The frontier of U.S. firearms and ammunition manufacturing lies abroad. Some manufacturers don’t want to take operations outside the United States due to concerns about quality control, logistics and other supply chain considerations. But other manufacturers have been able to use off-shore production to reduce costs, build or expand their customer base and improve after-sale customer support.
Manufacturing ITAR-regulated products outside the U.S. always involves the export of ITAR-regulated technical data and often defense services as well, so a prerequisite to having your products made or serviced outside the U.S. is obtaining the correct license from the State Department’s Directorate of Defense Trade Controls (DDTC).
Here’s an overview of the three primary types of licenses that are available and how they can be used.
If a manufacturer locates a vendor abroad that can make quality parts to print and deliver them on time, one of the first steps is to get a quote from the vendor. To issue the quote, the vendor will need the “drawings” for the parts, usually 3D engineering files, but that information is ITAR-controlled technical data. It can’t be given to the foreign vendor without a license. In a build-to-print situation, a DSP-5 permanent export license is used to obtain permission to export the technical data to the vendor and to authorize the vendor to make the parts at its facility for return to the United States. The requirements for build-to-print licenses are addressed in ITAR §124.13.
Obtaining a build-to-print license is not hard but there are some caveats. First, you can’t get a license to do business with a vendor in a prohibited country, such as China. Next, as in any export covered by the ITAR, you have to conduct due diligence so you know who you’re dealing with. A denied party search is essential, of course, but that’s not enough when manufacturing firearm parts in a foreign country. You need to satisfy yourself that the foreign vendor and its employees will not divert the technical data or any of the product and that they will otherwise play by the ITAR rules in all respects. A third caveat is that a build-to-print license doesn’t permit you to interact with the foreign vendor regarding manufacturing processes or design changes. Last, if the product made by the vendor is going anywhere other than the U.S. (or a U.S. agency abroad), a DSP-5 license cannot be used.
If engineering or manufacturing interaction is going to occur, or if product made by the vendor will not return to the U.S., you need to use one of the agreements discussed below.
2. Technical Assistance Agreement (TAA)
A technical assistance agreement allows for collaboration between the U.S.-based manufacturer and its international partners. A TAA gives you not just permission to send technical data to the vendor, but also to collaborate with the vendor on design changes, improvements and other joint development activities. A properly prepared TAA also provides a context facilitating DDTC approval of licenses authorizing the export of samples, tools and other hardware to the foreign partner in support of the collaborative activity. In addition, in a TAA you can obtain permission for the foreign-manufactured product to be exported to identified parties or categories of parties in other countries.
There are companies in the industry that have used TAAs to engage in some pretty clever and profitable business with partners outside the U.S. and to expand their footprints beyond U.S. borders. TAAs are also being used in reverse – by foreign companies that are looking to sell made-to-spec product in the U.S.
3. Manufacturing License Agreement (MLA)
A manufacturing license agreement takes the authority of the technical assistance agreement one step further. An MLA lets you do everything a TAA does, but it also allows you to transfer your manufacturing know-how to your foreign partner. Use an MLA to create a manufacturing capability outside the United States that requires transferring your manufacturing know-how and processes to a partner, either a subsidiary or affiliate of your company or a third party.
In the firearms and ammunition industry, companies growing in the international arena are using MLAs to finish and assemble parts and complete guns and ammo outside the U.S. for sale in many other countries. Others are using MLAs to build market presence and capture business in foreign countries or regions. Multinational companies are using MLAs to erase most of the ITAR barriers to full-scale international collaborations on firearms and ammunition.
Yes, you need to know what you’re doing when you dip your toe into the international waters. But it’s not as hard as you think. More important, if there is opportunity beyond the U.S. borders – Newsflash: there is – some of your competitors are pursuing it today.
If this is new to you, or if you think you could be doing more or better to compete in the global firearms and ammunition market, talk to us.
Orchid Advisors assists firearms manufacturers, distributors and retailers in achieving compliance and operational excellence through education, technology, software and consulting solutions that reduce risk, cut costs, and provide expert guidance to make our client’s business more successful and efficient.