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Critical Technology Assessment of the U.S. Advanced Ceramics Industry
It was estimated that the 1990 U.S. market for advanced ceramic components was $3.6 billion. Products destined for electronics end uses account for approximately 80 percent of this figure. Ceramics are used in such electronic applications as ceramic packages, capacitors, and sensors. They are also used extensively in structural applications, such as engines, cutting tools, armor, and wear components. Defense applications of advanced ceramics are wide-ranging, covering both electronic and structural applications. Ceramic semiconductor packages, for example, have innumerable uses in defense electronics. Other defense applications include vehicle and personnel armor and aircraft parts. Although commercial markets for advanced ceramics predominate, the industry has been adversely affected by recent cuts in defense spending. The decrease in these markets has combined with a general decline in the economy, resulting in lower profits and higher debt loads for the industry. The repercussions are significant: defense-dependent firms lack the financial strength to convert their operations; companies find themselves unable to fund research and development needed to remain competitive; and firms cannot afford to maintain their defense production capabilities.
This critical technology assessment of the U.S. advanced ceramics industry was initiated under Section 825 of the National Defense Authorization Act for Fiscal Year 1991. Section 825 required the Secretary of Defense and the Secretary of Commerce (acting through the Under Secretary for Export Administration) to submit annual reports to the Armed Services Committees of the Senate and the House of Representatives on the financial and production status of industries supporting technologies deemed by the Department of Defense (DOD) to be critical to the performance of current and next-generation weapon systems. The National Defense Authorization Act of Fiscal Year 1993, Section 4215, further expanded the scope and requirement for technology and defense industrial base capability assessments. The advanced ceramics industry is one of six chosen for assessment.
The primary objective of these assessments is to provide government policymakers and industry executives with comprehensive information and analysis on the production and technology status, economic performance, and international competitiveness of private sector firms involved in critical technologies, in light of declining defense budgets. While DOD 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.
The Department of Commerce's Office of Industrial Administration (OIRA), Strategic Analysis Division, is the office within the Bureau of Export Administration responsible for conducting these critical technology assessments. OIRA created an advanced ceramics advisory team made up of experts from government agencies and the private sector. The team included representatives from Commerce's Technology Administration (including the National Institute of Standards and Technology) and International Trade Administration, DOD's Advanced Research Projects Agency (ARPA), and the Department of the Interior's Bureau of Mines. The assistance of the United States Advanced Ceramics Association (USACA) and a number of individual member firms was particularly instrumental in survey design, technical advice, mailing lists, on-site visits, and establishing company contacts.
The FY 1991 and FY 1993 National Defense Authorization Acts require that the assessment address a number of factors. These factors include the financial ability of U.S. industries supporting these technologies to conduct R&D, apply the technologies to the production of goods and services, and maintain a viable production base in the wake of reductions or terminations in defense procurement; trends in profitability, investment, and R&D for these critical industries; international competitiveness and market trends; consequences of mergers, acquisitions, and takeovers; effects of dependence on foreign or foreign-owned suppliers; results of DOD spending on these technologies; efforts of DOD to expand its use of commercial technology and equipment; and the need and effort of industry in the area of defense conversion.
OIRA sent comprehensive questionnaires to U.S. industry under authority of the Defense Production Act of 1950 (DPA), as amended, and related Executive Order 12656. Information regarding the foreign advanced ceramics industry was gathered by BXA's Office of Foreign Availability (OFA). In preparing this separate assessment, OFA contacted industry specialists in domestic and foreign firms as well as experts in government and academia.
Advanced ceramics possess properties which allow their use in a variety of defense and commercial applications. In comparison with metals, these materials demonstrate superior wear resistance, high temperature strength, favorable electrical properties, chemical resistance, dimensional stability, and high strength-to-weight ratios. Advanced ceramics are used in functional (electronic), structural, and coating applications.
