Where Industry and Security Intersect
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This is an update of the 1995 National Security Assessment of the Cartridge and Propellant Actuated Device (CAD/PAD) Industry.The U.S. Department of Commerce, Bureau of Export Administration, Office of Strategic Industries and Economic Security performed this update (and the previous study) at the request of the U.S. Department of the Navy, CAD/PAD Program Office of the Naval Surface Warfare Center (NSWC) located at Indian Head, Maryland. The objective was to update the statistical profile of the industry, identify competitive developments, and assess progress made on the recommendations of the previous study.
Currently, the CAD/PAD industry is comprised of about 30 firms owning 34 establishments. Since 1995, about 10 establishments were closed but no capacity was lost as capital expansion occurred at several locations.Also, shipments expanded.The industry has two major divisions, the aerospace sector and the automotive airbag initiator sector.The two sectors are moving on different trajectories and may soon be considered separate industries despite using a common technology.
Re-enforcing the separation, Swedish company Autoliv, a world leading airbag supplier, purchased OEA (with establishments in the United States and Europe) in May 2000. OEA, along with Special Devices in California and Arizona, are the two major CAD/PAD entries into the airbag market. Both are also major aerospace CAD/PAD firms. Autoliv is in the process of selling OEA's Aerospace Division to B.F. Goodrich. B.F. Goodrich has acquired most of the ejection seat assets in the United States in recent years, and with the purchase of OEA Aerospace (to be affiliated with Upco), will also become the largest CAD/PAD producer.
The aerospace CAD/PAD sector has performed well in the last five years, and is poised for continued growth in the future. All economic indicators are up from the 1995 Assessment. Shipments of aerospace CAD/PADS increased by almost 30 percent during the 1995-1999 period, totaling $247 million by the end of the period. Ninety percent of the value of shipments was for defense applications. This increase in shipments was accompanied by an expanded workforce, which exceeded 2,410 by 1999. Capital outlays were robust at $45 million, and research and development spending was over $37 million. Pre-tax profits averaged more than 8 percent but soared to over 10 percent in the final two years.
Shipments in the automotive airbag initiator sector grew more than 160 percent in the 1995-1999 time period as motor vehicle companies completed installing airbags in all new passenger vehicles in 1999, in compliance with the Inter-modal Surface Transportation Efficiency Act of 1991. Shipments grew from $128 to $334 million. Investment outlays totaled $203 million and research and development was over $54 million. The growth cycle actually ended in 1998, as the necessary new capacity was in place. Prices dropped from $7.75 per initiator in 1993 to less than $3.00 today. Special Devices and OEA account for nearly 90 percent of shipments.
Mergers and acquisitions have played an influential role in improving the industry's competitiveness. For a rather small industry, an astonishing number of mergers and acquisitions occurred in the past decade that have intensified competition and forced many marginal firms to exit the industry. Experience is critical in the CAD/PAD industry. It's clear that existing firms (with experienced people) pose attractive targets for takeover. There were no new start-ups on the aerospace side of the CAD/PAD business.
From an economic point of view, business mergers commonly reduce costs (or increase profits), while maintaining or increasing the combined market share of the merging parties.This does not always work out, of course, but reduced costs put competitive pressure on the remaining competitors to do the same.
This latest round of restructuring mirrors the consolidation of the major aircraft and missile manufacturers.The new giant aerospace firms, primarily Boeing, Lockheed, and Raytheon, face ever-stiffer global competition and new challenges. This forces them to put pressure on prices throughout their subcontracting base in an effort to maintain market share. Moreover, they press for a leaner supply base that can shoulder more responsibility. Strategically, dealing with fewer but larger CAD/PAD firms reduces their transaction costs as well as staffing overhead, and contributes to their drive to focus on core capabilities. The pressure on the CAD/PAD firm is to improve performance and customer service, or risk losing business.
In retrospect, perhaps the major reason for CAD/PAD industry consolidation prior to 1995 was the drop in defense business. Here, stronger, more aggressive firms gobbled up weaker firms. Some CAD/PAD companies did this to maintain or even increase sales in a declining business environment. Consolidations of this kind tend to reduce industry redundancies, and thereby, lower costs. Surviving firms also sought to realign themselves to participate in more promising markets.
Surviving CAD/PAD companies struggled with a number of external forces in the last decade including defense downsizing; larger and more demanding customers; increasingly restrictive environmental policies; a slow-moving export licensing process; a leaner supply base; and various procurement issues. The structure of the industry changed rapidly to meet this new competitive environment, and will likely continue to do so. Larger firms have gained market share, while providing a wider range of products and services. Smaller firms are aggressively holding onto niche markets. Competition for resources (inputs), such as labor and materials, and customers is more aggressive and intense. It also appears that global competition is on the rise, which may have a profound impact on the industry in the future.
Chief concerns of the CAD/PAD industry are the slowness of the export license approval process under the State Department's International Traffic in Arms Regulations list, and lot acceptance testing, which is a point of contention between Indian Head and CAD/PAD companies. Progress on both of these issues since the 1995 report has been very slow, and indeed, nearly non-existent. Recently, Congress increased the budget of the State Department's Office of Defense Trade Control by 50 percent. This may help expedite the process; however, many CAD/PADs are non-lethal munitions and the industry thinks a two-tier system, similar to foreign regimes, would be more appropriate.
The entire industry objects to the Navy's insistence that lot acceptance testing be done at Indian Head.The Air Force allows the companies to perform this test at their facilities. From an economic efficiency standpoint, lot acceptance testing at Indian Head adds costs and delays deliveries.
Most of the large firms in the industry favor performance specifications over build-to-print. Performance specifications would allow CAD/PAD producers to leverage their technical staffs and better utilize their facilities.Some companies argued that performance specifications would increase competition by unfreezing designs. A related issue is best value vs. low bid.It appears that policy momentum favors performance specifications and best value over build-to-print and low bid. Build-to-print appears to have a legitimate place in legacy systems.
For more information on this project, please contact John Tucker at (202) 482-3755 or by email.