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National Security Assessment of the U.S. Forging Industry
The U.S. Department of Commerce, Bureau of Export Administration, Office of Industrial Resource Administration undertook this national security assessment of the forging industry at the request of the Office of the Assistant Secretary of Defense (Acquisitions and Logistics) to assist the Department of Defense in determining if a restriction limiting military procurement of certain forgings to domestic and Canadian sources was still necessary after 8 years. The Department of Commerce performed the assessment under authority of the Defense Production Act of 1950, as amended, and related Executive Order 12656. Nine major forging companies were sent a survey questionnaire to gather information for this assessment. They represented about one-quarter of the industry in 1990.
The forging procurement restriction was initiated in 1984 and is found in the Defense Federal Acquisition Regulations (DFAR) in sections 208.7802 and 208.7803 (48 C.F.R.). The restriction was instituted to respond to the serious deterioration of the domestic forging sector in the early 1980's, and rapidly rising imports.
About 20 percent of defense procurement of forgings (excluding foreign military sales) are covered by the restriction. In 1991, an estimated $943 million of forgings were purchased for all military purposes ($107 million FMS), of which about $180 million were covered by the restriction. Forgings under the restriction include various tank and automotive forgings (for combat vehicles), small caliber weapons forgings, 60mm and 81mm mortar forgings, guntube and guntube preforms and associated forged parts, and shipboard anchor chain, shipboard propulsion shafts, periscope tubes and ring forgings for bull gears over 10 feet in diameter. The restriction has been targeted at those forgings with the highest import penetration levels - primarily ferrous forgings used in Army and Navy applications. The Air Force declined to participate in the restriction, citing competitive strength and technical leadership in the largely nonferrous aerospace forgings sector.
Forgings are an intermediate product used by original equipment manufacturers in high performance, strength, and reliability applications where tension, stress, load and human safety are critical considerations. They are the product of the plastic deformation of virtually any metal or alloy, usually at elevated temperatures. Forgings are made by hammering on or squeezing a metal work piece so that it approaches its maximum theoretical density and the upper limits of the material's strength. Forgings range from less than an ounce to over 100 tons. Since forgings normally outlast their applications, only a very small aftermarket exists.
Due to their high strength and other properties, and the lack of alternative products or processes, forgings are essential components found in virtually all modern military weapon systems and supporting equipment. The M-60 battle tank contains at least 600 separate forgings. Forgings are the enabling technology that makes a modern aircraft possible. For example, the Boeing 747 (like the Lockheed C5 series or the older B-52s) has about 18,600 forgings. Forgings are used extensively in the landing gear, structural parts in the fuselage, tail assembly, wing spar, wing and engine attachments, and the engines.
Most U.S. forging end-markets, including defense, have declined and are the major cause of the industry's problems. The Forging Industry Association reports that U.S. forging demand has decreased about 20 percent since the 1970's. Aerospace markets began their decline late in the period and plunged 16 percent in 1991. While automotive markets remained stable, industrial markets declined 47 percent, off-road vehicles plunged 63 percent, railroads fell 54 percent and all others contracted 45 percent.
Shipments, employment and investment in the ferrous forgings industry were at their highest levels in the early 1970's. Between 1974 and 1983, shipments fell almost 53 percent from $5.53 billion to $2.61 billion. Employment peaked in 1978 at 41.2 thousand, and then fell to only 25 thousand in 1983. Investment reached its highest level in 1977 at $242.8 million, but dropped to $87.9 million in 1983, and only $82.1 million in 1986. Since the late 1970's, more than 110 forging plants have shutdown.
The two major markets for forgings are automotive and aerospace. In 1991, these two markets accounted for about two-thirds of forgings made by the hot impression die process (equal to roughly 75 percent of all forgings). In 1974, these two markets accounted for less than half the total because of the then greater size of industrial, off-road vehicles, railroad and other markets.
The forging industry has also fragmented into smaller firms. The implications (unless the market greatly expands) are reductions in R&D, increased market volatility, less investment, and a gradual deterioration in competitiveness. In 1979, 47 plants in the ferrous forging sector had more than 250 employees. In 1984, when the DFAR was introduced, 23 such plants existed. By 1989, only 18 such plants remained, a drop of over 60 percent. Further declines in the number of large plants are expected.
