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Critical Technology Assessment of the U.S. Advanced Composites Industry
It is estimated that the 1991 U.S. market for advanced composites was $2.6 billion, out of a total world market of $4.7 billion. The U.S. industry is driven by defense/aerospace applications, the largest U.S. end-user market of advanced composites, while foreign advanced composite industries are more focused on commercial applications. Reductions and cancellations in recent years in defense spending, particularly in military aircraft applications such as the Air Force's Advanced Tactical Fighter, the B-2 bomber, the Army's LH light helicopter, and the Navy's A-12 airplane, have resulted in the downsizing of the U.S. industry, declining profits, employment, and private research and development (R&D) expenditures. Recent years have also shown an increased government share of the industry's total R&D (according to our sample), indicating a growing dependency on federal dollars during a time of defense reductions. The implications for the U.S. industry are negative, as the industry is less financially capable of converting to commercial applications, where the U.S. industry has historically lagged, without sustained U.S. Government assistance.
The National Defense Authorization Acts of 1991 and 1993 require the Departments of Commerce and Defense to prepare assessments for the Senate and House Armed Services Committees on the financial and production status of industries supporting technologies critical to current and next generation defense systems.
The primary objective of these assessments is to provide government policymakers and industry with comprehensive information and analysis of the production and technology status, economic performance, and international competitiveness of private sector firms involved in critical technologies, in light of declining defense budgets.
Advanced composites were one of six such technologies chosen for initial analysis by a consensus of the Department of Commerce (Bureau of Export Administration), Department of Defense, and the White House Office of Science and Technology Policy. The other assessments cover Advanced Ceramics, Artificial Intelligence, Flexible Computer Integrated Manufacturing, Optoelectronics, and Superconductivity. While the Department of Defense has deemed these technologies essential to the development of the next generation of weapon systems, they are also crucial to the nation's ability to compete in the global economy.
Advanced composites are generally defined as a family of lightweight structural materials with reinforcing fibers such as carbon, aramid, or high-strength fiberglass that are embedded in a matrix material. Advanced composites are generally distinguished from other reinforced materials by the use of these continuous high-stiffness strength fibers.
A comprehensive questionnaire was used by the Department of Commerce to collect data from a wide range of companies in the U.S. advanced composites industry: material suppliers; fabricators; and prime contractors.
Associations and consortia were asked to participate and provided support in survey design and field testing, technical advice, and in establishing company contacts. The Suppliers of Advanced Composite Materials Association (SACMA) was particularly instrumental in this advanced composites assessment.
An extensive product code list was formulated to collect data from this broad spectrum of companies. It was subdivided into two groupings, one for the actual advanced materials and the other for applications of these materials.
The materials covered include fibers, resins, prepregs, metal matrix composites, ceramic matrix composites, and carbon/carbon composites.
Applications include military aircraft, other non-aircraft military items, commercial aircraft, sports and recreation, automotive, industrial, non-defense space structures (other than ablatives), mass transit, civil engineering/construction, and an "all other" category.
The U.S. Bureau of Mines estimated that the 1991 U.S. market for advanced composites (excluding advanced ceramics) was $2.6 billion, which comprised 54 percent of the world market of $4.7 billion.
Study participants reported total sales by their advanced composite divisions as $1.1 billion during this same time period, representing almost half of U.S. consumption. This comparison is not definitive, however, as total sales of certain advanced ceramics, specifically, ceramic matrix composites, are included in this study's data, which may not be included in the Bureau of Mines data. In addition, many of the value-added advanced composite structures, which comprise a portion of the total market, may not have been reported as such, indicating an understatement by our study participants. Foreign sales in the United States were also not definitively captured.
A total of 66 companies participated in this data collection effort, with information provided on 73 individual company operating units. These units serve as the sample analyzed for purposes of this assessment. This sample is strongest in its coverage of the U.S. advanced composite fibers industry. Information collected on imports was limited to those foreign producers who have actual sales offices in the United States.
