Defense Suppliers: Factors Affecting U.S. Titanium Aircraft Component Manufacturers' Market Share of DOD Business
Published: 2013-07-01T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Titanium is used in airframe components and jet engines, in part because it provides greater strength at lower weight than other metals. It is produced in a number of shapes, including bars, billets, and sheets. By law, U.S. manufacturers are generally required to use U.S. produced titanium for DOD aircraft components, unless an exception applies. One exception allows companies in 23 "qualifying countries" to use foreign produced titanium when manufacturing aircraft components for DOD. There is concern that U.S. manufacturers are losing market share to qualifying country manufacturers that are able to use foreign produced titanium.
The House Armed Services Committee report accompanying the National Defense Authorization Act for Fiscal Year 2013 mandated that GAO assess the ability of U.S. aircraft component manufacturers to compete for DOD contracts. In this report, GAO assessed (1) available data on titanium prices, (2) available data on U.S. and foreign manufacturers' market share of DOD aircraft component contracts, and (3) the factors that affect the ability of U.S. aircraft component manufacturers to compete for DOD contracts. GAO reviewed Census foreign trade data, the best proxy for titanium prices; federal procurement data; and relevant industry studies; and interviewed a broad range of government and industry officials.
section_title: What GAO Found
paragraphs: Census data show that U.S. and foreign produced titanium prices varied from 2003 through 2012 depending on the product. For example, in 2012, the export price (the proxy for the U.S. price) for titanium bar--used to make engine blades--was higher than the import price (the proxy for the foreign price), while the export price for titanium sheet--used to make wing components--was less than the import price. Industry officials noted that these differences may be due to varying operating costs and titanium production capabilities in different countries and to titanium producers' negotiated agreements with prime contractors or aircraft component manufacturers.
U.S. aircraft component manufacturers receive the majority of Department of Defense (DOD) business, whether through direct purchases by the department or through purchases made by its prime contractors. Based on obligation of procurement money, 98 percent of DOD's purchases of aircraft components went to U.S. manufacturers from fiscal years 2008 to 2012. The remainder went to foreign manufacturers, primarily from qualifying countries. DOD prime contractors reported that over the past 10 years they have bought 70 to 100 percent of DOD titanium aircraft components from U.S. manufacturers.
Industry officials identified management of titanium sourcing and industry consolidation, rather than titanium price, as factors affecting competition between aircraft component manufacturers for DOD business. Prime contractors generally manage titanium sourcing decisions for their DOD component manufacturers through long term agreements and an approval process that often directs competing manufacturers to the same titanium source, thereby potentially reducing pricing advantages available to aircraft component manufacturers in qualifying countries. Many officials from aircraft component manufacturers also identified industry consolidation of the titanium producers and component manufacturers as a factor that could affect their access to titanium for DOD contracts, although they have not yet seen any adverse impacts.
section_title: What GAO Recommends
paragraphs: GAO is not making recommendations in this report. Agencies and third parties reviewed GAO's draft report and technical comments received were incorporated as appropriate.

section_title: Letter
paragraphs: Specialty metals, such as titanium and titanium alloys, are essential in the  manufacture of critical Department of Defense (DOD) aircraft  components, in part because they are lightweight, strong, and corrosion  resistant. Since the early 1970s, DOD and its contractors have generally  been required to acquire titanium produced in the United States for the  production of aircraft components unless an exception applies. One such  exception, known as the qualifying country exception, waives the  requirement for procuring specialty metals produced in the United States  if the acquisition relates to international agreements with other countries.  This qualifying country exception permits titanium aircraft component  manufacturers in 23 “qualifying countries” to acquire titanium produced  outside the United States, including titanium produced in non-qualifying  countries, for use in DOD procurements.
H.R. Rep. No. 112-479, at 191 (2012). manufacturers’ market share of DOD aircraft component contracts, and  (3) factors that affect the ability of U.S. aircraft component manufacturers  to compete for DOD contracts.
