Children Adults $ 422 $ 117 3. ishing $ 153 4. wimming $ 10 5. Enhanced boating $ 0 4. ildlife viewing $ 88 5. Nonuse benefits ( ½ recreational use benefits) $ 125 Total Monetized Benefits $ 930 Reduce Reduced r Enhanced f Enhanced s Enhanced w Source: U. S. EPA analysis.

ES 19 MP& M EEBA Executive Summary ES. 6.2 Social Costs EPA also estimated the social costs of the final rule for MP& M facilities in Ohio. EPA developed engineering estimates of compliance costs for each Ohio facility, and annualized costs using a seven percent discount rate over a 15 year period.

Estimating the frequency of baseline closures is necessary to assess the costs of regulation. Facilities assessed as baseline closures are not expected to incur compliance costs under the final MP& M regulation. The screener data collected for Ohio facilities did not provide financial data to perform an after tax cash flow or net present value test, as done in the national analysis. EPA therefore used data from the national analysis to estimate the percentage of facilities assessed as baseline closures. EPA assumed that the frequency of baseline closures among Ohio facilities would be the same as that estimated in the national analysis for facilities with the same discharge status, subcategory, and flow category. For example, two percent of direct Oily Wastes facilities discharging less than one million gallons per year close in the baseline in the national data set;

this same percentage is assumed for Ohio screener indirect dischargers in that flow and size category. EPA reduced the total estimated costs for screener facilities, by analysis category, based on the fraction of facilities assessed as baseline closures.

EPA used the same methods as used in the national social cost analysis to estimate other components of social costs for the Ohio case study. Table ES. 12 shows the total estimated social costs of the final rule for Ohio facilities.

Table ES. 12: Annual Social Costs for Ohio Facilities: Final Option ( thousands, 2001$, costs annualized at 7%)

Component of Social Costs Final Rule Resource value of compliance costs $ 62 Government administrative costs $ 0 Social cost of unemployment $ 0 Total Social Cost $ 62 Source: U. S. EPA analysis.

ES. 6.3 Comparing Monetized Benefits and Costs The Ohio case study shows substantial net positive benefits associated with the MP& M regulation. EPA estimates the social cost in Ohio of the final regulation to be $ 62 thousand annually ($ 2001). The sum total of benefits that can be valued in dollar terms is $ 930 thousand annually ($ 2001). Comparing the midpoint estimate of social costs ($ 62 thousand) with the midpoint estimate of monetizable benefits ($ 930 thousand) results in a net social benefit of $ 868 thousand. This represents a partial cost benefit comparison because not all of the benefits resulting from the regulation can be valued in dollar terms ( e. g.,

changes in systemic health risk).

For the reasons previously discussed, EPA judges that the analytic approach and detailed data used for the Ohio case study provide a more robust and accurate benefits estimate than the data and approach used for the national level analysis.

ES 20 MP& M EEBA Part I: Introduction and Background Information Chapter 1: Introduction Chapter 1: Introduction INTRODUCTION The U. S. Environmental Protection Agency ( EPA) is promulgating effluent limitations guidelines and standards for the Metal Products and Machinery ( MP& M) Point Source Category, under Sections 301, 304, 306, 307 and 501 of the Clean Water Act. EPA has determined that the final rule is not likely to result in aggregate costs to the economy that exceed $ 100 million annually. The Agency therefore found that the final regulation is not a   significant regulatory action  as defined by Executive Order 12866 ( 58 FR 51735, October 4, 1993). CHAPTER CONTENTS 1.1 Purpose ................. ................. . 1 1 1.2 Organization ................. .............. 1 1 1.3 Readers  Aids ................. ............. 1 3 1.1 PURPOSE This Economic, Environmental, and Benefits Analysis report ( EEBA) presents EPA s economic and benefits analyses for the final MP& M regulation. These analyses supported EPA in developing the final regulation and in meeting the requirements of the following statutes and executive orders:

  Executive Order 12866   Regulatory Planning and Review , which requires analysis of costs, benefits, and economic impacts of the final rule and regulatory alternatives;

  Unfunded Mandates Reform Act ( UMRA), which requires evaluation of impacts on governments, among other requirements;

  Regulatory Flexibility Act as amended by the Small Business Regulatory Enforcement Fairness Act of 1996 ( RFA/ SBREFA), which requires consideration of the rule s impact on small firms and governments;

  Executive Order 12898   Federal Actions to Address Environmental Justice in Minority Populations and Low

Income Populations ; and   Executive Order 13084   Protection of Children from Environmental Health Risks and Safety Risks .

1.2 ORGANIZATION This report is organized in five major parts, 22 chapters, and 14 appendices, as follows:

Part I   Introduction and Background Information  ( Chapters 1 though 4) describes the need for the regulation, provides a profile of the MP& M industry, and describes regulatory options evaluated and selected by the Agency for the final rule.

Part II   Costs and Economic Impacts  ( Chapters 5 through 11) presents EPA s analysis of the economic impacts and social costs of the final rule. Chapter 5 presents the analysis of costs and impacts at the facility level. Chapters 6 through 9 present analyses of other types of economic impacts that derive from the facility level analysis, including impacts on employment,

governments ( for EPA s analyses under UMRA), communities, foreign trade, firms, and new facilities. Chapter 10 provides an analysis of impacts on small firms and governments, as required by RFA/ SBREFA. Finally, Chapter 11 presents the social costs of the final rule.

Part III   Benefits  ( Chapters 12 through 17) provides EPA s analysis of the environmental impacts and benefits of the final rule. Chapter 12 provides an overview of the benefits expected from the rule. Chapters 13 through 16 present EPA s analyses of different components of the benefits analysis. These include human health benefits ( except for lead related)

( Chapter 13), lead related benefits ( Chapter 14), recreational benefits ( Chapter 15), and benefits to POTWs ( Chapter 16).

Chapter 17 presents an analysis of the environmental justice effects of the final rule, as required by Executive Order 12898.

1 1 MP& M EEBA Part I: Introduction and Background Information Chapter 1: Introduction Part IV   Comparison of Costs and Benefits  ( Chapters 18 and 19) compares the social costs and benefits for the final rule ( Chapter 18) and for other regulatory alternatives evaluated by the Agency for the final rule ( Chapter 19).

Part V   Ohio Case Study  ( Chapters 20 through 22) provides a detailed case study of the final rule s costs and benefits for the State of Ohio. This case study includes a more detailed and complete analysis of benefits, based on more complete information on the number and location of MP& M facilities and the characteristics of affected waters than was available for the national analyses. The case study also includes an original travel cost study to value recreational uses affected by the final rule. EPA believes that the case study provides more robust results because it avoids the uncertainties that result from the need to extrapolate sample facility results to the national level. The results of the case study generally confirm the overall results of the national analysis.

Appendices to this report provide additional material in support of the analyses described in the chapters, including the following:

  Appendix A: supporting material for the profile of the MP& M industries in Chapter 3;

  Appendix B: description of the cost pass through analysis;

  Appendix C: description of the moderate impact analysis;

  Appendix D: description of the methodology used to estimate capital outlays as part of the facility impact analysis;

  Appendix E: description of the calculation of capital cost components;

  Appendix F: description of the methodology used to estimate POTW administrative costs;

  Appendix G: summary of the method used to extrapolate sample facility results to the national level;

  Appendix H: description of fate and transport model for drinking water and Ohio analyses;

  Appendix I: discussion of methodologies and results of the environmental assessment analysis;

  Appendix J: analyses of spatial distribution of MP& M facility location and benefiting population;

  Appendix K: description of the surface water valuation studies and specific values selected for assessing recreational benefits from the final regulation;

  Appendix L: description of parameters in the IEUBK lead model;

  Appendix M: sensitivity analysis of lead related benefits; and   Appendix N: analysis of the national demand for water based recreation survey ( NDS).

The docket for the final rule, located at U. S. EPA Headquarters, provides additional supporting documentation, including:

  copies of the literature cited in the report;

  documentation of the financial and economic portions of the MP& M Section 308 surveys;

  memorandums documenting supplementary analyses undertaken in support of regulation development, but that are not included in the EEBA; and   datasets, spreadsheets, and programs used to perform the analyses.

1 2 MP& M EEBA Part I: Introduction and Background Information Chapter 1: Introduction 1.3 READERS AIDS Each chapter includes a chapter specific table of contents. A list of references is provided at the end of each chapter.

Glossaries and lists of acronyms are also provided at the end of the chapters, and the first usage of items listed in them are denoted in the text with the following formats:

  Glossary indicates that a term is defined in the chapter glossary, and   Acronym indicates that the acronym is included in the chapter list of acronyms.

1 3 MP& M EEBA Part I: Introduction and Background Information Chapter 1: Introduction THIS PAGE INTENTIONALLY LEFT BLANK 1 4 MP& M EEBA Part I: Introduction and Background Information Chapter 2: The MP& M Industry and the Need for Regulation Chapter 2: The MP& M Industry and the Need for Regulation INTRODUCTION The Metal Products and Machinery ( MP& M) effluent guidelines establish limitations and standards only for direct dischargers in the Oily Wastes subcategory ( 40 CFR 438,

Subpart A). EPA establishes industrial subcategories based on a number of considerations ( see Chapter 4 and Section 6 of the TDD). EPA evaluated seven other subcategories for the final rule: general metals, metal finishing job shops, non chromium anodizing, printed wiring board, railroad line maintenance, shipbuilding dry docks, and steel forming and finishing. EPA evaluated a number of options for these seven subcategories. Based on these analyses, EPA did not establish or revise limitations or standards for facilities in these seven subcategories. CHAPTER CONTENTS 2.1 Overview of Facilities Evaluated for Regulation under the MP& M Point Source Category .............. 2 1 2.2 MP& M Discharges and the Need For Regulation . . 2 3 2.2.1 Baseline MP& M Discharges for Regulated Facilities ................. ......... 2 4 2.2.2 Discharges under the MP& M Regulation . 2 4 2.3 Addressing Market Imperfections .............. 2 5 2.4 Overlap with Other Effluent Guidelines .......... 2 6 2.5 Meeting Legislative and Litigation Based Requirements ................. ............. 2 9 Glossary ................. ................. ... 2 11 Acronyms ................. ................. .. 2 13 The facilities regulated under this rule produce, manufacture, rebuild, or maintain metal parts, products, or machines for use in sixteen different industrial sectors. These industrial sectors include: hardware, aircraft, aerospace, ordnance, electronic equipment, stationary industrial equipment, mobile industrial equipment, buses and trucks, motor vehicles, household equipment, instruments, office machines, railroads, ships and boats, precious metals and jewelry, and miscellaneous metal products. Most of the subcategories above serve multiple markets. EPA evaluated options that would have covered facilities in three additional industrial sectors: printed wiring boards, metal finishing job shops, and iron and steel. The final regulation does not cover facilities in these sectors.

This chapter provides an overview of the MP& M industry evaluated for the final rule and presents the pollutant discharges from MP& M facilities subject to the final regulation. The chapter also reviews the reasons why EPA is regulating the industry s effluent discharges including the need to reduce pollutant discharges from the MP& M industry, the issue of addressing market imperfections, other effluent guidelines that may overlap in coverage of the MP& M industry sectors evaluated for the final rule, and requirements that stem from the Clean Water Act ( CWA) and litigation.

2.1 OVERVIEW OF FACILITIES EVALUATED FOR REGULATION UNDER THE MP& M POINT SOURCE CATEGORY The MP& M Point Source Category regulates oily operations process wastewater discharges to surface waters from existing or new industrial facilities ( including facilities owned and operated by Federal, State, or local governments) engaged in manufacturing, rebuilding, or maintenance of metal parts, products, or machines for use in the sixteen Metal Product &

Machinery ( MP& M) industrial sectors listed above. Please note the underlined language in the previous sentence as a facility may be subject to the MP& M effluent guidelines even if it is not in one of the MP& M industry sectors. For example, EPA considers a facility performing machining part of the   Bus & Truck  MP& M industry sector if it manufactures metal parts for truck trailers. Process wastewater means wastewater as defined at 40 CFR parts 122 and 401, and includes wastewater from air pollution control devices ( see 40 CFR 438.2( g)). Oily operations are listed at 40 CFR 438.2( g) and defined in Appendix B to Part 438 ( see also Section 4 of the TDD).

As defined for this document, MP& M facilities: ( 1) produce metal parts, products, or machines for use in one of the 19 industry sectors evaluated for coverage in the MP& M point source category; ( 2) use operations in one of the eight regulatory subcategories evaluated for coverage in the MP& M point source category; and ( 3) discharge process wastewater, either 2 1 MP& M EEBA Part I: Introduction and Background Information Chapter 2: The MP& M Industry and the Need for Regulation directly or indirectly, to surface waters. MP& M facilities frequently produce products for multiple sectors and subcategories.

As referred to in this document, MP& M facilities represent only a portion of all facilities in the industry sectors, since some facilities may perform operations that are not covered by one of the subcategories ( i. e., part assembly or plastic molding), and some may not generate or discharge process wastewater.

According to Statistics of U. S. Business, 1996, approximately 638,696 establishments operate in the MP& M industry sectors.

Based on information in the MP& M survey database, approximately 44,000 facilities meet the definition of an MP& M facility. These 44,000 facilities include approximately 41,000 indirect dischargers ( i. e., facilities discharging effluent to a publicly owned sewage treatment works or POTWs) that would be subject to Pretreatment Standards for Existing Sources ( PSES) . The remaining 3,000 direct dischargers ( i. e., they discharge effluent directly to a waterway under a National Pollutant Discharge Elimination System ( NPDES) permit) and would thus be subject to Best Available Technology Economically Achievable ( BAT) and Best Practicable Control Technology Currently Available ( BPT) requirements.

Table 2.1 reports the estimated number of MP& M facilities and total discharge flow ( before final rule implementation) by type of facility. The largest number of sites, approximately 22,000, perform   rebuilding/ maintenance only  and account for approximately 6 percent of the total estimated discharge flow for the industry.   Manufacturing only  contains the next largest number of facilities ( 15,400) and accounts, by far, for the largest percentage of the total estimated discharge flow for the industry ( 82 percent).