Defense applications for advanced ceramics are wide-ranging. One of their most important uses is in ceramic semiconductor packages, which are utilized extensively in defense electronics. Apart from the myriad electronic applications, other defense applications include vehicle and personnel armor, aircraft parts, and gas turbine engine parts. Other applications include catalytic converters, bearings, cutting tools, capacitors, sensors, and power tubes.
OIRA's questionnaire to firms in the U.S. industry was the main source of information for this assessment. Fifty-three firms responded to the survey, providing information on 103 manufacturing establishments scattered throughout the United States. Twenty-two were small firms, with less than 50 employees. Twenty-five indicated that they were owned by another firms; of these nine had foreign parents. Forty-seven firms identified themselves as manufacturers, 11 as research facilities, five as resellers, three as distributors, and one as a trading company. (Many firms perform more than one function.)
Electronic, or functional, applications are the most mature and largest endmarkets for advanced ceramics. Ceramics used in functional applications offer high thermal conductivity, low electrical conductivity, and small dielectric constant. Functional applications include electronic packages and substrates, capacitors, varistors, transducers, and sensors.
Ceramics used in structural applications offer hardness, wear and abrasion resistance, corrosion and heat resistance, and lightness and are the second largest endmarket. Key structural applications include engines, cutting tools, armor, and heat exchangers.
Raw materials are critical to the eventual quality of ceramics. The composition of the materials, their impurities, and the characteristics of their particles all contribute to material quality and affect reliability.
Ceramics are also used as coatings to protect or lubricate a variety of materials including metals, composites, and other ceramics. Coatings are especially useful in parts that must withstand heavy wear.
Shipments of advanced ceramics grew steadily between 1989 and 1993 (estimated). Shipments per respondent grew from approximately $39 million in 1989 to $47.5 million in 1993, an increase of almost 22 percent. In the same period, aggregated total shipments for the 27 firms who provided data for all five years rose by nearly 29 percent. Structural ceramics accounted for approximately 30 percent of these shipments, functional applications made up about 60 percent, and production of raw materials and ceramic coatings accounted for the remainder.
Defense shipments as a percentage of total reported shipments peaked in 1990. Defense shipments constituted 4.6 percent of shipments that year, then fell to 1.5 percent of shipments by 1993. This figure is likely low, since not all respondents were able to identify defense specific shipments. For those firms who reported defense shipments, such shipments constituted nearly 17 percent of their total shipments in 1989 and peaked in 1991 at about 22 percent, ending the period in 1993 with 20 percent of shipments destined for defense.
Firms responding to this survey provide advanced ceramics products to more than fifty military systems. Systems identified included numerous missiles, aircraft, space craft, satellites, and communications and radar equipment.
Most respondents indicated that they are not taking any steps to convert their defense capabilities for domestic uses. Thirty-six of the 49 firms responding to this question indicated that they were not taking any steps to convert; only five said that they were. Another six indicated that their production facilities were already used for both defense and commercial applications. Two indicated that, for their operations, defense conversion was not possible.
Most respondents were unaware of any government programs designed to assist them in their defense conversion efforts. Those who were aware of any such programs mentioned the Department of Energy's (DOE) Cooperative Research and Development Agreements (CRADAs) and Defense's Advanced Research Project Agency. Some respondents gave ideas for programs which might help them in their conversion efforts. Suggestions included end-user education, funding for research and development, capital gains and research expenditure tax credits, and government-industry consortia.
Few respondents were aware of any efforts made by DOD to expand its use of commercially-viable products. Many respondents made suggestions about how Defense could do more in this area. The ideas included improving ARPA's Ceramic Insertion Program, the creation of more CRADAs, and a commercial market awareness program for Defense.
Employment fell slightly over the assessment period. The average total employment per firm fluctuated during the period, beginning at a high of 360 employees per firm, hitting a low of 259 employees in 1991 (a figure that is influenced by the presence of small firms reporting 1991 data only), and ending the period in 1993 with 348 employees per firm.