To address our objectives, we analyzed U.S. Census Foreign Trade  statistics data to determine U.S. export and import values of titanium  metals from calendar years 2003 to 2012, which we determined were the  best available proxy as no publicly available U.S. and foreign titanium  price data are available. For the purposes of this report, Census export  data serve as a proxy for U.S. produced titanium prices, while import data  serve as a proxy for foreign produced prices. We compared these data to  other industry information on prices, obtained concurrence from  knowledgeable government officials that these data were the best  available proxy, and determined that these data were sufficiently reliable  for our purposes. We identified U.S. and qualifying country  manufacturers’ market share of DOD aircraft component contracts from  fiscal years 2008, the year that DOD started collecting these data,  through 2012 by analyzing data from the Federal Procurement Data  System-Next Generation (FPDS-NG) using the relevant aircraft claimant  codes, some of which may not include titanium, because FPDS-NG does  not specifically identify components by their titanium content. We  excluded contracts for services and items that were not identified as  manufactured end products. We also excluded indefinite delivery  contracts but included contract orders issued from those contracts. We  compared the FPDS-NG data to data from DOD reports on supplies  manufactured outside the United States that use the same source data  and determined the data were sufficiently reliable for our purposes. To  determine the market share for aircraft component subcontracts awarded  by DOD prime contractors, we collected information from selected DOD  program offices, aircraft and engine manufacturers, and manufacturers of  titanium aircraft components—such as engine blades and rotating discs— for DOD products. We also reviewed relevant studies on the titanium and  aircraft component industries. We supplemented our work with interviews  with a broad range of officials from government agencies, the four major  U.S. and foreign titanium producers, five of the six major DOD aircraft and  engine prime contractors, as well as nine titanium aircraft component  manufacturers primarily identified by prime contractors. Additional  information about our scope and methodology can be found in appendix I.
We conducted this performance audit from September 2012 to July 2013  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
subsections: section_title: Background
subsections: section_title: Specialty Metals Domestic Source Restriction and Qualifying Country Exception
paragraphs: In 1941, Congress enacted the Berry Amendment, a domestic source  restriction, which required that certain items procured for defense  purposes be grown or produced in the United States. Specialty metals,  including titanium and titanium alloys, were added to the Berry  Amendment in the early 1970s, generally requiring DOD and its  contractors to procure specialty metals produced or melted in the United  States unless an exception applied allowing specialty metals from foreign  countries. In 1978, the “qualifying country exception” was added to the  specialty metals domestic source restriction, which waived the  requirement for procuring specialty metals produced in the United States  when the purchase relates to agreements the United States has with  foreign governments, known as “qualifying countries.” Under this  exception, aircraft component manufacturers in 23 “qualifying countries”  currently are exempt from the specialty metals domestic source restriction  and are permitted to use non-domestic produced titanium to manufacture  DOD aircraft components. Under the current version, the specialty  metals domestic source restriction does not apply to aircraft or aircraft  components manufactured in a qualifying country or aircraft or aircraft  components containing specialty metals produced or melted in a  qualifying country. Table 1 lists the 23 qualifying countries.
Under the qualifying country exception, manufacturers in the listed  countries have greater flexibility when procuring specialty metals for DOD  procurements than U.S. manufacturers. Specifically, they can procure  specialty metals from any source—including non-qualifying countries— while a component manufacturer in the United States must procure  specialty metals from a source in the United States or a qualifying  country, as shown in figure 1.
