U.S. Department of Justice

Federal Bureau of Prisons

Wednesday, February 10, 1999

SOUTHERN AUTO WHOLESALERS
597 N SAGINAW ST
PONTIAC
MI. 483421468

Dear Sir/Madame:

Enclosed is a copy of the impact study of Federal Prison Industries, Inc.'s (FPI) proposal to manufacture new engine electrical components. Also enclosed is a copy of the procedures followed by FPI for all new product proposals.

The availability of the impact study was announced in the Commerce Business Daily on February 4, 1999. The 45-day period during which comments on the study may be submitted to FPI ends March 22, 1999. Comments should be addressed to:

Manager, Planning, Research and Activation
Federal Prison Industries, Inc.
320 First Street N.W.
Washington, D.C. 20534

Sincerely yours,

Robert C. Grieser

Manager,

Planning, Research and Activation

Federal Prison Industries, Inc.
Planning Research and Activation
February 1999

COMPETITIVE IMPACT STUDY ON ENGINE ELECTRICAL COMPONENTS

TABLE OF CONTENTS

EXECUTIVE SUMMARY .

I. INTRODUCTION.

A. FPI's Mission

B. Background

C. FPI History of Repairing and Rebuilding Engine Electrical Components

II. DESCRIPTION OF SPECIFIC PRODUCT

III. THE FEDERAL MARKET FOR ENGINE ELECTRICAL COMPONENTS

A. Description of the Market

B. Procurement Data

C. Total Federal Market and FPI's Projected Market Share

IV. THE DOMESTIC MARKET FOR ENGINE ELECTRICAL

A The Overall Automotive Parts and Accessories Industry

B. Imports and Exports

C. Growth Trends In the Engine Electrical Components Industry

D. The Original Equipment Market

E. The Replacement Market

F. Forecast for the Total Domestic Market

. V. IMPACT ON INDUSTRY

A. Companies and Workers in the Industry

B. Size of Companies

C. Current Federal Vendors .

D. FPI Re-Investing in the Private Sector

VI. FPI'S FUTURE PRODUCTION PLANS

VII. THE NEED FOR ADDITIONAL INMATE EMPLOYMENT
AND FPI's EFFORTS TO PROVIDE JOBS USING
ALTERNATIVES TO ITS TRADITIONAL INDUSTRIES

VIII. CONCLUSIONS/RECOMMENDATION

APPENDIX I Company Letters and Comments

APPENDIX II. Final Report of the FPI Methodology Review Panel

APPENDIX III. Company Specific Information

EXECUTIVE SUMMARY

• The product for which this impact study is conducted is engine electrical components which fall primarily within Federal Supply Classification (FSC) code 2920 - Engine Electrical System Components, non-aircraft. FSC code 2920 forms the basis for identifying the Federal market for engine electrical components.
  
• Within the Standard Industrial Classification (SIC) system, engine electrical components primarily fall within SIC industry code 3694, Engine Electrical Equipment. SIC code 3694 forms the basis for identifying the overall commercial market for engine electrical components. SIC code 3694 and SIC code 3714, Motor Vehicle Parts and Accessories, were also used to further define FSC code 2920 Federal market data.
• Federal procurements of engine electrical components are estimated to have been $30 million in FY 1997. The estimated Federal market for engine electrical components is projected to reach $38 million by FY 2004.
• FPI proposes that its share of the Federal market for engine electrical components be set at 12 percent in FY 2000. After commencing production, FPI's Federal market share is proposed to be progressively increased to 25 percent for FY 2004.
• The estimated value of the total domestic engine electrical component market was approximately $9.4 billion in 1996. The total domestic market for engine electrical components is estimated to reach $11.2 billion in 2000 and $13.4 billion by 2004. FPI's share of the total market for engine electrical components will be far less than one percent in 2004. Indeed, the entire Federal market is less than one-third of one percent of the domestic market.
• The engine electrical component industry is healthy and is experiencing steady growth in terms of sales, the number of employees, and continuing increases in capital expenditures.
• Most vendors active in the Federal engine electrical component market are either diversified manufacturers or distributors of a wide variety of products other than engine electrical components and also market those productsto the commercial sector.
• FPI's proposal to initiate production of engine electrical components would allow FPI to generate the level of sales necessary to provide up to 200 additionalinmate jobs, Ideally, FPI would be able to activate an additional factory dedicated to manufacturing engine electrical components.
• The Board of Directors should approve FPI's plan to expand production of engine electrical components to ensure sufficient inmate jobs are available, in fight of the minimal impact on the private sector and the limited alternatives available.
• As part of this initiative, FPI is exploring opportunities to partner with an established domestic manufacturer of engine electrical components, in an effort to repatriate to the U.S. production of engine electrical components which are currently being produced offshore. This approach should further negate any adverse impact on domestic manufacturers.
• FPI has had preliminary discussions with Prestolite Electric, Inc. of Ann Arbor, Michigan, about the possibility of manufacturing a 60 amp alternator, National Stock Number (NSN) 2920009092483, for the U. S. Army's Tank and Automotive Command. This particular alternator is currently being manufactured in Greece by the company Sielman, S.A., which, according to Dun & Bradstreet, was formed in 1982, has 50 employees, and annual sales of approximately $3 million
• It is anticipated that no civilian Jobs within the domestic industry will be lost as a result of this initiative,

IMPACT STUDY OF PROPOSED PRODUCTION OF ENGINE ELECTRICAL
COMPONENTS BY FEDERAL PRISON INDUSTRIES

I. INTRODUCTION & BACKGROUND

A. FPI's Mission

Federal Prison Industries, Inc. (FPI) is a wholly-owned government corporation. An integral part of the U.S. Bureau of Prisons, FPI was created by statute and executive order in 1934. Its statutory mandates, as set forth in 18 U.S.C. Sections 4121-4129, can be summarized as follows:

1) To employ the greatest number of those inmates in U.S. penal and correctional institutions who are eligible to work as is reasonably possible;

2) To concentrate on manufacturing products that are labor intensive;

3) To provide a maximum opportunity for inmates to acquire a knowledge and skill in trades and occupations which provide a means of earning a livelihood upon release;

4) To sell its products to the several Federal departments and agencies and all other government institutions of the United States, at prices which do not exceed current market prices;

5) To diversify, as far as practicable, prison industry operations so that no single private industry shall be forced to bear an undue burden of competition;

6) To diversify its products so that its sales are distributed among its industries as broadly as possible;

7) To reduce competition with private industry and free labor to a minimum;

8) To avoid capturing more than a reasonable share of the market among Federal departments, agencies and institutions for any specific product; and,

9) To operate in such a manner as to be economically self-sustaining.

These statutory mandates may be viewed as comprising FPI's corporate business philosophy, and when compared to the business philosophy of a typical private sector corporation, the differences are clear. The first two elements of FPI's statutorily mandated business philosophy described above are in direct contradiction to a private sector business philosophy. As private manufacturing concerns evolve, they continually attempt to maximize profits through the optimum combination of labor and capital resources. In the last twenty years, this optimum productivity level, more often than not entailed substituting capital for labor, reducing employment through the introduction of more highly automated equipment. In this environment, private U.S. companies have steadily abandoned traditional, labor-intensive industries and concentrated in the areas the U.S. has a mutual advantage high technology and capital-intensive industry.

In contrast, FPI must continually seek to increase its employment in all its factories as each institution's inmate population rises, in order to continue to employ the requisite number of inmates in prison industries. Put simply, FPI is employment-driven rather than efficiency-driven. To accommodate these higher-than-outside-world employment levels, FPI does not introduce automation to the extent that the private sector does. This was highlighted in the Congressionally-mandated independent study of FPI operations, conducted by Deloitte and Touche in 1991, which stated:

"... FPI's mode of operations in industrial activities frequently involves production methods that are more labor-intensive than those in the private sector."¹

'Deloitte & Touche, "Report to Congress on Study- Findings and Recommendations Appendices," Independent Market Study of UNICOR Federal Prison Industries, Inc., (1991) at 33.

B. Background

Federal Prison Industries, Inc., in an effort to diversify its product base is announcing its intent to manufacture engine electrical components, such as, new alternators, 'generators, stators, and starters. The purpose of this study is to determine whether FPI's market share resulting from its entry into this market will be "reasonable" and whether the impact of the expansion will cause an "undue burden" on industry or free labor. As part of this initiative, FPI is exploring opportunities to partner with established domestic manufacturers of engine electrical components, in an effort to repatriate to the U.S. production of engine electrical components which are currently being produced offshore. This approach should negate any adverse impact on domestic labor and manufacturers.

FPI has had preliminary discussions with Prestolite Electric, Inc. of Ann Arbor, Michigan, about the possibility of manufacturing a 60 amp alternator, National Stock Number (NSN)2920009092483, for the U. S. Army's Tank and Automotive Command. This particular alternator is currently being manufactured in Greece by the company Sielman, S.A., which, according to Dun & Bradstreet, was formed in 1982, has 50 employees, and annual sales of approximately $3 million.

