KONE Inc. - April 09, 2012
Mr. Stephen J. Cox
Director, Sourcing - Americas
One KONE Court
Moline, IL 61265
Subject: Letter of lnterpretation-KONE Inc.'s Escalator Manufacturing Process
Dear Mr. Cox:
I write in response to your request for a letter of interpretation. You have described the process KONE Inc. (KONE) intends to use to produce escalators for projects to be funded by the Federal Transit Administration (FTA), and asked whether the process includes sufficient activities in the United States (U.S.) to comply with the Buy America requirements of 49 U.S.C. § 5323(j), as implemented at 49 C.F.R. Part 661, that apply to FTA-funded projects. After careful consideration, FTA has determined that the U.S. activities described by KONE are insufficient to meet this requirement. As such, escalators produced in the manner proposed by KONE would not be eligible to be purchased with FTA funds.
Since FTA updated its Buy America rules in 2007, this is the second letter of interpretation regarding a KONE product. On December 7, 2010, FTA issued a letter of interpretation to San Francisco Municipal Railway (S.F. Muni) determining that the manufacturing process for KONE's EcoMod escalator complied with FTA's Buy America regulations for a manufactured product. In that letter, FTA determined that KONE's activities satisfied the requirement that all manufacturing processes take place in the U.S. because KONE performed the manufacturing of its escalator at its plant in Coal Valley, Illinois.
In this instance, you requested a similar determination that KONE's escalator manufacturing processes comply with FTA's Buy America rules, but with substantial differences in the manufacturing processes from those described in the previous 2010 request. Now, you state that KONE manufactures a large number of the escalator subcomponents in its facilities in Kunshan, China. You describe KONE' s escalators to be comprised of the following subcomponents: the handrail, skirting, steps/pallets, decking, balustrade, drive station, controller, comb plate, truss, step chain, tracks, access cover plate, newel, and safety devices (speed sensors, emergency stop switches, comb segment lighting devices, and associated wiring harness). According to the following excerpt from your letter, KONE will manufacture and test most of these escalator subcomponents at its facility in China:
These processes include the cutting and welding of steel to manufacture the truss, and the manufacture of the front plates, newels, newel ends, access frames and covers, handrails, balustrade panels, tracks, steps, chains and drive.
You also state that KONE "performs initial testing and quality control of subassemblies" at its foreign facilities. More specifically, you provide that:
... KONE performs preliminary testing of the subcomponents, which requires some integration of the subcomponents into a subassembly. Specifically, the steps and chains are assembled onto the truss, and the drive subcomponent is integrated, in order to test whether the truss, drive, tracks, chains, and steps are all properly aligned, and whether these major subcomponents will operate correctly when the escalator is manufactured at the construction site. Such subassemblies can themselves be considered higher-tier subcomponents.
Once the alignment and testing is complete, and KONE is satisfied with the quality and functionality of the subcomponents, the subassembly (the built-up truss with the steps, chains and drives) is broken down into two or more sections for shipment. Other subcomponents, such as the balustrade illl1er panels, handrail guide supports, decking, skirts, newels and front plates, are all packaged separately and shipped to the installation site . ...
The only production activities to be performed by KONE in the U.S. would take place directly at the job site. You state that the following would occur at the U.S. job site: assembly of the truss and the intermediate and end supports to the truss; integration of the balustrade subcomponents, which includes building up the skirts, decking and inner panels, installing, connecting, and adjusting the handrails, and connecting and testing the electrical devices, including the sensor switches; the positioning and installing of the drive base and attaching it to the drive chain (if there is an external drive and control); the connecting of the drive chain, installing and testing the controller, electrical conduit and drive chain tension device; and the connecting and testing of the remote monitoring system.
You further provide that at the U.S . job site "KONE performs extensive calibration and testing to ensure proper functionality" by "adjust[ing] and align[ing] the escalator steps and calibrat[ing] the moving parts; and "test[ing] certain electrical and mechanical elements, including but not limited to the drive chain detector switch, the vibration monitor, the automatic oiler, the key start switch, the emergency stop button, the step chain tension, the track guidance system, and service brake."
With certain limited exceptions, FTA may not obligate funds for a project unless the manufactured products used in the project are produced in the United States.[FN1] To be considered produced in the United States:
(1) All of the manufacturing processes for the product must take place in the United States; and
(2) All of the components of the product must be of U.S. origin. A component is considered of U.S . origin if it is manufactured in the United States, regardless of the origin of its subcomponents. [FN2]
In two separate letters of interpretation dated December 7, 2010, FTA determined that escalators are components of a manufactured end product facility, such as a bus or train station.[FN3] A "component" is defined as "any article, material, or supply, whether manufactured or unmanufactured, that is directly incorporated into the end product at the final assembly location."[FN4] An escalator, which is incorporated into a station and becomes functional only upon such incorporation, is therefore a component and all of its manufacturing processes must take place in the United States.
To satisfy Buy America, a component must be produced as a result of a manufacturing process that occurs in the United States.