In addition, there are other exceptions to the specialty metals domestic  source restriction that allow DOD to procure items containing specialty  metals, including titanium in aircraft or aircraft components, from  manufacturers in qualifying and non-qualifying countries. For example,  one such exception, known as the domestic non-availability exception,  waives the specialty metals domestic source restriction when DOD makes  a determination that specialty metals, including titanium in aircraft or  aircraft components, are not available in the United States in the required  form and at a reasonable price. Other exceptions waive the specialty  metals domestic source restriction for purchases outside the United  States in support of combat operations or purchases in support of  contingency operations.
section_title: Titanium and Aircraft Component Industry
paragraphs: The commercial aerospace industry is the largest consumer of titanium  metals in the world. DOD estimates that the aerospace industry accounts  for 60 to 75 percent of the U.S. market, with military and DOD business  accounting for up to 15 percent of the aerospace industry. Titanium  metals are important metals in the aircraft industry, in part because they  are lightweight, strong, and corrosion resistant, making them common for  use in structural airframe and jet engine components. In an airframe,  titanium may be used in bulkheads, tail sections, landing gears, wing  supports, and fasteners. In engines, titanium may be used in blades,  rotating discs, rings, and casings. To manufacture a titanium aircraft  component, there are multiple steps in the supply chain, from titanium  production through the manufacturing of the finished component. Figure 2  provides an overview of the DOD titanium production and aircraft  component manufacturing processes.
There are a limited number of titanium producers in the world, and market  shares are concentrated in a small number of large producers. Currently,  there are four major worldwide producers of high-quality titanium for  aerospace: one in Russia (Verkhnaya Salda Metallurgical Production  Association) and three in the United States. These three major U.S.  titanium metal producers—Allegheny Technologies Incorporated (ATI);  RTI International Metals, Inc. (RTI); and Titanium Metals Corporation  (TIMET)—account for 94 percent of the U.S. production capacity. Due in  part to the limits of worldwide production capacity, titanium products  require a long lead time to produce, and manufacturers may order  titanium metal years before it is expected to be delivered in a finished  product to the customer.
For tactical aircraft and engines, DOD generally contracts with six prime  contractors—Boeing, Lockheed Martin, Northrop Grumman, General  Electric, Pratt & Whitney, and Rolls-Royce—the latter three for engines.  These prime contractors generally rely on aircraft component  subcontractors to produce titanium aircraft components. Prime  contractors or aircraft component manufacturers generally purchase  titanium from one of the four major titanium producers. As described  above, when selling components to DOD, the specialty metals domestic  source restriction limits the U.S. prime contractors’ and aircraft  component manufacturers’ purchase of titanium to one of the U.S. or  other qualifying country sources. Qualifying country aircraft component  manufacturers that sell to DOD have the flexibility to source titanium from  any producer, including a non-qualifying country source.
section_title: U.S. and Foreign Titanium Price Differences Varied By Product Type
paragraphs: Census data from calendar years 2003 to 2012 show variations in U.S.  and foreign produced titanium prices for ingot, bar, billet, and sheet.  Data for ingot—the titanium form used to produce mill shapes—show that  U.S. export and import prices have varied over the last 10 years. The  import price was $3.93 less per kilogram than the export price in 2004,  while the export price was $7.84 lower per kilogram than the import price  in 2007. In 2011 and 2012, export and import prices converged, as seen  in figure 3.
Census data also show that import and export price differences for mill  shapes—the titanium shapes made from ingot and used to manufacture  aircraft components—have also varied over the past 8 years. Specifically,  the import prices for billet—used to make rotating disk engine  components—have, with the exception of 2011, remained less than  export prices over the past 8 years; however, the price difference has  been reduced from $17.82 per kilogram in 2005 to $2.77 per kilogram in  2012. Price differences for sheet—used to make wing components—have  also varied over the last 8 years, with the import price exceeding the  export price from 2009 to 2012. The import price of bar—used to make  engine blade components—has consistently remained significantly lower  than the export price over the last 8 years. Figure 4 shows the historical  import and export prices of titanium billet, sheet, and bar.
Relevant reports and government and titanium industry officials we  interviewed attribute overall price variations to changes in global demand  and the supply capacity of titanium producers to meet demand. Industry  officials also told us that price differences between the U.S. and foreign  produced titanium products can be driven in part by differences in  operating costs and production capabilities between U.S. and foreign  producers. In addition, officials told us that price differences between  titanium products, such as bar and billet, can partly be due to the  increased number of steps needed to produce one over the other.