Respondents further defined the 73 operating units into 99 manufacturing plants located in thirty-one U.S. states and seven foreign countries. The majority of these plants, 89 of the 99, are located domestically.
Sixteen of the 66 respondent companies are foreign-owned: 6 by British firms; 4 by Japanese firms; 2 each by Dutch and Swiss firms; and 1 each by a French and a German firm.
The data collected on the U.S. industry, ranging from financial statistics, employment, shipments, capacity utilization, to research and development expenditures, highlights the negative impact of defense reductions on this U.S. industry. This injurious effect, combined with foreign industries' lead in commercial advanced composite applications, has dire implications for the future competitiveness and survivability of the U.S. industry.
The vast majority of information provided by companies who are users of advanced composites materials pertained primarily to defense uses. Almost all respondents, whether producer or user of advanced composites, reported supplying various domestic weapon systems: 34 different military aircraft systems were identified; 24 missile and rocket systems; and 16 other various military and space systems. This is in contrast to foreign advanced composite industries, particularly those in Asia (primarily Japan), where commercial uses are more predominant than defense.
The surveyed firms reported that domestic plants are on average 17 years old; foreign plants are on average 8. Over half the domestic facilities went on-line since 1980, indicating a high level of continued investment by this industry.
Capacity utilization rates for the advanced composites industry are low in comparison to the U.S. average for manufacturing facilities. The average rate for all reporting facilities in 1992 was 59 percent. In all, 50 percent of these facilities (19 of 38) were operating at 50 percent or less capacity.
Financial information was collected on both a corporate basis and, when possible, on a division basis. Many companies in the advanced composites industry are operating units of much larger, diversified corporations.
On a corporate basis the financial performance of participant companies varied between 1987 and 1991, with aggregate sales volumes (including advanced composites) increasing from $56 billion in 1987 to $93 billion in 1991. Profit margins declined during the same period, dropping from 7.3 percent of sales in 1987 to 4.5 percent in 1991. Roughly one-third of the reporting companies experienced net corporate losses in each year during the five year review period.
The division data reflects the changing nature of the advanced composites business, where economic pressures on all businesses have resulted in new financial pressures on each operating unit of larger organizations.
Division level sales grew 73 percent over the review period, yet net losses grew from $2.2 million in 1987 to $27.4 million in 1991. This reflects extreme competition and the high costs of doing business in advanced composites. Profit/loss margins reflect these losses. [More detailed financial information is included in the material suppliers, fabricators, and prime contractor summaries below.]
Based on this financial data, corporations are now generally less capable of financially underwriting specific operating units in the long term, resulting in these units having to financially support themselves more than in the past. The consolidation in this industry (e.g., Rhône-Poulenc's sale of its advanced composites operation in Kentucky to Ciba-Geigy or BASF's shut-down of its South Carolina facility for want of a buyer) reflects this inability by large corporations to maintain non- or less-profitable units.
Overall industry employment declined 17.3 percent between 1989 and 1993.
Manufacturers comprised the vast majority of employees reported, ranging from 89.9 percent of total employment in 1989 to 91.7 percent in 1993. Manufacturers' total employment declined 16.7 percent between 1989 and 1993, with the downsizing beginning in ernest in 1990.
Research and development (R&D) facilities comprised the second largest group of employees reported, accounting for 9.1 percent of total employment reported in 1989 and declining to 5.3 percent in 1993. The number of R&D employees declined each year, with a net change between 1989 and 1993 of -53.9 percent. This reduction is attributed to the contraction of the industry due to reductions in the aerospace market, which is the predominant reason for the decline in profits. Companies cannot afford R&D at the same level as before the aerospace downturn.
Employment by sales/non-manufacturing firms was the smallest category of employees, but was the only category to experience an increase in employment. During the review period employment climbed 253.4 percent. The growth is attributed to increased market share by foreign companies with sales operations in the United States.
