Defense Industry Update Archives

December 20, 2012 By Matias Maloberti

International Defense Sales: 2013 Trends and Predictions

As we wrap up 2012 and look toward 2013, the overwhelming news is of the fiscal cliff. Even if/when that gets resolved, we will almost certainly see cuts in U.S. military spending. How does this impact the scenario for international defense sales? Here are my predictions for the coming year …

Trend #1: Growing Interest in International Sales

A side effect of the uncertainty and budget cuts in the U.S. is strong industry interest in international sales. Defense companies that have never worked abroad are now eyeing the international market as a way to diversify their sales and balance out volatility in the U.S. market.

What does this mean for the industry? It’s not easy to jump into international sales, especially when we’re talking about ITAR-restricted items. Defense companies need to educate themselves about the regulations of international sales before they start discussing their first deal. How to do that? This webpage is a great place to start!

Trend #2: Growing Demand for Support Services

With the looming budget cuts across the USG, transportation services for FMS cases will be first to go. The DOD already terminated US transportation to Latin America, and I expect it will follow with cuts to other regional programs in this and coming years.

What does this mean for the industry? Assuming that FMS sales continue to grow, customers that have relied on the U.S. Defense Transportation System will need to contract for transportation and logistic support by US-based Freight Forwarders. As a result, I expect to see logistics and transport companies becoming more involved in FMS deals. (As always, they should be aware of the regulations – see point 3 here.)

Trend #3: Budget-Conscious Customers

We are all-too-aware of potential cuts to U.S. defense programs, but lots of other countries are also working in tight fiscal conditions. With customers more budget-conscious than ever, it might not be realistic to hope for major systems purchases in 2013. Rather, I would expect to see lots of maintenance and parts contracts, smaller systems, or modified equipment purchases.

What does this mean for the industry? The industry can improve their chances of making sales in a tough budgetary environment by focusing on value-for-money. This may mean modifying or simplifying a product to reduce the price, or adding a maintenance package to extend the life of the product.

Trend #4: Continuing Growth in Unmanned Solutions

Finally, this year’s growth in unmanned systems will continue, and will be mirrored by other countries. While aerial drones (Unmanned Aerial Vehicles or UAVs) are the most well-known example, unmanned systems also include ground-based and maritime robots. The diversity and capacity of these systems are rapidly developing and prices are falling. While the U.S. clearly leads in employing unmanned solutions, other countries are quickly embracing this trend.

What does this mean for the industry? I expect to see strong growth for exports of all kinds of unmanned systems – aerial, ground-based, and maritime. Within the constrained budget environment discussed above, customers will be looking for simpler systems at competitive prices. The U.S. industry may do well to consider product alterations to create a range of price-points for overseas consumers.

What are your predictions for international defense sales in 2013?

And on a personal note … LMDefense will be on a blogging break until early January. Enjoy the holidays!

October 3, 2012 By Matias Maloberti

Amphibious Assault Vehicles’ Enduring Popularity in South America

In the early 70’s, the Argentinean and Brazilian marines introduced the original LVTP-7 at almost the same time as the USMC. Forty years later, the amphibious assault vehicle (AAV) is back in the spotlight: The Chilean Navy is looking for twelve AAV-7A1s to replace their already decommissioned LVTP-5s and DSCA notified Congress of a potential sale to Brazil of twenty-six AAV/RAM-RS (plus the upgrade of the old ones to RAM/RS configuration). During the last couple of years, Argentina locally upgraded the survivors of their fleet, and Venezuela (the other historical user of the LVTP-7 in the region) was in conversations with Argentina to do the same. (United Defense was the original equipment manufacturer for the LVTP-7 and was later purchased by BAE, which now manufactures the AAV-7A1.)

While the new AAV-7A1 or the AAV RAM/RS are far more modern and powerful than the original LVTP-7s, it is still the same base vehicle. After forty years, the AAV is not only still in service, but it is being upgraded, produced, and procured by multiple countries. Out of ten international users, four are South American countries, four are Asian (Korea, Taiwan, Indonesia, and Thailand), and two are European (Spain and Italy). The vehicle’s dominance in the Latin American market is remarkable. What makes this gator so well-suited for this region of the world?

The AAV demonstrates its versatility in the deserts of Iraq.

Last week at the Modern Day Marine expo in Quantico, VA, I had the opportunity to meet Ms. Signe Johnson, BAE Systems Program Manager for the AAV-7. (Signe manages the U.S. side of the program, not the international part. Still, she very kindly answered my questions about the AAV in South America.) “The AAV is not only amphibious, it also has a tremendous cargo capacity that makes the vehicle ideally suited for disaster relief operations. The USMC used the AAV-7 extensively after Katrina” she mentioned. Additionally, she pointed out that the Brazilian Navy used AAVs to support Brazilian police operations in the favelas. The AAV-7’s capacity to support disaster relief in flooded areas, plus its versatility for law enforcement (and peacekeeping) operations, in addition to its unique amphibious tracked assault role, is what makes it so popular.

In discussing the different options to procure the AAV-7, she mentioned that BAE Systems can deliver through either DCS or FMS, both the AAV RAM/RS (rebuilt from the USMC’s retired AAVs) and factory-new AAV-7A1s. In addition, the option to partner with local companies is always open. “We did that with Samsung for the South Korean order,” she added. BAE’s commitment to producing and upgrading the AAV – and to making it available to foreign customers through DCS or FMS – ensures that the vehicle will remain an important component of South American militaries for years to come.