Employee training costs rose dramatically over the period. For firms providing both employment and training costs, the training cost per employee more than doubled, growing 138 percent between 1989 and 1993. Comments received from respondents suggest that this growth can be attributed to two factors: (one) that employees required more advanced training as the years passed; and (two) that new hires required extensive training on basic skills.
Those firms who indicated that labor problems have adversely affected their manufacturing operations most often mentioned educational and skill-related deficiencies. More than half of the respondents indicated that they had not experienced any labor-related difficulties. Those who did experience problems told of workers lacking skills in basics such as math, reading and writing as well as ceramic-specific knowledge. Firms reported fewer difficulties in recruiting and retaining research and development personnel. For the minority of firms who experienced problems recruiting these employees, attracting qualified applicants to the firm's location was a frequently-cited difficulty. Others mentioned a shortage of engineers and technicians with ceramic-specific knowledge.
Privately-funded investment in plants, machinery and equipment peaked in 1991, then fell to a low point in 1993. Private investment per company rose from just over $8 million in 1989 to $10.3 million in 1991; by 1993, investment per firm had fallen to an estimated $4.8 million per firm. Throughout, funding was predominantly sourced from within the firm.
Government-funded investment in plants, machinery and equipment was small compared to private funding. Government funds were greatest in 1989, at a total of $5.4 million; funding ended the period in 1993 with a total of $3 million. The Department of Defense and Energy were the primary sources of funding, always providing at least 70 percent of total government financing.
Total reported R&D funding started and ended the period at about the same level, peaking in 1991. As with investment, funding for R&D was almost entirely private, accounting for at least 85 percent of funds in each year. In-house resources were the predominant source for private funding; domestic customers also played a small part but never grew to more than 5 percent. Public funding of R&D peaked in 1993, with 15 percent of total spending. As with investment, Defense and Energy played the largest roles; other sources included the National Science Foundation, the National Institute of Standards and Technology, and the National Aeronautics and Space Administration.
Defense spending cuts have had relatively little impact on firm R&D activities. When rating, on a scale of 0 to 10, the impact of defense cuts on R&D activities, 48 firms responded, with the most frequent response was 0, that cuts have no impact, and the average response was 2.85.
The majority of research funding was allocated to one of two areas. Respondents indicated that 43 percent of funds went to the support of existing business, and 35 percent was used for new business projects support. Projects in development included enhanced versions of current products as well as new products. Work with powders was most frequently mentioned, highlighting the overall importance of quality powders to ceramics. Products under development or improvement included armor, bearings, engine components, ceramic packages, and multi-chip modules. Firms indicated that processing and preparation of powders were the areas of the production process where they considered the application of new technologies to be the most important.
Firms highlighted several problems that they had encountered in marketing ceramics as substitutes for other materials. Cost was frequently mentioned; also important is the lack of customer awareness. There is a lack of quantitative performance data, making potential endusers of advanced ceramics hesitant. Moreover, changing to ceramics requires new machining systems and special design criteria.
Corporate-level sales rose between 1987 and 1991, while net income decreased. On a per company basis, net sales, peaked in 1990, at $4.4 billion (this includes non-advanced ceramic sales). Per company net income that year was $329.7 million, its second-highest level of the period. The average profit margin in 1990 was 6.1 percent. In 1991, both per company sales and net income fell dramatically, narrowing the average profit margin to just over 3 percent.
Division-level data indicate that divisions dedicated to advanced ceramics were in much worse financial condition than their corporate counterparts. Using per respondent data, net sales in 1991 were 34 percent lower than in 1987. Average profit margins in 1987 were 2.8 percent; they peaked at about 5 percent in 1988, then fell, eventually becoming negative in 1990 and 1991. The financial information portrays an industry that has suffered, particularly in the later years of the reporting period, showing declining income, negative profit margins, and relatively high debt ratios. This will make it difficult for the industry to afford the research and development necessary for competitiveness in world markets; it will make it difficult for the industry to maintain defense production capabilities.