While price differences between U.S. and foreign titanium can be large— for example, in 2005, Census bar import price was $25.02 per kilogram  and export price more than twice that at $50.37 per kilogram—officials  from prime contractors and aircraft component manufacturers told us that  price differences have not been large enough to have a significant impact  on the cost of a DOD aircraft. For example, data in one DOD study show  that a 50 percent increase in the price of titanium would result in about a  1 percent increase in the cost of a DOD aircraft, because titanium cost is  generally a small percentage of the overall aircraft cost. Furthermore,  prices are typically negotiated through private agreements and can  depend on the specific terms of the agreement between the customer and  producer. In addition, industry officials noted that U.S. produced titanium  has been competitively priced relative to foreign produced titanium.
section_title: U.S. Manufacturers Have the Majority of DOD’s Aircraft Component Business
paragraphs: DOD can either directly contract for aircraft components or contract with  prime contractors that in turn buy them from component manufacturers.  DOD awarded the majority of aircraft component contracts to U.S.  manufacturers from fiscal years 2008 through 2012. Specifically, FPDS- NG data over the past 5 years show that DOD directly obligated a total of   This includes all  $209.6 billion for aircraft component contracts.contracts for aircraft components, some of which may not contain  titanium. Of the $209.6 billion, DOD obligated $205.3 billion, or 98  percent, of these purchases to U.S. manufacturers. Additionally, DOD  obligated $2.7 billion, or 1.3 percent of the total obligations, to  manufacturers in qualifying countries. While obligations to manufacturers  in qualifying countries increased from $335 million in 2008 to $661 million  in 2012, their market share of DOD obligations remained between  approximately 1 to 2 percent each year. Through other authorities  available to DOD, the department obligated $1 billion to manufacturers in  non-qualifying countries.consistently been awarded the majority of DOD aircraft component  obligations each year from fiscal years 2008 through 2012.
section_title: Factors Other Than Titanium Price Affect the Ability of U.S. Aircraft Component Manufacturers to Compete for DOD Business
paragraphs: Industry officials told us that prime contractors’ long term agreements,  prime contractors’ approval of titanium producers, and industry  consolidation—rather than titanium price—are major factors affecting the  ability of U.S. aircraft component manufacturers to compete for DOD  contracts. Prime contractors generally manage titanium sourcing  decisions for their DOD component manufacturers through long term  agreements for titanium that include pre-negotiated prices. Additionally,  DOD prime contractors can also require their component manufacturers  to purchase titanium from producers that they have approved. Prime  contractors’ use of these methods to manage titanium sourcing may  reduce potential pricing advantages from the titanium sourcing flexibilities  that are available to manufacturers in qualifying countries. In addition,  many officials from aircraft component manufacturers identified industry  consolidation as a factor that could affect their ability to compete.  However, they did not identify competition for DOD contracts from  manufacturers in qualifying countries with potential pricing advantages  from titanium sourcing flexibilities as a major factor.
According to industry officials, DOD aircraft and engine prime contractors  leverage their buying power by arranging long term agreements with  titanium producers to ensure titanium availability and pre-negotiated  prices. These arrangements usually specify titanium product, price,  quantity, and delivery schedule. In turn, prime contractors can then direct  their titanium aircraft component manufacturers in the United States or in  qualifying countries to purchase titanium under these agreements. For  example, with rotating components which are strictly controlled, the prime  contractors require component manufacturers to use the titanium from the  agreement to ensure quality. As such, potential price differences between  U.S. produced and foreign produced titanium would not impact the ability  of U.S. component manufacturers to compete with manufacturers in  qualifying countries if all manufacturers buy titanium from the same  agreement. For example, the prime contractor for the F-35 Lightning II  has negotiated a long term agreement with a U.S. titanium producer to  supply titanium at a pre-negotiated price for the airframe of the F-35  Lightning II. Given this, industry and government officials told us that  aircraft component manufacturers working for the prime contractor on the  F-35 Lightning II airframe buy titanium from the U.S. producer at the  prime contractor’s pre-negotiated price.
