Rethinking Electronics Manufacturing for U.S. Federal Opportunities

The United States is making historic investments in domestic infrastructure, defense technology, and clean energy programs that create once-in-a-generation business opportunities for companies throughout the world. As a condition of participating in these programs, the Government is challenging companies to invest in the U.S. economy through the use of so-called “Buy America” requirements aimed at creating manufacturing operations and jobs in the United States. These requirements present unique compliance challenges, requiring that products be produced in the United States with a minimum percentage of U.S.-manufactured components. 

SOURCE: Setting the Benchmark Blog

Adding to these challenges is the fact that various key terms, such as “manufacture” and “component,” are defined in ways that sometimes depart from how the terms are used in commercial settings. These differences can lead companies to make mistakes when determining their compliance obligations and structuring their supply chains and manufacturing operations.

This blog post builds on Benchmark’s updated Unofficial Guide to U.S. Domestic Preference Laws for Electronics e-Book by discussing key definitions and concepts commonly used in U.S. domestic preference laws and highlighting examples of how those terms are used in practice.

Key Definitions/Concepts

Words Matter.

Although different U.S. federal agencies may utilize different defined terms, there are several basic terms that are essential to understanding U.S. domestic preference laws.  Generally, defining an end product as “domestic” is determined using a two-part test. First, an end product must be “manufactured” in the United States. Second, a specified percentage of all the product’s components must also be manufactured in the United States. This percentage is often determined by the cost of the U.S.-made components, and the exact percentages vary depending on the agency or procurement program. For example, under the Build America, Buy America Act (BABA)—the domestic sourcing component of the 2021 bipartisan infrastructure bill—an end product is a domestic end product if it is manufactured in the United States and the cost of its components manufactured in the United States is at least 55% percent the cost of all components. Separately, the Federal Transit Administration (FTA) also requires end products to be manufactured domestically but imposes a more stringent 100% cost of the components test. Whatever the specific test, however, a few basic principles emerge:

1.    End Product: Generally, an end product is the finished item or deliverable a company sells or provides to the Government for public use. Federal Acquisition Regulation (FAR) 25.003 defines an “end product” as “those articles, materials, and supplies to be acquired for public use” and the Buy America FTA regulation requires that the product must be “ready to provide its intended end function or use without any further manufacturing or assembly change(s).” For example, in a procurement or federally funded grant opportunity to support an electronic surveillance program, the end product could be one lot of advanced cameras or an entire surveillance system consisting of cameras, integrated connection equipment, and backend monitoring equipment.

2.    Manufactured/Manufacturing: There is no single, one-size fits all definition of the term “manufacturing” in so-called “Buy America” or “Buy American” (collectively referred to here as “BAA”) statutes or regulations. While some courts and administrative tribunals have held that basic activities like packaging, testing, or simple assembly do not meet the bar for “manufacturing”, the degree of transformation or complexity required to constitute “manufacturing” is still not fully defined. For example, in attempting to define “manufacture” in different contexts, some tribunals have looked to:

• Whether a product or its components have undergone material changes to their physical character
• The extent to which the production process consists of multiple, separate stages, and;
• Whether a product or its components are subject to sufficiently complex alteration, manipulation, or assembly.

These guideposts, while helpful, leave many questions unanswered and require a highly fact-specific inquiry to determine if a product or component has been “manufactured” in the United States.

3.    Component: Generally, a component is any article, material, or supply that goes directly into an end product. This definition, or variations thereof, is commonly used in different BAA statutes and implementing regulations. See, e.g., FAR 25.003 (defining the term as “an article, material, or supply incorporated directly into an end product or construction material.”). Importantly, because most component tests focus on whether or not an item is incorporated “directly into an end product,” companies can adjust their manufacturing processes to maximize the use of U.S.-made components (for example, by selectively onshoring the production of a product’s major assemblies). We discuss this point in greater detail below.

4.    Subcomponent: Some BAA laws and regulations classify a subcomponent as any part or item that is incorporated directly into a component, though most are silent on the definition of this term. See, e.g., the Federal Railroad Administration (FRA). FTA’s BAA definition of “subcomponent” for rolling stock (certain vehicles and their control and communication systems) is “any article, material, or supply, whether manufactured or unmanufactured, that is one step removed from a component in the manufacturing process and that is incorporated directly into a component.” This can be significant because if a particular legal regime focuses only on where components are manufactured, then companies generally are free to source subcomponents from foreign sources, provided those sources are not otherwise barred for some other reason (e.g., sanctions or other sourcing laws).