The impact study first defines engine electrical components in terms of the formal definition of specific product. The study discusses both the Federal market and total domestic market for engine electrical components in terms of market size and FPI's forecast for the markets future. Finally, the study evaluates the impact that FPI's entry into the Federal market would have on the engine electrical components industry and free labor.

As precise data was not always available, it was sometimes necessary to either extrapolate from existing data or make use of the best available data sources. Information has been provided by the industry, and has been utilized in the study where applicable. Copies of all submissions received by FPI in response to a request for data related to this study are included in Appendix 1.

It should be noted that, in response to criticism of previous FPI impact studies, FPI's Board directed that a comprehensive review be completed of the methodology used by FPI's staff to estimate the size of the Federal government market for its products. The Board mandated that such a review be conducted by independent sources, with expertise and experience in Federal procurement. In September 1997, the FPI Methodology Review Panel presented its final report to FPI's Board of Directors. The Panel's report stated, "this panel believes the basic approach and methodology employed by FPI is sound and reasonable." The Panel's final report is included in Appendix II.

C. FPI History of Repairing and Rebuilding Engine Electrical Components

This competitive impact study has been initiated for the purpose of gaining the Board of Director's approval to enter into production of a "new product," i.e. newly manufactured vehicular engine electrical components. FPI's interest in pursuing the production of new engine electrical components stems from its experience in repairing and rebuilding used engine electrical components.

FPI has a long history of repairing and rebuilding alternators, generators, starters, stators, solenoids, fans, electric fuel pump ' s and other vehicular components. Employment levels involved in the service-oriented repair and rebuilding of alternators and related automotive components is approximately 190 inmates located at three institutions. The primary customers for these services have been military organizations.

II. DESCRIPTION OF SPECIFIC PRODUCT

In March 1997, FPI published revised definitions of the terms "specific product," "new product" and significant expansion of an existing product" as related to FPI's expansion guidelines. The revised definitions were included in the March 12, 1997, issue of the Federal Register . The new definitions make an item's Federal Supply Classification (FSC) code the primary determinant of a specific product.

• "A specific product refers to the aggregate of items which are similar in function (e.g., bags and sacks), or which are frequently purchased for use in groupings (e.g., dormitories and quarters furniture) to the extent provided by the most current Federal Supply Classification (FSC) Code... Specific products will equate to the most current 4-digit FSC Code, published by the General Services Administration, Federal Procurement Data Center (FPDC). As a general rule, products will be deemed to be different specific products if they are identified by a distinct 4-digit FSC Code."

Federal Register, volume 62, No, 48, dated Wednesday, March 12, 1997, Notices Section, pages 11465-11471.

Engine electrical components are primarily found in FSC code 2920- Engine Electrical System Components, non-aircraft. FSC 2920 includes generators, magnetos, spark plugs, ignition coils, ignition distributors, engine voltage regulators, ignition harness assemblies, and starting motors for engines. FPI previously manufactured wiring harnesses under FSC 2920 from 1987 to 1996. However, the other types of engine electrical components, such as alternators, generators, starters, stators and regulators, are different enough to be considered a new product.

Prior to the FSC based definitions for specific product, FPI defined a product based upon the Standard Industrial Classification (SIC) system which is maintained by the U.S. Department of Commerce, Bureau of the Census. The new definitions also allow for the use of 4-digit SIC codes to more adequately define the product.

• "In some instances, an item may be considered separate from another product in the same 4-digit FSC category, if its function differs substantially. In such cases, the 4-digit Standard Industrial Classification (SIC) code may be used as a backup measure to more adequately define the product."'

Federal Register, volume 62, No. 48, dated Wednesday, March 12, 1997, Notices Section, pages 11465-11471.

Within the SIC system, an industry is assigned a 2-digit code. Product categories are identified and detailed by successive 3, 4, 5, and 7 digit codes. Generators, alternators, stators and starters are typically classified within SIC industry 3694 - Engine Electrical Equipment. The items, as defined by their 5 and 7 digit codes, are very similar to those included within the definition of FSC 2920, with the exception that SIC code 3694 includes aircraft related components.

The 4-digit level of the SIC system is the only level used by Federal agencies in reporting their procurement data. Other SIC codes which may apply include: 3714 - Motor vehicle parts and accessories. FPI will use SIC codes 3694 and 3714 to define the market.

III. THE FEDERAL MARKET FOR ENGINE ELECTRICAL COMPONENTS

A. Description of the Market

The Federal Fleet

The Federal market for any vehicular component is determined, in general, by the number of vehicles owned and maintained by the Federal government. The Federal Motor Vehicle Fleet Report, which is published by the General Services Administration, provides details of the fleet inventory, by agency, as well as operational and maintenance costs. The table below fists the number of vehicles owned by each agency for FY 1996:

The 575,265 vehicles owned by the Federal government has fluctuated somewhat during the five year period of 1992 through 1996. However, the five year average is 574,400, indicating no general trend. But, looking at the breakdown, by agency type, there has been a six percent overall increase in the number of civilian vehicles, a seven percent increase in postal vehicles, offset by a 16 percent decline in vehicles owned by the military.

This trend in increasing civilian agency ownership will continue through a General Services Administration program to purchase light duty vehicles and lease them to the military. The following two tables, based on information contained in the FY 1999 Budget of the United States Government, illustrate continued growth in the GSA Interagency Fleet Management System's revenue while the military's budget for operation and maintenance of equipment is also growing significantly.

Source: Appendix, Budget of the United States Government, 1999. U.S. Government Printing Office, Washington, D.C. 1998.

Department of Defense

The Federal market for engine electrical components is highly fragmented. While the military may contract for large volumes of engine electrical components, the civilian sector is more likely to purchase engine electrical components on an "as needed" basis. In many cases these will be service related repairs obtained via small purchase procurement procedures for "services" rather than procurement of specific parts. Consequently, procurement data will not reflect specific engine electrical component buys. Also, as a matter of policy, civilian owned, and even military owned, light duty vehicles are often replaced before major repairs (such as replacing engine electrical components) are needed. Purchases of replacement engine electrical components, whether undetected when labeled a "service" or reported as a product purchase, generally occur more often for heavy duty vehicles which are kept in use for a longer time period. Certainly, in the case of the military, available procurement data point to a greater ability to capture data for heavy duty vehicles such as the HMMV utility vehicle, tanks and trucks. It should be noted that the combat vehicles of the military engage in extensive training exercises which are designed to test the limits of troops, weapons, vehicles and vehicle components. Consequently, there is an ongoing requirement for replacement of alternators, starters, and other engine electrical components. Also, any tendency to defer replacement of vehicles (i.e. because of budget constraints) is likely to increase maintenance costs, including replacement of major components. A more complete description of the DOD market is included in Section III. B. Procurement Data.

Civilian Agencies

Of the 271,000 vehicles owned by civilian agencies, over 151,000 are owned by the General Services Administration. According to GSA's Federal Vehicle Policy Division: "The vast majority of repair and vehicle services are performed at individually-owned service stations and repair establishments while some repairs are done at national or regional maintenance chains." The GSA Interagency Fleet Management System (IFMS) uses a network of more than 40,000 maintenance vendors to service government owned vehicles. Due to the complexity of maintaining data for all types of service, repairs and component replacements, no database exists to completely track civilian agency purchases of engine electrical components. Thus, FPI will estimate for purposes of this study, replacement of engine electrical components at the rate of every tenth vehicle each year, or approximately 27,000 vehicles, and at a cost of $200 per vehicle to reflect the component cost, exclusive of labor, for such items as alternators, starters, regulators, etc. This results in annual purchases totaling $5.4 million.

The U.S. Postal Service Fleet

According to information on the U.S. Postal Service's web site, the Postal Service recorded $56.4 billion in revenues in FY 1996. Operating expenses totaled $53.1 billion. The active vehicle fleet consisted of 202,224 postal-owned vehicles and 6,555 leased vehicles. These vehicles traveled 1. 1 billion miles during the year at a total expense of $773 million. Approximately 85 percent of the 202,224 postal-owned vehicles are 1/4 and 1/2 ton vehicles used in the pick-up and delivery of the mail. These vehicles are designed for very long service life and are driven a relatively short distance on a daily basis. There is no significant secondary market for these vehicles, thus they are likely to be maintained for an extended ownership period.* In the absence of specific procurement data, FPI is estimating engine electrical component replacement at the rate of 1/10th of total vehicles each year, or approximately 20,000 vehicles, and at cost of $200 per vehicle. This results in annual purchases totaling $4 million.

*GSA indicates that the average age at time of disposal of 4x2 Light Trucks in the Federal Fleet without Postal Service is 11 years, but with the Postal Service it is 25 years, indicating that the Postal Service maintains their delivery trucks for at least 25 years. While the body and frame of these vehicles are very long lasting, and annual miles driven are relatively few, the frequent starts and stops will have a profound effect on moving parts, such as brakes, alternators, starters, etc. http://policyworks.gov/org/main/mt/homepage/mtv/perform2.htm

Information from GSA indicates that the Postal Service has a much higher maintenance and repair cost on a per mile basis than the rest of the Federal Fleet for 4x2 Light Trucks. GSA's Federal Fleet performance measurement data indicate that the Postal Service incurs, at least, $.19 per mile for their 4x2 Light Trucks*.