Availability of a skilled workforce was of major concern to survey participants. Many entry-level employees have low skills, requiring significant company investment in basic training, as well as technical training needed for advanced composites work. Lack of skilled workers, both in basic fundamentals such as math and reading and technical expertise, serves as an impediment to the vitality of this and probably other U.S. industries.
Total reported shipments of all fibers increased 29.7 percent between 1989 and 1993. During this same period, defense shipments as a portion of total shipments declined from 35.3 percent to 28.1 percent. This can be attributed directly to reduction in defense spending. Exports grew from 9.6 percent to 14.0 percent. Carbon fiber comprised the bulk of these reported fiber shipments.
The increase in fiber shipments is attributed in part to an increase in exports and to the trend of sports and recreational product manufacturers' expanding use of fiber (carbon fiber). The price necessary to compete in this application, however, is substantially less than defense/aerospace carbon fiber, resulting in fiber producers barely breaking even, if at all. The same holds true for the growth in prepreg shipments as discussed below.
The remaining fiber categories experienced a 24 percent decline in shipments between 1989 and 1993. Defense shipments fell drastically, dropping 59 percent in dollar terms and from 51.5 percent to 27.5 percent of total shipments. These products have been severely hit by defense cutbacks. Exports of these other fibers grew, both in dollars (18 percent) and as a percent of total shipments (from 16.4 percent in 1989 to 25.5 percent in 1993).
Total shipments of resins rose nearly 35 percent between 1989 and 1993. Defense shipments dropped 13.6 percent over the period. More significant is the drop in defense's share of all resin shipments, which fell from 28.4 percent in 1989 to 18.3 percent in 1993. Exports fluctuated, with a net result of a 4.5 percent increase overall. The majority of data submitted in the resins category pertained to epoxies.
Total prepreg shipments showed steadier growth throughout the review period than did either fibers or resins. Shipments grew 13.3 percent between 1989 and 1993. Prepreg shipments for defense fell, both in dollars and as a percent of total shipments. Defense applications accounted for 49.4 percent of total shipments in 1989, dropping to 36.3 percent in 1993. The value of defense shipments fell by 16.8 percent during the same period. Prepreg exports boomed, growing 42.3 percent between 1989 and 1993, and going from 4.6 percent of total shipments to 19 percent.
Shipment information for non-polymer matrix composites, metal matrix composites, ceramic matrix composites, and carbon/carbon composites, were found to be almost entirely defense driven, more than any other product reviewed. Non-polymer based composites comprise less than 10 percent of all advanced composites, but hold unique abilities unavailable from polymer matrix composites. Defense shipments of non-PMCs declined 31 percent between 1989 and 1993, dropping from 100 percent of total shipments to 78.4 percent. There were no exports reported during the review period. As the development of these newer composite areas is driven overwhelmingly by the Defense Department, defense spending cutbacks could inhibit U.S. industry participation in these areas.
Many companies reported that their reduced overall sales correlate to reduced profits and reduced funds available for R&D. Increased competition in a smaller worldwide defense market, combined with declining U.S. defense spending, will further impair financially-troubled companies' ability to expend funds for new research. In the long term this could result in next generation technologies being developed offshore by foreign firms who are not as dependent on defense spending and defense markets.
Total reported research and development (R&D) expenditures grew 58 percent during the review period. During this same period there was a drastic change in the sources of R&D funding. In 1989 private funds (i.e., industry) accounted for nearly 80 percent of all reported R&D; by 1993 private funds made up less than half of R&D spending.
Through the five-year review period, private R&D funds were fairly constant in dollar terms, declining slightly over five percent between 1989 and 1993. In-house sources comprised the majority of these private funds, but the dominance of this source lessened somewhat, dropping from 77 percent of total private R&D funds in 1989 to 65.2 percent in 1993. The role of domestic customers grew in importance, from 19.9 percent in 1989 to 33.8 percent in 1993. The other private sources remained fairly constant and were not significant.