Table 2.1: Number of MP& M Facilities and Total Discharge Flow by Type of Facility Type of Facility Number of Facilities Total Estimated Discharge Flow ( million gal/ yr) Percent of Facilities Percent of Total Discharge Flow Manufacturing &

Rebuilding/ Maintenance 6,600 9,400 15.0% 12.0%

Manufacturing Only 15,400 64,100 35.0% 82.0%

Rebuilding/ Maintenance Only 22,000 4,700 50.0% 6.0%

Total 44,000 78,200 100.0% 100.0%

Source: U. S. EPA analysis. See Section 4 of the Technical Development Document for the final rule.

Of the 43,858 water discharging facilities, 3,593 are predicted to close in the baseline, leaving 40,265 existing MP& M facilities that EPA estimates could be regulated. 1 After accounting for subcategory and discharger class exclusions, EPA estimates that the final rule will regulate 2,382 of these facilities, all of which are direct dischargers. These regulated facilities represent 5.9 percent of the 40,265 facilities that could be potentially regulated.

Table 2.2 summarizes information on the total number of MP& M facilities that were evaluated for the final rule, and the number that will be regulated under the final rule. As reported in Table 2.2, no indirect dischargers are subject to the final regulation. The rule will regulate 2,382 direct dischargers in the Oily Wastes subcategory. The rule excludes direct dischargers in the General Metals, Metal Finishing Job Shops, Non  Chromium Anodizing, Printed Wiring Board, Railroad Line Maintenance, Shipbuilding Dry Docks, and Steel Forming and Finishing subcategories ( 214 facilities, 12 facilities, 0 facilities, 8 facilities, 6 facilities, 6 facilities, and 13 facilities, respectively) 2 .

1 These are facilities that are predicted to close due to weak financial performance under baseline conditions, i. e., in the absence of the final rule. EPA does not attribute the costs or the reduced discharges resulting from these baseline closures to the final rule, and therefore excludes these facilities from its analyses of the rule s impacts. Baseline closures account for differences between the universe of facilities discussed in this report and the universe discussed in the Technical Development Document.

2 EPA excluded 3,511 indirect and 98 direct dischargers predicted to close in the baseline.

2 2 MP& M EEBA Part I: Introduction and Background Information Chapter 2: The MP& M Industry and the Need for Regulation Table 2.2: MP& M Facilities by Subcategory and Discharger Class, and Facilities Regulated Under the Final Rulea Subcategory Indirect Dischargers Direct Dischargers Evaluated for Regulation (# of facilities) Regulated under Final Rule (# of facilities) Evaluated for Regulation (# of facilities) Regulated under Final Rule (# of facilities)

General Metals 10,244 0 214 0 Metal Finishing Job Shop 1,479 0 12 0 Non Chromium Anodizing 93 0 0 0 Printed Wiring Board 600 0 8 0 Steel Forming & Finishing 12 0 13 0 Oily Waste 24,394 0 2,382 2,382 Railroad Line Maintenance 820 0 6 0 Shipbuilding Dry Dock 9 0 6 0 All Categories 37,652 0 2,641 2,382 a Excludes facilities that close in the baseline.

Source: U. S. EPA analysis.

2.2 MP& M DISCHARGES AND THE NEED FOR REGULATION EPA is regulating the MP& M industry because the industry releases substantial quantities of pollutants, including toxic pollutant compounds ( priority and nonconventional metals and organics) and conventional pollutants such as total suspended solids ( TSS) and oil and grease ( O& G). These MP& M industry pollutants are generally controlled by straightforward and widely used treatment system technologies such as chemical precipitation and clarification ( frequently referred to as the   lime and settle  process). 3 Discharges of these pollutants to surface waters and POTWs have a number of adverse effects, including degradation of aquatic habitats, reduced survivability and diversity of native aquatic life, and increased human health risk through the consumption of contaminated fish and water. In addition, many of these pollutants volatilize into the air, disrupt biological wastewater treatment systems, and contaminate sewage sludge.

Metal constituents are of particular concern because of the large amounts present in MP& M effluents. Unlike some organic compounds and other wastes that are metabolized in activated sludge systems to relatively innocuous constituents, metals are chemical elements and cannot be eliminated. Moreover, in solution, some metals have a high affinity for biological uptake.

Depending on site specific conditions, metals form insoluble inorganic and organic complexes that partition to sewage sludge at POTW s or underlying sediment in aquatic ecosystems. The accumulated metal constituents can return to a bioavailable form upon land application of sewage sludge; dredging and resuspension of sediment; or as a result of seasonal, natural, or induced alteration of sediment chemistry.

Benefits of reducing metal and other pollutant loads to the environment from MP& M facilities include reduced risk of cancer and systemic human health risks, improved recreation opportunities ( e. g., fishing , swimming, boating, and other near water recreational activities), improved aquatic and benthic habitats, and less costly sewage sludge disposal and increased beneficial use of the sludge. 4 3 See Chapter 12 and Appendix I for more detailed information on the pollutants of concern in the MP& M industry.

4 Sewage sludge is also called biosolids.

2 3 MP& M EEBA Part I: Introduction and Background Information Chapter 2: The MP& M Industry and the Need for Regulation The goal of the MP & M regulation is to reduce pollutant discharges and to eliminate or reduce the level of risk and harm caused by them. These pollutant discharges and their harmful consequences are the externalities that the MP& M regulation addresses, as discussed in Section 2.3.

2.2.1 Baseline MP& M Discharges for Regulated Facilities Table 2.3 provides an overview of the discharges from MP& M facilities that are regulated under the final rule. Loadings are defined as toxic weighted loadings. This measure weights quantities of different pollutants by a measure of their relative toxicity. Toxic weighted loadings measures the relative toxic effects of discharges containing different mixtures of pollutants.

MP& M discharges also contain conventional pollutants with little or no toxic effects but that can have substantial adverse environmental impacts, such as O& G and some components of TSS.

Table 2.3: Toxic Weighted Discharges for Direct Discharging Facilities in the Oily Wastes Subcategory a # of Regulated Facilities 2,382 Baseline Discharges 3,351 Average Baseline Loadings per Facility 1.41 Remaining Discharges Under Final Rule 668 Average Discharges Under Final Rule per Facility 0.28 Discharge Reductions Achieved by Final Rule 2,683 ( Pounds Equivalent)

a Discharges discussed in this table are total discharges from the facility, and do not reflect POTW pollutant removals. EPA believes it is appropriate to analyze wastewater discharges disregarding POTW removals because indirect discharges present environmental risks that are not fully addressed by POTW treatment. The MP& M industry releases 89 pollutants that cause inhibition problems at POTWs and an additional 35 pollutants that volatilize to form hazardous air pollutants ( HAPs) that may present a threat to human health or the environment.

Other MP& M pollutants are found in POTW sludge. Only eight of these pollutants have land application pollutant criteria that limit the uses of sludge.

b Excludes discharges from facilities that are projected to close in the baseline ( 327 lbs equiv., or an average of 4.4 lbs equiv. per closing facility).

Source: U. S. EPA analysis.

As reported in Table 2.3, direct dischargers in the Oily Wastes subcategory currently release a total of 3,351 toxic weighted pounds per year, an average of 1.41 toxic weighted pounds per facility. After implementation of the final rule, EPA estimates that Oily Wastes direct dischargers will release only 668 toxic weighted pounds per year, an average of 0.28 toxic pounds per facility. EPA estimates that the final rule will reduce pollutant discharges by approximately 2,683 toxic weighted pounds per year.

2.2.2 Discharges under the MP& M Regulation Reductions in toxic loadings result from treatment of effluents and pollution prevention at facilities that are subject to the regulation. Table 2.4 shows baseline and post regulation loadings by type of pollutant, both as unweighted pounds and on a toxic weighted basis, for facilities that are regulated under the final rule. The final rule eliminates 80.1 percent of the baseline toxic weighted loadings from the facilities that are regulated, including 83.7 percent of the priority pollutants ( 87.3 percent of metals, 22.4 percent of organics, and 1.3 percent of arsenic) and 57.4 percent of the nonconventional pollutants ( 62.1 percent of metals, 13.3 percent of organics, and 50.0 percent of   other inorganics ). The final rule also eliminates substantial fractions of the baseline discharges of conventional pollutants from the regulated facilities, including 6.6 percent of 2 4 MP& M EEBA Part I: Introduction and Background Information Chapter 2: The MP& M Industry and the Need for Regulation chemical oxygen demand ( COD) , 37.1 percent of biological oxygen demand ( BOD) , 93.2 percent of oil and grease ( O& G ), and 54.1 percent of total suspended solids ( TSS). 5 Table 2.4: Summary of Discharges by Pollutant Type for Facilities Regulated under the Final Rulea Pollutant Category Current Releases Releases under the Final Rule Final Rule Reductions Pounds Pounds Eq. Pounds Pounds Eq. Pounds Pounds Eq.

Priority Pollutants Metals 794 2,756 153 351 641 2,405 Organics 336 58 268 45 68 13 Arsenic 22 75 21 74 1 1 Cyanide ( CN) 0 0 0 0 0 0 Nonconventional Pollutants Metals 25,863 417 16,428 158 9,435 259 Organics 2,159 45 1,038 39 1,121 6 Other Inorganics 2,334 0.2 1,301 0.1 1,033 0.1 Bulk Pollutants 335,679 167,295 168,384 Conventional Pollutants BOD 263,419 165,567 97,852 COD 523,440 488,697 34,743 O& G 428,137 28,955 399,182 TSS 160,695 73,769 86,926 a Discharges discussed in this table are facility discharges and do not account for POTW removals. EPA believes it is appropriate to analyze wastewater discharges disregarding POTW removals because indirect discharges present environmental risks that are not fully addressed by POTW treatment. The MP& M industry releases 89 pollutants that cause inhibition problems at POTWs and an additional 35 pollutants that volatilize to form hazardous air pollutants ( HAPs) that may present a threat to human health or the environment.

Other MP& M pollutants released by the industry are found in POTW sludge. Only eight of these pollutants have land application pollutant criteria that limit the uses of sludge.

Source: U. S. EPA analysis.

2.3 ADDRESSING MARKET IMPERFECTIONS Environmental legislation in general, and the CWA and the MP& M regulation in particular, seek to correct imperfections   uncompensated environmental externalities   in the functioning of the market economy. In manufacturing, rebuilding, and repairing metal products and machinery, MP& M facilities release pollutants that increase risks to human health and aquatic life and cause other environmental harm without accounting for the consequences of these actions on other parties ( sometimes referred to as third parties) who do not directly participate in the business transactions of the business entities.

5 It is not possible to provide an overall estimate of total pollutant pounds removed, because overlap among some of the pollutant categories would result in double counting if the categories were summed. For example, TSS may include some of the priority pollutant and nonconventional metals discharges. Use of the toxic weighted loadings avoids this double counting, but does not include conventional pollutants.

2 5 MP& M EEBA Part I: Introduction and Background Information Chapter 2: The MP& M Industry and the Need for Regulation These costs are not borne by the responsible entities and are therefore external to the production and pricing decisions of the responsible entity.

A profit maximizing firm or a cost minimizing government owned facility will ignore these costs when deciding how much to produce and how to produce it. In addition, the externality is uncompensated because no party is compensated for the adverse consequences of the pollution releases.

When these external costs are not accounted for in the production and pricing decisions of the responsible entities, their decisions will yield a mix and quantity of goods and services in the economy, and an allocation of economic resources to production activities, that are less than optimal. In particular, the quantity of pollution and related environmental harm caused by the activities of the responsible entities will, in general, exceed socially optimal levels. As a result, society will not maximize total social welfare.

In addition, adverse distributional effects may accompany the uncompensated environmental externalities. If the distribution of pollution and environmental harm is not random among the U. S. population, but instead is concentrated among certain population subgroups based on socio economic or other demographic characteristics, then the uncompensated environmental externalities may produce undesirable transfers of economic welfare among subgroups of the population. See Chapter 17: Environmental Justice and Protection of Children for more information.

The goal of environmental legislation and implementing regulations, including the final MP& M rule that is the subject of this EEBA, is to correct these environmental externalities by requiring businesses and other polluting entities to reduce their pollution and environmental harm. Congress, in enacting the authorizing legislation, and EPA, in promulgating the implementing regulations, act on behalf of society to achieve a mix of goods and services and a level of pollution that more nearly approximates socially optimal levels. As a result, the mix and quantity of goods and services provided by the economy, the allocation of economic resources to those activities, and the quantity of pollution and environmental harm accompanying those activities will yield higher economic welfare to society.

Requiring polluting entities to reduce levels of pollution and environmental harm is one approach to addressing the problem of environmental externalities. This approach imposes costs on the polluting entities in the form of compliance costs incurred to reduce pollution to allowed levels. A polluting entity will either incur the costs of meeting the regulatory limits or will determine that compliance is not in its best financial interest and will cease the pollution generating activities. This approach to addressing the problem of environmental externalities will generally result in improved economic efficiency and net welfare gains for society if the cost of reducing the pollution and environmental harm activities is less than the value of benefits to society from the reduced pollution and environmental harm.

It is theoretically possible to correct the market imperfection by means other than direct regulation. For example, negotiation and/ or litigation could achieve an optimal allocation of economic resources and mix of production activities within the economy. However, the transaction costs of assembling the affected parties and involving them in the negotiation/ litigation process, as well as the public goods character of the improvement sought by negotiation or litigation, make this approach impractical.

