and work to increase and expand markets for recovered materials through greater Federal Government preference and demand for such products."

In response to this Executive Order, the Under Secretary of Defense for Acquisition and Technology, Jacques Gansler, distributed a memorandum in December 2000 that reinforced Executive Order 13101 and stated that the munitions demilitarization stockpile should be viewed "as an asset instead of a liability and use it to maximize resource recovery and reuse."

The United States currently does not manufacture some explosives, one example being TNT**, and would potentially benefit from a recycled domestic source. In addition, explosives manufacturing uses a variety of environmentally hazardous chemicals. Using current explosives rather than creating new material would help reduce environmental risks and damage.

Not many of the survey respondents salvage explosive materials from surplus munitions; however, a third of the survey participants stated that they were interested in examining the concept to see whether it is practical. Specifically, eleven respondents expressed interest in recycling HPES. Conversely, two respondents stated that HPE recycling would hurt their business base. Overall, the respondents were positive toward the concept.

Company opinions on recycling were qualified by a variety of factors however. One of the points most frequently mentioned was that the recycling of HPES would have to be done on a case-by-case basis. Each formulation is different and stringent specifications would need to be followed to ensure that the recycled material would perform the same as virgin material.

Some respondents stated that recycling HPES may not be economical compared to newly produced HPEs. One respondent stated that the "techniques for recycling to produce economically viable products [from the myriad of explosives & components] do not yet exist, and DoD R&D funds are inadequate to fully explore the potentials."

44 The US Army is currently studying how to address a shortage of TNT that will occur in the next several years. One of the options is to reuse or recycle TNT from obsolete munitions. It is yet to be determined if the reclaimed material will be suitable for reuse.

Another side to the recycling story could become an important factor in deciding whether HPES should be recycled: recycled material could compete with new production HPEs.

Currently, there are several programs underway to find ways to recycle HPEs. TPL, Inc. of New Mexico is testing a process that recovers HMX from LX-14. Alliant Techsystems's Thiokol Propulsion unit is developing a process that will pull HMX out of ballistic missile rocket motors at a price that may compete with new production HMX. In the case of recycled HMX from ballistic missile rocket motors, the amount of potential recycled material is in the millions of pounds. This potential reserve of HMX could supply the U.S. with its peacetime HMX needs for many years.

All of these processes are in development and are several years from becoming full-scale production processes. The HPES from recycled material would have to be qualified for military systems. These potential options may give users of HPEs an alternative U.S. source. Producers of HPES, especially HSAAP, could find it difficult to compete against recycled HPEs.

Taggant Use in High Performance Explosives

Terrorist attacks on military and civilian facilities over the past 20 years caused western countries to call on manufacturers of HPEs to blend taggants into their materials. Taggants are marking agents that identify the explosive used after detonation. Taggants assist law enforcement agencies in tracing the source of explosives materials used in terrorist attacks.

Four organizations responded that they have been required to add taggants to their products. Of those four, three of them stated that using taggants has not significantly affected the way they do business. One firm said that using taggants increased the cost of production, an expense passed on to customers, but did not dramatically affect the way it does business.

In contrast, another respondent stated that the use of taggants did have a significant affect. This respondent stated that the taggant it used was expensive and that the use of the taggant required the organization to purchase additional equipment to work with it.