In contrast, public funding skyrocketed between 1989 and 1993, particularly in the first two years. Funds from public sources grew by nearly 300 percent. The Department of Defense (DOD) consistently accounted for the majority of the funding, while non-defense government entities never provided more than 19 percent of total public support. Within DOD the Air Force was initially the largest financier of advanced composites R&D; by the end of the review period, the Advanced Research Projects Agency (ARPA) had assumed the dominant role.
In 1992 the average capacity utilization rate for material suppliers was 58.9 percent. The largest producers who comprise the bulk of U.S. production have the lowest utilization rates, a negative indicator for the industry.
Between 1987 and 1991 total corporate sales for material suppliers increased 62 percent, while net income fluctuated. Corporate profit margins exhibited a decline, dropping by almost half from 9.5 percent in 1987 to 5.1 percent in 1991. The number of individual companies reporting net losses increased each year, ranging from 12.5 percent of respondents in 1987 to 31 percent in 1991. In spite of the increase in dollar value of sales, profits have declined.
The financial performance of these companies' advanced composites divisions was much worse. While total divisional sales increased ($328 million in 1987 to $563 million in 1991), net incomes plummeted from about $12 million in 1987 to a loss of $28.5 million in 1991. These divisions' aggregated profit margins dropped from 3.6 percent in 1987 to -5.1 percent in 1991.
The percentage of companies experiencing net losses grew from 20 percent of divisions in 1987 to almost half in 1991.
R&D expenditures by material suppliers increased by almost 41 percent during the review period of 1989 to 1993. In 1989 private funds accounted for 98.1 percent of these expenditures; this percentage dropped further in each subsequent year. By 1993 private sources accounted for less than half the R&D expenditures. This sharp decline reflects the poor financial health of material suppliers' advanced composites businesses.
The decline in the U.S. industry's ability to internally fund research for new materials impairs the ability of the industry to compete internationally in next generation developments.
Moving from material suppliers to fabricators and then prime contractors, the nature of these different firms changes, as fabricators and prime contractors are more diversified and thus less dedicated to the advanced composites sector. For this reason it was difficult for these companies to segregate their advanced composites business for reporting purposes.
Fabricators had an average capacity utilization rate of 58.6 percent in 1992, about the same as material suppliers. Over half the reporting plants were operating at 50 percent or less capacity. Unlike the material suppliers, fabricators with the largest shipment volumes also had the highest capacity utilization rates. This is attributed to their diversified operations, of which their advanced composites business is only a portion.
Corporate sales for fabricators grew between 1987 and 1991, from $31.1 billion to $53.2 billion. Net income peaked in 1989, and then declined. Profit margins reflected this trend, peaking at 8.8 percent in 1989 and dropping to 4.1 percent in 1991.
The number of companies reporting corporate losses during the review period was fairly constant at about 38 percent of responding firms.
At the division level, gross sales grew during the five-year period, from $303 million in 1987 to $531 million in 1991. In only one year, however, was a net profit reported. In 1987 the loss was 4.6 percent; fabricators recovered in 1991, the only profitable year, with a profit margin of 0.2 percent. The number and percentage of companies experiencing net losses declined during the five-year period, with 71 percent of divisions reporting losses in 1987 and 33 percent of those reporting in 1991.
Fabricators' R&D expenditures rose 37 percent between 1989 and 1993. Private funds comprised 68.8 percent of these total expenditures in 1989, and declined as a percentage of the total each year. In 1993 private funds accounted for 58.9 percent of fabricators' R&D expenditures.
In 1992 prime contractors had on average the highest capacity utilization rate, 72.7 percent. None of these companies, however, are major advanced composite producers, and are dependent on their upstream suppliers, both fabricators and material suppliers.
