US report on the Impact of Defence Offsets on Its Defence Industrial Base

The  16th  Annual  Report  to  Congress  on  the  Impact  of  Offsets  in  Defence  Trade  has  the  following  to  say:

  1. Between  1993-2010,  US  firms  agreed  to  $78.08  billion  worth  of  Offsets  out  of  defence  exports  worth  $111.59  billion,  or  nearly  70%.    Technology  transfer  was  among  the  top  3  offset  categories.

NEGATIVES  FOR  US:

  1. The  report  however  warned  that  Offsets  would  “limit  future  business  opportunities  for  U.S.  subcontractors  and  suppliers,  with  negative  consequences  for  the  domestic  industrial  base.  Other  kinds  of  offsets,  such  as  technology  transfers,  may  increase  research  and  development  spending  and  capital  investment  in  foreign  countries  for  defence  or  non-defence  industries,  thereby  helping  to  create  or  enhance  current  and  future  competitors  to  U.S.  industry….”

Which  is  exactly  the  point  of  Offsets,  that  they  should  help  in  boosting  the  defence  industrial  base  and  wean  developing  countries  off  the  need  to  keep  importing  in  perpetuity.

POSITIVES  FOR  US:

  1. However  the  report  also  notes  –  ‘anecdotal  information  obtained  from  industry  suggests  that  “cutting  edge”  or  nascent  technologies  under  development  in  the  United  States  are  less  likely  to  be  transferred  to  foreign  companies  in  fulfillment  of  offset  obligations  than  are  mature  technologies’.   
  2. Also,  Offsets  involving  technology  transfers  were  only  $985.0  million,  equivalent  to  only  0.24%  of  total  US  R&D  spend.
  3. The  report  further  notes  “Despite  the  capabilities  that  may  accrue  to  foreign  firms  resulting  from  offset  agreements  signed  with  U.S.  industry,  purchases  from  foreign  firms  do  not  represent  a  significant  share  of  DOD’s  total  purchases.    Purchases  of  defence  manufactures  from  US  sources  by  DOD  totaled  $102.46  billion  out  of  total  purchases  of  $106.80  billion  in  2010,  with  purchases  from  foreign  entities  only  $4.34  billion,  or  4%  of  the  total.   
  4. Moreover,  the  US  recorded  ‘an  overall  net  gain  …  a  positive  $7.2  billion  in  added  “input”  opportunities  for  the  U.S.  industrial  base,  and  a  net  gain  of  22,553  in  employment  opportunities  created  or  sustained  during  the  2009-2010  period’.   

POINTS  OF  INTEREST  FOR  POLICYMAKERS

  1. Interestingly,  one  discovered  that  the  analytical  report  is  written  in  pursuance  of  a  US  Defence  Production  Act,  whose  existence  one  was  unaware  of.    The  Defence  Production  Act  has  helped  the  US  develop  a  number  of  new  technologies  and  composite  materials  and  has  also  hand-held  startups  to  commercially  produce  technologies  they  could  not  have  done  on  their  own.   
  2. The  Defence  Production  Act  also  enjoins  on  the  government  to  very  closely  scrutinise  foreign  investment  proposals  in  the  United  States.    It  is  under  the  provisions  of  this  Act  that  some  Chinese  Investments  have  been  denied  in  the  US.
  3. The  point  is,  even  as  many  countries  have  benefited  from  leveraging  Defence  Offsets,  India  is  probably  not  among  them.  This  has  to  change.   
  4. The  above  also  imply  that  negotiating  defence  offsets  is  a  tough  business,  but  other  countries  have  succeeded  and  India  too  needs  to  stick  it  out.
  5. The  other  point  is,  the  US,  the  quintessential  free  marketer,  has  a  wide  variety  of  industrial  promotion  policies  to  help  maintain  its  technological  and  industrial  edge  and  fend  off  foreign  competition.  All  countries  follow  policies  that  are  conducive  to  promoting  their  own  domestic  industrial  base.    As  this  Livemint  article  (“An  economic  roadmap  for  India”points  out  –  it  is  not  healthy  that  India  has  failed  to  nurture  its  manufacturing  base:  “The  fact  that  India  has  moved  from  an  agricultural  economy  to  a  service-driven  economy  with  almost  no  growth  in  industry  is  not  a  virtue;  it  is  an  outcome  of  policies  that  have  hampered  manufacturing  and  mining.    With  production  costs  rising  in  China,  international  buyers  are  looking  for  alternative  sourcing  destinations  for  manufactured  products.  If  India,  with  its  large  labour  force,  is  to  seize  this  opportunity,  it  must  nurture  its  industrial  sector”.