Industry officials also told us that DOD aircraft and engine prime  contractors often direct DOD aircraft component manufacturers to specific  titanium producers that they have approved. These officials noted that as  a part of the approval process prime contractors typically require titanium  producers to undergo a certification process that can be costly and take  over a year to ensure titanium quality. Prime contractors then direct their  aircraft component manufacturers to use titanium only from an approved  producer regardless of whether the aircraft component manufacturer is  located in the United States or a qualifying country. For example, officials  from one prime contractor told us that their company has only approved  U.S. titanium producers for DOD aircraft components and therefore they  are certain all titanium for their components are sourced from the United  States, even if the component manufacturer is located in a qualifying  country. Additionally, officials told us that in some cases prime contractors  require titanium to be produced by specific processes for DOD products.  For example, one prime contractor told us that it requires its titanium to be  produced by cold hearth melting for any components that rotate on its  DOD aircraft. According to this prime contractor, currently only two U.S.  titanium producers can meet this requirement. Consequently, aircraft  component manufacturers in the United States and qualifying countries  producing DOD rotating components for this prime contractor must use  titanium from one of these U.S. producers to meet the prime contractor’s  requirement.
Lastly, many of the officials from DOD titanium aircraft component  manufacturers that we spoke with identified consolidation between the  titanium production and aircraft component manufacturing industries as  affecting their ability to compete more than competition from  manufacturers in qualifying countries that may have titanium pricing  advantages. According to these officials, before consolidation, companies  generally performed one step in the processes of producing titanium,  manufacturing titanium aircraft components, or assembling a final product  for DOD. Thus, component manufacturers had relatively equal access to  titanium producers. In recent years, two of the three major U.S. titanium  producers have consolidated with aircraft component manufacturers.  These consolidations enable one company to perform multiple steps such  as producing titanium and manufacturing aircraft components. Officials  from manufacturers that have not consolidated told us that they are  concerned about their access to titanium from producers that have  consolidated with competing aircraft component manufacturers. However,  they have not yet seen the impact of industry consolidation on their  companies. Moreover, one official from a non-consolidated titanium  aircraft component company told us that prime contractors’ sourcing  decisions would most likely continue to guarantee access to titanium for  his company.
section_title: Agency and Third- Party Comments
paragraphs: We provided a draft of this report to DOD, Commerce, Interior, and Labor  for their review and comment. Interior provided technical comments that  we incorporated, as appropriate. DOD, Commerce, and Labor did not  provide comments. To help ensure accuracy, we also provided pertinent  sections of the draft to companies with which we spoke and received  clarifying comments which we incorporated as appropriate.
We are sending copies of this report to interested congressional  committees, as well as the Secretaries of Defense, Commerce, and the  Interior, and Acting Secretary of Labor. In addition, the report will be  available at no charge on GAO’s website at http://www.gao.gov.
If you or your staff have any questions about this report, please contact  me at (202) 512-4841 or martinb@gao.gov. Contact points for our Offices  of Congressional Relations and Public Affairs may be found on the last  page of this report. GAO staff who made key contributions to this report  are listed in appendix II.