Aggregated corporate sales increased each year during the five-year period, from $1.7 billion to $2.4 billion. Net incomes also increased each year, from $55.1 million to $92.9 million. The profit margins fluctuated from 3.2 percent in 1987 to 3.8 percent in 1991. None of the reporting companies reported a net loss.
None of the reporting prime contractors have operating divisions which specialize predominantly in advanced composites, so no such information was provided.
R&D expenditures by prime contractors grew significantly between 1989 and 1993, up 224 percent, although in actual dollars these expenditures were much lower than those by material suppliers and fabricators. In 1989 private funds accounted for roughly half these expenditures. As was seen with both material suppliers and fabricators, this percentage declined each year. In 1993 private funds accounted for only 23.2 percent of R&D expenditures.
Industry participants reported 81 significant cooperative agreements, both domestic and foreign. The trend toward joint efforts, particularly in consortia, has been growing in recent years, especially since the principal U.S. advanced composite end-market, the defense/aerospace industry, continues to decline. The companies reported that they are engaged in joint efforts as a necessity for financial survival.
Examples of consortia include Great Lakes Composites Consortium, an industry/Navy cooperative development effort, the Advanced Composite Technology Transfer Consortium, an academia/industry group studying infrastructure applications, and the Northrop Development Team, a group of 18 California companies who are developing mass transit applications.
The National Aerospace Plane (NASP) program, developing an airplane that can fly into space, is an example of a joint industry/government program. The NASP program to date has cost approximately $2.5 billion, of which the U.S. Government has invested $1.8 billion. Industry has estimated that commercial application of composite developments alone will provide at a minimum about $7.5 billion in new sales during a twenty year period, generating 75,000 new jobs and a four-fold return on taxpayers' investment.
Of the 81 major cooperative agreements reported, 31 are with foreign firms. While there has been significant interrelationships between U.S. and foreign companies in this industry since the 1960s, our study participants reported recent licensing agreements that indicate that technology tends to be flowing out of the United States, rather than into the United States. The Japanese were cited most frequently in foreign agreements.
Industry survey respondents reported a number of sole and single source producers and suppliers for defense items. Rather than citing this as a potential bottleneck to production, the companies attributed this in part to DOD's costly qualification process, which tends to create single and sole sources. Respondents also cited the proprietary material formulation used by companies which results in many advanced composite materials being sole sourced, although other materials may have similar properties and be qualified to the same specification. In sum, few items or products serve as impediments due to sole or single source problems.
Companies also reported imports of key manufacturing equipment, components, parts, and materials needed for their advanced composite operations. The most frequently cited source was the United Kingdom, followed by Japan and then Germany. In most cases the use of foreign sources is attributed to the DOD qualification system, costs, and lack of awareness, among other factors.
The study participants were asked of the impact of defense cuts on their advanced composite business as a whole. Most companies indicated that their sales have declined, along with comparable drops in employment and in expertise. Technological developments in the industry, historically driven by military programs, were also reported to feel the adverse affects of reduced defense spending.
The reductions and cancellations of major defense programs and the slow-down in commercial aircraft build rates have thus adversely impacted the U.S. advanced composites industry. Sales to defense/aerospace customers were the most profitable for advanced composite suppliers. While some of the volume lost has been recovered, the prices required to compete with both foreign sources and conventional materials in these market segments force advanced composites suppliers to often sell at a loss in these areas. As a result the financial health of U.S. advanced composites suppliers continues to erode.
The vast majority of study participants indicated that they were unaware of any Federal, state, or local government defense conversion programs to assist advanced composite suppliers.
Awareness of conversion programs is changing, however. In March 1993 President Clinton announced an initiative to distribute the $1.4 billion appropriated by the Congress in 1992 plus an additional $300 million. About $500 million is available this fiscal year through the Technology Reinvestment Program (TRP), an interagency project which already has identified advanced composites as technology focus areas.