Other  factoids  that  it  would  be  useful  for  our  policymakers  to  be  aware  of:

  1. “DOD  is  willing  to  use  reliable  foreign  suppliers  when  such  use  offers  comparative  advantages  in  performance,  cost,  schedule,  or  coalition  operations.    DOD  has  negotiated  bilateral  Reciprocal  Defence  Procurement  Memoranda  of  Understanding  (RDP  MOUs)  with  21  countries”  –  based  on  these  MOUs,  the  US  has  made  blanket  public  interest  exceptions  to  the  Buy  American  Act  for  20  of  these  countries,  as  a  result  of  which,  their  “products  are  evaluated  on  the  same  basis  as  domestic  products  in  competitive  DOD  procurements.”
  2. The  US  also  conducts  a  Dialogue  with  other  countries  on  Limiting  the  Adverse  Effects  of  Offsets  in  Defence  Procurement.  It  has  set  up  an  interagency  team  to  study  the  issue  and  report  to  Congress.  The  team  concluded  that  other  industrialized  nations  are  also  very  concerned  about  offsets  in  defence  procurement.
  3. The  European  Union  (EU)  Defence  Procurement  Directive  in  August  2011  was  a  very  significant  event  in  defence  offsets.    But  even  in  Europe  the  Code  states  that  offsets  will  not  exceed  the  value  of  the  procurement  contract  (100  percent  offset  limit).    
  4. 100%  is  way  above  the  highly  diluted  30%  offsets  provided  in  India,  and  even  this  we  have  been  unable  to  implement.

TIME  TO  LAUNCH  AND  IMPLEMENT  OFFSETS  IN  DEFENCE  PRODUCTION  AND  THE  AEROSPACE  INDUSTRY!

 

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CANADA FIRST!

SO PAPA DON’T PREACH

(On Defence Offsets)

We have the “once-in-a-century” opportunity to get it right when it comes to changing how we buy defence equipment.”  Honourable Diane Finley, PC, MP, Minister of Public Works and Government Services, Announcing the Defence Procurement Strategy,  Ottawa, Ontario, February 5, 2014

The High Tech Forum on Defence Innovation, which comprises experts in various fields related to enhancing indigenous high-tech capabilities, had concluded that Defence Offsets provide a huge opportunity to kick start India’s defence industrial base.

Successfully leveraging defence purchases to build indigenous capabilities is a worldwide trend. On the VISTAS-भारत Facebook page we had mentioned many countries implementing 100% Offsets – not just the 30% provided in our own laws.  Some countries even apply 400%!

So first of all, “Papa Dont Preach!” 30% is not too Onerous considering how many countries practice 100% and above. 100 percenters:

Argentina

Austria

Brazil

Bulgaria

Canada

Chile

Colombia

Croatia

Denmark

Estonia

Greece

Italy

Malaysia

Netherlands

Norway

Peru

Portugal

Slovenia

Switzerland

Canada is insisting on 100% REAL Offsets. Check out our earlier post on the subject – because of their “consistent” insistence, both Boeing and Dassault are either “promising offsets for Canadian industry worth 100 percent of the purchase contract value, or providing full transfer of aircraft technologies to the Canadian government, with no restrictions”.

Contrast this with the tough stance reportedly being taken with India on the MMRCA offset clause. India should straightaway jack up Defence Offsets to 100% at least and derive the maximum out of this once in a century opportunity. India is also right to insist that lifecycle costs and not just the initial purchase price, should be taken into account while calculating Offsets, as lifecycle costs can be extremely high. 

Now, Canada has just overhauled its defence procurement strategy to strengthen indigenous high-tech defence industry and take advantage of the fact that “Defence-related  industries  are  unique  in  that  governments  are  essentially  the  only  customers,  and  have  flexibility  under  international  trade  agreements  to  favour  domestic  suppliers.”

Since advanced nations are constantly brandishing the WTO against us – we must at least take advantage of the flexibilities provided for the defence sector. Wasn’t the WTO meant to facilitate our industrial development? But we had to withdraw the Preferential Market Access Policy for private sector procurements which would have benefited our manufacturing industry.

Thus, many countries have leveraged Offsets to become part of the sophisticated global high-tech aerospace supply chain. But at every turn we have failed to leverage our civil and military aircraft purchases and our considerable air travel market to build our own aerospace industry which can be part and parcel of an exciting high-tech global supply chain.

India also needs to develop the MRO market. A presentation by HAL is being posted which outlines the full potential of the market that can be exploited by Indian firms.

The next post will be on the subtle propaganda on the reputation and capabilities of Indian industry, and the myths being propagated in this regard. This helps only non-Indian firms. Since defence markets are under pressure worldwide, it is essential for OEMs to corner the growing Indian defence market and ensure Indian companies, which have won massive tenders abroad, are disregarded in their own country.

 SUMMARY OF DEVELOPMENTS IN CANADA

2008:  Canada  establishes  the  Canada  First  Defence  Strategy  (CFDS)  which  provides  stable  long-term  funding  and  a  roadmap  for  the  modernization  of  the  Canadian  Forces  over  a  20-year  period.

