The Buy American List and New Buy American Rules for RUS Borrowers are creating a Multi-Billion Dollar Sales Opportunity.
Broadband network investments by rural Telco’s and other service providers which are funded by the USDA’s Rural Utilities Service (RUS) represent a multi-billion dollar market for telecom equipment manufacturers. But the RUS has recently changed the rules on how manufacturers do business with the borrowers. Broadband equipment manufacturers, distributors and other suppliers must understand how the new rules will affect their strategies, business plans and revenues and make the adjustments necessary to meet new challenges and take advantage of new opportunities.
Rural Service Providers are Leaders in Technology Deployment.
The U.S. telecommunications equipment market can be segmented into three tiers.
Tier 1, after a series of mergers and acquisitions, consists of two giant companies: AT&T and Verizon, including their landline, wireless and long-distance operations.
Tier 2 is composed of large regional Telco’s such as CenturyLink, including recently-acquired Qwest, as well as Frontier, Windstream, Fairpoint and TDS.
Tier 3 is contains about 800 small, mostly rural, Telco’s averaging about 4,000 access lines. Although Tier 3 Telco’s represent less than 5% of the access lines, they have about 25% of the exchanges, and they cover about 37% of the land area of the U.S.
Because they are small in size and operate in low-density rural areas that are difficult and costly to serve, Tier 3 Telco’s are heavily subsidized by various government programs. They, therefore, tend to be very progressive about deploying new technologies and products. Almost all (97%) of them have deployed broadband technologies in their access networks. About half of them offer TV services, and a substantial fraction of these are either deploying IPTV or have plans to do so. Virtually all of them are transforming their access and transport infrastructures to packet and fiber technologies in order to deliver voice, data and video in the form of high-speed streams of IP packets. And, many of them are deploying some mix of wireless technologies to complement and expand their broadband reach and services.
Tier 3 Telco’s have always been much more open than larger Telco’s to new suppliers, technologies and products. So, the Tier 3 market segment represents significant opportunities for telecom equipment manufacturers, especially new ones seeking to get established in the U.S. market.
To realize these opportunities, a manufacturer needs to raise its profile among the Tier 3 carriers, establish the technical credibility of its products, and launch marketing programs to get its story told to both the Telco’s and, importantly, to the consulting engineers who design their networks.
Loans from the Rural Utilities Service Fund Rural Deployments.
The RUS (formerly REA) was established in the mid-1930s as an agency of the U.S. Department of Agriculture (USDA) responsible for fostering rural infrastructure developments for essential services such as electricity, telephone, and drinking water. The RUS’ Telecommunications Program, established 60 years ago, provides low-cost financing for rural America’s telecommunications infrastructure through a combination of loans and grants:
- The Telecom Infrastructure Program provides loans to build and improve telecommunications service in rural areas.
- The Broadband Loan Program provides loans to fund the costs of constructing, improving and acquiring facilities to provide broadband service to eligible rural communities.
- The Distance Learning and Telemedicine Program brings electronic educational resources to rural schools and improves health care delivery in rural America.
- The Community Connect Grant Program provides financial assistance to eligible applicants to provide broadband in unserved areas, to provide public safety services, and to foster economic growth.
The RUS, through its Broadband Initiatives Program (BIP), also administers a substantial part of the broadband stimulus funds authorized by the American Recovery and Reconstruction Act of 2009 (ARRA). BIP projects will bring new or improved broadband services to 2.8 million households, reaching nearly 7 million people, 364,000 businesses, and 32,000 community institutions such as schools, healthcare facilities, and public safety agencies.
Since 2009, the RUS has invested $1.52 billion in loans for broadband infrastructure, $13.4 million in grants for broadband in remote rural areas and $71 million in distance learning and telemedicine grants. These programs, combined with broadband stimulus funds, have invested more than $4.3 billion in loans, grants, and combined loan/grant awards to rural service providers and communities.
