Table 1 lists the 23 qualifying countries. 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. 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. U.S. and Foreign Titanium Price Differences Varied By Product Type

Census data from calendar years 2003 to 2012 show variations in U.S.  and foreign produced titanium prices for ingot, bar, billet, and sheet. 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. 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. In addition, industry officials noted that U.S. produced titanium  has been competitively priced relative to foreign produced titanium. U.S. Manufacturers Have the Majority of DOD’s Aircraft Component Business

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. Factors Other Than Titanium Price Affect the Ability of U.S. Aircraft Component Manufacturers to Compete for DOD Business

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. In addition,  many officials from aircraft component manufacturers identified industry  consolidation as a factor that could affect their ability to compete. 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. Thus, component manufacturers had relatively equal access to  titanium producers. However,  they have not yet seen the impact of industry consolidation on their  companies. Agency and Third- Party Comments

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. 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. 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. 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.
Why GAO Did This Study

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.

What GAO Found

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.

What GAO Recommends

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.