2.4 OVERLAP WITH OTHER EFFLUENT GUIDELINES EPA has previously promulgated effluent guidelines regulations for 13 metals related industries. In some instances, these industries may perform operations that are found in MP& M facilities. These effluent guidelines are:

  Electroplating ( 40 CFR Part 413),

  Iron & Steel Manufacturing ( 40 CFR Part 420),

  Nonferrous Metals Manufacturing ( 40 CFR Part 421),

  Ferroalloy Manufacturing ( 40 CFR Part 424),

  Metal Finishing ( 40 CFR Part 433),

  Battery Manufacturing ( 40 CFR Part 461),

2 6 MP& M EEBA Part I: Introduction and Background Information Chapter 2: The MP& M Industry and the Need for Regulation   Metal Molding & Casting ( 40 CFR Part 464),

  Coil Coating ( 40 CFR Part 465),

  Porcelain Enameling ( 40 CFR Part 466),

  Aluminum Forming ( 40 CFR Part 467),

  Copper Forming ( 40 CFR Part 468),

  Electrical & Electronic Components ( 40 CFR Part 469), and   Nonferrous Metals Forming & Metal Powders ( 40 CFR Part 471).

In 1986, the Agency reviewed coverage of these regulations and identified a significant number of metals processing facilities discharging wastewater that these 13 regulations did not cover. From this review, EPA performed a more detailed analysis of these unregulated sites and identified the discharge of significant amounts of pollutants. This analysis resulted in the formation of the   Machinery Manufacturing and Rebuilding  ( MM& R) point source category. In 1992, EPA changed the name of the category to   Metal Products and Machinery  ( MP& M) to clarify coverage of the category ( 57 FR 19748).

Only direct dischargers in the Oily Wastes subcategory will be regulated under the final regulations for 40 CFR Part 38.

Table 2.5 shows the MP& M subcategories and the coverages that apply to each. EPA does not intend this table to be exhaustive, but rather to provide a general overview of the applicability of the Electroplating, Metal Finishing, and Metal Products & Machinery effluent guidelines.

2 7 MP& M EEBA Part I: Introduction and Background Information Chapter 2: The MP& M Industry and the Need for Regulation Table 2.5: Coverage by MP& M Subcategory Subcategory Continue Coverage under 40 CFR Part 413 ( Electroplating) Continue Coverage under 40 CFR Part 433 ( Metal Finishing) Coverage under 40 CFR Part 438 ( Metal Products & Machinery)

General Metals ( including Continuous Electroplaters) Existing indirect dischargers currently covered by Part 413. New and existing direct and indirect dischargers currently covered by Part 433. None Metal Finishing Job Shops Existing indirect dischargers currently covered by Part 413. New and existing direct and indirect dischargers currently covered by Part 433. None Non Chromium Anodizers a Existing indirect dischargers that are currently covered by 413. New and existing direct and indirect dischargers currently covered by Part 433. None Printed Wiring Board ( Printed Circuit Board) Existing indirect dischargers that are currently covered by 413. New and existing direct and indirect dischargers currently covered by Part 433. None Steel Forming & Finishing Wire Drawinga N/ A N/ A None Oily Wasteb N/ A N/ A All new and existing direct dischargers under this subcategory. ( See 438.20)

Railroad Line Maintenanceb N/ A N/ A None Shipbuilding Dry Docksb N/ A N/ A None a These facilities will continue to be subject to Part 420.

b There are no national categorical pretreatment standards for these facilities.

Source: U. S. EPA analysis.

2 8 MP& M EEBA Part I: Introduction and Background Information Chapter 2: The MP& M Industry and the Need for Regulation Figure 2.1 illustrates the relationship among the various metals industries effluent guidelines.

Figure 2.1: Metals Industries Effluent Guidelines Covered Under 40CFR Source: U. S. EPA analysis.

2.5 MEETING LEGISLATIVE AND LITIGATION BASED REQUIREMENTS EPA s effluent limitations guidelines and standards for the MP& M industry are under authority of the CWA, Sections 301,

304, 306, 307, and 501. These CWA sections require the EPA Administrator to publish limitations and guidelines for controlling industrial effluent discharges consistent with the overall CWA objective to   restore and maintain the chemical,

physical, and biological integrity of the Nation s waters.  EPA s MP& M industry regulation responds to these requirements.

In addition, the MP& M regulation responds to the requirements of a consent decree entered by the Agency as a result of litigation. Section 304( m) of the CWA ( 33 U. S. C. 1314( m)), added by the Water Quality Act of 1987, required EPA to establish schedules for ( i) reviewing and revising existing effluent limitations guidelines and standards, and ( ii) promulgating new effluent guidelines. On January 2, 1990, EPA published an Effluent Guidelines Plan ( 55 FR 80), in which schedules were established for developing new and revised effluent guidelines for several industry categories. One of the industries for which the Agency established a schedule was the Machinery Manufacturing and Rebuilding Category ( MM& R). 6 6 The name was changed to Metal Products and Machinery ( MP& M) in 1992 to avoid confusion over what was covered by the rule.

2 9 MP& M EEBA Part I: Introduction and Background Information Chapter 2: The MP& M Industry and the Need for Regulation The Natural Resources Defense Council, Inc. ( NRDC) and Public Citizen, Inc. challenged the Effluent Guidelines Plan in a suit filed in U. S. District Court for the District of Columbia ( NRDC et al v. Reilly, Civ. No. 89 2980). The plaintiffs charged that EPA s plan did not meet the requirements of Section 304( m). A Consent Decree in this litigation was entered by the Court on January 31, 1992. This plan required, among other things, that EPA propose effluent guidelines for the MP& M category by November, 1994 and take final action on these effluent guidelines by May, 1996. EPA filed a motion with the Court on September 28, 1994, requesting an extension until March 31, 1995, for the EPA Administrator to sign the proposed regulation and a subsequent four month extension for signature of the final regulation in September 1996. EPA published a proposal entitled,   Effluent Limitations Guidelines, Pretreatment Standards, and New Source Performance Standards: Metal Products and Machinery  ( 60 FR 28210) on May 30, 1995.

EPA initially divided the industry into two phases based on industry sector, as the Agency believed that would make the regulation more manageable. The Phase I proposal included the following industry sectors: Aerospace; Aircraft; Electronic Equipment; Hardware; Mobile Industrial Equipment; Ordnance; and Stationary Industrial Equipment. At that time, EPA planned to propose a rule for the Phase II sectors approximately three years after the MP& M Phase I proposal.

EPA received over 4,000 pages of public comment on the Phase I proposal. One area where commenters from all stakeholder groups ( i. e., industry, environmental groups, and regulators) were in agreement was that EPA should not divide the MP& M industry into two separate regulations. Commenters raised concerns regarding the regulation of similar facilities with different compliance schedules and potentially different limitations for similar processes based solely on whether the facilities were in a Phase I or Phase II sector. Furthermore, a large number of facilities performed work in multiple sectors. In such cases, permit writers and control authorities ( e. g., POTWs) would need to decide which MP& M rule ( Phase I or 2) applied to a facility.

Based on these comments, EPA decided to combine the two phases of the regulation into one proposal. EPA published a proposal entitled,   Effluent Limitations Guidelines, Pretreatment Standards, and New Source Performance Standards for the Metal Products and Machinery Point Source Category  ( 66 FR 424) on January 3, 2001. The proposal published in January 2001 completely replaced the 1995 proposal.

On June 5, 2002, EPA published a Notice of Data Availability ( NODA) ( 67 FR 38752). In the NODA, EPA discussed major issues raised in comments on the 2001 proposal; suggested revisions to the technical and economic methodologies used to estimate compliance costs, pollutant loadings, and economic and environmental impacts; presented the results of these suggested methodology changes and incorporation of new ( or revised) data; and summarized the Agency s thinking on how these results could affect the Agency s final decisions.

This report addresses the 304( m) decree as amended, requiring the MP& M rules to be promulgated by February 14, 2003.

2 10 MP& M EEBA Part I: Introduction and Background Information Chapter 2: The MP& M Industry and the Need for Regulation GLOSSARY Best Available Technology Economically Achievable: Effluent limitations for direct dischargers, addressing priority and nonconventional pollutants. BAT is based on the best existing economically achievable performance of plants in the industrial subcategory or category. Factors considered in assessing BAT include the cost of achieving BAT effluent reductions, the age of equipment and facilities involved, the processes employed, engineering aspects of the control technology, potential process changes, non water quality environmental impacts ( including energy requirements), economic achievability, and such factors as the Administrator deems appropriate. The Agency may base BAT limitations upon effluent reductions attainable through changes in a facility's processes and operations. Where existing performance is uniformly inadequate, EPA may base BAT upon technology transferred from a different subcategory within an industry or from another industrial category.

Best Practicable Control Technology Currently Available: Effluent limitations for direct discharging facilities,

addressing conventional, toxic, and nonconventional pollutants. In specifying BPT, EPA considers the cost of achieving effluent reductions in relation to the effluent reduction benefits. The Agency also considers the age of the equipment and facilities, the processes employed and any required process changes, engineering aspects of the control technologies, non

water quality environmental impacts ( including energy requirements), and such other factors as the Agency deems appropriate. Limitations are traditionally based on the average of the best performances of facilities within the industry of various ages, sizes, processes, or other common characteristics. Where existing performance is uniformly inadequate, EPA may require higher levels of control than currently in place in an industrial category if the Agency determines that the technology can be practically applied.

bioavailable: Degree of ability to be absorbed and ready to interact in organism metabolism.

( http:// www. epa. gov/ OCEPAterms)

biological oxygen demand: A measure of the amount of oxygen consumed in the biological processes that break down organic matter in water. The greater the BOD, the greater the degree of pollution.

( http:// www. epa. gov/ OCEPAterms/ bterms. html)

chemical oxygen demand: A measure of the oxygen required to oxidize all compounds, both organic and inorganic, in water. ( http:// www. epa. gov/ OCEPAterms/ cterms. html)

Clean Water Act: Act passed by the U. S. Congress to control water pollution. Formerly referred to as the Federal Water Pollution Control Act of 1972 or Federal Water Pollution Control Act Amendments of 1972 ( Public Law 92 500), 33 U. S. C.

1251 et. seq., as amended by: Public Law 96 483; Public Law 97 117; Public Laws 95 217, 97 117, 97 440, and 100 04.

conventional pollutants: Statutorily listed pollutants understood well by scientists. These may be in the form of organic waste, sediment, acid, bacteria, viruses, nutrients, oil and grease, or heat. ( http:// www. epa. gov/ OCEPAterms)

distributional effects: Occurs when the distribution of pollution and environmental harm is not random among the U. S.

population, but instead is concentrated among certain population subgroups based on socio economic or other demographic characteristics, then the uncompensated environmental externalities may produce undesirable transfers of economic welfare among subgroups of the population.

externalities: Costs or benefits of market transactions that are not reflected in the prices buyers and sellers use to make their decisions. An externality is a by product of the production or consumption of a good or service that affects someone not immediately involved in the transaction.

( http:// www. enmu. edu/ users/ biced/ home/ glossary. html)

A type of market failure that causes inefficiency.

( http:// www. amosweb. com/ cgi bin/ gls_ dsp. pl? term= externalities)

MP& M facilities: MP& M facilities are defined on the basis of three considerations: ( 1) they produce metal parts, products,

or machines for use in one of the 19 industry sectors evaluated for coverage in the MP& M point source category; ( 2) they use operations in one of the eight regulatory subcategories evaluated for coverage in the MP& M point source category; and ( 3)

they discharge process wastewater, either directly or indirectly, to surface waters. In this document, the term   MP& M facilities  refers to all facilities meeting the above definition, regardless of whether a facility s industrial sector, subcategory,

or discharger category is covered by the final regulation. If the MP& M facilities are referred to as   regulated  facilities or facilities   subject to the final regulation , the use of the qualifier   regulated  or   subject to the final regulation  restricts 2 11 MP& M EEBA Part I: Introduction and Background Information Chapter 2: The MP& M Industry and the Need for Regulation the definition to include only those facilities in the industry sectors, subcategory, and discharger category covered by the final regulation.

MP& M industry: The facilities and markets comprising the 19 industry sectors evaluated for coverage in the MP& M point source category. In this document, the term   MP& M industry  refers to the full 19 industry sectors, regardless of whether an industry sector is covered by the final regulation. If the MP& M industry is referred to as the regulated MP & M industry, the use of the qualifier   regulated  restricts the definition to only the industry sectors, subcategory, and discharger category covered by the final regulation.

nonconventional pollutants: Any pollutant not statutorily listed or which is poorly understood by the scientific community.

( http:// www. epa. gov/ OCEPAterms)

oil and grease ( O& G): These organic substances may include hydrocarbons, fats, oils, waxes and high molecular fatty acids. Oil and grease may produce sludge solids that are difficult to process. ( http:// www. epa. gov/ owmitnet/ reg. htm)

Pretreatment Standards for Existing Sources ( PSES): Categorical pretreatment standards for existing indirect dischargers, designed to prevent the discharge of pollutants that pass through, interfere with, or are otherwise incompatible with the operation of POTWs. Standards are technology based and analogous to BAT effluent limitations guidelines.

priority pollutants: 126 individual chemicals that EPA routinely analyzes when assessing contaminated surface water,

sediment, groundwater or soil samples.

publicly owned treatment works: A treatment works for municipal sewage or liquid industrial wastes that is owned by a State or municipality.

socially optimal level: Situation in which it is impossible to make any individual better off without making someone else worse off. Also referred to as Pareto optimal.

social welfare: The sum of the welfare of all participants in the society; measured by the sum of consumer surplus  the value consumers derive from goods and services less the price they have to pay for the goods and services  and producers'

surplus  the revenue received by producers of goods and services less their costs of producing the goods and services.

third parties: Those affected by a by product of the production or consumption of a good or service that are not immediately involved in the transaction.

total suspended solids: A measure of the suspended solids in wastewater, effluent, or water bodies, determined by tests for " total suspended non filterable solids."

( http:// www. epa. gov/ OCEPAterms/ tterms. htm l).

toxic weighted pollutants: This measure weights quantities of different pollutants in effluents by a measure of their relative toxicity. Toxic weighted loadings measures the relative toxic effects of discharges containing different mixtures of pollutants.

uncompensated: Where parties damaged by externalities receive no compensation for accepting the damage.