What other benefits do you see in the AAV? Do you know of any other countries interested in BAE’s AAV-7A1?

photo credit

October 1, 2012 By Matias Maloberti

Beretta M9 Remains Available via FMS

I recently had the chance to speak with representatives of Beretta USA, and I was impressed by the company’s commitment to supporting the Foreign Military Sales (FMS) program for international sales. The Beretta M9 (or 92FS) has a strong record as a military pistol not only in the U.S. but around the world. Since 1987, Beretta has produced the U.S.-made M9 for the U.S. Armed Forces and for several international militaries that have acquired the M9 using FMS channels.

Two weeks ago, we included in our weekly news update the announcement that the U.S. Army is ordering more M9 Pistols from Beretta USA. Last week at Modern Day Marine expo in Quantico, VA., I had the opportunity to talk to Casey Betzold, Beretta’s International Sales Manager. Betzold told me that Beretta is committed to supporting international customers through FMS in the same way they always have. This means that the new contract for M9 pistols could be used for FMS orders as well – great news for allied nations that prefer to pursue procurement actions through the FMS system.

Photo of Marines shooting Beretta's M9 pistol

Marines practice shooting the M9 pistol aboard Al Asad Air Base, Iraq, in 2009.
photo credit

I was particularly interested in Beretta’s take on FMS, since not all companies are so enthusiastic. Most U.S. Defense companies support the FMS system, but a few see FMS as a threat to their Direct Commercial Sales (DCS). A large contract with the U.S. Government means that per-unit prices will be lower than commercial prices, which is one of the reasons why so many countries prefer to buy FMS. The USG allows defense companies to exercise a “right of refusal” over FMS requests, so the company could pursue a DCS instead (and presumably try to charge the foreign customer a higher price).

The reality is that many countries choose to go FMS primarily for the simplicity of the process, not for the product itself. Their primary interest is simplifying the procurement process, and the associated international logistics, by outsourcing those procedures to the U.S. DOD. I saw this happen once: FNH exercised its right of refusal to sell the M240B via FMS, stating that the weapon may be purchased directly from FN Herstal. The foreign nation then chose to order U.S. Ordnance’s MK43 instead – and they ordered it through an FMS case. Refusing the FMS case cost FNH the sale.

In a separate note, Sandy Henderson—Beretta’s Channel Marketing Manager for Law Enforcement & Military—was very kind in giving me a detailed explanation of SAKO’s M10 Multi Caliber Configurable Sniper Weapon, the company’s entry to SOCOM’s Precision Sniper Rifle (SPR) competition. The M10 is an impressive weapon, reconfigurable from .308 Win to .300 Win Mag. to .338 Lapua Mag. with no extra tools than the ones included with the rifle. SAKO’s renowned expertise in bolt-action firearms clearly makes the M10 one of the strongest contenders for the SPR contract. Mr. Betzold also pointed out that if the M10 is selected as the SPR, it would be also available via FMS to international customers.

Kudos to Beretta for its commitment to FMS!

What other companies do you see using FMS effectively? Do you agree with this approach?

September 25, 2012 By Matias Maloberti

Chinese Military Sales a Threat to U.S. Defense Companies?

Will Chinese military sales eventually displace U.S. defense companies in the international market? A well-researched article last week pointed out that in the last 10 years, China’s foreign military sales increased 95%, making it the world’s 6th largest arms supplier. The same article says that China is “creating its own military-industrial complex, with the private sector taking a leading role.”

The article focuses mainly on China’s dramatic military expansion, which is worrisome enough on its own. However, rather than focus on China’s military capabilities, let’s look at the commercial side: Will the expansion in China’s military exports threaten or displace U.S. military sales?

As the article points out, in recent years the quantity of Chinese arms sales has exploded. China has made major sales to Bangladesh, Pakistan, North Korea, Iran, sub-Saharan Africa, and many others. South America, traditionally a U.S./European customer, got into the game with the purchase of Chinese aircraft (Bolivia and Venezuela), radars (Ecuador), and helicopters (Bolivia). Even Peru, a strong U.S. ally, was convinced by Chinese defense contractors to cancel a $114M contract with a U.S/Israeli/European consortium. “This contract cancellation shows that the Chinese contractors are becoming more sophisticated players in the Latin America arms market,” said R. Evan Ellis, an assistant professor at National Defense University in Washington.

Although Chinese exports are growing, U.S. military exports still hold major competitive advantages:

Post-sale support: Especially when offered through FMS, U.S. weapons sales are typically part of a “total package” deal, including spare parts, training, and post-sale support. The Chinese usually offer none of this.

Quality and dependability: U.S. defense products work, while Chinese products may not. This is not just a preconception: the Chinese radars purchased by the Ecuadorian Air Force never actually worked.

Compatibility and interoperability: For those countries that already own U.S. weapons systems and/or operate alongside U.S. forces, is much better off sticking with American-made. Chinese systems are difficult (if not impossible) to be properly integrated with U.S. hardware.

Communication: English as a second language is far more common than Chinese. Around the world, armed forces are much more likely to speak and read English, making it MUCH easier for them to read operating manuals and seek maintenance support.

New technologies: U.S. companies are constantly innovating; Chinese companies are generally reverse-engineering. China has yet to introduce any new technology or groundbreaking new system.

Financing: The Chinese often sell arms in exchange for promises of natural resources – oil, minerals, etc. – which may allow cash-strapped countries to make deals they otherwise couldn’t afford. On the other hand, the USG can help purchasing countries by arranging a Foreign Military Sales (FMS) payment schedule that matches their financial requirements. In addition to this, the USG also has the Foreign Military Financing (FMF) program, where it essentially gives countries grants to purchase U.S.-made military equipment.

To keep things in perspective, in 2011 the total value of Chinese arms exports were only 13.6% of U.S. exports. While there has been a clear trend of explosive growth in Chinese exports, the U.S. defense industry still holds numerous advantages, and its dominance in the industry will continue.