*GSA indicates that the average maintenance/repair cost per mile of 4x2 Light Trucks in the Federal Fleet without Postal Service is $0.0895, but with the Postal Service it is $0.1859, indicating that the Postal Service spends at least $0.1859 per mile for delivery trucks. http://policyworks.gov/org/main/mt/homepage/mtv/perform2.htm

If the Postal Service delivery vehicles, which comprise 85 percent of their fleet, account for 75 percent of the 1.1 billion miles driven by the total fleet, those delivery vehicles would account for 825 million miles. At $.19 per mile, maintenance and repair costs would approximate $157 million. A certain portion of that $157 million would be for replacement of engine electrical components. If only $1 out of every $40 were for engine electrical components, it would suggest that the Postal Service spends approximately $4 million per year on delivery vehicles for this type of maintenance, which would confirm the analysis of the previous paragraph. It should also be noted that Postal purchasing of these items is very decentralized, suggesting that a market opportunity exists but is not served by any one supply source at present.

Operations and Maintenance

While the number of vehicles in the Federal fleet play a significant role in determining general trends in the overall market for engine electrical components, a clearer picture can be developed from trends in over" maintenance costs. The graph below shows an increase in total operating costs for large domestic fleets from $1.4 billion in FY1992 to $1.55 billion in FY1996, representing an increase of about 10 percent. However, maintenance costs increased 28 percent during this period and, proportionly, increased from 29 percent of total operating costs to 34 percent. Of the $523 million expended for maintenance, a certain percentage would have been the result of alternator and starter replacements.

Note that these costs are not all inclusive for the entire Federal vehicle fleet.

B. Procurement Data

The Federal government collects procurement data through the Federal Procurement Data Center (FPDC) and categorizes its procurements using the Federal Supply Classification (FSC) system. Within the FSC system, Federal procurements are broken down into over 600 different commodity classes. Each class is designated by a four-digit code. As stated previously, engine electrical components are primarily found within FSC 2920 Engine Electrical System Components. However, the FPDC data does not completely capture the vast majority of Federal engine electrical component procurements. This is due to a variety of reasons. First, the FPDC reports only buys in excess of $25,000. Since a substantial portion of engine electrical component procurements are for smaller amounts, this excludes many Federal engine electrical component purchases. Second, the FPDC does not include any information on purchases made via government credit cards. As discussed by the FPI Methodology Review Panel (see Appendix II), the level of Federal purchasing made via credit card is growing sharply. Third, many Federal engine electrical component procurements are included with other purchases, such as repair services. Finally, many agencies do not report their procurement actions to the FPDC. As a result, engine electrical component procurements reported to the FPDC are only a fraction of the total Federal market.

When calculating the size of a Federal product market, FRI has typically relied upon data from the FPDC as a "starting point." The procurements reported to the FPDC are then adjusted to account for the "missing" segments of the market. As seen in the following table, purchases within FSC 2920 reported to the FPDC during FY 1997 were $26 million. This is in line with the average annual expenditures reported to the FPDC from FY 1993 through FY 1997 of $26.6 million.

Source: Federal Procurement Data Center (GSA) and Eagle Eye Publishers, Inc.

Purchases of FSC codes 2590 and 2990 are included in this table as indicators of general trends in Federal vehicular fleet maintenance costs. Those trends indicate significant growth in recent years. These two FSC codes were significantly above their five year averages in FYI 1997.

The FPDC also reports Federal purchases by 4-digit SIC codes. The most appropriate classification for engine electrical components is SIC 3694, which is defined in greater detail at the five digit levels: 36942 - "Battery charging alternators, generators, and regulators"; 36943 - " Starters"; 36947

- "Complete engine electrical equipment, N.E.C." (ignition coils, distributors, magnetos),- and 36949

- "Parts for engine electrical equipment (armatures, field coils, drive end housings, and parts for ignition distributors)." The following table indicates the Federal purchases reported to FPDC under SIC3694. Purchases in FYI 997 were $3 0.9 million, or five percent higher than the five year average of $29.4 million. Data for SIC '3714 indicates expenditures for related automotive maintenance costs. Reported purchases in FYI 997 were $267.4 million, or 27 percent higher than the five year average.

Source- Federal Procurement Data Center (GSA) and Eagle Eye Publishers, Inc.

(Note: SIC 3694 also includes five digit 36941 - "Ignition harness sets" and 36944 - "Spark plugs". SIC code data is not as reliable as FPDC data and is subject to error.)

Of the $30.9 million reported purchases of SIC 3694 and $26 million of FSC 2920 in FY 1997, $10.9 million actually overlapped. SIC 3714 and FSC 2920 overlapped in a total of $7.8 million of FY 1997 procurements. This data overlap, which totals $18.7 million, identifies those procurements which are most likely to be within the scope of the definition of specific product as used in this report.

One of the more significant aspects of the $26 million in purchases of FSC 2920 reported in FY 1997, is that 99.65 percent of these procurements were by the Department of Defense. As detailed in Table 1, the military owned 107,199 of the 575,265 vehicles reported in the FY 1996 Federal Motor Vehicle Fleet Report, or only 19 percent of the Federal fleet. Thus, any engine electrical system components purchased for the vast majority of the Federal market are not reflected in the data from the Federal Procurement Data Center. Furthermore, even the data reported by the military to the Federal Procurement Data Center is not all-inclusive of actual purchases of alternators and other components.

C. Total Federal Market and FPI's Projected Market Share

The total Federal engine electrical components market in FY1997 with each segment's estimated size was:

*Based on 10 percent of reported data, on the premise that significant procurement activity occurs under the $25,000 reporting threshhold. The $25,000 reporting criteria is not relevant to the Postal Service and Civilian Agencies estimates because they were derived from statistical analysis in the absence of procurement data.

Note that the military, with 19 percent of the government's vehicles, represents almost 69 percent of the estimated Federal market for engine electrical components. This should confirm the extent to which FPI's estimate of the Postal Service and Civilian Agencies segments of the Federal market have been based on as conservative a foundation as possible. In the absence of actual procurement data upon which to base FPI's estimate, it should be clear that no attempt has been made to inflate the size of the Federal market for engine electrical components.

FPI anticipates the possibility of initial production in late FY 1999, should the Board approve this proposal. Production capacity would increase to $4 million in FY 2000, and progressively ramp up until FY 2004, when sales are estimated to reach $9.6 million. (See following table.)

FPI's market share for engine electrical components in FY 2000 is projected to be 12 percent, based on an estimated increase in the size of the market of three and one-half percent per year between FY 1997 ($30 million) and FY 2000 ($33.3). The forecasted increase in the Federal market is based on an estimated inflationary growth of two and one-half percent plus one percent real growth. If the Federal engine electrical components market continues to increase three and one-half percent annually, it would total $38.2 million in FY 2004. Thus, FPI's share of the Federal market would reach 25percent in FY 2004.

IV. THE DOMESTIC MARKET FOR ENGINE ELECTRICAL COMPONENTS

A. The Overall Automotive Parts and Accessories Industry

The domestic engine electrical components industry is a mature industry with growth tied to the health of the overall automotive market. Data from the Department of Commerce for the overall automotive parts and accessories industry indicate that total value of shipments have been increasing at a compound annual rate of 5.5 percent in current dollars for the past ten years. It is reasonable to expect that the engine electrical components industry, as a subset of the automotive parts and accessories industry would have experienced a similar growth pattern.

Source: U.S. Department of Commerce, Bureau of the Census, International Trade Administration.

Notes: Amounts for 1996 and 1997 are estimates. Amounts for 1998 are forecasts. Data based on SIC's 3465, 3592, 3647, 3691, 3694, and 3714.

B. Imports and Exports

The domestic engine electrical components industry is also part of the larger international market with exports and imports playing a role in the relative success of the industry. Trade data for the overall automotive parts and accessories industry indicate that between 1989 and 1996 imports and exports have been roughly in balance. Since then exports have grown at a faster pace than imports. Contributing to these trends have been two significant factors. First, the growing investments in new factories in the U.S. by Japanese automobile manufacturers which have resulted in greater percentages of local component content in domestically manufactured, Japanese label vehicles. And, second, growing investments by U.S. automotive manufacturers in Mexico and Canada to assemble vehicles for the entire North American market, thus increasing potential markets for U.S. based component suppliers.

Source: U.S. Department of Commerce, Bureau of the Census, International Trade Administration. Note: Amounts for 1996 and 1997 are estimates. Amounts for 1998 are forecasts.

C. Growth Trends In the Engine Electrical Component Industry

The U.S. engine electrical components industry is healthy and is experiencing steady growth. Data from the Bureau of Census, Annual Survey of Manufacturers, shows that in 1996, the value of shipments for SIC industry 3694 Engine Electrical Equipment rose to $9.4 billion from $8.3 billion in 1995 and from $7.2 billion in 1992. This represents a 13 percent increase from 1995 levels. As seen in the table below, the value of shipments for SIC industry 3694 have increased by an annual average of 7 percent since 1992. SIC industry 3714, Motor Vehicle Parts and Accessories, was used in defining the Federal market for FSC code 2920, Engine Electrical Components, but is not used here in identifying the overall domestic market for Engine Electrical Equipment.

