Export-security rules trip small manufacturers
Circuit-board manufacturer says it’s tough to keep up with export laws, not get in trouble with Washington and stay ahead of foreign competitors.
Special to The Washington Post
FRASER, Mich. — Richard Kincaid’s family business is printed circuit boards, the nerve centers that power not just consumer electronics and household appliances but also tools of war such as improvised-explosive-device jammers and avionics systems.
K&F Electronics, based in a perfectly square industrial suburb northeast of Detroit, by all rights should have a robust business, selling its wares to many different customers for many uses. But Kincaid is among a legion of small manufacturers fighting an uphill battle to keep making things in the United States.
One challenge, many say, is trying to keep up with export controls set by federal regulators.
The controls are supposed to help the United States walk the tightrope between national security and business interests. But the exponential speed of technological progress and the inherent complexity of the manufacturing process make writing transparent and lasting regulations difficult, and the Obama administration has undertaken an effort for reform.
Big companies such as Northrop Grumman, Boeing and General Electric have sophisticated export-compliance operations that help them navigate the labyrinth of regulations and avoid becoming ensnared in a foreign military’s hunt for sensitive technology.
Kincaid has nothing like that. In an economy struggling to shake off the recession doldrums, just keeping the lights on takes up most of his time, he said.
K&F, which he said has about $3.5 million in annual sales, recently laid off four people and cut workweeks back to four days.
“Things have been dropping off in the last six to eight months,” said Kincaid, who keeps a binder of business lost to China in his tiny windowless office. “We’re getting orders, but they’re less.”
At this rate, he said, “I think I’ll be out of business in 10 years.”
Honor or hindrance?
Every circuit board put out by Kincaid’s 24,000 square feet of industrial space begins as an invoice and a computer file from a customer.
Once Kincaid’s staff processes the order to its specifications, the circuit board is carved out of large, flat sheets of copper.
Those sheets move through the production process, much of which has been automated and much of which requires messy chemicals strictly regulated by federal guidelines. At the end, each component undergoes rigorous testing.
This is, in short, the type of manufacturing shop facing the fiercest competition from overseas, where cheap labor is a distinct advantage.
Complying with strict export regulations comes at a cost, but in this regard the government and industry experts see the circuit-board business as a bit of an outlier: Whereas many companies view the rules as a burden, the circuit industry tends to take on the most stringent controls as a “made in the U.S.A.” badge of honor.
Kincaid said that if the invoice tells him the board is ITAR (shorthand for the State Department’s International Traffic in Arms regulations), he knows he can’t produce it in China, where it is cheaper. The easy solution would be to avoid ITAR orders, which require production in an approved country.
Building the boards in the U.S. costs Kincaid “100 to 400 percent” more, he said.
But he did not hesitate to fill out the paperwork five years ago and pay the fee, now more than $2,000, to become an ITAR-registered manufacturer because he appreciated the made-in-the-U.S. sentiment and thought it might “bring some of the work back.”
Doing so both deepened and complicated his business prospects.
People in the circuit-board industry draw an analogy between boards for military use and a book full of classified information. It is not the technology that goes into making a board that is sensitive but rather the information contained inside.
Fern Abrams, director of government relations and environmental policy at the industry-trade group IPC, said ITAR regulations ought to list circuit boards in the munitions section.
“It’s almost a basic common-sense measure if you understand — and most people don’t — how much information is in a circuit board,” she said.
Not only that, but knowing the layout of the board, even if the components or data have yet to be affixed, could yield valuable intelligence for a hostile organization.
Understanding the circuit-board design for an avionics system, for example, could allow a foreign military to reverse-engineer key elements of the system’s design, according to an IPC white paper by Peter Lichtenbaum, a former assistant secretary of commerce for export administration.
As Abrams sees it, the trouble for businesses like Kincaid’s isn’t compliance with export controls but the rules’ uneven application.
For instance, her organization has seen identical bid requests “with one stamped ITAR and one not stamped ITAR,” she said. So if one company complies and the other does not, the noncompliant manufacturer seizes a significant competitive advantage, assuming no one comes calling from the departments of State, Commerce or Treasury — three agencies with different computer systems, missions and cultures, but all with responsibilities in export controls.
Telling the difference
It can be a slog to determine whether, where and under what conditions a company can sell its product overseas.
Suppose K&F makes a circuit board for a telecom company selling an antenna that could be used for military or civilian purposes.
The telecom must determine whether it is subject to Commerce or State Department regulations.
For example, a Commerce Department license is required for security reasons to send certain items if they have “an acoustic carrier frequency outside the range from 20 to 60 kilohertz.
An exporter selling such a piece of equipment would not need a license to sell its product to obvious allies, such as Australia, but could need one for trade partners such as India.
If, however, the antennae is designed for a sensitive military vehicle, the licensing jurisdiction falls to the State Department. Its restrictions are far more stringent.
And what of Kincaid’s responsibility? “If a customer never says ITAR,” Kincaid said, “that board can be sent to a foreign country, as far as we’re concerned.”
Lichtenbaum, a lawyer who has done work for the circuit-board industry, said the responsibility to comply falls to the exporter.
So when K&F sends a batch of circuit boards to a customer who intends to export, that customer is expected to know where the boards are going and who will use them.
Determining the end user and use of a product can be difficult enough in a globalized economy, but the sophisticated cat-and-mouse games played by countries like China and Iran can raise the risks to levels for which small manufacturers are unprepared.
One common technique for a country seeking sensitive material is to set up a shell company in a shipping center such as Singapore and “ping” U.S. companies in an attempt to find one that will inadvertently export sensitive technology.
The penalties for running afoul of the regulations are significant. Companies could face fines of up to $250,000 per violation. And for criminal violations, in which prosecutors must prove intent, penalties can reach $1 million and 20 years in prison per violation.
Eric Hirschhorn, undersecretary of commerce for industry and security, said his department recognizes a difference between purposeful violations and mishaps. ”
Companies are scrambling to get up to speed because of a noticeable uptick in enforcement.
The Justice Department established a national export-control coordinator to enforce criminal violations in 2007, while the Commerce Department employs more than 100 special agents with arrest authority.
To sharpen the point, the Commerce Department published a 56-page document in 2010 called “Don’t Let This Happen To You!” It outlines all of the ways exporters can get themselves in legal trouble.
Commerce, State and Treasury operate help lines for guidance, but some businesses worry that calling them can raise suspicions.
The export-control system’s complexity has dogged every post-Cold War president, said Brandt Pasco, a lawyer and founding member of the National Security Council Task Force on Export Control Reform who has helped write new rules the government began publishing for comment last year.
In 2009, President Obama launched his own export-control-reform initiative, complete with a website, blog and fact sheets. Pasco said Obama’s directive to staff was simply to “make it better.”
The centerpiece rests on streamlining the Commerce Control List and the U.S. Munitions List. The idea, Pasco said, is to move items from the stringent munitions rules to the commerce list.
“It’s a national security problem because it’s hurting our defense-industrial base,” said Hirschhorn. “With the decrease in the defense budget, small and medium-size businesses who make these components are selling less to DOD, and it’s difficult or impossible for them to sell overseas.”
The Obama administration also seeks to develop a unified computer system and, most ambitiously, to create one agency that would handle all export control.
Kincaid said he does not have the time to follow the details of export-control reform but instead relies on his membership in IPC.
Meanwhile, Kincaid keeps his company afloat through his personal relationships with suppliers, a good building lease and a modern development: domain names.
By his count, he owns 70 associated with the printed circuit-board industry, including the coveted circuitboards.com. Precious commodities beyond the reach of export controls.