The workshop’s second session featured four speakers who discussed examples of how different companies deal with their chemical manufacturing equipment in the context of a changing industry and the restrictions of what can be done with it after its initial owner has no further use for it. Charles Mooney, Director of Global Trade Compliance at Xylem, spoke about his experience in exporting chemical equipment export. Ye Shao, Manager of International Relations for the Morimatsu Group, discussed China’s perspective on international trade of chemical manufacturing equipment. Ana Prieto, an independent consultant on global environmental, health, and safety functions, gave her perspective on how chemical manufacturing equipment is managed in the field and how that relates to an important limitation of current controls. J. Craig Desrosiers, Senior Buyer at E.I. du Pont Canada, described some of the different types of equipment used in chemical manufacturing. A discussion moderated by Clara Zahradnik, Export Control Leader for DuPont Chemicals & Fluoroproducts and a member of the workshop organizing committee, followed the presentations.
- There is tremendous variation in the way individual countries implement the many international provisions dealing with chemical processing equipment. (Mooney)
- A combination of durable materials (Desrosiers) and the ingenuity of chemists and chemical engineers mean that chemical manufacturing equipment rarely dies, but rather is reconditioned or repurposed for other uses. This is particularly true for equipment used in the biotechnology and fermentation industries, where process conditions are generally mild and non-abrasive, and for equipment that has no moving parts. (Mooney)
- There is a low barrier to entry into the chemical equipment manufacturing industry, with China being one example, where there are now some 3,000 companies capable of building chemical production equipment. The only barriers to entry are access to capital and labor. (Shao) When coupled with the lack of regulations in many developing countries governing the sale and disposal of equipment within national borders, this expansion of equipment manufacturers increases the opportunities for the diversion of chemical manufacturing equipment. (Prieto)
- As the market for chemicals grows in the developing world, so too will the number of small- to mid-sized chemical equipment manufacturing companies. These companies will need to have a certain level of technical sophistication to make equipment for the U.S. and European export markets. (Shao)
- Three trends—industry consolidation, globalization, and an increasing focus on core competencies and the accompanying shift to contract manufacturing in the closely related pharmaceutical industry means that there is surplus chemical manufacturing equipment available and a developing global market seeking to purchase this equipment. (Prieto)
- The advent of online commercial marketplaces, such as eBay and others, increases the chances that surplus equipment will move across borders and become challenging to track. (Prieto)
- The increase in mergers and acquisitions in the pharmaceutical industry can create gaps in inventory control and tracking of surplus equipment. (Prieto)
- Today’s export controls are linked to an expectation of practice that does not necessarily align with rapid changes that are taking place in the industrial landscape. As a result, export regulations were crafted
during a time when the concern was over nations using equipment for nefarious purposes may not be up to the task of controlling proliferation of chemical weapons capabilities in today’s world in which groups rather than counties are the main threat. (Prieto)
- Current regulatory schemes take a backward-looking approach to technology. Regulators could instead look ahead and try to devise approaches to respond to emerging technology. (Prieto)
- In addition to an expansion in the number of companies globally that can produce chemical manufacturing equipment, there has been a concomitant growth in the number of firms that can produce the corrosion-resistant materials that are required to build long-lasting equipment. (Desrosiers)
- The time required for regulators to respond to requests for licenses and the need for speed and flexibility in industry can lead to tension as manufacturers endeavor to comply with global export and nonproliferation regulations. However, strong corporate culture among established chemical companies makes it possible to maintain profitability alongside compliance with regulatory requirements and “doing the right thing.” (Desrosiers, Mooney, Shao)
There are four pillars to export controls, said Charles Mooney. The first pillar concerns products and it requires knowing what the product is, what it will be used for, and what it is capable of being used for beyond its intended application. The second pillar deals with the end use of an item, that is, how the equipment is going to be used. “As chemical producers and manufacturers of equipment, one of our concerns is that our equipment is always used the way it is intended to be used or designed,” said Mooney. For example, his company makes heat exchangers that are subject to controls of the International Traffic in Arms Regulations (ITAR) because of their intended use. Others are subject to controls of the Export Administration Regulations (EAR) because the materials used to make the equipment, which are specialized and enable its use in harsh chemical environments, are controlled.
The third and fourth pillars refer to the destination for the item and the end user at that destination. “The country is a concern, but this is more about who is using it in the country since countries don’t use equipment or chemicals—end users do,” explained Mooney. In the end, these four pillars all come down to a matter of trust, capability, and capacity, he said. “If your exporter does not have a program that is grounded in these elements…chances are there is going to be no control and there is going to be an issue,” Mooney stated.