Source: Bureau of the Census, 1996 Annual Survey of Manufacturers

The following table depicts steady growth in new capital expenditures from 1992 through 1996 of approximately. 10 percent per year. The total investment of over $1 billion is indicative of an industry that anticipates significant future earnings.

Source: Bureau of the Census, 1996 Annual Surveyof Manufacturers

D. The Original Equipment Market

Another method of estimating the size (dollar value) of the domestic engine electrical components market would be to base it on the number of new vehicles manufactured domestically. (This presumes imported engine electrical components roughly equals exported engine electrical components.) According to the Wall Street Journal (WSJ), there were 6,582,620 cars and 6,73 36,590 light trucks produced domestically in 1998, or a total of 13,319,210*

*The Wall Street Journal, Thursday, January 7, 1999. Page A4,

. Each of these vehicles contain an alternator/generator plus a starter. If each unit cost approximately $75, or $150 per vehicle, the car/light truck segment of the original equipment market would total $1,997,881,500. Additionally, the original equipment market includes medium and heavy duty trucks, busses, motorhomes, construction vehicles, farm vehicles and implements, motorcycles, and motor boats. Most applications in these market segments would require significantly heavier duty engine electrical components and, even though volumes would be significantly lower than in the car/ light duty truck segment, higher unit prices would contribute to the significance of these market segments.

E. The Replacement Market

In addition to the original equipment market, the overall engine electrical components market is driven by the need to maintain an existing domestic fleet of cars, light trucks, motorcycles, motorhomes, medium and heavy duty trucks, busses, farm vehicles, construction vehicles, and motor boats. According to the Bureau of Census, there were 206 million vehicles registered in the U.S. in 1996. This represents a very large replacement market since most vehicles are likely to experience failed engine electrical components at least once during their useful life. If, for example, the typical replacement cycle were 10 years, approximately 20 million alternators (10% of 206 million registered vehicles) and 20 million starters would be replaced each year. Even if each unit resulted in only $40 of revenue to the manufacturer, the replacement market would total $3.2 billion. Thus, combining the original equipment market and the replacement market, the total domestic engine electrical components market exceeds $5 billion per year.

F. Forecast for the Total Domestic Market

As the previous data on imports and exports for the overall automotive parts and accessories industry demonstrated, domestic manufacturers, including U.S. based foreign manufacturers, have more than compensated for increasing import levels by increasing exports by an even greater extent. This is indicative of the continuing competitiveness of the domestic industry. However, domestic demand is the key determinant of the industry's success. That demand is obviously tied to 1) the health of the U.S. automotive industry for original equipment requirements, 2) the replacement market, and 3) more generally, the overall health of the economy. As stated previously, unit sales of domestic automobiles and light trucks totaled $ 13 3.3 million in 1998. The December sales were seven percent ahead of year ago levels. The domestic auto industry has seen steady growth during the entire decade of the 1990's. Overall employment has continued to rise and the unemployment level has declined to the lowest rate (4.3%) since 1957. Interest rates are also at the lowest levels in over 20 years. Also, inflation continues to decline to current levels of less than two percent per year. Basically, the U.S. economy remains very healthy and should continue its steady growth.

Between 1992 and 1996, SIC industry 3694 experienced an average annual growth in the value of shipments of seven percent. For purposes of this study, FPI will project an annual sales increase in the value of shipments of four and one-half percent (4.5%), comprised of two and one-half percent for inflation*

*The Congressional Budget Office utilizes 2.5 percent as its estimate for inflation in its latest budget forecast.

and two percent (2.0%) real growth. Thus, starting with the 1996 value of shipments of $9.4 billion dollars for SIC industry 3694, FPI projects the following:

V. IMPACT ON INDUSTRY

A. Companies and Workers in the Industry

Overall employment within SIC industry 3694 experienced modest growth between 1992 and 1996. The previously mentioned $1 billion in new capital expenditures during this time period may have contributed to improved worker productivity. Sales revenue per production worker increased from approximately $186,000 to $218,000 from 1992 through 1996 and further productivity gains can be anticipated in future years.

Source: Bureau of the Census, 1996 Annual Survey of Manufacturers

Employment of production workers within SIC industry 3694 increased 10 percent from 1992 to 1994 but has basically leveled off since then.

Source: Bureau of the Census, 1996 Annual Survey of Manufacturers

Wages for production workers increased approximately 15 percent between 1992 and 1994 before leveling off.

B. Size of Companies

The Census of Manufactures survey identified 478 of the 524 companies in SIC industry 3694 as employing less than 250 employees, While the smaller size firms represent 91 percent of the firms in the industry, the are responsible for less than one-fifth of the shipments. Actually, if the survey were able to reflect all of the shipments, the large businesses would represent more than the indicated 81 percent of the market.

Source: 1992 Census of Manufacturers *Not included due to proprietary nature.

C. Current Federal Vendors

The following table identifies vendors that were under contract to Federal agencies to provide engine electrical components based on search criteria of FSC 2920 and SIC 3694 or SIC 3714 in the Eagle Eye FPDC database. Of the 34 vendors listed, 25 had Federal sales of engine electrical components which represented less than five percent of their firms' total sales. Two vendors had Federal sales between five and ten percent of their total sales. Four firms (C.E. Niehoff & Co.; Ohio Generator Remanufacturing, Inc.; Ruta Supplies, Inc.; and Southern Auto Wholesalers, Inc.) had Federal sales of engine electrical components that represented ten percent or more of the firms' total sales.

Source of Total Sales: Dun and Bradstreet

Very few of the identified Federal vendors of engine electrical components rely exclusively on the manufacture of engine electrical components for financial success. Most are either diversified manufacturers or distributors of a wide variety of products. All of these vendors, in addition to the Federal market for engine electrical components, have access to the much larger domestic market for engine electrical components. Indeed, the entire Federal market for engine electrical components represents less than one-third of one percent of the overall domestic market. Furthermore, they also have access to the Federal market and the much larger domestic and international markets for their entire lines of diversified goods and services.

While FPI foresees very little direct impact on domestic vendors of engine electrical components to the Federal market, FP1 wants to highlight possible impact on those four firms which, based on the data available, obtained ten percent or more of their total sales from the Federal government in FY 1997.

C. E. Niehoff & Co., Inc., Evanston, Illinois, was started in 1984, has 214 employees, and annual sales of approximately $24 million. D&B describes the company as a manufacturer of heavy duty alternators. Classified as a small business, Niehoff was the largest single supplier of FSC code 2920 related products to the military in FY 1997, with approximately $4 million supplied. This represented one-sixth of the company's total sales. From FY 1991 through FY 1996, Niehoff's total sales to the Federal market averaged $4.6 million per year, It appears that FPI may have a minimal impact on this firm, but is unlikely to affect any jobs given the small share (16%) of their company's sales to the Federal government. It should also be noted that FPI currently offers repair and rebuilding services for various engine electrical components manufactured by Niehoff.

Ohio Generator Remanufacturing, Inc., Canton, Ohio, was started in 1979, has 12 employees and annual revenue of approximately $900,000. D&B describes the company as a small business remanufacturer and manufacturer of alternators, starters and generators. Approximately 15 percent of the company's total revenue in FY 1997 was derived from Federal sales of FSC code 2920 related products. From FY 1991 through FY 1996, the firm's total sales to the Federal market averaged 327,000 per year. It appears that FP1 may have a minimal impact on this firm, but is unlikely to adversely affect any jobs given the small share of their company's sales to the Federal government.

Ruta Supplies, Inc., Dover, New Jersey, was started in 1993, has 10 employees, and annual sales of approximately $4.4 million. D&B describes the company as a small business wholesaler of truck parts and accessories. Ruta provided $578,000 worth of FSC code 2920 related products to the military in FY 1997, which represented 13 percent of the company's total sales. From FY 1992 through FY 1996, the firm's total sales to the Federal market averaged $134,000 per year. FPI is not proposing to be involved in Ruta Supplies' primary line of business, and therefore is unlikely to have an adverse impact on this company.

Southern Auto Wholesalers, Inc., Pontiac, Michigan, was started in 1980, has 23 employees and annual sales of approximately $X million. It is a small business. D&B describes the company as a small business manufacturer of direct current motors, starting motors, ignition components, alternator switches, controls and electromechanical instruments. Southern Auto Wholesalers was a significant source to the military of FSC code 2920 related products in FY 1997, providing almost $X million worth, or 32 percent of the company's total sales. From FY 1992 through FY 1996, the firm's total sales to the Federal market averaged $X million per year. It appears that FPI may have a minimal impact on this firm.

Additional details on the other vendors are included in Appendix III.

D. FPI Re-Investing in the Private Sector

To accurately measure the impact of FPI engine electrical component production, it must be noted that FPI buys its raw materials from private vendors. Approximately 73% of each FPI sales dollar goes for materials, equipment, machinery, services and supplies. The suppliers who obtain contracts from FPI for materials can maintain their current employment level, or potentially increase their employment, as a result of FPI business. These are the same companies that supply private manufacturers. In some cases, potential suppliers to FPI are often FPI end-use competitors and may recuperate lost Federal sales, and maintain employment, by providing intermediate goods and materials to FPI.