2 12 MP& M EEBA Part I: Introduction and Background Information Chapter 2: The MP& M Industry and the Need for Regulation ACRONYMS BAT: Best Available Technology Economically Achievable BPT: Best Practicable Control Technology Currently Available BOD: biological oxygen demand COD: chemical oxygen demand CWA: Clean Water Act MM& R: Machinery Manufacturing and Rebuilding MP& M: Metal Products and Machinery NPDES: National Pollutant Discharge Elimination System NRDC: Natural Resources Defense Council O& G: oil and grease POTW: publicly owned treatment works PSES: Pretreatment Standards for Existing Sources TSS: total suspended solids 2 13 MP& M EEBA Part I: Introduction and Background Information Chapter 2: The MP& M Industry and the Need for Regulation THIS PAGE INTENTIONALLY LEFT BLANK 2 14 MP& M EEBA Part I: Introduction and Background Information Chapter 3: Profile of the MP& M Industry Sectors Chapter 3: Profile of the MP& M Industry Sectors INTRODUCTION The final MP& M rule will apply to facilities that manufacture, rebuild, or maintain metal parts, products or machines to be used in a large number of industrial sectors.

Manufacturing is the series of unit operations necessary to produce metal products, and is generally performed in a production environment. Rebuilding/ maintenance is the series of unit operations necessary to disassemble used metal products into components, replace the components or subassemblies or restore them to original function, and reassemble the metal product. These operations are intended to keep metal products in operating condition and can be performed in either a production or a non production environment. Manufacturing and rebuilding/ maintenance activities often occur at the same facilities.

The MP& M industry encompasses a large number of industries that manufacture intermediate and final goods,

support transportation and other vehicle services, and repair and maintain products and equipment. The health of the MP& M industry is generally tied to the overall economic performance of the economy. The MP& M industry includes manufacturing and non manufacturing industries defined by 224 4 digit Standard Industrial Classification ( SIC)

codes, which are grouped into nineteen industry sectors. 1 Of the 224 SIC codes, 174 are manufacturing ( SICs 20 through 39) and 50 are non manufacturing. All nineteen sectors include manufacturing industries, and eleven include non

manufacturing industries as well.

Although EPA evaluated regulatory options that would have covered facilities operating in any of the nineteen sectors, the final regulation covers facilities operating only in sixteen of those sectors. CHAPTER CONTENTS 3.1 Data Sources ................. ............. 3 2 3.2 Overview of the MP& M Industry and Industry Trends ................. ............... 3 3 3.2.1 Aerospace ................. ........ 3 7 3.2.2 Aircraft ................. .......... 3 7 3.2.3 Electronic Equipment ................ 3 7 3.2.4 Hardware ................. ........ 3 8 3.2.5 Household Equipment ............... 3 8 3.2.6 Instruments ................. ....... 3 9 3.2.7 Iron and Steel ................. ..... 3 9 3.2.8 Job Shops ................. ........ 3 9 3.2.9 Mobile Industrial Equipment .......... 3 9 3.2.10 Motor Vehicle and Bus & Truck ...... 3 10 3.2.11 Office Machine ................. ... 3 10 3.2.12 Ordnance ................. ....... 3 10 3.2.13 Precious Metals and Jewelry .......... 3 11 3.2.14 Printed Wiring Boards .............. 3 11 3.2.15 Railroad ................. ........ 3 11 3.2.16 Ships and Boats ................. .. 3 11 3.2.17 Stationary Industrial Equipment ....... 3 12 3.3 Characteristics of MP& M Manufacturing Sectors 3 12 3.3.1 Domestic Production ............... 3 13 3.3.2 Industry/ Market Structure ............ 3 18 3.3.3 Financial Condition and Performance . . 3 24 3.4 Characteristics of MP& M Non Manufacturing Sectors ................. ............. 3 25 3.4.1 Domestic Production ............... 3 25 3.4.2 Industry Structure and Competitiveness . 3 28 3.5 Characteristics of All MP& M Sectors ......... 3 30 3.5.1 Eight firm Concentration Ratio ....... 3 30 3.5.2 Risk Normalized Return on Assets ..... 3 31 3.6 Characteristics of MP& M Facilities ........... 3 32 Glossary ................. ................. ... 3 38 Acronyms ................. ................. .. 3 40 References ................. ................. . 3 41 This chapter provides a profile of the industry sectors that were evaluated for coverage by the MP& M rule. The profile focuses on the economic characteristics of the sectors and the facilities within the sectors, which may affect the rule s financial and economic impacts. It presents and interprets a wide variety of data associated with production, market structure,

and competitiveness, for each sector and for the MP& M industry as a whole.

1 Appendix A lists the nineteen sectors and their associated 4 digit SIC codes.

3 1 MP& M EEBA Part I: Introduction and Background Information Chapter 3: Profile of the MP& M Industry Sectors 3.1 DATA SOURCES This profile presents data from the Economic Censuses, Statistics of U. S. Businesses ( SUSB), Annual Survey of Manufacturers ( ASM ), U. S. Industry and Trade Outlook, EPA s Sector Notebooks, and other sources, to characterize the MP& M sectors, including both dischargers and non dischargers.

The years 1988 and 1996 were chosen as the years for which data are presented because these are the base analysis years,

respectively, for the MP& M Phase 1 sectors survey and the Phase 2 survey. In the cases when data for those years were not available, data from other years were used.

This profile relies on industries defined by SICs, both because data collection for the MP& M sectors was defined by SICs and to allow use of historical data. The Census Bureau switched to use of the new North American Industry Classification System ( NAICS) codes starting with the 1997 Economic Censuses. Data classified by NAICS code were converted to SIC format before being included in the profile. The conversion used a bridge containing the percentage of each NAICS code that needed to be assigned to each SIC code. For a detailed discussion of the bridge, see Appendix A.

The Agency used survey data to characterize the facilities within the MP& M sectors that are potentially subject to the rule because they discharge process wastewater from MP& M operations. The survey provides data such as discharge type, small business status, sources of revenues, and financial performance.

The survey requested information on the sectors from which each facility derives its revenues. Many facilities derive revenues from more than one sector. It is therefore difficult to link facility characteristics to a specific sector. Data on the potentially regulated facilities are therefore summarized by the regulatory subcategories rather than by sectors.

All monetary values are shown in real 2001 dollars. EPA used the Producer Price Index ( PPI) for industrial commodities as a conversion tool. A PPI is an index that measures price changes, from the perspective of the seller, of a collection of goods and services that are important inputs for a specific industry or for the economy as a whole. This chapter uses the PPI for industrial commodities to inflate nominal values to real values. Later chapters include PPI s that are sector specific.

These PPI s are derived from the average of the PPI s for each component industry SIC code, weighted by industry output.

Table 3 1 shows the PPI values for the relevant years for which prices were deflated. The PPI for industrial commodities increased slightly every year between 1988 and 1996. Total inflation for industrial commodities from 1988 to 1996 was 19.8%.

3 2 MP& M EEBA Part I: Introduction and Background Information Chapter 3: Profile of the MP& M Industry Sectors Table 3.1: Producer Price Index for Industrial Commodities Year Producer Price Index ( PPI) Percent Change 1988 100.0 n/ a 1989 105.0 5.0%

1990 108.9 3.8%

1991 109.6 0.6%

1992 110.4 0.8%

1993 111.9 1.4%

1994 113.5 1.4%

1995 118.1 4.0%

1996 119.8 1.4%

1997 120.1 0.3%

1998 117.4  2.3%

1999 119.0 1.4%

2000 126.8 6.6%

2001 127.7 0.7%

Source: Bureau of Labor Statistics, Producer Price Index.

3.2 OVERVIEW OF THE MP& M INDUSTRY AND INDUSTRY TRENDS This section provides a general overview of the MP& M industry. It describes the individual MP& M industry sectors,

provides basic economic information about MP& M manufacturers, and summarizes recent industry trends.

Figure 3 1 shows that MP& M facilities are located in every state. A few MP& M sectors such as shipbuilding are concentrated geographically. Transportation related MP& M facilities are found throughout the country. Overall, MP& M 3 3 MP& M EEBA Part I: Introduction and Background Information Chapter 3: Profile of the MP& M Industry Sectors facilities are most concentrated in the heavy industrial regions along the Gulf Coast, both the East and West Coasts, and the Great Lakes Region ( New York, Pennsylvania, Ohio, Indiana, Illinois, and Michigan).

Figure 3.1: Number of MP& M Facilities by State in 1992 Source: Department of Commerce, Bureau of the Census, Census of Manufacturers, Census of Transportation, Census of Wholesale Trade, Census of Retail Trade, Census of Service Industries, 1992.

Table 3.2 lists the MP& M sectors and provides a brief description of the products and services produced by each. Appendix A provides a more detailed list of the 4 digit SIC codes in each sector.

3 4 MP& M EEBA Part I: Introduction and Background Information Chapter 3: Profile of the MP& M Industry Sectors Table 3.2: MP& M Sector Definitions Sector Sector Description Aerospace Metal parts or products such as missiles, space vehicles, satellites and associated launching equipment.

Aircraft Metal parts or products including all types of aircraft for public, private or commercial use. aircraft parts and equipment as well as aircraft maintenance activities.

Bus and Truck Metal parts or products including freight trucks and trailers as well as public, private and commercial buses. ludes all associated equipment including equipment specific to truck and bus terminals.

Includes bus and truck maintenance activities.

Electronic Equipment Metal parts or products including general electronic components such as tubes, capacitors, and transformers, as well as finished electronic equipment such as televisions, radios, and telephones.

Hardware Metal parts or products such as tools, cutlery, valves and tubing, dies, springs, sheet metal, drums, and heat treating equipment.

Household Equipment Metal parts or products including appliances such as refrigerators, laundry equipment, lighting equipment, cooking equipment, and vacuum cleaners. munication type radios and televisions are included in this sector.

Iron and Steel Sites engaged in iron or steel manufacturing, forming and finishing.

Instruments Metal parts or products such as laboratory and medical equipment, measuring devices, environmental and process controls, optical equipment, surgical and dental equipment, and pens.

Metal Finishing Job Shop Facilities with more than 50 percent of their revenues coming from work on products not owned by the site. While there are SIC codes associated with some Metal Finishing Job Shops, they sell to a variety of markets and are not a market in and of themselves.

Mobile Industrial Equipment Metal parts or products including tractors and other farm equipment, construction machinery and equipment, mining machinery and equipment, industrial cranes and hoists, and tracked military vehicles.

Motor Vehicle Metal parts or products including private passenger vehicles and associated parts and accessories such as automobiles, motorcycles, utility trailers and recreational vehicles, and mobile homes.

Office Machines Metal parts or products including office computer equipment, storage devices, printers, photocopiers and associated parts and accessories.

Ordnance Metal parts or products including all small arms, artillery, and ammunition with the exception of missiles ( aerospace). anufacture of explosives.

Other Metal Products Metal parts or products including products and machinery not categorized into the other sectors ( e. g., sporting goods, musical instruments).

Precious Metals and Jewelry Metal parts or products including jewelry, silverware, trophies, and clocks as well as all associated parts and accessories.

Printed Wiring Boards Metal parts or products including printed wiring boards and printed circuit boards.

Railroad Metal parts or products including railcars, locomotives and associated parts and accessories as well as track, switching and terminal stations.

Ships and Boats Metal parts or products including ships and boats for military, freight, and private recreation.

submarines, ferries, tug boats, barges, yachts, and other recreational boats as well as all parts and accessories. lso includes rebuilding and maintenance activities performed at marinas, dry docks, and other on shore activities specifically related to ships and boats.

Stationary Industrial Equipment Metal parts or products including all industrial machinery, such as turbines, oil field machinery, elevators and moving stairways, conveying equipment, chemical process industry equipment, pumps,

compressors, blowers, industrial ovens, vending machines, commercial laundry equipment, commercial refrigeration and heating equipment, welding apparatus, motors, and generators. Includes Inc Non com Does not include the chemical processing or the m Includes A Source: U. S. EPA analysis.

Table 3.3 shows output by sector for manufacturers, non manufacturers, and all MP& M firms. Output is a good indicator of the overall size of a market. In 1997, MP& M firms accounted for more than $ 2.8 trillion in output. Motor vehicles were the 3 5 MP& M EEBA Part I: Introduction and Background Information Chapter 3: Profile of the MP& M Industry Sectors largest single MP& M sector, accounting for 43 percent of all MP& M output. Ordnance is the smallest sector, with 0.2 percent of MP& M output.

The MP& M manufacturing and non manufacturing sectors differ in several important ways. The manufacturing sector accounted for $ 1.6 trillion in output, equal to 57 percent of the total MP& M output. The non manufacturing sector accounted for $ 1.2 trillion, or 43 percent of MP& M output. Although MP& M non manufacturers  revenues were nearly $ 400 billion smaller than manufacturers  revenues, the MP& M non manufacturers had three times as many facilities as the MP& M manufacturers. Also, although manufacturing output was relatively evenly divided among the different sectors, more than 86 percent of non manufacturing output came from the motor vehicle and bus and truck sectors.