Regarding international standards, Mooney said that the provisions for dealing with most chemical processing equipment, particularly dual-use items, are found in the CWC, the Australia Group’s Common Control Lists, the Missile Technology Control Regime, and to a lesser extent in the Wassenaar Agreement and guidelines of the Nuclear Suppliers Group. In particular, there is tremendous variation in the way individual countries implement these standards. Each country has its own control lists, even though they originate from the same multinational agreements. Japan’s list, for example, fills a thin book, while the U.S. Department of Commerce’s list takes up a very thick book, according to Mooney. Countries also differ in how they interpret these agreements and how often they update their control lists. For example, when his former company wanted to move mixers to new plant in China, it used a Japanese company to source the equipment because Japan, unlike the United States, did not require any licensing to move the mixers to China, enabling the mixers to be moved in 10 months. He noted that during a subsequent move of the same size and type of mixers from the U.S. to China, simply acquiring the licenses from the U.S. Bureau of Industry and Security took approximately the same amount of time to obtain. “That doesn’t make it right, that doesn’t make it wrong,” said Mooney. “It is a business reality, though.”
Often, said Mooney, there are more than one set of controls for the same transaction, and this can create difficulties, particularly when working in more than once country. “To comply with global standards, the exporter must consider the regulations of the local exporting company, and any extra-territorial controls,” he said. In Europe, for example, Germany and the United Kingdom have very rigorous export-control regimes, but other countries, such as Italy and Spain, have, as Mooney put it, “a different perception of what the regulations mean.”
Mooney said that it is important to plan for the time that it takes to get all of the necessary licenses when planning to export equipment covered by any of the multinational agreements. In some cases, licenses can take just a few days or weeks to procure, but in other cases it can take many months of back and forth with regulators. One problem he sees with all of the regulations is that they largely depend on self-policing and honesty. While the United States may issue an export license with various provisos and logging requirements, keeping track of what happens to equipment after it has moved or been sold to others can be difficult at best. His advice to those individuals responsible for export controls is to err on the side of caution when seeking authorization to export equipment or materials that could have dual-use applications.
Turning to the subject of chemical equipment lifetime, Mooney quipped that chemical manufacturing equipment never dies, but rather it comes back to life in some other form with some other use because of the significant initial
investment that is made in these items. Multiple factors determine the lifetime of a piece of equipment, he explained, including the materials from which it is made, what it can be used to make, and if it was designed to be maintained over many years. He noted that he has seen mixers in use that were at least 50 years old, and added that much of this type of equipment, including reactors, have no moving parts to wear out. This is particularly true of equipment used in the biotechnology or fermentation industries, where process conditions are generally mild and certainly not caustic or abrasive. Mooney also credited the chemical industry overall for its skill in creating new uses for old equipment.
From his perspective as a manufacturing representative for a company in China that builds chemical production equipment, Ye Shao said this business is not very sophisticated and that it is easy to establish a new company to compete in this market—China alone has some 3,000 companies capable of building chemical production equipment, and they are largely interchangeable in terms of their capabilities. Given that the competition is stiff, it should not be surprising that this is a difficult business to sustain. He noted that for his company, there are five major parts: raw materials, engineering, labor—the welders, inspectors, and engineers involved in building a piece of equipment—and infrastructure, which includes the large facilities at which equipment is put together. He also said that the equipment manufacturing business is become less rather than more integrated, with many companies now outsourcing engineering, inspection, and sometimes even assembly to outside shops in order to reduce costs and remain competitive.
The global market for mechanical fabrication equipment, said Shao, began in the United States and Europe in the 1950s and it largely remained in those two markets until the 1970s. The industry then moved to Japan and Singapore in the 1970s and remained there for the remainder of the last century. Today, Korea, China, and the Middle East are major players in this industry, and Shao predicted that the industry will move to other developing countries, particularly within Africa, in the years ahead as the need for energy and chemicals grows in those markets.
Though it does not take much beyond capital to establish a manufacturing company, there are a number of standards that anyone competing in this field must meet in order to sell the equipment they produce. The oldest standard is the American Society of Mechanical Engineers (ASME) Code, which was developed more than 100 years ago. Originally a national standard, the ASME Code has been adopted as a global standard followed by engineers worldwide. “ASME certificates are entry tickets for doing something in the global markets,” explained Shao. In May 2002, a new standard—the European Union’s Pressure Equipment Directive—was enacted and made it legally compulsory for all fabricator shops to follow this directive if they want to sell their products in the European markets. China recently enacted its own standard, known as GB 150, that is equivalent to the ASME Section VII, Division 1 standard that provides requirements applicable to the design, fabrication, inspection, testing, and certification of pressure vessels operating at either internal or external pressures. Shao said that newly industrialized companies have to be certified according to these standards to do business in the United States, Europe, and China.
