| LONDON, June 20
LONDON, June 20 After years of dictating the
terms under which they supplied top of the range fighter planes
and weaponry to a volatile third world, western defence
contractors are increasingly losing the upper hand to their
Middle East and Asian customers.
The global market in fighters has been a crowded place for
some time, but with world defence spending falling and cuts in
European and U.S. budgets gaining pace, the battle for an
estimated $90 billion in orders by 2020 has become more frantic.
Industry players at the Paris Airshow this week said that
has put all the cards in the hands of growing economies like the
United Arab Emirates, India or Brazil who still have money to
spend, allowing them to demand far more in return.
The value of reciprocal industrial contracts that firms like
Lockheed Martin or BAE Systems are offering as
part of such deals is expected to have risen tenfold in the
decade to 2016 as a result, according to one industry study.
"There's a dramatic shift in aggregate demand from one part
of the world to the other," Alessandro Pansa, chief executive of
Italian contractor Finmeccanica told Reuters. "The
shift is taking place from countries where defence companies
exist, to countries where companies do not exist.
"We definitely are becoming more price takers than price
Defence offsets, which funnel industry investment into the
buyer country, have been around since World War Two but have
proliferated as export deals increased in importance.
China, Russia, Vietnam and Saudi Arabia all raised defence
spending in 2012, while U.S. and European outlays fell by 5 and
2 percent respectively and global spending slipped - to $1.73
trillion - for the first time in 14 years.
In the battle for a piece of that shrinking pie, consultancy
Avascent estimates governments through 2016 will rack up $500
billion in commitments to invest and orders to suppliers in the
buyer country, up from $50 billion a decade earlier.
At stake for Lockheed Martin's F-35 fighter jet, the
Eurofighter Typhoon backed by Finmeccanica, BAE and EADS
, Dassault Aviation's Rafale aircraft, the
Gripen by Sweden's Saab AB and Boeing's F-15
fighter are orders in Asia, the Middle East and South America.
"Many of these countries know that they're in a position of
strength because everybody is scrambling for growth, so they
will try and wring as much as possible out from these big deals
beyond the actual aircraft themselves," said Roger Johnston, an
analyst at Edison Investment Research.
"It's much wider than just the aircraft itself in terms of
capability. It's what else can you offer?," he said.
India is currently exclusively speaking to Dassault on a $12
billion order of 126 war planes, while also in prospect is an
order for at least 60 new aircraft to replace the UAE's Mirage
fleet and a 60 jet order from South Korea.
India, which only formulated an official defence offset
policy in 2005, wants 50 percent of work worth up to $6 billion
from the jet contract to be given to Indian companies compared
to the legislative minimum of 30 percent.
In Brazil, Boeing has invested heavily and in April
announced it would establish a new research centre in the Sao
Paulo state at a time when it is trying to sell its F/A-18 Super
Hornet to the government.
Lockheed vice president Steve O'Bryan this week announced a
new deal with Japan's Mitsubishi Heavy Industries for final
assembly of its F-35 Joint Strike Fighter, designed from the
outset as a collaborative global program and now including over
250 suppliers worldwide.
Contractors say such deals are essential to building
relationships with governments and local players, and to getting
a foothold in such markets in the long term.
But some analysts warn that companies are taking large risks
for the future and that export markets will not be enough to
make up for cutbacks in their home markets.
"The risks are certainly there if you're taking on huge
obligations worth billions and you don't know how to do it," one
senior industry source said, adding that some defence
contractors were already finding it difficult to fulfil such