Table 3.3: MP& M Output and Share in 1997a ( millions, 2001$)

Sector Manufacturers Non Manufacturers Sector Total Output b Share Output b Share Output b Share Aerospace 20,115.1 1.2% 20,115.1 0.7%

Aircraft 105,163.8 6.4% 9,935.9 0.8% 115,099.7 4.0%

Bus & Truck 15,118.4 0.9% 209,316.1 16.7% 224,434.5 7.8%

Electronic Equipment 145,886.9 8.9% 145,886.9 5.1%

Hardware 189,145.5 11.6% 189,145.5 6.6%

Household Equipment 102,242.3 6.3% 2,847.7 0.2% 105,090.0 3.6%

Instruments 141,548.0 8.7% 7,401.9 0.6% 148,949.9 5.2%

Iron and Steel 20,403.0 1.2% 20,403.0 0.7%

Job Shop c 15,360.2 0.9% 15,360.2 0.5%

Mobile Industrial Equipment 54,704.7 3.3% 54,704.7 1.9%

Motor Vehicle 366,448.7 22.4% 870,450.5 69.6% 1,236,899.2 42.8%

Office Machine 119,783.0 7.3% 30,929.9 2.5% 150,712.9 5.2%

Ordnance 5,778.8 0.4% 5,778.8 0.2%

Other Metal Products 60,249.6 3.7% 22,040.7 1.8% 82,290.3 2.9%

Precious Metals and Jewelry 9,760.7 0.6% 367.4 0.0% 10,128.1 0.4%

Printed Wiring Boards 10,400.7 0.6% 10,400.7 0.4%

Railroad d 8,412.6 0.5% 30,727.9 2.5% 39,140.5 1.4%

Ships and Boats 18,081.1 1.1% 37,383.0 3.0% 55,464.1 1.9%

Stationary Industrial Equipment 227,053.7 13.9% 29,747.1 2.4% 256,800.8 8.9%

Total MP& M 1,635,656.8 100.0% 1,251,148.1 100.0% 2,886,804.9 100.0%

Percent of total 56.7% 43.3% 100.0%

a Data for 1996 were not available, so economic census data from 1997 were used.

b Value of shipments for manufacturing industries; total sales for retail and wholesale trade; total receipts for service industries; total revenue for transportation.

c Includes facilities in two SICs that are defined specifically as job shops ( SICs 3471 and 3479.) Facilities reporting in other sectors may also operate as job shops, so these data are likely to understate the true output of MP& M job shops.

d Non manufacturing railroad data are estimated based on 1992 data.

Source: Department of Commerce, Bureau of the Census, Census of Manufacturers, Census of Transportation, Census of Wholesale Trade, Census of Retail Trade, Census of Service Industries, 1997.

The following sections describe the MP& M sectors and briefly discuss recent industry trends in each sector. The discussion is based on 2001 Value Line Industry Reports, U. S. Industry and Trade Outlook 2000 ( DRI McGraw Hill), EPA s Sector Notebooks, and other sources.

3 6 MP& M EEBA Part I: Introduction and Background Information Chapter 3: Profile of the MP& M Industry Sectors 3.2.1 Aerospace The aerospace industry includes original equipment manufacturers ( OEM ) and facilities that rebuild and repair aerospace equipment. The industry serves both military and commercial end uses such as space vehicles for commercial communication satellites, although military applications dominate. Its products include guided missiles, space vehicles, and associated propulsion units and parts. The assembly of aerospace products draws on numerous other industries, including plastics,

rubber, fabricated metals, metal casing, glass, textile, and electronic components. Aerospace products are typically produced by a prime contractor and several tiers of subcontractors. Final assembly is performed by relatively few facilities, only a small number compared with the numerous subassembly and parts manufacturers. Aerospace manufacturing is extremely capital intensive.

The U. S. aerospace industry has consolidated substantially in recent years, due to declines in defense spending. The number of facilities and firms as well as sector value of shipments and employment decreased from 1988 to 1996 in the US.

Growth in the industry is expected to come from lower cost air to air missiles, with strong focus on increasing efficiency in production by reducing costs. Consumer demand has also grown for direct to home television, voice and data transmission,

and other satellite services, which have increased the commercial demand for space vehicles needed to launch satellites.

The aerospace industry exports a substantial share of its output. Many North American and European governments with large defense budgets have been seeking to reduce their military budgets, while governments in South America ( with smaller budgets) have been maintaining or increasing their defense spending. Substantial consolidation has occurred in the European aerospace industry, which has become more competitive with U. S. companies ( U. S. EPA 1997; DRI/ McGraw Hill 2000).

3.2.2 Aircraft Trends in the aircraft sector are heavily influenced by changes in industry structure and in the international political economic arena. Although new aircraft production increased substantially in 1998 and 1999, production weakened in 2001 because of the economic slowdown and then plummeted following the September 11th terrorist attacks. Airlines have reacted to falling ticket sales by cutting scheduled flights, reducing personnel, and delaying or cancelling investment in new aircraft.

During the 1990' s, there was substantial restructuring through mergers and consolidation in the aircraft manufacturing industry, including producers of both aircraft and aircraft parts nationally and internationally. Firms focused on improving efficiency through cost cutting efforts such as reduced staffing. In addition, there is a growing trend for U. S. producers to outsource many aircraft parts to firms in other nations, in order to bring down costs and compete internationally.

In addition to aircraft manufacturing, this sector includes rebuilding and repair of aircraft at manufacturers  facilities or at airports. 2 The aircraft maintenance and repair industry has slowed with the post 9/ 11 decline in passenger travel.

3.2.3 Electronic Equipment The electronic equipment sector can be divided into two general groups of industries: microelectronics manufacturers and telecommunications equipment manufacturers.

Microelectronics industries manufacture a wide range of products, from electronic connectors to integrated circuit panels.

These products are used as material inputs in many industries such as automotive, telecommunications, aerospace, computer,

and medical equipment. Although the microelectronics industry covers a diverse array of products, producers, and end uses,

some general trends have been evident in the industry. A strong increase in the use of microelectronic products in industries throughout the economy has led to rapid growth in microelectronics manufacturing over the past two decades. Although the US is a major producer of consumer electronics, Japan is the world s leading producer of consumer electronics, and U. S.

firms face strong international competition for cutting edge technological advances in their products. Due to the high skill level necessary in the development of products, there is considerable competition for skilled labor. The recent economic slowdown has led to lowered demand for end products that incorporate microelectronics. In response, the microelectronics 2 The rule regulates wastewater generated from washing vehicles only when it occurs as a preparatory step prior to performing an MP& M unit operation ( e. g., prior to disassembly to perform engine maintenance or rebuilding). The rule does not cover the washing of cars, aircraft, or other vehicles when it is performed only for aesthetic/ cosmetic purposes.

3 7 MP& M EEBA Part I: Introduction and Background Information Chapter 3: Profile of the MP& M Industry Sectors industry has reduced capacity and laid off workers to reduce costs. Despite this decline, microelectronics continue to be an increasingly necessary component of the global economy.

Telecommunication industries focus on the production of network equipment, fiber optics, and wireless communication equipment. Much of the growth in the industry has come from the increasing use of fiber optics and wireless end user devices. The telecommunications industries experienced rapid growth in the nineties; however, industry activity slowed considerably with the collapse of the telecommunications bubble. Telecom firms have reacted by cutting employees, reducing costs, and selling off portions of their firms. Most have continued their R& D efforts.

3.2.4 Hardware The hardware sector consists of many different industries, which can be generally classified into three groups: building hardware, conventional hardware, and tooling hardware.

Building hardware consists of a group of industries that manufacture metal building products, including fabricated structural metal, sheet metalwork, and architectural metalwork. This group of industries grew rapidly throughout the 1990' s. The building products industry as a whole saw record sales in 1998 and again in 1999. Much of this growth is attributed to large highway projects funded by the Transportation Efficiency Act for the 21st Century.

Conventional hardware includes products such as screws, industrial fasteners, and valves and hose fittings. The products produced in this industry are used in the production of manufactured goods. Trends in this industry, therefore, generally reflect trends in other manufacturing industries. One of the most important industries influencing conventional hardware is the auto industry. Hardware producers have experienced pressures from end users such as auto makers to reduce costs. The industry faces a continued trend of consolidation of firms and increasing global pressure from countries with low labor costs.

Domestic producers of screws and industrial fasteners saw growth in the real value of shipments due to the strong U. S.

economy in the late nineties.

The tooling hardware sector also contains a variety of different industries that produce various types of tools for different uses. Because these industries also face continued globalization, many of them are impacted by changes in the global economy. The decline in Asian markets in 1998 and 1999 resulted in a sharp decline in the value of shipments for the machine tooling industries. Prior to the 1998 financial crisis, value of shipments were increasing annually. The market for the power driven segment of hand tools has increased, however, despite troubled overseas markets.

3.2.5 Household Equipment There are three general groups of industries included in the household equipment sector: household furniture, household appliances, and plumbing equipment. Generally speaking, factors that affect this sector are consistent across these three groups. Low unemployment and increased disposable income stimulated growth in each of these industries in the nineties.

However, because purchases of household equipment are relatively expensive and discretionary, consumers cut back spending in the recent recession. All three household equipment industries face international competition, as imports account for a substantial share of domestic consumption.

Metal furniture accounts for 20 percent of the household furniture industry. Metal components are increasingly being added to non metal furniture. For example, there is a trend to increase the functionality of non metal furniture by equipping recliners with heat and massage. This could increase the industry s reliance on metal parts. The industry has integrated vertically, as large manufacturers have begun to open their own retail stores in an effort to differentiate their products.

There are two groups of household appliance manufacturers. Major appliances such as washing machines and refrigerators are produced by relatively few firms. Smaller appliances are characterized by little product differentiation but considerable price competition and are manufactured by a larger number of companies.

Finally, a significant characteristic of the plumbing equipment market is the extent of U. S. dependence on foreign imports.

While the U. S. construction market has grown at a record pace in the past few years, increasing demand for plumbing equipment, much of the demand has been served by imports and this industry has a trade deficit.

3 8 MP& M EEBA Part I: Introduction and Background Information Chapter 3: Profile of the MP& M Industry Sectors 3.2.6 Instruments The instruments sector is characterized by a diverse array of technologically advanced products and intense global competition among many firms of varying sizes. The sector can be generally divided into industrial measuring and testing instruments, and medical instruments.

In the industrial measuring industry, producers of laboratory instruments are typically integrated firms who have consolidated and reduced costs in response to pressures from medical and pharmaceutical customers. Producers of measuring devices are also facing pressures to consolidate. These firms have been hurt by low commodity prices during the past few years, which have led to reduced investment in measuring equipment by fuel and grain producers. Sales should rebound, however, if Asian economies and fuel prices continue to grow. Small companies still dominate the electronic test equipment industry, which is characterized by a high degree of product differentiation. Most of these firms are not large enough to export products.

Sales for medical devices increased steadily throughout the 1990' s, while employment remained relatively constant. The industry has historically been characterized by many small to mid size firms and intense competition for technological innovation. Efforts to bring down health care costs is one of the primary challenges facing this industry. Pressure to reduce costs has reduced insurance companies  willingness to pay for new equipment. As the population ages, however, demand for medical services and devices is expected to grow. The industry will likely continue to grow in the next few years, but at a slower pace than it has grown historically..

3.2.7 Iron and Steel The basic iron and steel industry is regulated under 40 CFR 420, and primary iron and steel works, blast furnaces and rolling mills are not affected by the MP& M rule. The MP& M rule will regulate facilities that perform MP& M operations or cold forming operations on steel wire, rod, bar, pipe, or tube. This subcategory does not include facilities that perform those operations on base materials other than steel, nor does it include wastewater from cold forming, electroplating or continuous hot dip coating of steel sheet, strip, or plates or wastewater from performing any hot steel forming operations.

Events in the global steel industry in the past few years have had significant and possibly far reaching impacts on domestic producers. In 1998, the industry experienced a global steel crisis. This crisis was caused in part by the Asian financial crisis,

which triggered a sharp decline in imports of steel by major steel importing countries of Asia. This led to a flood of steel imports into U. S., and U. S. steel imports rose 33 percent in 1998. The situation was made worse by global overcapacity largely derived from producers in Russia and Latin America.

This flood of steel into the U. S. and Europe led to rapidly declining steel prices in both regions. Excess inventories that accrued during the surge of imports hurt domestic producers. The   unfair  trading prices resulted in over 20 nations taking formal trade protection actions such as import duties and price floors. The US Congress determined that foreign steel was being sold in the US at unfair prices, and reacted by enacting anti dumping tariffs. The slowdown in the US economy has also negatively affected the steel industry. Most steel firms are being forced to focus on rationalizing capacity and cutting costs.

3.2.8 Job Shops MP& M metal finishing job shops are defined as those facilities with more than 50 percent of their revenues coming from products not owned by the site. While there are specific SIC codes associated with some Metal Finishing Job Shops, they sell to a variety of markets and are not a market in and of themselves.

3.2.9 Mobile Industrial Equipment Mobile industrial equipment includes a number of different industries that produce machinery for different purposes,

including construction, farming, and mining. Growth in the construction equipment industry is typically tied to economic factors such as housing starts, employment, and consumer confidence. Shipments of construction equipment rose steadily during much of the 1990' s. The 1998 Transportation Equity Act for the 21st Century was expected to stimulate further spending by federal, state, and local governments. However, the current recession has forced many industry buyers to cut back or cancel orders.

3 9 MP& M EEBA Part I: Introduction and Background Information Chapter 3: Profile of the MP& M Industry Sectors The farm and mining machinery industries both have been suffering from low commodity prices. Both industries experienced growth in shipments throughout much of the 1990' s, but were hit in 1999 by low prices. Farm equipment was hit hardest as the real value of shipments fell by 38 percent in 1999. Output is expected to continue to decrease until grain surpluses decline and agricultural prices rise. However, the consolidation of farms has also had a significant in impact on this industry. With the increase in farm size, there is growing dependence upon mechanization to farm more acres per farm.

3.2.10 Motor Vehicle and Bus & Truck The major trend in the motor vehicle and bus and truck industries is the continual consolidation of firms into highly capital intensive globalized manufacturers. Motor vehicle manufacturers are no longer constrained within national boundaries, as mergers and joint ventures include some of the largest firms from different countries. Many foreign owned manufacturers have facilities located in the U. S., and relative production costs and exchange rates play a greater role in determining the location of production facilities than the national identity of parent companies.

Manufacturers have increasingly standardized the design of motor vehicles and their parts. These changes have resulted in much less product differentiation among manufacturers, but also in greater product quality. However, greater product quality has resulted in a consistently sharp increase in price over the past three decades. This price increase may have reached its pinnacle in the mid nineties, since prices declined in 1998 and 1999. Industry output for automobiles increased 1.3 percent between 1996 and 2000. Although the current recession has hurt car prices, manufacturers have used incentives such as zero percent financing to maintain sales volume.

