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Other Issues Affecting the HPE and HPEC Industries

Imports of HPEs into the U.S.
Imports of Manufacturing Equipment into the U.S.
U.S. Exporters Face Hurdles..
Canada's Special Access ..
Surge Capability...
Recycling of HPEs..

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Appendix A: Survey Document
Appendix B: Review of SIC 2892
Appendix C: Review of SIC 3483
Appendix D: Census Definitions from the 1997 Economic Census
Appendix E: List of BXA Assessments

Foreword

The Indian Head Division, Naval Surface Warfare Center (NSWC) of the Naval Sea Systems Command requested this national security assessment of the high performance explosives and explosive components sector. NSWC Indian Head was concerned about the ability of its suppliers of high performance explosives and explosive components to produce their products in the future. Additionally, NSWC Indian Head was concerned about the dwindling investment in research and development, which historically has led to the development of explosive materials for new applications. A key question was the degree to which suppliers' capabilities had been weakened by an extended period of declining defense budgets.

High performance explosives are substances that go through a rapid chemical reaction (decomposition) that produces an expansion of hot gas at an extremely high rate. For the purposes of this report, only those material formulations that have a rate of reaction that is faster than the speed of sound are considered high performance explosives (HPEs). Other materials (propellants and pyrotechnics) produce heat and an expansion of gasses but they have a rate of reaction below the speed of sound.

A high performance explosive component (HPEC) is a weapon, or subassembly of a weapon, that utilizes an HPE as its source of destructive power. Examples of HPECs are artillery shells, warheads for missiles, bombs, fuzes, detonators, etc. Some of these items (e.g., a fuze) use only small amounts of very sensitive HPEs. Other HPECs such as the main explosive charge of a bomb or artillery shell use larger amounts of less sensitive HPEs.

The U.S. Department of Commerce's Bureau of Export Administration (BXA) is delegated the authority under Section 705 of the Defense Production Act of 1950, as amended, and Executive Order 12656 to collect basic economic and industrial information from industry. These provisions enable BXA to gather data essential to assessing the capabilities of the U.S. industrial base. With these assessments, the government can develop policy alternatives that will improve the capabilities and competitiveness of specific industrial sectors and support the national defense.

The Office of Strategic Industries and Economic Security (SIES) is the operating unit within BXA with the responsibility for this data collection and analysis. The Strategic Analysis Division of SIES performed this assessment with technical support from NSWC Indian Head. SIES has worked with the armed services in conducting over 30 national security assessments in the past 10 years. These studies have focused on a wide range of industries that are of great importance to the armed services. Such assessments include ball and roller bearings, gears, robotics, semi-conductors, ejection seats, and cartridge and propellant actuated devices (CAD/PAD).

Executive Summary

The United States' supplier base for high-performance explosives and related components -- products essential to the defense of the nation -- has been operating under increasing stress since the late-1980s. Reduced production orders and lower revenues have made it difficult for both federal government production facilities and private companies to maintain their full capabilities.

It is critical that the United States be an innovator and leader in the HPE and HPEC industries -- and it maintain a broad capability to manufacture compounds and components. To remain competitive in the field, both technologically and in manufacturing know-how, forward-looking management will be required of U.S. government agencies and of private-sector suppliers.

a

Manufacturers of high performance explosives (HPEs) and high performance explosive components (HPECs), whether U.S. government-owned production operations or private companies, face a number of challenges in the years ahead. Munitions R&D dollar spending been falling for the past 10 years, and will continue to fall another 50 percent by 2005, according to Defense Department projections. Munitions R&D is also falling as a percentage of the overall Defense R&D budget. In addition, some manufacturers report an aging of their workforces—a phenomenon that is found in these organizations' research laboratories as well as in their production facilities.

a

For the moment, the nation does not face a supply crisis in HPE and HPECs. But if the United States is to retain sufficient explosive production capacity for the future, greater thought must be given in the next few years on how to maintain infrastructure—in terms of manufacturing facilities, trained personnel, and R&D.

This study examines these matters and other factors affecting the HPE and HPEC industries. The recent history of these industries as well as future needs are covered in the report, which looks at a range of issues, including:

O

Shipments in units and dollars
Employment
Investment in operations
Financial performance

Research and development
• Comparison of U.S. and selected foreign manufacturers of HPEs/HPECS

Competitive assessment of U.S. respondents

BXA Assessment Findings

The HPE and HPEC industries are small. The 33 organizations responding to BXA's survey had combined HPE and HPEC shipments of approximately $513 million' in 1998 and employed approximately 7,900 people in the United States. These organizations were located in 17 states, with the most numerous concentrations in California and Tennessee.

Overall Performance of the HPE and HPEC Industries

While U.S. manufacturers of HPECs were relatively successful from 1995 to 1999, the nation's largest supplier of HPE was in crisis, a situation that affected both the company's federal government and private customers. The U.S. government-owned Holston Army Ammunition Plant? (HSAAP), which dominates HPE production in the United States, lost many of its customers. The reason: rising product prices attributed to high overhead expenses and reduced demand for its HPE products.

Department of Defense (DoD) weapon systems program managers reacted to these higher prices by finding cheaper foreign alternatives. As a result, HSAAP's overhead problem grew bigger because rising costs were spread over a smaller customer base, which drove prices even higher.

In 1998, the U.S. Army solicited bids for a new supplier of HPEs. The Army selected Royal Ordnance (a part of Great Britain's BAE Systems) as the new manager for its underutilized HSAAP facility.

Production was stopped except for a few items. The result of this “shutdown” and change of contractor was a 55 percent reduction in HPE shipments. During this time, it appears that the vast majority of the weapon system programs that left HSAAP bought their HPEs from overseas vendors located in Norway and Sweden.

Royal Ordnance, the first foreign contractor to manage HSAAP, immediately began reorganizing the government manufacturing facility's operating structure, lowering costs, and significantly reducing prices for HPEs. Royal Ordnance is currently trying to win lost customers back as contracts expire.

In contrast, private U.S. manufacturers of HPECs experienced an upward trend during the mid-to late-1990s. Shipments from these producers, as measured in dollars*,

rose 12

1

Two government-owned, contractor-operated facilities could not provide shipment data in the form
requested.
2

HSAAP is located in Kingsport, TN. HSAAP produces HMX and RDX, HPEs with many defense
applications.

Royal Ordnance is a British company, which manufactures explosive materials. BAE Systems, an
aerospace conglomerate, owns Royal Ordnance.
Dollars over time are not adjusted in this assessment.

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