When and How Components Are Incorporated Matter

As noted above, a product is generally considered a domestic product if it is manufactured in the U.S. and a certain percentage of the product’s components are also produced in America (e.g., 55% U.S.-made components, by cost, under the Build America, Buy America Act). Because the second prong of this test focuses on components, and components are generally defined as items directly incorporated into an end product, companies can strategically structure their sourcing and manufacturing processes to maximize U.S.-domestic content now while transitioning additional overseas operations to the United States over time.

For example, a company can adjust its existing processes to ensure that:

(1):    A product’s major assemblies qualify as “components” by fully producing those assemblies as standalone items and then integrating them late in the manufacturing process, directly into the end product, and;

(2) Production and integration of those major assemblies take place in the United States so that they qualify as “domestic components”, even if they are largely comprised of foreign subassemblies or smaller parts (provided those lower-level items are not procured from sources prohibited by other laws).

Not All Operations Constitute “Manufacturing”

While different industries often categorize a wide variety of production or assembly activities as “manufacturing”, the Federal Government generally requires such activities to be sufficiently “complex” to rise to the level of manufacturing for BAA purposes. As discussed above, there is no single definition of “manufacturing” that applies in this area, though it is generally accepted that mere assembly of parts or simple production processes (e.g., piecing together equipment through simple connections) may not constitute “manufacturing” sufficient to create a domestic end product. Instead, components may need to undergo a more material transformation to be considered domestic. Some examples of a material transformation include changes to the physical character, use, and functionality of the components, or a multi-stage production or assembly of subcomponents that results in the creation of a “new” major assembly/component.

With these general concepts in mind, companies considering Federal opportunities subject to BAA requirements should always ask a few basic questions:

• How do I define my “end product”?
• Where is that end product manufactured?
• What are my end product’s components, and where are those components manufactured?
• Do I produce enough of those components in the United States, by cost, to meet the minimum domestic content threshold applicable to this Federal opportunity?
• If not, how can I adjust my sourcing and manufacturing processes to create a domestic end product that meets those requirements?
• Will those processes be sufficiently complex to qualify as domestic “manufacturing”?

The following examples show how these concepts can be put into practice with support from a U.S.-based contract manufacturer like Benchmark.

EV Charging: Component Manufacturing and Assembly

The Biden Administration has allocated approximately $7.5 billion in Federal funding for the creation of a national electric vehicle (EV) charging network. EV chargers are a prime example of how manufacturing processes can be adjusted to meet applicable domestic sourcing requirements. For example, PCBA assemblies are often thought of as subcomponents because they typically support other functions and assemblies and are frequently integrated into EV chargers toward the beginning or middle of the product’s manufacturing process. At the same time, many people assume that PCB assemblies cannot be produced economically in the United States, but that is not correct. PCB assemblies can be produced economically in the United States and also qualify as a “domestic component” as long as the U.S.-manufacturing process is complex enough to qualify as domestic “manufacturing,” and the finished PCB assembly is integrated directly into the end product late in the manufacturing process.

Counter-Unmanned Aircraft Systems (Counter-UAS): Full System Build

Counter-UAS technologies are highly sought-after systems under various Federal programs, including security and defense agencies, the Federal Aviation Administration (FAA), and the Department of Homeland Security (DHS). These programs are frequently subject to restrictive sourcing requirements such as the Trade Agreements Act (TAA), which creates an exception to the Buy American Act in certain Federal procurements. The TAA also authorizes U.S. agencies to acquire products from designated foreign countries with which the United States maintains a free trade agreement, including Mexico, Canada, and Members of the European Union. Benchmark has significant manufacturing capabilities in several of these approved foreign locations and can help UAS technology providers ensure that their systems meet the TAA’s manufacturing or “substantial transformation” requirements. Benchmark can also produce key components of these systems in the United States or in TAA-designated countries, including custom radio frequency (RF) filters and components.

Electrical Grid Infrastructure: Component or Subcomponent Manufacturing and Delivery

Ensuring the reliability and safety of electrical grid infrastructure is essential to the United States’ national security. For this reason, many federally funded programs require that key infrastructure products meet BAA requirements. This is yet another area where a strategic sourcing and manufacturing approach can make all the difference. For example, even if a full system for a generator build cannot be accomplished in the United States, the integrator of that product can still rely on Benchmark’s U.S. manufacturing capabilities to domestically produce components, such as PCBAs and power modules, to contribute to the product’s percentage of domestic components. Similarly, Benchmark can provide U.S. manufacturing of a system’s structural components, such as electromechanical assemblies, all in a secured domestic facility utilizing U.S. labor.

No matter what type of electronic system a company is marketing to the Federal Government or Federal grantees, meeting BAA requirements can be the key to success. By re-thinking sourcing strategies with these definitions in mind, and with the help of a flexible manufacturing partner like Benchmark, companies can achieve long-term Federal marketing wins with efficient, cost-effective U.S. manufacturing.