VI. FPI's FUTURE PRODUCTION AND INMATE EMPLOYMENT LEVELS

The following table depicts FPI's projected dollar value production levels from FY 1999 when initial production is anticipated to begin through FY 2004. Approximately 200 additional inmate jobs will be created by FY 2004 at the proposed production levels. Ideally, FPI would be able to activate an additional factory dedicated to manufacturing engine electrical components. FPI's projected growth in inmate employment is modest and, in comparison to the 43,000 workers in the domestic industry, the proposed FPI inmate employment level will be insignificant. It is anticipated that no civilian jobs within the domestic industry will be lost as a result of this initiative.

FPI's proposed sales level of $4.0 million in FY 2000, relative to the projected value of SIC 3694 industry's shipment of $11.2 billion in CY 2000, is inconsequential. Even in FY 2004, when FPI proposes a sales level of $9.6 million, the domestic industry is projected to increase to $13.4 billion.

VII. THE NEED FOR ADDITIONAL INMATE EMPLOYMENT & FPI's EFFORTS TO PROVIDE JOBS USING ALTERNATIVES TO ITS TRADITIONAL INDUSTRIES

The Federal Bureau of Prisons is faced with a Federal inmate population that continues to grow. Thus, FPI is faced with the responsibility of providing an ever-increasing number of jobs for Federal inmates. Since the Congressionally-mandated study of FPI's operations, conducted by Deloitte and Touche in 1991, FPI has made a continuous and concerted effort to employ inmates through alternatives to its traditional manufacturing industries. Since the expansion guidelines went into effect, the BOP inmate population has more than doubled and FPI's inmate employment has increased by only one-third. Thus, FRI has had difficulty identifying potential new inmate jobs in light of the burgeoning prison population growth.

VIII. CONCLUSIONS AND RECOMMENDATION

FPI's proposed production level of $4.0 million in FY 2000, rising to $9.6 million in FY 2004, is inconsequential to the overall domestic market, estimated to have annual shipments valued at over $ I I billion in 2000 and $ 13.4 billion in 2004. FPI's proposed share of the Federal market for engine electrical components (12 percent in FY 2000, rising to 25 percent in FY 2004) will not place an undue burden on the industry. Most vendors to the Federal government are not heavily reliant onthe Federal market. Many are highly diversified as manufacturers of other products, and/or as distributors/wholesalers of a multitude of products.

In conclusion, it is recommended that FPI manufacture engine electrical components. Initially, the manufacturing of engine electrical components will provide approximately 80 inmate jobs for BOP's increasing population. Eventually, FPI should obtain enough business to develop a new plant which will exclusively manufacture new engine electrical components and provide approximately 200 inmate jobs. FPI's production in this industry is small but represents a significant part of the total employment needed for FPI to maintain a safe prison environment.

APPENDIX I. Company Letters and Comments

• Lucas Aftermarket Operations
• Onan Corporation
• Small Motors and Motion Association

Lucas

Lucas Aftermarket Operations
Lucas 1624 Meijer Drive
P.O. Box 7079
Troy, Michigan 48007-7079

Telephone: (248) 288-2000
Fax: (248) 280-8280

December 8, 1998

Mr. Robert C. Grieser
Federal Prison Industries, Inc.
Planning, Research and Activation Branch
320 First Street, NW
Washington, DC 20534

Dear Sir:

RE: Generators and Alternators Impact Study

Thank you for the opportunity to respond to the market study on starters and alternators.

Lucas exited from the manufacture of these products and now acts as a distributor for product manufactured by Prestolite Inc. and Magnetti Marelli for units made in England.

Regards,

C.R. Green

Contract Sales Manager cc. P.M,M. Rayne

Onan

January 11, 1999

Federal Prison Industries, Inc.
Planning, Research, and Activation Branch
320 First Street, NW
Washington, DC 20534

Attention: Generators and Alternators Impact Study

Dear Sir:

This is in response to your November 25, 1998 memo outlining the desire of the Federal Prison Industries, Inc. to enter the vehicular generators, alternators, stators, and starters.

Cummins Onan is a manufacturer of Electrical Power Systems and related equipment. Our generators are driven by diesel and gaseous fueled engines and span a range from a few kilowatts to over 4 megawatts per unit. Using paralleling equipment we can satisfy any requirement larger that any one single unit. Applications include recreation vehicles, mobile commercial vans, stationary utility backup, and stationary prime power for remote locations. Our market is global and we service this market with manufacturing and regional offices in the United States, United Kingdom, and Asia.

Your request indicates the desire to understand market projections for the Federal market which I would assume to be North America. Unlike some industries we do not have a specific tracking or registration system for generators, therefore Cummins Onan uses a variety of sources and collates the information for internal use. This information is company confidential so only the broad statistics will be shared. Following is a point by point discussion answering your questions:

• Cummins Onan market projections estimate the North America market to be around $2 billion for diesel and gaseous engine driven generator sets.
• The sales supplied by Cummins Onan to the Federal Government is approximately 2% of the total Power Generation business.
• Cummins Onan's engine driven generator business is approximately 90% of total sales.

Sales for Cummins Onan has increased between 5-10% in the last 3 years with employment flat.

Cummins Onan is not classified as a small or disadvantaged business.

The current capital investment is for the production of engine powered generator sets and can not be used to manufacture other goods.

The current situation and dynamics of engine powered generator sets is that the industry for years has had excess capacity and very competitive prices. In recent years consolidation has taken place and a handful of major players remain. Much of this consolidation is in the United States but the clear direction is for engine powered generator sets to become a more global market. I hope this information is useful and if you have any future questions, please send to me.

Sincerely,

Mark Westphal
Sr. Market Manager

Onan Corporation 1400 73rd Avenue N.E. Minneapolis, MN 55432 (612) 574-5000

SMMA

Small Motors & Motion Association

January 6, 1999

Robert C. Grieser, Manager
Planning, Research and Activation Branch
FEDERAL BUREAU PRISONS INDUSTRIES INC.
320 First St. NW
Washington, DC 20534

ATTN Generators and Alternators Impact Studies

Dear Mr. Grieser:

We are in receipt of your request dated November 25, 1998 requesting market data relative to vehicular generators, alternators, stators and starters. Thank you for your kind attention.

SMMA is a trade association representing roughly 200 members involved in the manufacturing of small motors, typically less than I horsepower in rating and have very little representation of manufacturers of the type product you refer to. As a result we would not have market data that would be of value to your study.

Perhaps an inquiry to the Society of Automotive Engineers (SAE) would be an alternative worth pursuing.

Thank you again for your interest.

Sincerely,

Roger E. Hollis

Vice President Product and Market Development, ARKANSAS GENERAL INDUSTRIES INC.

President, SMMA

APPENDIX II. Final Report of the FPI Methodology Review Panel

FINAL REPORT OF THE FPI

METHODOLOGY REVIEW PANEL

September 9, 1997

Panel Members:

Grafton Biglow, Chief, Customer Liaison Branch

Government-Wide Information Systems Division

Federal Procurement Data Center

General Services Administration

Harvey Bronstein, Economist

Small Business Administration

(representing Gary Jackson, Assistant Administrator

Office of Size Standards, Small Business Administration)

John Gates, Ph.D., Special Assistant to the Chief

Manufacturing and Construction Division

Bureau of the Census

Department of Commerce

FINAL REPORT OF THE
FPI METHODOLOGY REVIEW PANEL

Background

The Federal Prison Industries, Inc. (FPI) Methodology Review Panel was created to review the methodology used by FPI's staff to estimate the size of the Federal government market for those products supplied by FPI. As part of its review, the Panel also examined the recently revised definitions for FPI's expansion guidelines, and explored ways to further strengthen the new definitions.

The Methodology Review Panel is comprised of Federal officials whose collective breadth of experience covers Federal procurement policy and data collection, industry categorization and product identification policy, as well as small business concerns. The Panel held four formal meetings, and reviewed extensive materials supplied by FPI staff.

Review of FPI's Basic Methodology

The Panel did not seek to verify the accuracy of FPI's procurement estimates. Rather, panel members were asked to analyze the methodology employed by FPI in generating such estimates. In this effort, the Panel examined the sources of information used by FPI, any adjustments or modifications made by FPI to the available data along with the justification for such adjustments, and the degree to which FPI documented its methodology so as to be available for public review and criticism. A brief description of FPI's basic methodology is included as an attachment.

It is the consensus of the Methodology Review Panel that the basic methodology used by FPI to estimate Federal procurements is reasonable. The Panel appreciates the complexity involved with estimating Federal procurements, and recognizes the difficulty in obtaining data. The Panel also recognizes that FPI may find itself the subject of criticism, if only for reasons of perception, as long as FPI staff are responsible for generating the Federal procurement estimates. Thus, while FPI may receive criticism from interested parties for its procurement estimates, this panel believes the basic approach and methodology employed by FPI is sound and reasonable.

