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. 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. 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. 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. 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. 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. 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. 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.

Summary: 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. 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. 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.