3.2.11 Office Machine The office machine sector experienced rapid growth in the nineties that reversed itself with the downturn in the economy.

The industry experienced 7.8 percent growth in the real value of shipments between 1996 and 2000. While this growth was accomplished with only a 1.3 percent increase in total employment, production employment increased by 5.4 percent. The relative difference between total and production employment can be attributed to increasing reliance on the Internet for sales,

thereby reducing the need for non production sales staff. Despite this increase in production employment, the industry remained extremely capital intensive. The recent weakness of the US economy hit the office machine sector hard with business purchases of computers and computer accessories falling significantly.

Firms in the office machine sector have undergone mergers and acquisitions to bring down costs in order to compete. Firms often rely on joint venturing agreements, and sometimes form alliances with past competitors to produce complementary components of new technologies. Consolidation also allows firms to diversify, providing a range of products such as PCs,

software, and information technology to protect against the strong competition in the market for any one product. Firms have also increasingly outsourced production to electronics manufacturers more equipped to increase production and take advantage of economies of size, while the original firms utilize their resources for research and development of new technologies to stay competitive.

Globalization is an important trend in this industry as machine components are produced in different countries. Despite the trend toward a globalized market, the U. S. has held a negative trade balance for over a decade.

3.2.12 Ordnance The ordnance sector includes firms that manufacture small arms, including grenade launchers and heavy field machine guns;

artillery, including naval, aircraft, anti aircraft, tank, coast, and field artillery; and ammunition, including bullets, bombs,

mines, torpedoes, grenades, depth charges, and chemical warfare projectiles. It does not include the chemical processing or manufacture of explosives. Overall, the industry has a high ratio of value added to total sales.

The ordnance sector has contracted significantly since the end of the Cold War. Decreases in US government military spending have caused significant declines in ordnance production, leading to lower industry shipments and cutbacks in employment. Foreign customers, including foreign governments, buy over 80 percent of the ordnance manufactured in the US. Although shipments of military weaponry have declined, sales of small arms have increased in the US over the past few years. Recent military actions by the US will likely result in government weapons purchases that will benefit the industry.

3 10 MP& M EEBA Part I: Introduction and Background Information Chapter 3: Profile of the MP& M Industry Sectors 3.2.13 Precious Metals and Jewelry Domestic production in the precious metals and jewelry industry is dominated by many small firms with low capital intensity,

mostly concentrated in the northeast US. It is influenced by trends in consumer behavior, the retail market, and global competition. Devaluation in the price of gold due to declining world prices has benefitted the industry because it reduces the cost of making jewelry. Increased disposable income fueled strong consumer spending on precious metals and costume jewelry in the nineties, but this trend has weakened with the recent economic downturn.

Increases in spending have not always translated into gains for domestic producers. The lowering of tariffs has resulted in a steady increase in imports of costume jewelry, as labor intensive production is often less expensive in developing countries.

Domestic producers have also been hurt by the strong U. S. dollar, which makes U. S. exports more expensive. Another challenge comes from the retail market, which has put strong pressure on producers to bring down prices in order to compete.

These challenges include consolidation of retailers, giving them greater purchasing power, increased Internet and television home shopping, and a decrease in the number of wholesalers.

3.2.14 Printed Wiring Boards Printed wiring boards ( also referred to as printed circuit boards) are the physical structures on which electronic components such as semiconductor and capacitors are mounted. Computers and comm unications are the largest uses for printed wiring boards. In addition, printed wiring boards are used in a wide array of other products, including toys, radios, television sets,

electronic wiring in cars, guided missile and airborne electronic equipment, biotechnology, medical devices, digital imaging equipment, and industrial control equipment. While some producers of PWBs produce them for their own use, most manufacturers are independent firms that sell PWBs to the open market. The majority of PWB manufacturers are small firms.

The domestic PWB industry experienced considerable growth throughout the 1990' s. Real industry output grew nine percent from 1996 to 2000. Growth was spurred by continual growth in end use markets. In addition to the increased in value of shipments, U. S. firms saw a 5.6 percent increase in average hourly earnings and a 16.3 percent increase in capital expenditures over the same period. However, demand in the PC, telecommunications, and electronics sectors has weakened recently. In parallel, there is growing international competitive pressure for PWB makers to reduce production costs. Consequently, many of the larger PWB firms are looking to relocate offshore.

3.2.15 Railroad Railroad service consists of both freight and passenger service. In the past few years, railroad companies have been focusing on improving the efficiency of their lines and services. There has been a continued trend toward consolidation of major freight railroads. Consequently, companies have reduced the number of lines and focused attention on increasing the capacity of fewer lines. Railroads have also begun to focus on guaranteeing deliveries at specific times, which will allow them to compete with the trucking industry.

Since the 1980' s railroad traffic increased by 50 percent, while the line network decreased by 39 percent. This was accomplished by increasing capital expenditures for equipment such as new locomotives with greater horsepower, installation of double tracks, and increases in the capacity of non railroad owned freight cars. Consequently, freight service in the nineties saw the first increase in operating revenue since 1984, although this was coupled with sharp decreases in employment. Passenger service has undergone similar changes to increase efficiency by adding new locomotives and beginning a transition to high speed train service. Total industry output increased 7.6 percent per year from 1988 to 1996.

Although transportation volume is sensitive to the generally poor macroeconomic situation, railways have succeeded in cutting costs to maintain earnings.

3.2.16 Ships and Boats Ship manufacturing experienced continual declines throughout the 1990' s. Despite efforts by the Federal Government to stimulate investment in converting the industry from production of military ships to merchant ships, the U. S. Navy remains the primary customer of shipbuilders. The U. S. Navy dramatically reduced its orders for new vessels since the end of the Cold War, and has decommissioned many ships and submarines. The Navy decreased its fleet by 208 ships from 1985 to 1998. Although the Navy plans to add 66 new ships through construction and conversion from 2000 through 2004, this represents a decline of over 60 percent in the procurement of new ships since the 1980' s. The ship building industry was 3 11 MP& M EEBA Part I: Introduction and Background Information Chapter 3: Profile of the MP& M Industry Sectors helped by the Oil Pollution Act of 1990, which required all oil tankers entering U. S. ports to have double hulls. General economic woes and instability in the Middle East are expected to hurt the ships and boats industry.

This sector also manufactures recreational boats, with sales that reflect overall trends in recreational expenditures. The U. S.

boat building business is the world s leading supplier of recreational craft. Despite this, rapid growth in the market for smaller personal water craft ( e. g., jet skis) has led to an increase in imports of boats.

3.2.17 Stationary Industrial Equipment The stationary industrial equipment sector includes firms that manufacture machinery and machinery parts used for oil, paper,

and food production, printing and packaging, as well as heaters and air conditioners, electric generating equipment, and motor generators. These industries also produce large metal working machines used in making parts for other industries.

The industries supplying oil and gas production, paper production, and printing machinery were affected by similar global factors, and consequently followed similar trends. Low petroleum prices affected oil production in 1998. Natural gas production was influenced by the low oil prices, which put pressure on the gas industry to reduce costs in order to compete.

These factors led to a decline of 38 percent in real value of shipments for oil production equipment manufacturers in 1998 and 1999. The price of petroleum increased in 1999 and 2000 and machinery shipments rebounded by 9.2 percent. However,

natural gas prices fell in 2001, hurting the industry.

Paper manufacturing equipment has suffered from events overseas. Although the U. S. has seen a decline in the production of paper throughout the latter half of the 1990' s, the U. S. remains the largest producer of paper manufacturing machinery. The industry therefore relies heavily on exports to sustain growth. With struggling economies overseas, the industry saw a decline in value of shipments from 1996 to 2000. Printing machinery manufacturers realized strong growth during the first half of the 1990' s due to increased demand for new digital presses, but a decline in exports resulted in slower growth for the later half of the decade. Global events did not have such an impact on manufacturers of packaging machinery, as the U. S. is not only the leading producer of this equipment but also its leading end user.

A variety of industries manufacture equipment used to produce energy or to power equipment. Refrigeration, air conditioning, and heating equipment sales tend to follow growth in housing starts and construction of new office buildings. A number of factors contributed to strong growth in this industry throughout the 1990' s including record housing starts, record heat in the summer of 1999, replacement of chlorofluorocarbon ( CFC) air conditioning units, and a large percentage of new homes being built with central air conditioning. With 66 percent of the existing air conditioners containing CFC technology still in operation, replacement of these machines provides an opportunity for growth in this industry in the future.

Manufacturers of turbines, transformers, and switchboards, all of which are used for the production of electricity, saw considerable growth in the late 1990s as the domestic economy grew. This strength has been limited by the recent recession.

A number of advanced technologies have been developed to meet the demands of a deregulated industry. These new technologies are capable of producing electricity from smaller facilities at competitive costs. Implementation of these technologies is not expected to take place for a few years, however, until the effects of deregulation become clearer.

3.3 CHARACTERISTICS OF MP& M MANUFACTURING SECTORS The data in these analyses come primarily from the Annual Survey of Manufacturers and the Small Business Administration,

although some data from the 1997 Census were used for important economic indicators that were not available in 1996. The multi year analyses presented in this section cover a nine year period from 1988 to 1996, the base years for the original Phase 1 and Phase 2 survey data. Although ideally data would have been presented for the ten year period from 1987 to 1996, OMB reclassified a number of 4 digit SIC industries in 1987. This made it difficult to compare SIC codes before and after this reclassification and resulted in incomplete data in the Annual Survey of Manufacturers for many SIC codes in 1987. Because the data were incomplete in 1987, 1988 was chosen as the first year of the time series. With the exception of data for non

manufacturing sectors, single year data focus on the year 1996, the base analysis year for the overall MP& M regulatory analysis. Because the Annual Survey of Manufacturers does not include data for non manufacturing sectors, single year data for these sectors are for 1997, the most recent year of the Economic Census.

3 12 MP& M EEBA Part I: Introduction and Background Information Chapter 3: Profile of the MP& M Industry Sectors 3.3.1 Domestic Production a. Output The two most common measures of manufacturing output are value of shipments ( VOS) and value added ( VA).

Historical trends in these measures provide insight into the overall economic health of an industry. Value of shipments is the sum of the receipts a manufacturer earns from the sale of its outputs. It is an indicator of the overall size of a market or the size of a firm in relation to its market or competitors. Value added is the difference between the value of shipments and the value of purchased non labor inputs used to make the products sold. It is used to measure the value of production activity in a particular industry. The ratio of VA to VOS is an indicator of the importance of the industry s contribution to the total value of the product. A ratio close to zero indicates that the value of the input materials is much more important than the value of industry processing. A ratio close to one indicates that industry processing is the primary source of value in the product.

Table 3.4 presents Department of Commerce data on VOS and VA for the MP& M manufacturing sectors during the period from 1988 to 1996. VOS for the entire MP& M manufacturing sector grew from 1.27 trillion dollars in 1988 to 1.51 trillion dollars in 1996, for an average annual growth rate of 2.1 percent. VA for the entire industry grew at a slower annual rate of 1.5 percent, from 638 billion dollars to 720 billion dollars. In comparison, US GDP grew at 2.6 percent per year over the same period.

Value added as a percent of value of shipments for the MP& M manufacturing industries as a whole was 48 percent in 1996.

This indicates that 48 percent of the value of their output was the result of MP& M processing and 52 percent was the cost of purchased inputs. In general, MP& M processing is important to the value of MP& M output products.

Growth in the individual sectors was generally consistent with the overall trend in MP& M manufacturing of slow positive growth. Fourteen of the nineteen sectors had positive growth in VOS, and thirteen had positive growth in VA. Railroad equipment manufacturers enjoyed the largest average annual growth of 7.6 percent in VOS. Electronic equipment experienced the next largest average growth, with annual growth in VOS averaging 5.1 percent. Only the aerospace and ordnance industries experienced a large decline in VOS and VA over this period. Aerospace VOS declined 7.6 percent per year and ordnance VOS declined 7.3 percent per year. Both decreases were attributable to cutbacks in government defense spending at the end of the Cold War.

VA as a percent of VO S for the individual sectors varied substantially from the manufacturing average of 48 percent. The ordnance sector had the highest ratio of VA to VOS, at 67.6 percent, and the instrument and printed wiring board sectors also had high ratios. In these sectors, industry processing is the most important part of the value of the finished product. Sectors with low ratios of VA to VOS included the iron and steel sector, railroad sector, bus and truck sector and especially the motor vehicle sector, for which VA as a percent of VOS was equal to only 33.7 percent. The value of input materials was the most important contributor to the value of products in these sectors.

b. Number of facilities and firms The number of facilities and firms in an industry is an indicator of industry size and structure. Changes in the number of firms and facilities can indicate whether or not the industry is experiencing growth, and changes in the ratio of facilities to firms can indicate whether an industry is becoming more integrated.

This profile uses SUSB data to assess the number of firms and facilities in the MP& M manufacturing sector. The SUSB did not begin its survey until 1989, and it did not include firms in its survey until a year later. Thus, facilities data are presented in 1989 and firm data are presented in 1990.

Table 3.5 shows the number of MP& M manufacturing facilities in 1989 and 1996 and the number of firms in 1990 and 1996.

Overall, the number of firms grew 2.1 percent annually and the number of facilities grew 1.4 percent annually over this period. By 1996, there were 144,603 manufacturing firms and 153,354 facilities. The average number of facilities per firm was relatively constant, with only a minor decrease from 1.07 in 1990 to 1.06 in 1996. Most MP& M manufacturers are single facility firms.

Trends in the individual manufacturing sectors were generally consistent with overall trends in manufacturing. The aerospace industry was the only MP& M manufacturing sector to experience significant downsizing during this period, with firms and facilities decreasing annually by 4.1 and 4.2 percent, respectively. The iron and steel industry experienced a more modest decrease in number of firms and facilities. The number of firms and facilities in the printed wiring board sector grew the fastest, by a little over five percent annually.