U.S. firms generally ranked themselves as behind Pacific Rim competitors and ahead of European competitors on a variety of measures. Competitive factors rated include quality, application of R&D, price, delivery, customer satisfaction, capital costs, labor supply, and government support.
Numerous countries around the world were mentioned as emerging competitors in advanced ceramics. The most frequently mentioned region was the former Soviet Union, which possesses good powder technology and production capabilities for pumps and electronics sensors. Other areas that respondents mentioned include Eastern Europe, the People's Republic of China, South Korea, Taiwan, Australia, India, Brazil, Africa, Israel and Mexico.
Companies mentioned a wide range of issues which impact the U.S. advanced ceramics industry in the world market. Company- and market-specific factors included problems with capital availability, declining defense spending, increased competition, lack of customer knowledge, and lack of cooperation among firms in the industry. Business environment factors mentioned included a lack of tax incentives for R&D, the need for an inducement to make long-term investment decisions, the cost and quality of labor, a lack of cooperation among government, ceramics manufacturers and endusers. Legal, regulatory and other governmental factors mentioned included patents, a general lack of government support for R&D, export controls, OSHA standards and other environmental regulations, and a lack of a consistent trade policy. External factors affecting the industry included foreign trade practices, trade tariffs, competing against low labor costs of some producing regions, and the existence of more positive government-industry relationships in Asian and European countries.
The majority of firms expect their competitive prospects to improve either somewhat or greatly in the next five years. These firms mentioned increased emphasis on cost of production and product quality, broader product lines, lower costs of production, new markets, and increased investment in equipment and facilities. Those firms with more negative outlooks cited the presence of stronger and more numerous foreign competitors, declines in the defense and aerospace markets, the lack of funding for R&D, and the negative impact of government regulations.
Companies were almost evenly split over the impact of mergers and acquisitions. The industry has experienced a proliferation of such agreements over the last few years, making giants of some previously-small firms. Several noted that the increase in the number of larger firms, some foreign-owned, made it more difficult for remaining smaller firms to compete. Those involved in mergers and acquisitions were said to have greater access to R&D funding and capabilities as well as better manufacturing facilities. Further, some foreign firms have gained access to new markets through such arrangements.
Most firms do not perceive antitrust laws to be a barrier to strategic alliances. Forty-seven of fifty firms responding also indicated that they had not had any experiences where U.S. antitrust laws has created a barrier to cooperation with other firms in either R&D partnerships or manufacturing relationships. The vast majority of firms responding would consider forming vertical alliances with supplier, manufacturers, or distributor firms in the advanced ceramic field.
Several firms stated that the governments of Germany, Japan, and other Pacific Rim countries provide tax incentives for investing in new technologies to their indigenous advanced ceramic firms. The German government is said to share R&D costs through grants, provide investment tax credits, and give tax rebates for the construction of new plants. The Japanese government offers similar rebates, and, through MITI, provides funds at low interest rates to advanced ceramics firms. Similarly, the governments of China and Taiwan are said to share R&D costs and subsidize capital costs with very low interest rates.
Surveyed firms stated that some foreign governments allow banks and other financial institutions to own a share of advanced ceramics manufacturers. Based on survey responses, in both Japan and Germany many large advanced ceramic manufacturers are frequently part of vertically-integrate corporations, and banks generally hold some stock. Small independent manufacturers may or may not have banks as shareholders. One potential advantage of such an arrangement is that access to capital is assured. Apart from providing support for R&D, foreign governments are believed to enter into procurement arrangements and other assistance to guarantee purchase of all or part of the product manufactured using new technology. Survey respondents stated that the governments of France, Germany, and Japan engage in such agreements.
An assessment of the foreign advanced ceramics industry suggests that all of the leading foreign advanced ceramics companies benefit directly or indirectly from national technology policies designed to promote their commercial competitiveness. The U.S. and Japan are at parity in terms of technology, but Japan is better able to commercialize the technology. Japanese firms are ahead in using enabling technologies such as flexible manufacturing and robotics, and are also adept at cooperative research.