One of the drivers for the development of standards is that standards make life simpler with regard to national regulations, said Shao, and both the World Trade Organization (WTO) and the International Organization for Standardization (ISO) are trying to develop standards to guide this industry, such as a standard for fabricating pressure vessels and boilers. He noted, though, that during his 10 years in the industry he has yet to see a WTO or ISO standard being compulsory for any specific project.
Before discussing China’s perspective on this industry, Shao spoke briefly about the economics of chemical equipment manufacturing. Using a $1 million stainless steel pressure vessel as his example, he explained that 60 percent of that $1 million goes to purchase the raw materials, about 35 percent is spent on labor costs, and the remaining 5 percent pays for engineering. One unusual feature of chemical manufacturing equipment is that labor costs rise with the size of the equipment, giving countries with low labor costs a competitive advantage when it comes to building large pieces of equipment. However, some contracts specify that the bidder must obtain written approval of the buyer to use any materials or labor not originating in the United States, Canada, Japan, the United Kingdom, France, Germany, Spain, and Italy. Shao noted that companies in developed countries are competitive because they have a better understanding and application of the regulations germane to them, they tend to be more efficient, and because they have an accumulated knowledge base that lends itself to better efficiency.
In China, the growth of ASME certified manufacturing companies has soared since 2003. In 2003, 115 out of a global total of 4,492 companies (2.5%) held ASME certificates. By 2013, that number had risen to 747 certificate holders out of 6,894 (10.8%) worldwide. Shao noted that there are no more than 300 certificate holders in the United States. He also said that while the perception is that China is a low-cost solution for manufacturing, this is increasingly not true. What has helped China expand its equipment manufacturing industry has been the rapid expansion of the market that has accompanied internationalization, China’s focus on large value-added projects that require sophistication but come with high rates of return, and recognition by global industries that China has the resources and skills to compete in this market. As global markets expand, he added,
there is an increasing demand for what he called “universal products” that meet the specifications spelled out in global, technology-driven regulations.
As an introduction to her talk, Ana Prieto explained that she would be speaking from her perspective as an environmental health and safety professional who spent much of her career in the pharmaceutical industry. She noted that in 2010, the world’s chemical industry realized an estimated turnover of roughly $3.12 trillion dollars, of which the United States accounted for approximately 21 percent. By segment, basic chemicals accounted for $250 billion of the U.S. chemical industry revenue, specialty chemicals totaled $126 billion, agricultural chemicals totaled $30.7 billion, and consumer products accounted for $71.5 billion of the total. Pharmaceuticals represented the largest category, totaling $186 billion.
In brief review of the pharmaceutical sector, Prieto explained that there are two major components to the process of making a finished drug product, whether it is a tablet, ointment, cream, or injectable. The first is the production of the active pharmaceutical agent itself and the second is formulation, which is when the active pharmaceutical agent is mixed with other ingredients to produce the finished product. The major difference between the pharmaceutical industry and other segments of the chemical industry is scale, she said, but the equipment used to make pharmaceuticals—reactors, centrifuges, distillation columns, and others—is similar if not the same as that used in chemical manufacturing. Most pharmaceuticals, for example, are made in batch processes. Another aspect of the pharmaceutical industry is that there are three subsectors: original or “branded” pharmaceuticals, the products of “big pharma;” generics, which are copies of drugs whose patents have expired; and over-the-counter agents that have been deemed safe for self-medication and for which no prescription is required.
What all of this has to do with the topic of this workshop, said Prieto, is that the pharmaceutical industry is experiencing some of the same trends as the overall chemical industry. The first trend is consolidation, which reflects the growth potential for emerging markets, the expiration of patents, and the development of desirable new technologies. These technologies may be more lucrative to own and control by purchasing the company that developed them rather than merely licensing it from the developer. The second trend is globalization driven by cost efficiency, market opportunities, and economic development, and the third trend—the one that Prieto said is most germane to the issue of chemical manufacturing equipment—is a focus on core processes. Companies, she said, are trying to focus on what they do best, whether that be research and development, marketing, or manufacturing, and are turning more to contract organizations and partnerships to reduce costs of drug production. When undergoing these shifts in business models, companies may decommission or sell their chemical manufacturing facilities.