The Panel's specific -findings related to FPI's methodology are as follows:

• Comprehensiveness of Methodology.- The Panel considers FPI's methodology to be quite thorough, and as inclusive as possible, as far as the data elements (purchases under $25,000, non-reporting agencies, etc.) represented. While exact figures are preferable to estimates, the steps taken by FPI to account for missing data represent a reasonable attempt to account for this missing part of the market. Since complete information is unavailable, FPI has to make certain assumptions.
• Documentation of Working Assumptions. FPI is to be- lauded for stating its assumptions and documenting the procedures used in each of the impact studies. This is particularly important in instances where little or no alternative data is available. FPI has done a thorough job of documenting each step taken in estimating Federal procurements and making them available for review and criticism.
• Credit Card Purchases. Currently, Federal purchases made via government credit cards are not reflected in the Federal Procurement Data Center (FPDC) data used by FPI- Neither are credit card purchases included in the total purchases under $25,000 that are reported to the FPDC. Use of Federal credit cards is increasing rapidly. In FY 1996, Federal credit cards were used for almost $3 billion in purchases. The number of credit card transactions jumped from 4.2 million to 7.3 million last year Alone. Procurement trends suggest that credit card buys will account for $10 billion in Federal procurements in three to four years. For example, the Department of Agriculture's goal is to have 100% of its purchases under $25,000 made by credit card within 3 years.
• Availability of Data. Data for Federal procurements made using government credit cards should become available to FPI in the future. The FPDC has requested that the General Services Administration require the contractor for its new award for credit card services to report detailed product information for all credit card purchases to the FPDC. Once this occurs, the FPDC will make this data available to FPI.

The Panel outlined several recommendations which may allow FPI to strengthen some of the estimates included in its methodology. In an effort to insure the strongest possible procurement estimates, FPI should consider the following:

• Consistency of Application. To the extent possible, FPI should consistently follow the same methodology in estimating Federal procurements. The Panel recognizes that various modifications and adjustments to the data are necessary in different analyses to attain accuracy. However, a consistent approach may reduce risk to FPI's credibility, particularly in cases where FPI adjustments result in an increase in the estimated size of the market.
• Non-Reporting Agencies. Since the U.S. Postal Service (USPS) does not report its procurements to the FPDC, FPI's methodology makes estimates to account for buys made by the USPS. The Postal Service accounts for 94% of the employees working for agencies that do not report their purchases to the FPDC. FPI should make every effort to use the USPS' own procurement data. The USPS' procurement database has information on approximately $10 billion in Federal purchases not reflected elsewhere. Access to USPS procurement data would replace one of the bigger ''estimates'' in FPI's methodology with actual procurement data. In discussions with the USPS, the Panel discovered first-hand the difficulties FPI may encounter in trying to gain access to this data. However, its value to FPI's effort is great. The Panel has furnished FPI an initial entre' to pursue further access to USPS data.
• Purchases under $25,000. The section of FPI's methodology with the highest level of uncertainty involves estimating purchases valued at less than $25,000. There were approximately 18 million federal buys last year, accounting for approximately $20 billion in sales. There is no detailed information on such buys.: The Office of Management and Budget has determined that collecting and providing more detailed information on such Federal procurements would require a great deal of effort and expense. While procurement data for purchases under $25,000 for specific products may be unavailable, the amount of these purchases remains uncertain.
• FPI currently bases its estimate of such purchases on its own breakdown of sales under $25,000. Basing the calculation on just one measure (such as FPI's sales) may not accurately reflect the overall Federal buying pattern. It would be useful to have more than one data point on which to base the under $25,000 purchase figures.
• Use of Weighting. FPI may wish to make greater use of weighting to calculate purchases valued at less than $25,000 and purchases from non-reporting agencies. That is, FPI might .use its sales data showing which agencies buy an item from FPI and in what dollar amounts. Instead of projecting a certain portion of sales for the item to be under $25,000 for the whole Federal government, FPI could project differing ratios for different departments and agencies. Similarly, FPI might examine its own sales data to see what portion of its sales for, an item are to Federal customers reporting to the FPDC as compared to non-reporting agencies. This data may be helpful in projectingtotal purchases by non-reporting agencies.
• Benefits of Benchmarking. The absence of any type of benchmark makes it difficult to measure the specific accuracy of each individual study. FPI does not have a "control" dollar value against which to measure its impact studies. FPI may want to include data on total Federal purchasing. A second, independent estimate would be useful to employ, even if only for comparison to the final numbers. To the degree possible, FPI should continue to seek out alternative data sources that may be used to corroborate FPI's estimates.
• Objectivity. FPI will always be open to criticism for extrapolating data which has a direct bearing on the corporation's operations. Even when FPI is justified in making certain data assumptions, the fact that such actions may benefit FPI will probably serve to generate criticism of FPI's methodology.
• FPI may be less open to criticism if the job of estimating procurements was contracted to an outside source. Short of contracting, we recommend that a "fire wall" exist between the market evaluators and those tasked with expansion and sales responsibilities. At a minimum, the staff members responsible for market evaluation should not report to the same supervisor as those with expansion and sales responsibilities.
• Non-government Data Sources. FPI should continue to work with industry sources to obtain any privately generated Federal procurement data that is available. The Panel recognizes that FPI has not encountered much success on this front, and there may not be any motivation on the part of private industry to volunteer information that could benefit the process, particularly if the information might increase FPI's estimate of the size of the market.

II. FPI's Interim Guidelines Definitions

Below are observations, ideas and recommendations of the Methodology Review Panel regarding the revised definitions for FPI's expansion guidelines.

In regards to the revised definitions for FPI's expansion guidelines, the Panel supports the changes approved by the Board of Directors on an interim basis earlier this year.

The Panel endorses using the Federal Supply Classification (FSC) system as the primary determinant of a "specific product." Using the FSC system is logical since it is the categorization structure used by the Federal government for its procurements.

The revised definitions' use of FSC codes will make it easier for FPI to obtain Federal procurement data and facilitate FPI's ability to meet its data tracking responsibilities under the guidelines, while allowing private vendors to monitor FPI more closely. The Panel believes the shift to the FSC system is especially prudent in view of the decision to phase out the Standard Industrial Classification (SIC) system upon which the original definitions relied.

There are some problems with utilizing the SIC system, such as products produced under more than one SIC code. Gas masks represents one example. The SIC system is soon to be replaced with the North American Industry Coding System (NAICS). The NAICS will define industries with a 6-digit code, as opposed to the present 4-digit SIC. It is unclear whether the government will collect NAICS data for its purchases, once this transition from the SIC system is complete.

The Panel acknowledges the logic in revising the definition of "significant expansion of an existing product" so that FPI's sales, rather than FPI's capacity, function as the definition's trigger. The Panel feels this revision offers some clear advantages to both FPI and the private sector.

The Panel recognizes that FPI makes its sales data available to the public through an announcement in the Commerce Business Daily (CBD). The corporation may wish to include data for previous years in its sales report made available to the public through the LIM. At a minimum, we recommend a statement be included in FPI's public announcement to the effect that sales data for previous years will be available upon request. This will facilitate public scrutiny of FPI's growth as specified under the definition of "significant expansion of an existing product."

In determining the "market" for its products, FPI may want to draw upon aspects of the guidelines used by the Department of Justice's Anti-Trust Division (AID). While the ATD determination is an evolving process with some degree of subjective judgement, parts of their guidelines may be potentially useful to FPI. These include sections dealing with which firms participate in a market or may potentially participate.

The definition of FPI's "market" is critical to the process. A narrow definition of what constitutes FPI's market may yield a different result than a broader definition. For many of the goods supplied by FPI, the idea that there is a Federal market which is separate and distinct from the commercial market is unsubstantiated.

The Panel points out that FPI's expansion guidelines seem to conflict with the corporation's authorizing legislation. FPI's authorizing legislation restricts the corporation from having an undue burden on any single industry, while the guidelines are directed toward measuring FPI's share of the market for a specific product. The Panel notes that a single industry may produce multiple products.

Under FPI's new interim definitions, SIC data is used, as necessary, as a back up to the primary determinant of a product, i.e., the FSC code. Using FSC in combination with the SIC I should serve to exclude those goods outside the focus of FPI's study. Moreover, the 4-digit SIC level is the most detailed level for which some SIC information is collected by the government. Nonetheless, caution should be exercised when cross-referencing the two data systems, so as not to define the market too broadly or too narrowly. The Panel's understanding of "market" suggests limited substitutability with other products. FPI's current approach of grouping together similar items produced by the vast majority (e.g., 80%) of the establishments appears to be reasonable.

Attachment

Overview of FPI's Basic Methodology

The general process FPI uses to calculate the dollar value of a product's Federal market is as follows:

A) Start with Federal procurement data collected by the Federal Procurement Data Center (FPDC);

The FPDC collects procurement information on purchases valued over $25,000 from most Federal departments and agencies. However, some Federal agencies do not submit procurement data to the FPDC. Agencies reporting their procurements often fail to include purchases from FPI. To account for these purchases not reflected in the FPDC data, FPI makes several adjustments.

