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Defense contractors should prepare for the challenges of foreign markets.

Whereas the Defense Department is expected to cut back on purchases of new weapons, nations such as China, India, Brazil, South Korea and Australia are increasing spending on defense equipment.

Defense contractors that have traditionally focused on U.S. programs must look for opportunities with other nations.

But doing business outside the United States can be challenging. Issues range from the high level of difficulty and risk of building manufacturing infrastructure and developing a local supply chain, to meeting the foreign government's demands for offsets, particularly local employment and technology and skills transfer.

The following three nations present defense opportunities and challenges:

Brazil: This emerging power has the largest armed forces in South America. In 2009, the defense ministry announced a new national defense strategy, which set ambitious goals that are aimed at replacing aging equipment and creating jobs. To support these objectives, the ministry will receive $733 million from the government to procure defense equipment including 4,170 trucks, 40 Guarani armored vehicles and 30 Astros 2020 missile launcher vehicles.

In May 2012, Defense Minister Celso Amorim stated that the defense budget would gradually increase to 2 percent of Brazil's gross domestic product, up from the current 1.6 percent, as part of the effort to secure its borders against potential threats to its natural resources, including offshore oil reserves.

Brazil is focusing its defense spending in three major areas: land forces for internal security and border protection; helicopters, jet fighters and transports, and homeland security for the Olympics and World Cup, including airport security and surveillance.

Brazil already has a respectable aerospace industry that is dominated by Embraer, a primarily commercial aircraft manufacturer which has a defense and security business. There is new domestic competition including Odebrecht, a Brazil-based, multinational construction conglomerate that launched a defense and security company in 20111. Additionally, the number of foreign and domestic defense companies in Brazil jumped to 150 last year from 39 in 2007, with sales of $3.5 billion, according to the Brazilian Defense and Security Industries Association.

The Brazilian government desires to work with contractors that have local engineering, manufacturing and supply chains. But operating in Brazil involves a number of challenges. The terrain is extremely diverse and formidable, ranging from jungle to mountains, making it difficult to transport goods. Procurement of technology within the country, as preferred by the government, is complicated because of a lack of local component manufacturers. Contractors also face a rigorous customs system and the need to pay heavy import duties, which vary across states.

India: The nation has embarked on an ambitious modernization project for its air force, navy and land forces in the face of perceived threats to its security from Pakistan and China, as well as the internal threats of terrorism. India is already the world's largest weapons importer, reports the Stockholm International Peace Research Institute (SIPRI), and is planning to spend another $50 billion to $100 billion to upgrade its military and security infrastructure.

Traditionally, India has looked to Russia for fighter and attack aircraft, but has expanded its scope to the United States and Israel in recent years. For example, India ordered patrol aircraft from Boeing in 2009 and recently added to that order, and purchased an airborne-radar system from Israel in 2009 and 2010.

One of the major roadblocks to doing business with India has been meeting the country's offset requirements. At least 30 to 50 percent of the total of all deals valued at more than $65 million must be in the form of offsets returned to India to help bolster its nascent defense industry. India recently eased offset rules by allowing foreign contractors more flexibility in meeting them, such as extending the time frame two years beyond completion of the contract. But there is still a strict limit on foreign ownership of companies in India--no more than a 26 percent share--which makes joint ventures more challenging.

U.S. contractors can benefit from the likelihood that India's state-owned Defense Public Sector Undertakings cannot keep pace with projected growth and will have some gaps in technology capabilities that are required for next-generation defense systems. Contractors often must work with these DPSUs, which requires specialized knowledge.

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Other concerns are restrictions in choice of supply chain partners because of India's strong desire to avoid Chinese components in order to avoid counterfeits and also to deny support to China's economy. As in Brazil, the huge size and varied topography of the Indian subcontinent makes transport a major challenge.

United Arab Emirates: In the highly volatile Middle East, the United Arab Emirates is taking a defensive stance in its military strategy, primarily to deter Iran from flexing its ballistic missile and nuclear capabilities. Facing an uncertain security and defense environment, the UAE is looking at defense equipment as a multiplier to its relatively smaller armed forces. SIPRI notes that the UAE, which is composed of seven emirates, is second only to Saudi Arabia in defense spending in the Gulf region. Although statistics are difficult to obtain, the UAE is estimated to spend 6 percent of GDP on defense, which includes investments in jet trainers, tankers, transport planes and patrol boats.

The high level of defense spending is driven by the desire to diversify the oil-based economy, increase employment and build technology skills. For this reason, the UAE strongly favors in-country manufacturing by contractors and is also interested in synergies between other technology areas such as materials and telecommunications and defense and aerospace.

In June 2010, the UAE updated its offset guidelines to support plans for an industrial base that delivers sustainable economic and social development through partnerships that help to create jobs for its citizens. A two-year timetable was established to enable defense suppliers to adjust to the new framework. Overall, this policy is less punitive. But it will require foreign manufacturers to demonstrate skilled job growth--potentially in a detailed supply plan--before a contract is awarded.

Companies that are considering seeking greater access to markets in nations such as Brazil, India and UAE--particularly defense firms--could benefit from partnering with global electronics manufacturing services providers. These companies typically have a large and established presence in non-U.S. markets.

Global manufacturing companies navigate the maze of foreign government requirements and regulations and work with local suppliers, workforces and logistics systems as part of their day-to-day business around the world. They can provide a local footprint, including local partnerships and expertise in supply chain management.

The following are several areas where a global manufacturing partner can provide valuable support:

Local presence and familiarity: By choosing a manufacturing partner with local facilities and workforce in a target region, a defense contractor can minimize capital outlays for buildings, equipment, staffing and training.

Local regulatory expertise: Manufacturing services providers have expertise in local regulations, government processes, import and export issues, tax structure and other local variables.

Established, secure material supply chain: Complex aerospace and defense components often require hundreds of parts and materials, each with specific requirements, associated standards and applicable regulations. A qualified supply chain can help defense contractors simplify production, ensure consistent quality, avoid counterfeit parts and provide alternative vendors in the case of an interruption.

Offset and skills transfer credit: Among the most common requirements of offset agreements is the creation of local jobs and technology training or transfer to help an emerging industry sector compete in the global marketplace. Unless the contractor already has a manufacturing facility in the country to which it seeks to export, these demands may be difficult to meet. A manufacturing services provider will engineer or produce defense equipment locally on behalf of the contractor, using trained local workers.

Transitioning from core U.S. opportunities: An electronic manufacturing services provider with presence both in the United States and foreign markets can help the contractor manage demand and provide flexibility in manufacturing. In some cases, it can help redesign U.S. products at a reduced cost and make them more attractive to foreign buyers.

Scott Gebicke is president of Jabil Defense and Aerospace Services.
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Title Annotation:Industry Perspective
Comment:Defense contractors should prepare for the challenges of foreign markets.(Industry Perspective)
Author:Gebicke, Scott
Publication:National Defense
Geographic Code:3BRAZ
Date:Dec 1, 2012
Words:1339
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