The impact of these three trends, said Prieto, is that there is both surplus manufacturing equipment available and a developing global market looking to purchase this equipment. The advent of online marketplaces, such as eBay and others, makes it more likely that this surplus equipment will move across borders and become challenging to track. At the same time, the increase in mergers and acquisitions comes with the potential that the buyer of a company may not know what equipment it is purchasing as it may not be inventoried accurately. “There really are some potential gaps in the knowledge as to the equipment owned,” said Prieto.
As an example, she described the time she went to visit a site in Croatia for a first-time visit to a company her firm had purchased. While touring the rather large facility, she and her hosts came across a building filled with chemical manufacturing equipment that had been dismantled, put into storage, and forgotten. “There was no inventory control or tracking of what was in place,” said Prieto. She noted that the gaps in this particular purchased company’s organization capacity that allowed this equipment to go uncatalogued is not that uncommon, particularly in smaller companies. With limited resources and systems, these smaller firms are placing increased reliance on service providers such as equipment dealers, freight forwarders, and auctioneers, to manage their transactions. “If you are not careful how you choose that partner, you may unintentionally, with all the best ideas and thoughts, wind up not being able to track what you have and where,” said Prieto.
Another issue that she discussed briefly was that while there are a great many export regulations in place, there are few controls over the sale and disposition of equipment that does not cross national borders. “Other than hazardous waste regulations that tell me what I can and cannot do if a material is a hazardous waste, I don’t believe in my experience that there have been any regulations around in-country movement of equipment,” said Prieto. She added that this is also true in some of the less developed nations that are building their own equipment manufacturing infrastructure for internal use.
In closing, Prieto said that from her perspective, “manufacturing equipment is used in a broad variety of sectors and is easily available through a variety of ways. In reality, there are no or few mechanisms in place to identify and manage that equipment in an in-country transaction.” She added that the focus on core capabilities and economic drivers has increased the number of companies with access to chemical manufacturing equipment. “The complexity and the number of players who are now in this field and may not have the necessary knowledge are extensive,” said Prieto. She noted, too, that the export controls that are in place are linked to an expectation of practice that does not necessarily align with rapid changes that are taking place in the industrial landscape. As a result, she worries that while export regula-
tions were crafted during a time when the concern was over nations using equipment for nefarious purposes, the reality of today’s world is that groups rather than counties are the main threat.
In this session’s final presentation, J. Craig Desrosiers used DuPont’s equipment needs as a means of describing the specialized materials used to construct chemical manufacturing equipment and their respective applications and durability over time. He noted that DuPont’s seven major market segments uses a variety of items, such as heat exchangers, reactors, distillation columns, and pressure vessels, and that these items can be constructed using many different materials that include glass linings, fluoropolymer linings, hi-nickel alloys, and exotic metallurgies such as titanium and tantalum.
Glass-lined equipment is valued for its corrosion resistance to all but a few chemical environments; its inert nature that does not contaminate products and protects their color and purity; its smoothness that minimizes friction and reduces demands on agitation equipment, and its superior performance under vacuum arise from the tight bond that forms between glass and steel. French company De Dietrich began making glass-lined equipment in 1870, and U.S. company Pfaudler launched its first glass-lined product in 1884. The two companies together still dominate the market and now have factories around the world. China, he said, now has as many as 30 factories making glass-lined equipment, though only a few can meet global quality requirements, and there are some smaller companies that specialize in re-glassing used equipment. In the United States, surplus equipment brokers are major supplies of glass-lined equipment.
Typically, he explained, glass-lined equipment has a lifetime of longer than 20 years, but mechanical damage from maintenance or operations can lead to expensive repairs or re-glassing in 2 to 5 years. Accessories, such as agitators, baffles, and other internal components, are replaced frequently—usually after 2 to 5 years. A National Board Number in the United States and a CE Number in Europe is associated with each piece of equipment on an attached nameplate and can be used for tracking purposes.
Fluoropolymer-lined equipment such as distillation columns, reactor vessels, scrubbers, tanks, and piping, is used in highly corrosive environments. There are several major players in this market sector and the market for fluoropolymer-lined equipment has grown substantially over the past 20 years. Because of the need for the highest level of quality and inspection, the supply chain for fluoropolymer-lined equipment often still starts in the United States. Desrosiers noted that the life cycle of this equipment has improved significantly over the past 20 years and tracking of this equipment can be handled easily using its National Board Number.