3 13 MP& M EEBA Part I: Introduction and Background Information Chapter 3: Profile of the MP& M Industry Sectors Table 3.4: Real Value of Shipments and Value Added: MP& M Manufacturing Sectors ( millions, 2001$)

Sector Value of Industry Shipments Value Added by Manufacture 1988 1996 Average Annual Growth Rate 1988 1996 Average Annual Growth Rate Value Added as a % of Value of Shipments in 1996 Aerospace 35,991 19,111  7.6% 24,167 10,645  9.7% 55.7%

Aircraft 101,554 88,897  1.7% 51,692 48,204  0.9% 54.2%

Bus & Truck 9,843 14,362 4.8% 3,622 5,513 5.4% 38.4%

Electronic Equipment 85,498 127,347 5.1% 48,862 67,071 4.0% 52.7%

Hardware 152,597 180,756 2.1% 82,644 98,674 2.2% 54.6%

Household Equipment 87,764 98,763 1.5% 42,595 45,551 0.8% 46.1%

Instruments 118,322 136,377 1.8% 78,160 89,052 1.6% 65.3%

Iron and Steel 19,396 19,963 0.4% 7,228 7,103  0.2% 35.6%

Job Shops 11,733 14,927 3.1% 6,967 8,307 2.2% 55.7%

Mobile Industrial Equipment 45,150 56,159 2.8% 21,356 24,302 1.6% 43.3%

Motor Vehicle 315,641 387,547 2.6% 107,025 130,627 2.5% 33.7%

Office Machine 86,352 110,084 3.1% 43,008 43,849 0.2% 39.8%

Ordnance 10,241 5,567  7.3% 6,631 3,761  6.8% 67.6%

Other Metal Products 58,809 63,995 1.1% 36,039 37,431 0.5% 58.5%

Precious Metals and Jewelry 10,790 9,242  1.9% 5,018 4,403  1.6% 47.6%

Printed Wiring Boards 10,162 11,408 1.5% 5,927 6,997 2.1% 61.3%

Railroad 4,195 7,533 7.6% 1,893 2,761 4.8% 36.7%

Ships and Boats 18,802 16,666  1.5% 10,086 8,424  2.2% 50.5%

Stationary Industrial Equipment 176,961 236,213 3.7% 97,388 125,443 3.2% 53.1%

Total 1,359,801 1,604,916 2.1% 680,309 768,118 1.5% 47.9%

US GDP 7,189,924 8,821,069 2.6% n/ a n/ a n/ a n/ a Source: Department of Commerce, Bureau of the Census, Annual Survey of Manufacturers; Economagic Horizontal integration varied substantially across sectors. The railroad sector, with 1.41 facilities per firm in 1996, was the most horizontally integrated, but the iron and steel and aerospace sectors also had high numbers of facilities per firm. The precious metals and jewelry sector had nearly a one to one ratio between facilities and firms, indicating a very low level of horizontal integration.

3 14 MP& M EEBA Part I: Introduction and Background Information Chapter 3: Profile of the MP& M Industry Sectors Table 3.5: Number of Firms and Facilities: MP& M Manufacturing Sectors Sector Number of Firms Number of Facilities Facilities per Firm 1990 1996 Average Annual Growth Rate 1989 1996 Average Annual Growth Rate 1990a 1996 Aerospace 109 85  4.1% 143 106  4.2% 1.33 1.25 Aircraft 1,428 1,486 0.7% 1,633 1,691 0.5% 1.16 1.14 Bus & Truck 889 953 1.2% 1,016 1,040 0.3% 1.11 1.09 Electronic Equipment 5,649 6,180 1.5% 6,396 6,693 0.7% 1.08 1.08 Hardware 34,984 37,832 1.3% 37,861 40,044 0.8% 1.06 1.06 Household Equipment 6,787 7,563 1.8% 7,914 8,303 0.7% 1.11 1.10 Instruments 7,963 9,730 3.4% 8,959 10,552 2.4% 1.10 1.08 Iron and Steel 597 583  0.4% 784 770  0.3% 1.30 1.32 Job Shop 4,798 5,280 1.6% 5,104 5,549 1.2% 1.04 1.05 Mobile Industrial Equipment 3,318 3,341 0.1% 3,606 3,591  0.1% 1.07 1.07 Motor Vehicle 4,991 6,044 3.2% 5,977 7,024 2.3% 1.17 1.16 Office Machine 1,828 2,002 1.5% 2,050 2,087 0.3% 1.07 1.04 Ordnance 340 421 3.6% 385 442 2.0% 1.09 1.05 Other Metal Products 11,517 13,819 3.1% 12,069 14,198 2.3% 1.03 1.03 Precious Metals and Jewelry 3,719 3,867 0.7% 3,870 3,892 0.1% 1.01 1.01 Printed Wiring Boards 1,034 1,452 5.8% 1,046 1,530 5.6% 1.06 1.05 Railroad 147 152 0.6% 180 215 2.6% 1.27 1.41 Ships and Boats 2,511 3,195 4.1% 2,708 3,310 2.9% 1.05 1.04 Stationary Industrial Equipment 35,231 40,618 2.4% 37,261 42,317 1.8% 1.04 1.04 Total 127,840 144,603 2.1% 138,962 153,354 1.4% 1.07 1.06 a Calculated using data from 1990 for facilities and firms.

Source: Small Business Administration, Statistics of U. S. Businesses.

c. Employment Employment is a measure of the level and trend of activity in an industry. While employment growth generally signals economic strength in an industry, strong productivity growth and scale economies can yield growth in revenues that exceeds growth in employment. Changing patterns of labor utilization relative to output are particularly important in understanding how regulatory requirements may translate into job losses both in aggregate and at the community level. This profile presents DOC data on employment for 1988 and 1996.

Table 3.6 shows that employment in the MP& M manufacturing sectors as a whole decreased modestly between 1988 and 1997. Over those years, total employment dropped from 7.98 million to 7.55 million, an average decline of 0.7 percent annually. To put this in perspective, VOS for the entire MP& M manufacturing sector grew about 2.1% annually over the same period of time, signaling that growth in output has been driven by increases in capital expenditures and labor productivity, not by increases in employment.

Although total MP& M industry employment declined over the analysis period, not all sectors experienced employment declines. Employment grew or stayed constant in ten of the nineteen sectors. However, while a number of sectors evidenced 3 15 MP& M EEBA Part I: Introduction and Background Information Chapter 3: Profile of the MP& M Industry Sectors large percentage and absolute losses in employment, no sectors showed large percentage gains and only two showed large absolute gains in employment . Employment shrank by 11.6 percent annually in the aerospace sector, 9.1 percent in the ordnance sector, and 5.6 percent in the aircraft sector, due to cutbacks in defense spending following the Cold W ar. The greatest absolute decline occurred in the aircraft sector, which lost almost 220,000 jobs. The largest percentage increase in employment was in the railroad sector, which gained just 2.1 percent annually. The largest absolute increase in employment over the nine years was in the stationary industrial equipment sector, which gained 127,100 jobs.

Table 3.6: Employment: MP& M Manufacturing Sectors Sector Number of Employees 1988 1996 Average Annual Growth Rate Aerospace 223,700 81,000  11.9%

Aircraft 596,600 376,800  5.6%

Bus & Truck 63,900 67,700 0.7%

Electronic Equipment 602,500 604,800 0.0%

Hardware 1,246,200 1,307,600 0.6%

Household Equipment 584,900 570,600  0.3%

Instruments 886,500 753,800  2.0%

Iron and Steel 65,500 67,900 0.5%

Job Shops 123,300 129,200 0.6%

Mobile Industrial Equipment 232,400 232,600 0.0%

Motor Vehicle 928,000 974,000 0.6%

Office Machine 329,800 259,100  3.0%

Ordnance 86,500 40,200  9.1%

Other Metal Products 368,100 361,400  0.2%

Precious Metals and Jewelry 87,100 65,800  3.4%

Printed Wiring Boards 80,900 88,300 1.1%

Railroad 25,900 30,600 2.1%

Ships and Boats 182,900 141,300  3.2%

Stationary Industrial Equipment 1,269,800 1,396,900 1.2%

Total 7,984,500 7,549,600  0.7%

Source: Department of Commerce, Bureau of the Census, Annual Survey of Manufacturers.

3 16 MP& M EEBA Part I: Introduction and Background Information Chapter 3: Profile of the MP& M Industry Sectors d. Capital expenditures Capital expenditures are an indicator of production characteristics and market structure. Capital expenditures are the amount of money spent annually on capital, which includes equipment, machinery, vehicles, software, buildings, intellectual rights, or any other permanent addition to a firm. Capital does not refer to input materials that are consumed in the course of production. New capital expenditures are needed to modernize, expand, and replace a firm s existing production capacity to meet growing demand or to stay current with new regulations or changing technology.

An industry with high capital stock compared to its employee payroll is considered capital intensive: its production relies more heavily on machinery, software, and other forms of capital than on labor. An industry with high capital requirements can have significant barriers to entry for new firms, making the market less competitive.

Table 3.7 presents DOC data on new capital expenditures by MP& M manufacturing sector.

Table 3.7: New Capital Expenditures: MP& M Manufacturing Sectors Sector Capital Expenditures ( millions, 2001$) Capital Expenditures per Facility ( 2001$)

1988 1996 Average Annual Growth Rate 1988/ 89 1996 Change from 1988/ 89 to 1996 Aerospace 1,310 522  10.9% 9,160,839 4,924,528  4,236,311 Aircraft 3,015 2,156  4.1% 1,846,295 1,274,985  571,310 Bus & Truck 161 213 3.6% 158,465 204,808 46,343 Electronic Equipment 3,118 4,482 4.6% 487,492 669,655 182,163 Hardware 3,517 5,624 6.0% 92,892 140,446 47,553 Household Equipment 2,150 2,616 2.5% 271,670 315,067 43,396 Instruments 4,002 4,832 2.4% 446,702 457,923 11,221 Iron and Steel 420 623 5.0% 535,714 809,091 273,377 Job Shops 353 772 10.3% 69,161 139,124 69,963 Mobile Industrial Equipment 1,121 1,121 0.0% 310,871 312,169 1,299 Motor Vehicle 5,697 12,840 10.7% 953,154 1,828,018 874,864 Office Machine 3,044 3,109 0.3% 1,484,878 1,489,698 4,820 Ordnance 196 91  9.2% 509,091 205,882  303,209 Other Metal Products 1,768 1,999 1.5% 146,491 140,794  5,697 Precious Metals and Jewelry 93 156 6.7% 24,031 40,082 16,051 Printed Wiring Boards 430 624 4.8% 411,090 407,843  3,247 Railroad 78 103 3.6% 433,333 479,070 45,736 Ships and Boats 483 374  3.1% 178,360 112,991  65,369 Stationary Industrial Equipment 4,333 7,222 6.6% 116,288 170,664 54,376 Total 35,288 49,480 4.3% 253,940 322,652 68,712 Source: Department of Commerce, Bureau of the Census, Annual Survey of Manufacturers.

In general, the MP & M manufacturing sector is relatively capital intensive. In 1988, manufacturing capital expenditures were 38.3 billion dollars. They increased by 4.3 percent annually to reach a total yearly investment in capital of 49.5 billion dollars in 1996. Average yearly capital expenditures per firm increased from $ 254,000 in 1988 to $ 353,000 in 1996.

For the most part, changes in capital investment from 1988 to 1996 in the individual manufacturing sectors followed the trend for the MP& M manufacturing sectors as a whole. Capital expenditures in the job shop and motor vehicle sectors grew at over 3 17 MP& M EEBA Part I: Introduction and Background Information Chapter 3: Profile of the MP& M Industry Sectors 10% annually. The only sectors for which spending on new capital declined were aerospace, aircraft, ordnance, and ships and boats.

There was large variation in capital expenditures across the MP& M sectors. A few industries stood out as being extremely capital intensive. Aerospace firms spent an average of 4.8 million dollars on capital per firm in 1996, and the aircraft, motor vehicle, and office machine sectors each spent more than one million dollars per firm in 1996. The precious metal and jewelry sector had the lowest levels of capital investment, with only $ 40,000 spent per firm in 1996.

3.3.2 Industry/ Market Structure A number of factors play an important role in determining market structure for an industry, including the barriers that firms face in entering and exiting the market, the degree to which firms in the market are vertically and horizontally integrated, and the extent to which markets have been globalized. The following sections discuss these factors.

a. Facility size Facility size is an indicator of economies of scale. The presence of many large facilities can indicate that there are advantages to building on a larger scale, such as dividing labor more efficiently, utilizing equipment more effectively, or getting bulk discounts.

Table 3.8 shows 1997 Census data on the distribution of manufacturing facilities and VOS by employment size category and MP& M sector. The MP& M industry is characterized by a large number of small facilities. The Census data indicate that, in 1997, 98.6 percent of all facilities in the MP& M industry employed less than 500 employees. Those facilities, however,

accounted for only 59 percent of the total value of shipments from the manufacturing industries. The 1.4 percent of facilities with 500 or more employees generated 41 percent of the total VOS from the manufacturing industries. These large facilities are likely to enjoy substantial economies of scale.