FTA defines "manufacturing process" to mean:
The application of processes to alter the form or function of materials or of elements of the product in a manner adding value and transforming those materials or elements so that they represent a new end product functionally different from that which would result from mere assembly of the elements or materials.[FN5]
Alteration may include "forming, extruding, material removal, welding, soldering, etching, plating, material deposition, pressing, permanent adhesive joining, shot blasting, brushing, grinding, lapping, finishing, vacuum impregnating, and, in electrical and electronic pneumatic, or mechanical products, the collection, interconnection, and testing of various elements."[FN6]
It is important to note that while the regulation permits subcomponents to be produced outside the United States, this does not except an end product or its components from the requirement that all manufacturing processes occur in the United States. If no manufacturing processes occur at the component level, then those processes must occur in the U.S. at the subcomponent level.[FN7] Mere assembly is insufficient to satisfy the manufactured product requirements of 49 C.F.R. 661.5.
As stated above, an escalator is a component for Buy America purposes. Therefore, all manufacturing processes of the escalator must take place within the U.S. The manufacturing process proposed by KONE includes activities in China and the U.S. Thus, FTA's determination of whether KONE's escalator manufacturing processes comply with the requirement that all manufacturing processes of the component take place within the U.S. turns on whether KONE's activities in China constitute manufacturing of the component escalator and not merely the subcomponents of the escalator.
Based on the information you provided, I find that not all of the manufacturing processes of the escalator proposed by KONE would take place in the U.S. Instead, it appears as though KONE proposes to manufacture and disassemble each escalator in China, and then to reassemble it in the U.S. FTA rules at 49 C.F.R. § 661.5 require that all manufacturing of the escalator- as a component- take place in the U.S. In your description of the proposed escalator manufacturing process, "KONE performs preliminary testing of the subcomponents, which requires some integration of the subcomponent." You further state that "the steps and chains are assembled onto the truss, and the drive subcomponent is integrated, in order to test whether the truss, drive, tracks, chains, and steps are all properly aligned and whether these major subcomponents will operate correctly .... " Thus, a significant part of the installation, integration, and interconnection. of the subcomponents is done in China. FTA considers these activities to be part of the manufacturing of the component. As such, KONE may not maintain that all manufacturing processes of the component take place in the United States. This determination is distinguishable from the December 7, 2010, Letter of Interpretation to San Francisco Municipal Railway, in which FTA concluded that KONE's escalator manufacturing process as previously described was compliant with the Buy America requirements because "[a]t KONE's Coal Valley plant [in Illinois], all of the parts are installed, integrated, and interconnected to create the three modules of the escalator."
Moreover, you state that only after "the alignment and testing is complete, and KONE is satisfied with the quality and functionality of the subcomponents," the parts are "broken down into two or more sections for shipment . .. "to be shipped directly to the installation site, i.e., the final assembly location. The described activities that would take place at the final assembly location within the U.S. mostly are mere reassembly and do not constitute sufficient manufacturing as required by FTA Buy America regulations.
While the calibration and testing of the escalator occurring at the U.S. final assembly location may constitute part of the manufacturing process, these activities, by themselves, are insufficient to meet the Buy America requirement for manufactured products. Even with the specialized technical skills and knowledge required to perform the on-site assembly and testing, the "approximately 1,100 to 4,300 man hours, and the adjustment and calibration requir[ing] an additional 80-200 hours," these activities are performed as a check to ensure the reassembled escalator works properly. There are no new functions of the escalator derived from these actions.
Finally, while KONE distinguishes between different levels of subcomponents (i.e., higher-tier), FTA does not for purposes of Buy America, and these subcomponents, as described by KONE, would be thoroughly altered during the processes taking place in China and transformed into the component, which constitutes manufacturing of the component. As stated above, all of the manufacturing processes of the component escalator must take place in the United States.
Based upon the foregoing, the escalator manufacturing process proposed by KONE would not comply with FTA's Buy America requirements. Therefore, escalators manufactured according to the aforedescribed processes may not be used for FT A funded projects.
Please contact Mary J. Lee at (202) 366-0985 or firstname.lastname@example.org with any questions.
Dorval R. Carter, Jr.
FN1. 49 U.S.C. § 5323U); 49 C.F.R. § 66l.5(a).
FN2. 49 C.F.R. § 661.5(d).
FN3. Letter from Dorval R. Carter, Jr., Chief Counsel, Federal Transit Administration to Robin M. Reitzes, Deputy City Attorney, San Francisco Municipal Railway (Dec. 7, 2010); Letter from Dorval R. Carter, Jr., Chief Counsel, Federal Transit Administration to Daniel E. Walz, Esq., of Patton Boggs LLP, Counsel to Yonkers Contracting (Dec.7, 20 10).
FN5. 49 C.F.R. § 661. 3.
FN6. 56 Fed. Reg. 926, 929 (Jan. 9, 1991 ).
FN7. See Letter from Dorval R. Carter, Jr. , Chief Counsel, Federal Transit Administration, to Timothy J. Rudolph, General Counsel, Midwest Bus Corporation (Aug. 11, 2010).