B) Add purchases from agencies not reporting to the FPDC;

C) Add purchases from orders with values less than $25,000; and,

D) Add purchases from FPI.

E) Certain other adjustments are necessary for some products.

To insure accuracy, FPI has incorporated other factors into the final procurement estimate. These include purchases made with non-appropriated funds, and procurements for certain product areas "hidden" within larger projects. (Some procurements are not broken out and separated by commodity code. Instead, these different procurements are included within a single commodity group.)

It should be noted that in adjusting for purchases valued less than $25,000, FPI bases the level of such purchases on its own sales, using its sales as a barometer of the Federal government's buying pattern.

APPENDIX III. Company Specific Information

The following company specific information was obtained from Dun and Bradstreet (D&B). Federal sales data was obtained from the Federal Procurement Data System and Eagle Eye Publishers, Inc.

Aeroproducts, Inc. of Harrisburg, North Carolina was started in 1989 has five employees and annual sales of approximately $1.7 million. D&B describes the firm as a wholesaler of aircraft engine parts and aircraft tools. FPI is unlikely to have any adverse impact on Aeroproducts, Inc.

Allied Industries, Inc., Memphis, Tennessee, was started in 1981, has four employees and annual sales of approximately $2.4 million. D&B describes the firm as a manufacturer of electronic equipment including circuit breakers, power switching equipment and regulators. It is also a distributor of electronic supplies and equipment including circuit breakers, switch gear, electrical boxes and fittings and wiring supplies. D&B information on government contract actions show four contracts in FY1996 which totaled $133,000. None of these were for sales within FSC code 2920 FPI is not proposing, to be involved in Allied Industries' primary line of business, and therefore is unlikely to have an adverse impact on this company.

Allied Signal, Inc., Morris Township, New Jersey, is a $14.5 billion manufacturer of specialty chemicals and auto parts. Allied Signal had 1997 profits of $1.17 billion. FPI should not have an adverse impact on this company.

B.T.M.C. Corporation, Lewis Center, Ohio, was started in 1978 has eight employees and annual sales of approximately $3 million. D&B describes the firm as a wholesaler of automotive parts. D&B information and FPDC information indicate Department of Defense contracts to supply items within FSC code 2920 as follows: FY 1994 - $65,000; FY 1995 - none indicated; FY 1996 - $33,000; and FY 1997 - $26,000. FPI is unlikely to have any adverse impact on B.T.M.C. Corporation.

Cummins Engine Corporation, Columbus, Indiana, was started in 1919, has 26,300 employees and annual sales of approximately $5.6 billion. D&B describes the company as primarily engaged in the design and manufacture of diesel engines for heavy-duty truck, off-highway industries, and other industrial equipment manufacturing. The company also produces remanufactured diesel engines and parts as well as a broad range of engine-related components. FPI should not have an adverse impact on this company.

Detroit Diesel Corporation, Detroit, Michigan, was started in 1987, has 6,500 employees and annual sales of approximately $2.2 billion. While approximately one-third of the company's shares are owned by public stockholders, the balance is indirectly owned by Penske Corporation and DaimlerChrysler. D&B describes the company as designing, manufacturing and servicing of heavyduty diesel and alternative fuel engines, automotive diesel engines, off-road diesel engines and engine parts. The company also remanufactures engines and component parts. FPI should not have an adverse impact on this company.

Driveline, Inc., Fort Lauderdale, Florida, was started in 1988, has 17 employees and annual sales of approximately $6.6 million. D&B describes the company as a wholesaler of automotive and truck parts. Federal contract sales within FSC code 2920 represented approximately 3.7 percent of their total sales, thus, FPI should not have an adverse impact on this company.

Dutch Valley Supply Company, Atlanta, Georgia, was started in 1963, has 45 employees and annual sales of approximately $15.4 million. D&B describes the company as a wholesaler of aircraft equipment and supplies, specializing in hardware and components for DoD. While D&B indicated numerous (23) Federal contracts during FY 1996, none were for products classified in FSC code 2920. FPDC data for FY 1997 indicated only 30,000 in contract value classified as FSC code 2920. FPI should not have an adverse impact on this company.

Esso Electro Engineers, Inc., Schaumburg, Illinois, was started in 1964, has 40 employees and annual sales of approximately $7 million. D&B describes the company as a manufacturer of ground support equipment consisting of power supplies, non electrical jet aircraft engine starters, industrial electric and electronic controls and control accessories. D&B indicated numerous Defense contracts during FY 1995 and FY 1996, none of which were for products classified in FSC code 2920. The FPDC data for FY 1997 indicated only $42,000 in contract value classified as FSC code 2920, which represented less than one percent of the company's estimated total revenue. FPI should not have an adverse impact on this company.

International Aircraft Support Group, Inc., Mukwonago, Wisconsin, was started in 1989, has three employees and annual sales of approximately $2.8 million. D&B describes the company as a manufacturers' representative distributing aircraft equipment, parts and supplies. It also is involved in kitting for the military. FPDC data for FY 1997 indicated only $69,000 in contract value classified as FSC code 2920, which represented 2.5 percent of the company's estimated total revenue. FPI should not have an adverse impact on this company.

Kampi Components Co., Inc., Bristol, Pennsylvania, was started in 1988, has 45 employees, and annual sales of approximately $24 million. D&B describes the company as a government defense contractor distributing aerospace parts and equipment. D&B indicated numerous Defense contracts during FY 1995 and FY 1996, none of which were for products classified in FSC code 2920. The FPDC data for FY 1997 indicated only $65,000 in contract value classified as FSC code 2920, which represented less than one percent of the company's estimated total revenue. FPI should not have an adverse impact on this company.

Lucas Industries, Inc. and Lucas Aerospace, Ltd. are components of the international conglomerate Lucasvarity plc. of Shirley, England. The primary U.S. subsidiary is Lucasvarity, Inc., Buffalo, New York, which was formed in 1996 (the business actually dates back to 1847), has 9,755 employees and annual sales of approximately $7.5 billion. Lucasvarity, Inc. is a holding company with two separate operating groups: the automotive products group and the aerospace group. The automotive products group manufactures brake, electrical, and wheel components for light vehicles, and medium and heavy duty trucks and trailers. The aerospace group provides engine control, power generation, flight controls, cargo handling and customer support. The company and its subsidiaries operate 17 manufacturing facilities in the U.S. and Canada. Lucasvarity subsidiaries accounted for $2.7 million of the FPDC reported FSC code 2920 related products in FY 1997 to Federal customers. While this represents approximately ten percent of the FSC code 2920 market, it was a negligible amount in comparison to the company's overall sales. Also, in response to FPI's initial notification letter to industry, Lucas indicated they no longer manufacture related products but act as a distributor for other firms. FPI should not have an adverse impact on this company.

Minowitz Manufacturing Co., Inc., Roseville, Michigan, was started in 1968, present control succeeded in 1990, has 50 employees and annual sales of approximately $16 million. D&B describes the company as a manufacturer of electrical equipment for internal combustion engines including generators, blowers and electric gas pumps; motor vehicle parts, specifically drive shafts; mechanical fuel pumps and gas tanks; diesel engine parts; and miscellaneous modification, conversion and retrofit kits. Minowitz was a significant source to the military of items classified within FSC code 2920 related products in FY 1997, providing $856,000 worth, or 5.4 percent of the company's total sales. FPI currently offers repair and rebuilding services for various engine electrical components manufactured by Minowitz It does not appear that FPI will have an impact on this firm.

Nartron Corporation, Reed City, Michigan, was started in 1968 and has 335 employees. D&B did not provide a total estimate of annual sales, but does indicate that the company's net worth at the end of 1995 was $5.6 million. D&B describes the company as a manufacturer of advanced electronic control systems and sensors. Nartron supplied $1.3 million in FSC code 2920 related products to the military in FY 1997 according, to FPDC data. D&B identified similar contract amounts for FY 1996 and FY 1995. FPI is not proposing to be involved in Nartron Corporation's primary line of business, and therefore is unlikely to have an adverse impact on this company.

North American Trade Corporation, Houston, Texas, was started in 1984, has 16 employees, and annual sales of approximately $17 million. D&B describes the company as a small business wholesaler (export and import) of construction and mining equipment, miscellaneous industrial supplies and industrial chemicals. A negligible amount of North American Trade's revenue was derived from Federal sales of FSC code 2920 related products. FPI should not have an adverse impact on this company.

Onan Corporation, Minneapolis, Minnesota, is a subsidiary of Cummins Engine Company, Inc. (see above). Onan was started in 1986, has 1800 employees, and annual sales of approximately $600 million. The company manufactures diesel engines, crankshafts, gears, power generation equipment and electronic equipment. The FPDC data for FY 1997 indicated only $97,000 in contract value classified as FSC code 2920, which represented less than one percent of the company's estimated total revenue. FPI should not have an adverse impact on this company.

Oshkosh Truck Corporation, Oshkosh, Wisconsin, was started in 1917, has 3,500 employees and annual sales of approximately $903 million. D&B describes the company as a manufacturer of a broad range of fire and emergency apparatus and specialty commercial and military trucks. The FPDC data for FY 1997 indicated only $39,000 in contract value classified as FSC code 2920, which represented less than one percent of the company's estimated total revenue. FPI should not have an adverse impact on this company.