section_title: Appendix I: Scope and Methodology
paragraphs: To evaluate available data on U.S. and foreign produced titanium prices,  we reviewed multiple sources of titanium price data including American  Metal Market and Global Insight. These sources do not distinguish  titanium prices by the titanium producer or the place of production;  therefore these data do not allow for a comparison of U.S. and foreign  produced titanium prices. We determined that U.S. Census Foreign Trade  Statistics titanium export and import values were the best available proxy  for U.S. and foreign produced titanium prices. We identified four  harmonized system commodity codes in the Census data that identify  titanium products that can be used to produce titanium aircraft  components: (1) ingots; (2) billets; (3) bars, rods, profiles, and wire; and  (4) blooms, sheet bars, and slabs. For the purposes of this report, we  refer to “bars, rods, profiles, and wire” as bar and “blooms, sheet bars,  and slabs” as sheet. We used the Census values from calendar years  2003 to 2012 for titanium ingot and from 2005 to 2012 for titanium billet,  sheet, and bar. The harmonized system codes that identified products as  bar, billet, and sheet in the Census data changed in 2004. To maintain a  consistent data set, we limited our analyses to calendar years 2005  through 2012 for these products. The export values represent the selling  price of U.S. produced titanium metal. The import values represent the  price a U.S. manufacturer would pay for titanium from a foreign titanium  producer, and therefore includes duties paid in addition to the value of the  titanium product. To verify the appropriateness of these data as proxies,  we compared the Census values to other available industry price  information, obtained concurrence from knowledgeable government  officials that these data were the best available proxy, and determined  that these data were sufficiently reliable for our purposes.
To identify qualifying country manufacturers’ market share of Department  of Defense (DOD) aircraft component contracts, we analyzed available  data from the Federal Procurement Data System-Next Generation  (FPDS-NG) from fiscal years 2008, the year DOD started collecting data  on the use of the qualifying country exception, through 2012. For the  purposes of this report, we identified aircraft related contracts as those  designated by DOD claimant codes, A1A Airframe and Spares, A1B  Aircraft Engines and Spares, and A1C Other Aircraft Equipment, some of  which may not include titanium, because FPDS-NG does not specifically  identify components by their titanium content. These claimant codes  include components such as complete aircraft, airframe assemblies, wing  assemblies, landing gears, aircraft engine and parts, aircraft instruments  and parts, electrical equipment, and other accessories and parts readily  identifiable for aircraft use. We excluded contracts for services and items  that were not identified as manufactured end products. We also excluded  indefinite delivery contracts, because they do not specify the place of  origin in the contract. However, we included orders issued off of those  contracts, because they do specify the place of origin in the orders.  Countries listed in the Defense Federal Acquisition Regulation  Supplement (DFARS) § 225.003(10) were considered qualifying countries  for this analysis. Overall market shares are based on the place of origin  and place of manufacture fields in FPDS-NG. We compared the FPDS- NG data to DOD reports on supplies manufactured outside the United  States and determined the data were sufficiently reliable for our purposes.  To determine the market share for component subcontracts awarded by  DOD prime contractors, we collected information from selected DOD  program offices, aircraft and engine manufacturers, manufacturers of  titanium aircraft components—such as engine blades and rotating discs— for DOD products. We also reviewed relevant studies on the titanium and  aircraft component industries.
To identify the factors that affect the ability of U.S. aircraft component  manufacturers to compete for DOD contracts, we reviewed relevant  industry studies and interviewed government and industry officials. We  interviewed officials from DOD offices including Acquisition, Technology  and Logistics; Manufacturing and Industrial Base Policy; Defense  Logistics Agency; and the Defense Contract Management Agency  Industrial Analysis Center as well as officials from Department of the  Interior’s U.S. Geological Survey and the Department of Labor’s Bureau  of Labor Statistics. We also interviewed a broad range of relevant industry  officials from the four major U.S. and foreign titanium producers, five of  the six major DOD aircraft and engine prime contractors, relevant industry  associations, and nine titanium aircraft component manufacturers. These  aircraft component manufacturers were identified by prime contractors.
We conducted this performance audit from September 2012 to July 2013  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
section_title: Appendix II: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, John Neumann, Acting Director;  James Kim; Beth Reed Fritts; Tana Davis; Keo Vongvanith; Julia Kennon;  Marie Ahearn; Roxanna Sun; Danielle Greene; Namita Bhatia Sabharwal;  and Amy Abramowitz made key contributions to the report.