3 18 MP& M EEBA Part I: Introduction and Background Information Chapter 3: Profile of the MP& M Industry Sectors Table 3.8: Number of Facilities and Value of Shipments by Employment Size Category: MP& M Manufacturing Sectors in 1997 Sector Number of Facilities Value of Shipments ( millions, 2001$)

1 to 19 20 to 99 100 to 499 500 to 2,499 2,500 or more 1 to 19 20 to 99 100 to 499 500 to 2,499 2,500 or more Aerospace 33 23 20 13 10 42 991 15,993 185 2,916 Aircraft 898 441 270 72 32 716 10,087 74,417 2,744 17,913 Bus & Truck 658 335 154 18 1 675 8,013 573 2,366 3,357 Electronic Equipment 3,450 2,086 1,019 205 21 2,945 37,794 37,178 14,258 54,660 Hardware 26,065 11,854 2,686 189 0 20,669 79,456 3 69,005 25,619 Household Equipment 4,958 2,274 1,110 191 11 3,745 40,843 7,314 13,747 37,067 Instruments 6,741 2,667 1,103 253 20 5,592 44,850 21,168 17,124 52,680 Iron and Steel 278 292 205 13 0 528 11,072 0 4,530 4,254 Job Shop 3,701 1,654 199 6 0 2,103 5,610 0 7,273 343 Mobile Industrial Equipment 2,116 990 383 90 9 1,937 17,351 8,913 7,219 26,684 Motor Vehicle 4,004 1,874 1,206 324 79 3,495 54,221 231,896 13,404 119,088 Office Machine 1,408 485 218 73 21 1,553 16,551 59,499 4,842 35,440 Ordnance 298 77 40 17 2 168 1,472 935 522 2,686 Other Metal Products 11,265 2,375 611 68 3 5,382 21,579 7,473 12,511 16,812 Precious Metals and Jewelry 3,250 480 100 12 0 1,777 3,436 0 2,864 1,666 Printed Wiring Boards 801 412 156 20 0 526 4,322 0 2,022 3,334 Railroad 81 71 54 13 1 99 2,659 1,222 678 3,714 Ships and Boats 3,755 469 179 25 6 1,314 5,714 6,414 2,036 2,404 Stationary Industrial Equipment 30,513 8,555 2,344 343 12 18,793 86,348 10,837 50,039 69,921 Total 104,274 37,413 12,056 1,947 227 72,061 452,366 483,834 227,368 480,558 Source: Department of Commerce, Bureau of the Census, Census of Manufacturers, 1997.

Although the majority of MP& M industry facilities are small, the distribution of facilities by employment size category varies substantially among the 19 MP& M sectors. The aerospace, aircraft, motor vehicle, and railroad sectors all had proportionally high numbers of large facilities. The aerospace sector, in particular, had large economies of scale, with 23 percent of its facilities employing 500 or more employees. The hardware, job shop, other metal products, precious metal, and ships and boats sectors had proportionally large numbers of small facilities. At least 93 percent of facilities in each of these sectors had less than 100 employees.

b. Firm size This profile uses firm employment size as an indicator of market power and barriers to entry. If the largest firms in an industry own disproportionately many facilities or control a large portion of industry output, then they may have significant market power. These firms can use their large production capacities to control and exploit markets. The presence of many large firms in an industry can also indicate that there are barriers to entry into that industry, such as capital requirements or 3 19 MP& M EEBA Part I: Introduction and Background Information Chapter 3: Profile of the MP& M Industry Sectors economies of scale, that give existing firms in the industry a competitive advantage. EPA used 1996 SUSB data to assess the competitiveness of the MP& M manufacturing industries.

Table 3.9 presents the distribution of manufacturing firms, facilities, and VOS by firm employment size and MP& M sector.

Overall, most MP& M manufacturing firms were small, but the firms that were big owned many facilities and had disproportionately high receipts. In 1996, 138,492 firms, equal to 96 percent of manufacturers, had fewer than 500 employees. These small businesses owned 92 percent of all facilities but had total sales of only 418.3 billion dollars, equal to 28 percent of total estimated receipts. In 1996, 6,111 firms had 500 or more employees. These firms owned eight percent of all facilities but had estimated receipts of 1.08 trillion dollars, equal to 72 percent of the total for manufacturers. It is likely that there are significant economies of scale in the MP& M manufacturing industries.

Although MP& M manufacturing firms tend to be small, firm size varies significantly among individual sectors. The aerospace, iron and job shops, and railroad sectors had proportionally high numbers of large facilities. In the aerospace sector, 50 percent of facilities were owned by firms with 500 or more employees, and 38 percent of firms had 500 or more employees. In contrast, over 98 percent of firms in the job shop, other metal products, precious metals, and ships and boats sectors had less than 500 employees.

3 20 MP& M EEBA Part I: Introduction and Background Information Chapter 3: Profile of the MP& M Industry Sectors Table 3.9: Number of Firms, Facilities, and Estimated Receipts by Firm Employment Size Category, 1996: MP& M Manufacturing Sectors Sector Firms Facilities Estimated Receipts ( millions, 2001$)

1 to 99 100 to 499 500 or more 1 to 99 100 to 499 500 or more 1 to 99 100 to 499 500 or more Aerospace 51 2 32 51 2 53 n/ a n/ a 19,029 Aircraft 1,209 135 142 1,212 158 321 2,453 2,840 93,860 Bus & Truck 805 92 56 810 107 123 2,269 2,638 6,702 Electronic Equipment 4,936 681 563 4,977 786 930 12,156 17,353 81,615 Hardware 34,162 2,345 1,325 34,398 2,968 2,678 66,557 42,561 61,295 Household Equipment 6,408 665 490 6,455 791 1,057 12,799 17,412 66,409 Instruments 8,273 727 730 8,320 842 1,390 17,248 16,243 96,894 Iron and Steel 362 108 113 368 153 249 2,015 4,426 12,737 Job Shops 4,945 240 95 5,001 338 210 7,157 3,487 3,097 Mobile Industrial Equipment 2,875 263 203 2,898 319 374 6,668 6,321 32,129 Motor Vehicle 4,950 614 480 4,987 724 1,313 11,314 21,376 366,635 Office Machine 1,662 167 173 1,668 180 239 5,373 7,535 64,424 Ordnance 358 25 38 358 28 56 329 453 4,213 Other Metal Products 13,097 492 230 13,152 602 444 13,568 10,738 30,677 Precious Metals and Jewelry 3,747 86 34 3,753 89 50 3,559 2,019 2,148 Printed Wiring Boards 1,250 137 65 1,258 150 122 2,231 2,402 5,769 Railroad 99 24 29 101 30 84 326 496 6,271 Ships and Boats 3,003 137 55 3,012 165 133 2,699 2,954 11,501 Stationary Industrial Equipment 37,669 1,691 1,258 37,835 2,002 2,480 52,700 35,623 119,210 Total 129,861 8,631 6,111 130,614 10,434 12,306 221,420 196,877 1,084,612 Source: Small Business Administration, Statistics of U. S. Businesses, 1996.

c. Foreign trade This profile uses two measures of foreign competitiveness: export dependence and import penetration. Export dependence is the share of value of shipments that is exported. Import penetration is the share of domestic consumption met by imports. For both measures, a high value indicates a relatively high openness to foreign markets and global competition.

This openness has benefits, including providing domestic consumers with a wider selection of products and services at lower prices, and allowing domestic producers to make profits in foreign markets. It can have costs, too, if imports to domestic consumers are unreliable or if foreign competition drives down prices for domestic producers. This profile uses 1996 data from the Department of Commerce to illustrate trends in foreign trade.

Table 3.10 shows that overall, the U. S. is an importer of MP& M manufactured goods, with net imports of 75.7 billion dollars in 1996. In general, MP& M industry sectors face global competition, as illustrated by the number of sectors that had both a 3 21 MP& M EEBA Part I: Introduction and Background Information Chapter 3: Profile of the MP& M Industry Sectors high export dependence and import penetration. For example, in the precious metals sector, roughly 77 percent of U. S.

consumption was met by imports, while almost 23 percent of U. S. production was sold as exports.

Although overall the US has a large trade deficit in MP& M manufactured goods and services, the US was a net exporter in six of the eighteen sectors for which balance of trade data was available. Eighty one percent of production in the ordnance sector and 67 percent of production in the aircraft sector was consumed overseas. The aircraft sector had the highest absolute net exports, valued at 27.26 billion dollars. A few sectors, especially aerospace, ships and boats, iron and steel, and bus and truck,

were relatively closed to global competition, with low levels of imports and exports. Foreign imports had the highest relative importance in the precious metals, office machine, and household equipment sectors. The motor vehicle sector had the highest absolute net imports, valued at 63.12 billion dollars.

3 22 MP& M EEBA Part I: Introduction and Background Information Chapter 3: Profile of the MP& M Industry Sectors Table 3.10: Trade Statistics, 1996: MP& M Manufacturing Sectors Sector Value of Imports ( millions,

2001$) Value of Exports ( millions,

2001$) Value of Shipments ( millions, 2001$) Implied Domestic Consumptiona Import Penetrationb Export Dependencec ( a) ( b) ( c) ( d) ( e) ( f) ( g)

Aerospace 143 143 19,111 19,112 0.7% 0.7%

Aircraft 14,015 41,278 88,896 61,633 22.7% 67.0%

Bus & Truck 410 436 14,362 14,335 2.9% 3.0%

Electronic Equipment 31,478 30,615 127,347 128,211 24.6% 23.9%

Hardware 26,753 20,560 180,756 186,949 14.3% 11.0%

Household Equipment 40,697 16,809 98,762 122,650 33.2% 13.7%

Instruments 18,990 31,462 136,376 123,904 15.3% 25.4%

Iron and Steel 937 263 19,963 20,637 4.5% 1.3%

Job Shopd n/ a n/ a 14,927 n/ a n/ a n/ a Mobile Industrial Equipment 10,775 16,634 56,159 50,300 21.4% 33.1%

Motor Vehicle 124,203 61,015 387,546 450,735 27.6% 13.5%

Office Machine 67,082 47,783 110,084 129,384 51.8% 36.9%

Ordnance 647 2,792 5,566 3,421 18.9% 81.6%

Other Metal Products 25,282 11,243 63,996 78,035 32.4% 14.4%

Precious Metals and Jewelry 15,839 4,607 9,243 20,474 77.4% 22.5%

Printed Circuit Boards 2,667 1,947 11,408 12,127 22.0% 16.1%

Railroad 1,208 773 7,533 7,969 15.2% 9.7%

Ships and Boats 1,081 1,080 16,666 16,666 6.5% 6.5%

Stationary Industrial Equipment 38,809 55,835 236,213 219,187 17.7% 25.5%

Totale 421,015 345,274 1,604,915 1,680,656 25.1% 20.5%

a Implied domestic consumption based on value of shipments, imports, and exports [ column d + column b  column c].

b Import penetration based on implied domestic consumption and imports [ column b / column e]. Export dependence based on value of shipments and exports [ column c / column d].

d As explained in the text, job shops include only two SICs specific to job shops, and not facilities in other SICs that may be operating as job shops.

e Components may not sum to totals due to rounding.

Source: Department of Commerce, Bureau of the Census.

d. Establishment births and deaths The number of firms starting up and closing each year reflects the competitiveness of an industry. Industries with high numbers of these   births  and   deaths  relative to the total number of firms in the industry are likely to have low barriers to entry or exit. These industries are likely to be competitive. Industries with low number of births and deaths are more likely to have significant barriers to entry and exit, such as capital requirements or economies of scale, that make the industries less competitive. As discussed in previous sections, firms in less competitive industries can manipulate prices to generate profits,

while firms in more competitive industries have little control over prices. This profile presents SUSB data from 1989 to 3 23 c MP& M EEBA Part I: Introduction and Background Information Chapter 3: Profile of the MP& M Industry Sectors 1997 on establishment births and deaths. These data are only available by three digit SIC code, making it impossible to calculate sector specific birth and deaths rates. However, data for the MP& M industry as a whole are presented.

The M P& M manufacturing sector has an annual birth rate of 8.1 percent and an annual death rate of 7.8 percent, indicating that in general the MP& M manufacturing sector is relatively competitive. Three digit SIC industry birth and death rates are much more variable, ranging from 4 percent to up to 15 percent. For a more complete discussion, along with the three digit SIC birth and death rates, see Appendix A.

3.3.3 Financial Condition and Performance Operating margin is a measure of industry financial performance. Operating margin is defined as VOS less annual payroll and cost of materials, as a percent of VOS, and thus measures pre tax operating profitability before capital and financing

related charges. Firms with higher operating margins have more cushion against operating losses as a consequence of fluctuating input prices, and thus are likely to be more stable.

Table 3.11 presents DOC data on operating margins for each MP& M manufacturing industry for the years 1988 and 1996, as well as the change in operating margin between the two years. In 1996, the average operating margin for the MP& M sectors was 29.6 percent. This was a slight increase from 1988, when the average operating margin for the MP& M manufacturers was 28.0 percent. Ten MP& M manufacturing sectors experienced increases in their operating margins during this time period, while nine industries experienced decreases.

Instruments, other metal products, and ordnance were the most profitable sectors, according to this measure, with operating margins around 40 percent. The iron and steel, motor vehicle, railroad, and ships and boats sectors had the lowest operating margins, all near 22 percent. The greatest increases in operating margin occurred in the aircraft, ordnance, and bus & truck industries, which all gained between five and six percent. The greatest decrease occurred in the aerospace industry, which lost 3.5 percent.

3 24 MP& M EEBA Part I: Introduction and Background Information Chapter 3: Profile of the MP& M Industry Sectors Table 3.11: Operating Margina: MP& M Manufacturing Sectors in 1988 and 1996 Sector 1988 1996 Change in Operating Margin Aerospace 32.4% 28.9%  3.5%

Aircraft 20.6% 26.7% 6.1%

Bus & Truck 18.5% 24.4% 5.9%

Electronic Equipment 32.0% 33.8% 1.8%

Hardware 27.5% 29.7% 2.2%

Household Equipment 29.7% 29.5%  0.2%

Instruments 37.1% 41.1% 4.0%

Iron and Steel 23.2% 22.9%  0.3%

Job Shops 31.8% 30.8%  1.0%

Mobile Industrial Equipment 27.9% 28.2% 0.3%

Motor Vehicle 20.9% 22.4% 1.5%

Office Machine 31.7% 30.2%  1.5%

Ordnance 34.3% 39.6% 5.3%

Other Metal Products 41.9% 40.4%  1.5%

Precious Metals and Jewelry 27.9% 28.2% 0.3%

Printed Wiring Boards 37.2% 36.8%  0.4%

Railroad 22.4% 22.1%  0.3%

Ships and Boats 23.2% 22.5%  0.7%