Skip to comments.U.S. Industry Loses Big in India: Is ITAR to Blame?
Posted on 04/29/2011 6:16:30 AM PDT by sukhoi-30mki
U.S. Industry Loses Big in India: Is ITAR to Blame?
(Source: National Defense Industry Association blog; posted April 28, 2011)
Defense contractors and industry experts are trying to come to grips with Indias decision to exclude The Boeing Co. and Lockheed Martin Corp. from its $11 billion competition for a new fighter jet.
No specific rationale has yet been given by the Indian government for its determination to jettison Boeing's F/A-18, Lockheed F-16 and Saabs Gripen fighters, and proceed with a head-to-head contest only between two European offers the Eurofighter and the Dassault Rafale.
Companies are very concerned about the logic for the decision, said a U.S. industry source. Theres a bit of puzzlement.
India's decision was very surprising, says Tom Captain, vice chairman of global and U.S. aerospace and defense leader at Deloitte LLP. If the selection was based on technical merits, "It is difficult to explain how those two very capable aircraft were eliminated."
In the absence of factual information about how the selection was made, speculation is growing that restrictive U.S. export policies may have played a significant role in Indias evaluation of fighter jet candidates. Analysts had predicted that at least one of the two U.S. contenders would have the inside track. U.S. technology is considered more advanced, and more coveted by rising powers such as India. President Obama also raised the stakes by personally making a pitch on behalf of U.S. industry to Prime Minister Manmohan Singh during his visit to India. He also sent Singh a letter reinforcing the importance of Indias fighter program to the Obama administration. India is expected to buy up to 200 new aircraft.
We feel that our products are the best possible available, said the industry source.
India is projected to spend $80 billion on new weapons and space systems over the next five years. Its only a small fraction of what the United States spends, but the industry still regards it as a promising region where, once you get a foot in the door, opportunities could blossom.
Defense industry analyst Byron Callan contends that technology transfer was a major consideration in this competition.
Callan presumes that the U.S. government was unwilling to see key AESA [active electronically scanned array] radar and other avionics and electronic warfare technology made available at the level India wanted, Callan writes in a memo to industry investors. Technology transfer has also been a key consideration in Brazils FX fighter competition which has been delayed.
One issue to watch as a result of this decision, says Callan, is whether the U.S. further relaxes defense technology export restrictions in order to keep domestic production lines open. This is a major concern for U.S. manufacturers as Pentagon spending begins to contract next year. In the past, Callan says, when the U.S. restrained or reduced its defense spending, policy shifted to exporting advanced weapons to strategic partners.
He notes that F/A-18 production may still run through the end of this decade based on U.S. orders and from countries that had hoped for F-35s and who operate earlier-generation F/A-18s. The longevity of the F-16, meanwhile, hinges on its ability to win in niche markets in the Middle East, but it is less relevant to Lockheed Martin and Northrop Grumman (which makes the radar) with F-35 and the new bomber program ramping up.
For Boeing, losing Indias sales is a big blow because it needs foreign sales to keep the F/A-18 line open beyond the coming decade, unlike Lockheed, which has a long-term lifeline in the multinational Joint Strike Fighter.
It will be interesting to see what India does with combat fighter technology acquired from either Dassault or EADS and BAE Systems, and engine companies as well, Callan writes.
Larry Christensen, an export controls attorney at Miller & Chevalier, in Washington, D.C., believes the Indian decision will have lasting implications for U.S. industry, even though he says he has not seen any proof that Indias choice was influenced by ITAR, the International Traffic in Arms Regulations that restrict exports of sensitive U.S. technology.
The fact that an emerging power such as India would snub U.S. advanced weaponry offers further evidence that the current export control system which dates back to the Cold War has outlived its effectiveness, Christensen says. The U.S. government cannot repeal the laws of economics, he says. As the United States denies access to some of its best technology, it leaves a market void that, sooner or later, another country will fill. When that happens, the U.S. export control policy of denial, or policy of heavy restrictions, become ineffective for the purposes of barring potential enemies access to advanced weaponry, he says.
It is conceivable that India concluded that U.S. restrictions on technology sharing are not worth the hassle, Christensen suggests. Although the United States wanted India to buy its fighter jets, it was putting strings on those sales that would have curtailed Indias ability to upgrade components, software or sensors, or collaborate with other countries, he says. If India had picked a U.S. aircraft, ITAR would have "restricted them in their ability to move forward with that platform.
On a smaller scale, the same problem affects U.S. suppliers of less flashy products such as surveillance, law-enforcement and border protection technology, says Christensen. I know small firms that feel the pain of commercial customers saying that they like the U.S. product but they cant live with the restrictions and the overhead that goes with ITAR controls.
The consequences for U.S. competitiveness are significant, he says. The market is changing. Other countries are developing good technology. The time has passed when only the U.S., U.K., France or Germany were viable supplies of advanced hardware, he adds. Technology is now available from Russia, China and Israel, countries that are tend to place fewer restrictions on transfers.
Christensen points out that the Obama administration is taking meaningful steps to reforming ITAR to boost U.S. industry. I believe that there is significant movement, he says. Hundreds of government officials currently are busy redrafting regulations, he says. Its a long arduous task, and Im glad theyre taking the time to do it right.
Despite the Indian loss, U.S. arms are still hot sellers. The Pentagon is projecting arms sales to foreign buyers to exceed $46 billion in fiscal year 2011. Demand for U.S. weaponry is higher than ever, according to Richard A. Genaille Jr., deputy director of the Defense Security Cooperation Agency. DSCA currently oversees a $330 billion portfolio of foreign military sales to 220 countries and international organizations.
At an industry conference in April, Genaille discussed efforts by the administration to increase foreign military sales as a means to court allies and boost Third World countries internal security. The goal is to revamp how the U.S. government manages international arms sales so it can be more anticipatory of future needs and more responsive to foreign allies requests.
The Obama administration, which regards weapon exports as a vehicle for bolstering the U.S. economy, believes that current methods for managing arms sales are too reactive, rather than proactive, he said. Its hard to be responsive when our system is geared to wait for a letter of request from a country and then take action.
Obambi got the smack down! This is like when Obama wrote a letter to the Olympic committee. Perhaps it would be better if Obambi asked the Indians NOT to buy American aircraft -- they would have then bought American :)
For instance, circumventing ITAR by the Commerce Department under Clinton helped boost China's missile technology.
Well that was the kiss of death (Olympics). But this is a blow for Obama's export initiative. Exports have been growing and Obama jump on the band wagon and set a goal to double exports in 5 years. To do this, he needed some big deals to land. The export goal will not be reached without this deal...
On another note, I wonder what Boeing's opinion of the O'ster is... first the NLRB sue Boeing and now the administration loses this deal...
Horrible movie, but I don't think it is truly to blame in this case...
I blame baksheesh. In the US, no means no.
Once again, prosperity and success depend on a culture based on the Christian worldview.
I guess you need to thank baksheesh for the sale of the c-130, P-8I, C-17, Harpoon missiles and aircraft engines to India. All of which happened in the space of four-five years.
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