The concentration ratios of the industry have also dropped, despite the major contraction of the overall business. The market share in terms of shipments made by the largest four firms fell from 29 percent in 1972, to 22 percent in 1987. Market share for the eight largest companies slipped from 40 to 32 percent; and for the top 20 companies, it dropped from 57 to 47 percent during the period. The average shipments of the top four firms in 1987 was only $179.2 million, down 54 percent from the average in 1972.
The age of equipment in the forging industry has never been greater, and for the most part is fully amortized. The industry supports a large second hand equipment market. Labor productivity rates are almost unchanged in 20 years. For lack of adequate investment, the relative total cost of labor has risen in both the ferrous and nonferrous sectors as a portion of value added. This is opposite in direction to the trend in overall U.S. manufacturing. The forging industry in its present fragmented state is financially unable to undertake needed major investment projects, and incur higher fixed costs.
Between 1986-1990, the cost of labor, materials and energy averaged about 90 percent of dollars shipped for both the ferrous and nonferrous forging industries. This is significantly above the 79 percent average for overall U.S. manufacturers. The 90 percent rate leaves little for overhead and other costs, and implies the forging sector as a whole operated at a loss for the past several years. Moreover, these costs have consistently trended upward since 1974. Depressed end-markets, overcapacity, intense competition, and import pressures have created a protracted buyer's market.
Surveyed forging companies operated at 51 percent of capacity in 1991. Shipments were down 14 percent from 1990. Ramp-up time (i.e., time it takes to reach capacity production) averaged 7.6 months. The major bottleneck to reaching capacity production levels is labor. However, in an improved market situation, labor constraints may not be the concern shown here, as other areas such as die making or materials availability become more pronounced. Forging lead times for new orders averaged 39.3 weeks, and for repeat business, 15.4 weeks. These would both expand sharply at higher rates of capacity utilization. In times of high demand, queue time (i.e., waiting in line for processing) has been known to extend over a year at some forging plants. Employment at the surveyed companies dropped 14 percent between 1987-1991.
Profitability for the surveyed firms has been low since 1987, and in 1991 the group suffered over $100 million in losses. Before-tax profits were highest in 1990, at $43.2 million. However, they plummeted to a loss of $107.2 million in 1991, as sales fell by over 15 percent. All nine firms showed a drop in profits in 1991, and four of those reporting showed losses. Two firms showed losses for the 5-year period, and a third barely finished on the plus side.The financial balances of the surveyed firms improved as they reduced outstanding debt. This is not surprising, since rising long term debt commonly occurs in rapidly growing sectors where additions to capacity are needed to keep pace with an expanding market. In forgings, however, overcapacity is forcing firms to retrench. As a portion of total assets, debt dropped from 35 to 25 percent. Long-term assets, (down 23 percent), and equity, (down 6.4 percent), also dropped.
Capital expenditures for the surveyed companies held steady, but R&D budgets declined. Capital expenditures were 3.35 percent of shipments in 1990, and 4.02 percent in 1991. The companies forecast that expenditures will remain stable through 1995. R&D expenditures declined from a high of $15.5 million in 1988 to $12.7 million in 1991, a drop of more than 18 percent.
Most of the surveyed companies are using (and the rest considering) Total Quality Management, Concurrent Engineering, Statistical Process Control and CAD/CAM. Some firms are using (and others looking into) near-net shape forging, faster die changing, robotics, non-destructive testing and flexible cell manufacturing. Several companies reported benefits for both their companies and the Defense Department from Industrial Modernization Incentives Program (IMIP) projects which reduce weapon system acquisition cost through the implementation of modern manufacturing processes and increased or accelerated capital investments.
Four of the surveyed firms expect that their competitiveness will improve in the next 5 years, two see it remaining the same, and two others report competitiveness will decline. Those that see improvement noted that the industry is consolidating, which should further strengthen the strongest firms, and that export opportunities are improving. Those that see their prospects remaining the same indicated competition will stay intense worldwide because of global overcapacity and decreasing demand, especially for large custom forgings. In this environment, customers have been driven by price reductions without regard for the forging industry's longer-term survival. The two firms that see a decline noted that expected drops in defense expenditures will create additional surplus capacity, and financially weaken forging companies. Further, third world countries with lower energy and labor costs and newer equipment present a new and increasing challenge in both U.S. and foreign markets.