About 500 of the 800 Tier 3 Telco’s are RUS borrowers, and are required to conform to RUS technical standards and business practices. Most of the rest also follow RUS practices, to one degree or another. One of these practices has been to require RUS borrowers use, whenever possible, products that are “accepted” by the RUS and entered on its “List of Materials”.
Purchases by Borrowers were Constrained by the List of Materials.
The List of Materials Acceptable for Use on Telecommunications Systems of RUS Borrower’s – IP 344-2 (List of Materials) was an informational publication listing products accepted by the RUS’ Technical Standards Committee “A”. “Acceptable” products were those that 1) provided proven and satisfactory in-service performance; 2) met the RUS’ technical requirements and/or conformed to other recognized industry standards; and, 3) were in compliance with the “Buy American” provision. The RUS relied on documentation and substantiating data submitted by the product’s manufacturer in a Letter of Application to determine its acceptability for use by RUS borrowers.
The Impact on Loans/Grants of the Buy American Provision
Equipment and materials financed with RUS funds are subject to the “Buy American” provision of the Rural Electrification Act of 1936 (7 U.S.C. 901 et seq. as amended in 1938). This law requires that a manufacturer of a product must certify whether it complies with two requirements:
- Final assembly or manufacture of the product, as it would be used by an RUS borrower, must be done in the U.S. or in one of three other “eligible” countries: Mexico, Canada or Israel; and
- The costs of U.S. and eligible countries’ components (in any combination) used in the product must be more than 50 percent of the total costs of all components used in the product. The costs of components not manufactured in the U.S. or an eligible country includes duties, taxes, and shipping charges to the point of assembly or manufacture.
Products that do not meet these requirements could be included in the List of Materials as “technically acceptable”, but were classified as “non-domestic”. An RUS borrower may purchase a non-domestic product only if one of the following conditions is met:
- A non-domestic product is considered to be in compliance with the Buy American provision when the price bid for the competing domestic product exceeds the non-domestic bid price by an amount determined by computing six percent of the components cost content in the non-domestic product. Otherwise, the domestic product must be selected.
- A non-domestic product can be selected if it is shown that there is no domestic product that will meet the requirements of the project.
- A non-domestic product can be selected if use of a domestic product would result in an unacceptable delay in the completion of the project.
In the last two situations, the borrower is required to secure the RUS’ written permission to use the non-domestic product.
Important Recent RUS Change — List of Materials is Eliminated
On May 23, 2011 the RUS’ Administrator announced “…a fundamentally new approach to advancing state-of-the-art telecommunications technologies, consistent with our commitment to high quality rural service and the efficient use of taxpayer dollars…”, and that, “Effective immediately, Rural Development will no longer accept applications for equipment to be added to the List of Materials for Telecommunications and Rural Development will cease publication of the List of Materials for Telecommunications.”
Although the RUS is ending the publication of the List of Materials, it is not ending its insistence that infrastructure financed by its programs conform to the highest technical standards. The RUS plans to transition to a process that incorporates the determination of technical suitability and conformance to industry standards into its reviews of individual projects and its approvals of loan advances. Now, it will be up to the borrowers and their consulting engineers to assure themselves, and the RUS’ project reviewers, that products used on RUS-financed projects are technically sound and in conformance with accepted industry standards.
The RUS will retain its statutory obligation to enforce the Buy American provision of the Rural Electrification Act. Borrowers and their consulting engineers are required to use products that comply with this provision, and they must certify at several points during the project that they have done so. Absent any guidance from the List of Materials or something similar to it, they are required to conduct their own assessments of products’ compliance with the Buy American provision.
The “Buy American Register” is now the Key Listing for Vendors
Since May 23, we have had several in-depth conversations with RUS staff about the new rules and processes that will supersede the List of Materials. What we have been told is not yet official, since it is subject to review by the USDA’s Office of General Council (OGC). However, we believe that the information we have is solid enough for our clients to begin planning for the new processes.