Equipment made with hi-nickel alloys and other exotic metals are used for their outstanding corrosion resistance under highly acidic, highly chlorinated, and high-temperature conditions. Many of the materials used in this type of equipment are related to austenitic stainless steel but are more highly alloyed with nickel, chromium, and molybdenum to increase corrosion resistance. Long life cycles are associated with equipment made with these materials. Unlike with fluoropolymer-lined equipment, the supply chain for this type of equipment has expanded globally over the past 20 years. Today, companies in China, Japan, Korea, Taiwan, and India are significant players in this market, Desrosiers said in closing.
Elizabeth Scott Sangine of the U.S. Department of Commerce began the discussion by asking the presenters if they had any perspective on how the business models of their respective companies viewed proliferation risks. Desrosiers replied that DuPont is concerned about where its technologies will go in certain countries, particularly those in which the government makes no secret of the fact that it will take whatever technology it wants regardless of contracts and regulations. “I am extremely concerned about how we manage that risk,” said Desrosiers. He did comment that while export controls are absolutely necessary, they sometimes are cumbersome and very costly to follow. Clara Zahradnik, the session moderator, added that a key consideration is to have trust in one’s trading partners, and given that many of the chemical weapons that are appealing to terrorist groups can be “made in washtubs,” it is equally as important to control chemicals as well as equipment.
Detlef Maennig asked if there was a tracking technology in place for dual-use equipment and was reminded by Zahradnik of the National Board number or CE number that is affixed to each piece of equipment. Zahradnik did note, though, that often an export license is applied for and granted before a piece of equipment is produced and given an identifier number. Prieto wondered if it would be feasible to go back and assign tracking numbers to legacy equipment. This prompted Nancy Jackson, of the U.S. Department of State, to ask the panelists if they had any ideas on who would set up an international tracking system. Prieto replied that it may be possible to add provisions to existing regulations and treaties, but that she didn’t see a direct pathway. “I think the challenge will be keeping it somewhat simple,” said Prieto, especially given the multitude of regulations that exist outside of the United States and Europe.
Kathryn Hughes of the NRC asked if there was an intersection among international regulations, export controls, voluntary standards, and corporate culture where it would be possible to create a system of protection that goes beyond compliance. Mooney said that one of the biggest drivers of
protection is corporate culture and most of the companies in the chemical industry have strong corporate cultures that have found ways to balance regulatory requirements and doing the right thing with profitability. He added that this is not a U.S. initiative, but rather a worldwide initiative that is following in the footsteps of U.S. companies that are already doing the right thing.
Shao agreed that corporate culture is critical and added that from his perspective as a manufacturer, controlling technology is more important than controlling the actual equipment. Prieto suggested that trade associations and professional organizations might be able to play a role in developing voluntary programs and disseminating the knowledge needed to understand and follow controls and regulations. Zahradnik said that large companies, which have the necessary corporate cultures, can be ambassadors for following standards and adhering to best practices in their dealings with smaller companies and vendors. Usha Wright, of O’Brien & Gere and a member of the workshop organizing committee, asked if the transportation industry could play a role in terms of compliance and tracking, and Desrosiers thought it could act as a cross-checker but not as a primary enforcer.
Astrid Lewis from the U.S. Department of State asked Shao if China had an equivalent to the National Institute of Standards and Technology that develops the standards for various regulatory codes. Shao replied that China does have such an organization that does help set national standards and codes. He added that China largely models its standards after those of the United States, Europe, and Japan, and most often uses the ASME standards even when exporting to Europe. “If you want to do global sourcing, it is mandatory to have an understanding of the ASME standards,” said Shao.
Hughes asked what was being missed given the rate of change globally. Desrosiers replied that there is a significant skill gap between the European Union, North America, and the rest of the world. “While I know the gap is trying to be closed, one of the things that I find when I procure equipment outside of those regions, I have to spend significantly more in inspection to make sure the quality of the work is there, the quality of the material is there. While I think these countries are coming along nicely, there is still a significant gap between the experienced countries and the emerging countries,” said Desrosiers. Prieto thought that regulatory schemes are somewhat backward-focused given the rate of change. “We should be looking to what it is going to look like in another 10 years and try to devise regulations for that,” she said. Mooney said that the regulatory system needs to be more responsive in terms of time to approval. “We’ve got to find the right velocity,” he said.
Mooney made two additional observations. One was that while the world of new equipment is well controlled, the Internet is changing the landscape with regard to used equipment. The second observation was that none of this is taught in schools and perhaps that needs to change, too. Richard Cupitt of the U.S. Department of State said that there are efforts ongoing to teach “responsible science” at the university level and that various educational organizations, both in the United States and Europe, are developing courses in that area.