The respondents who were familiar with the TRP indicated the importance of funding advanced composites programs. These programs could utilize the dual use potential of these materials to address many of the nation's transportation and infrastructure needs while providing the military with the technology advantages it needs. The areas most often mentioned which would require Federal assistance to demonstrate the benefits of and catalyze the market acceptance/expansion of advanced composites include bridge construction/repair, automobile bodies/fuel tanks, and commercial aircraft engines/primary structures.
The Department of Commerce National Institute of Standards and Technology (NIST) Advanced Technology Program (ATP) was also mentioned as an opportunity to facilitate market acceptance/expansion of advanced composites. However, no companies were aware of any existing or pending NIST/ATP programs which focus on advanced composites.
Study participants made a number of suggestions of how the Federal Government could provide conversion assistance. These included recommendations for new Federal funding programs to demonstrate the benefits of advanced composites to new users, continued funding for existing programs, education and training assistance, and tax incentives for reinvestment to develop non-military applications.
Most responding companies reported (in 1992) that DOD has made no effort to use commercially viable advanced composites. When asked in what ways DOD could assist in promoting such dual use composites, companies provided a wide range of comments, including funding requests, development of dual-use demonstration programs, expansion of transition programs like the NASP, and the creation of a central technology development office which would coordinate defense and commercial technology activities.
There were 129 different companies reported as principal domestic competitors. Eighteen of these companies, roughly 14 percent, are foreign-owned. Half of the ten most frequently mentioned companies are also foreign-owned. Hercules of Magna, Utah, most the most frequently mentioned company by survey respondents.
Companies also provided information on who they consider to be their major foreign competitors. There were 64 different companies reported from 19 different countries. Only three of these companies are U.S.-owned firms. Toray Industries of Japan was the most frequently mentioned firm. Three of the ten most frequently mentioned foreign firms also appear in the list of top ten domestic companies.
It is evident from the responses that company respondents, whether material supplier, fabricator, or prime contractor, assessed the competitiveness area from a materials perspective, given the reporting of Hercules and Toray as the most frequently cited competitors. The industry is driven by the materials, as seen from these responses.
The combination of the defense cutbacks and the financial and competitive pressures on large corporations is having a negative impact on the size and vitality of the U.S. advanced composites industry, an industry deemed by DOD as critical to the performance of current and next generation weapon systems.
The high costs associated with commercializing advanced composites, coupled with the downturn in the aerospace market, have resulted in consolidation within the industry, especially among producers (rather than users) of advanced composite materials.
The industry has made continuous financial investment in plants and equipment, especially in the last thirteen years. Based on the fact that the domestic industry's greatest single market, the defense industry, is faced with a dramatic downturn which began with the end of the Cold War, it is apparent from the investment perspective alone that the defense downturn has dire financial implications for the advanced composites industry.
Material suppliers appear to be in the most precarious position: the largest companies have the lowest capacity usage, in fact, half of all responding material suppliers are at 50 percent or less capacity; corporate profits cut in half; these companies are collectively operating their advanced composites business at a loss; internal R&D funding is no longer affordable, diminishing chances of converting to commercial markets; increased competition from offshore competitors already well entrenched in commercial markets; future government (i.e., defense) funding is uncertain.
The entire production process, beginning with material suppliers, is unlike the supply chain in many industries, because the process is determined from the outstart by the specifications required by the ultimate end user. The decline of the U.S. advanced composite materials industry thus infects downstream users, both fabricators and prime contractors. Prime contractors are also in a precarious position because of reduced orders from DOD. The problem for them is thus cyclical, as it hurts them from above, their customer, and from below, their suppliers.
The Federal Government can help preserve the U.S. advanced composites industrial base. One of the best ways would be to assist U.S. advanced composite suppliers in speeding the adoption of these materials into non-defense/aerospace applications like infrastructure, automotive, and expanded use in commercial aircraft. The existing TRP and ATP programs could serve as vehicles to accomplish this objective.