The List of Materials will be replaced by a new RUS information publication listing products which comply with the Buy American provision, as currently used and defined. This new publication will be called something like “The Buy American Register”. The initial issuance of the Buy American Register will be based on the last issue of the List of Materials, dated February 28, 2011, but with all non-domestic products removed.
Going forward, a product can be added to the Buy American Register if its manufacturer submits a Letter of Application (LOA) to RUS. The LOA must certify that:
- The product complies with the Buy American provision, and it must say where the product is manufactured.
- The manufacturer is prepared to substantiate the costs of components and the location(s) of manufacture, if requested by the RUS.
- If manufacturing of the product is outsourced, the contract manufacturer(s) will also be required to certify compliance.
The manufacturer will be required to annually recertify the product’s Buy American compliance.
If an RUS borrower chooses to use a product that is not on the Buy American Register, and there is a comparable product already listed, then the 6% bidding penalty will be applied. If there is no comparable product on the Buy American Register, the borrower will be required to look for a comparable domestic product before applying for permission to use the non-domestic product.
Telecom ThinkTank Recommendations for Equipment Vendors
The new Buy American Register and the accompanying changes to RUS procedures presents both challenges and opportunities to telecommunications equipment manufacturers, particularly to those with new products aimed at the U.S. market.
Manufacturers of domestic products that were on the List of Materials should review the new Buy American Register as soon as it is published to ensure that their products are still on it.
Manufacturers of domestic products that can comply with the Buy American provision, as described above, but were not on the List of Materials, should apply for listing on the Buy American Register. Going forward, RUS project review and contracting practices will be strongly biased towards domestic products. A product that is not on the Buy American Register will be presumed to be non-domestic and treated as such in competitive bidding for RUS projects.
Manufacturers of non-domestic products which were listed as ” technically acceptable” on the List of Materials should consider changing their manufacturing processes so as to bring the products into compliance with the Buy American provision. This could require setting up a final assembly operation in the U.S., or in an eligible country, and/or adjusting the product’s Bill of Materials (BOM) so that more of its components’ cost is incurred in the U.S. or an eligible country. Once this is accomplished, the manufacturers should apply for listing on the Buy American Register.
Manufacturers of non-domestic products which cannot comply with the Buy American provision should adjust their marketing plans and messages so as to clearly differentiate their products, in terms of price, function and/or performance, from competitive domestic products. They should document, and be prepare to disclose, the costs of components in their products when bidding on RUS-financed projects.
Going forward, the U.S. market will be harder, but not impossible, for off-shore manufacturers to enter and penetrate, especially with look-alike products. If an off-shore manufacturer is serious about the U.S. market, it should plan to establish a U.S. manufacturing operation and to localize as much content as possible, as soon as possible.
Manufacturers of both domestic and non-domestic products should prepare clear, concise statements of their products’ compliance with industry standards, supported by test reports, performance data and reference customers, for use by Telco’s and consulting engineers in product selection decisions.
The responsibility for determining a product’s technical suitability has passed to the RUS borrowers and their consulting engineers. The burden of proof of a product’s technical suitability and Buy American compliance remains with the manufacturer.
Next Steps for Vendors selling into RUS Markets
Telecom ThinkTank Executive Affiliates have developed particular expertise and a unique approach to dealing with the RUS, the consulting engineers and the borrowers. We have worked successfully with over two dozen manufacturers to add their products to the List of Materials. In the course of preparing and submitting applications on behalf of these companies, we have developed an excellent and trusting working relationship with RUS staff.
The new RUS rules and the renewed emphasis on the Buy American provision will mean new challenges and opportunities for manufacturers, resellers, consulting engineers and borrowers. Telecom ThinkTank is ready to work with your company to help you meet the challenges and take advantage of the opportunities to market your products to this multi-billion dollar market.