Prestolite Electric, Inc., Ann Arbor, Michigan, a subsidiary of PEI, Inc., was started in 1991, has 2,800 employees and annual sales of approximately $144 million. Prestolite manufactures electric motors, alternators, starting motors, ignition components, switches, controls, electromechanical instruments and battery chargers. Prestolite was a significant source to the military of FSC code 2920 related products in FY 1997, providing $2.3 million worth, or 1.6 percent of the company's total sales. FPI currently offers repair and rebuilding services for various engine electrical components manufactured by Prestolite.

Semco Instruments, Inc., Santa Clarita, California, was started in 1965, has 85 employees and annual sales of approximately $6.4 million. D&B describes the company as a small business and a manufacturer of measuring and controlling instruments, including temperature sensors, electronic control devices, speed sensors, and metal sheathed mineral oxide insulated materials used as thermocouples. Semco provided $154,000 worth of FSC code 2920 related products to the military in FY 1997, which represented 2.4 percent of the company's total sales. FPI should not have an adverse impact on this company.

Sielman, S A, Magnissia, Greece, was started in 1982, has 50 employees and annual sales of approximately $3 million. D&B had limited information on this non-U.S. company.

Signal and Systems, Inc., Troy, Michigan, was started in 1972, has 31 employees and annual sales of approximately $287 million. D&B describes the company as a small business and a designer and manufacturer of special purpose electronic equipment for military applications. According to FPDC data, Signal and Systems provided $115,000 worth of FSC code 2920 related products to the military in FY 1997, which represented four percent of the company's total sales. FPI should not have an adverse impact on this company.

Tallie Corporation, Columbus, Ohio, was started in 1974, has 15 employees and annual sales of approximately $3 million. D&B describes the company as a wholesaler of material handling equipment and a jobber of burlap bags. Tallie provided $68,000 worth of FSC code 2920 related products to the military in FY 1997, which represented less than one percent of the company's total sales. FPI should not have an adverse impact on this company.

Unison Industries, Ltd., Jacksonville, Florida, was started in 1989, has 1,150 employees and annual sales of approximately $150 million. D&B describes the company as a manufacturer of ignition and other electrical components for aircraft and industrial users. FY 1997 sales of FSC code 2920 related products represented less than one percent of the company's total sales. FPI should not have an adverse impact on this company.

Viking, Inc., Marrero, Louisiana, was started in 1984, has 3 employees and annual sales of approximately $ 1.1 million. It is a small business. D&B describes the company as a wholesaler of diesel engine parts and related equipment. Viking provided $45,000 worth of FSC code 2920 related products to the military in FY 1997, which represented 4.2 percent of the company's total sales. FPI should not have an adverse impact on this company.

Wellman Thermal Systems Corporation, Shelbyville, Indiana, was started in 1988, has 250 employees and annual sales of approximately $26 million. D&B describes the company as a holding company operating through four subsidiary companies which manufacture, design and distribute industrial heating equipment and filtration equipment. It also manufactures diesel starting devices. Wellman was a significant source to the military of FSC code 2920 related products in FY 1997, providing $2.1 million worth, or 8.6 percent of the company's total sales. FRI is not proposing to be involved in Wellman Thermal System Corporation's primary line of business, and therefore is unlikely to have an adverse impact on this company.

Wheeler Brothers, Inc., Somerset, Pennsylvania, was started in 1960, has 90 employees and annual sales of approximately $45.6 million. D&B describes the company as a wholesaler of automotive supplies and parts. FY 1997 sales of FSC code 2920 related products represented less than one percent of the company's total sales. FPI should not have an adverse impact on this company.

FEDERAL PRISON INDUSTRIES

Public Involvement Procedures

The following steps will be followed whenever FPI proposes to produce a new product or to significantly expand production of an existing product. These procedures are substantially identical to the original procdures which were adopted following consultation with private industry and labor, shortly after the passage of the industry involvement guidelines. The principal changes are to provide for early accumulation of data and removal of strict page limitations, so as to make it easier to file comments with the Board.

1. Parties who are known to have an interest in a proposal by FPI to produce a new specific product or significantly expand in the production of an existing product will be contacted prior to the drafting of any market impact study to obtain relevant information for purposes of developing a comprehensive and fair study. Such information may include, but is not limited to, how a specific product is defined, size of the market, future market trends, and dependence of industry providers on the federal market.

2. All proposals to produce a new product or to significantly expand the production of an existing product shall be announced in the Commerce Business 3 Daily (CBD), and a copy of the announcement shall be mailed to known interested parties.

3. The announcement will state that interested parties may obtain a copy of the study which analyzes the impact, if any, on the private sector resulting from the proposed production initiatives by writing to the Manager, Planning Research and Activation, Federal Prison Industries 320 First Street, N.W. Washington, D.C. 20534. The: announcement will further state that comments on the study should be submitted in writing to the Chief Operating Officer. It will further state that comments are due no later than 45 days from the date of the annoucement and that the comments should address the issue of what percentage, if any, of the government market for the specific product constitutes a reasonable share of the market. All comments related to definition of the product, determination of the size of the market, impact on the private sector, and study methodology should be submitted a: this time, to allow time for adequate consideration of these comments prior to FPI's dissemination of its final study and recommendations. Failure to provide this information in a timely manner may result in the information not being considered or being given less weight by the Board.

4. Comments including all attachments should be kept as concise as possible.

5. FPI will contact known trade associations representing manufacturers of the relevant product, provide them with a copy of the announcement and the market analysis, and request their written and oral comments in an attempt to arrive at a mutually agreeable percentage figure as to what constitutes a reasonable share of the market. FPI will also provide a copy to the appropriate labor representatives.

6. A recommendation will be prepared by FPI to be provided to the Board of Directors on what constitutes a reasonable market share for the specific product in question. The recommendation will address all comments which are timely and relevant.

7. A copy of the written comments submitted in response to the announcement, FPI's responses to the comments, and FPI's final recommendation to the Board of Directors shall also be provided to comments who filed a timely submission. The material will be provided to the commenters no less than forty-five (45) days before the date of the Board meeting at which the proposal for production of the specific product at issue will be considered. In addition, all commenters will be advised, in an appropriate manner, of the date, time, and location of the Board meeting at which the proposal will be discussed, and advised of the opportunity to address the Board in person.

8. A final submission, whose sole purpose is to comment on FPI's recommended production levels, may be provided by commenters to the Board for its consideration. The final submission, including any attachments, should be as brief as possible. Comments related to the study methodology, i.e., how the specific product is defined, determination of the size of the market, and impact of FPI on the private sector, should be submitted within the 45 day review period after announcement ofthe study in the CBD (see Step #3), and not at this stage of the process, in order to be given due consideration by the Board. This final submission should be sent to the Ombudsman of FPI for transmittal to the Board. If a commenter wishes to appear at the Board meeting to make a statement that request should be made in connection with the final submittal, together with the names of the individuals desiring to appear before the Board.

9. All final submittals, together with any request to appear before the Board, must be received by the Ombudsman at least fifteen (15) days in advance of the Board meeting.

10. The following rules will apply at the in-person presentation: (a) A maximum of 30 minutes will be allotted to each commenter for presentation to the Board, unless the Board extends the time; (b) The presentation to the Board is open to the public. However, the hearing may be closed, or other safeguards taken, where the Board determines that proprietary informationmust be safeguarded, or for other good and sufficient reason. (c) The record before the Board at the time of the presentation is limited to the market study, comments and materials submitted in response to the market study, FPI's recommendations, and materials submitted by commenters in response to FPI's recommendations. No new documentation or arguments from commenters should be presented at the presentation that have not been submitted in compliance with these rules,' unless permitted by the Board. The Board reserves, the right to exclude from consideration or give less weight to information which should have been submitted at Step #3.

(d) The Chairman of the Board will preside at the hearing and impose such further rules as are reasonable to assure a full and orderly presentation, covering such matters as who may address the Board, the order in which presentations are made, what documents will constitute the record, what issues are relevant, and any questions concerning how much time is to be allotted to each presentation. The Federal Rules of Civil Procedure and formal rules of evidence will not be followed.

(e) The Board members may direct questions to a commenter to elicit further information, and may request that additional material be provided for the record.

11. The Board will determine whether a proposed new product may be produced or whether a proposed expansion of an existing product should be approved, and what the reasonable market share is with regard to the specific product in question. In determining the reasonable market share for a specific product, the Board will balance the interests of the corporation with the interests of the affected private sector, employing the criteria spelled out in the relevant statutes, legislative history, and corporate regulations.

12. The decision, of the Board will be made by majority vote. In the case of a tie, the position of the group which includes the Chairman will prevail.

13. The decision, together with the reasons for the decision, will be published in the CBD within 10 days of the date of the Board's decision.

14. Modification of these rules will be granted by the Board only in compelling circumstances Requests should be addressed to Chairman, Board of Directors, Federal Prison Industries, Inc., 320 First Street, N.W., Washington, D.C. 20534