2013, February: Canada issues the excellent report “Canada First: Leveraging Defence Procurement Through Key Industrial Capabilitiesthe document starts with Canada First! This is what we have been advocating all along – INDIA FIRST! In Canada they call Offsets the Industrial and Regional Benefits (IRB) policy: the report mentions ‘A main source of revenue for Canadian industry relates  to  the  government’s  long-standing  Industrial  and  Regional  Benefits  (IRB)  policy  —  often  referred  to  generically  as  an  “offsets”  policy—  that  requires  winners  of  major  defence  contracts  to  spend  the  equivalent  of  the  dollar  value  of  contracts  (which  are  often  awarded  to  foreign  firms)  in  support  of  Canadian  industry’.

2014, February 05: Canada launches new Defence Procurement Strategy (DPS), with the following goals:

  • Companies bidding on defence and security contracts have to provide 100 percent Offsets. They are insisting Canada get full value for any procurement from Dassault and Boeing.
  • Deliver the right equipment to the Canadian military in a timely manner;
  • Leverage Canada’s purchases of defence equipment to create jobs and economic growth in Canada; and
  • Companies bidding on major defence and Coast Guard procurements have to prove that their bids support “Key Industrial Capabilities (KICs) and other productivity drivers, including industrial and technological high-value activities, for example, “technology transfer”.
  • “Implement an enhanced Export Strategy to support international sales opportunities and “participation in global value chains“” (Note: this is our key goal also).

This is our once in a century chance to get things right too. Let us fulfill India’s promise!

Let’s get Serious! They say China Will…

This – “Why China will fight for a global climate deal next yearis good news for the Planet.  Time for everyone to realise together that we have only one planet! We see no sign of effective international action, so fusion technology, massive afforestation and use of green technologies will have to offset national emissions. Moreover, the transition to a high-tech growth model (below), which we in this Forum also envisage for India, will lead to a reduction in the more polluting industries:

China has started to establish innovation-based development. It is adjusting its economic structure, and no longer pursuing development at the cost of the environment. This new development path means that China has to lower its total energy consumption and change its energy framework to support further adjustments to its economic structure”

Extracts

“China’s leaders know that an effective treaty on climate change in 2015 is essential to the country’s development, says IPCC China expert Wang Chunfeng.

It isn’t hard to see that China’s motivation is genuine. First, China is suffering badly from the adverse effects of climate change. Over the last hundred years, the annual average rise in temperatures in China has been higher than the global average…Since the 1990s, China has suffered annual average economic losses of over 200 billion yuan (US$32 billion) as a direct result of extreme weather events, and an annual average death toll above 2,000. ..The latest reports from the Intergovernmental Panel on Climate Change (IPCC) predict that rising temperatures will grow more pronounced, adverse impacts will intensify and damage from extreme weather events in China will get even more serious.

Second, there is no contradiction between the direction of China’s economic development and tackling climate change…” as

China has started to establish innovation-based development. It is adjusting its economic structure, and no longer pursuing development at the cost of the environment. This new development path means that China has to lower its total energy consumption and change its energy framework to support further adjustments to its economic structure.”

Extract ends.

PROPOSALS FOR ENERGIZING INDIAN AEROSPACE AND DEFENCE INDUSTRY by Commodore Sujeet Samaddar

Uploaded here – AGENDA INDIAN A&D INDUSTRY GROWTH is an excellent report prepared by Commodore (Rtd) Sujeet Samaddar, NM, Director and CEO, ShinMaywa Industries India Private Limited and member of the High Tech Forum on Defence Innovation launched at IDSA.

To encourage indigenous high-tech manufacture, he has outlined several measures that would help provide a level playing field for Indian industry. Till now, the system was skewed towards PROCUREMENT, not PRODUCTION. A beginning has been made with DPP 2013, which according to a highly placed source “now requires justification for not taking recourse to Indigenous products. That needs to be followed strictly. There is already a shift towards Buy Indian on account of this but will need to be nurtured.”

So the test, as always, will lie in implementation. We have many apologists for foreign products deeply embedded in our system. It was noted at the 4th Forum meeting that the heads of 4 governments visited India to promote their jets for the MMRCA acquisition, whereas we shy away from promoting our own products and host huge air shows which promote the aircraft of other countries! This is despite the fact that Indian products are greatly appreciated far and wide.

Commodore Samaddar suggests several measures to equalize the field between Indian and foreign players, and even tilt it a bit towards Indian firms, an endeavour we fully support. No country has become strong without strong indigenous firms. 

Ideas such as a streamlined defence exports policy and “deemed exports” which will “make it attractive for foreign OEMs to contract in India and thus create capacity capability and jobs in India” are great and even overdue. So are the suggestions on amending taxation policy to encourage indigenous production, “prepared in consultation with leading tax and legal experts” and “attached separately as Annexure”. And all the other suggestions to flatten the playing field.

Please read the report, comment and send feedback to him and also yours truly.

email: sujeet.samaddar@shinmaywa-india.co.in

vistasbharat@gmail.com