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India's offset shuffle
The world's biggest military importer wants more than hardware from foreign suppliers.
It is difficult to overstate the importance of India to the world's big defence players. As western powers sharply reduce defence expenditure, India beckons as the world's biggest importer. Its airforce operates largely obsolete types, while across the Himalayas regional rival China is determinedly upgrading its airpower and aerospace industry.
Aside from the competitive cut and thrust of international arms sales campaigns, one key challenge facing defence aerospace players in India is offsets – the requirement,typically set by developing nations, that a certain percentage of the value of an import deal be locally sourced, to soften the balance of payments impact and/or develop local technical capability. In India, these deals amount to big money; the country's 2012-2013 defence budget of $34.8 billion includes $8.7 billion for the air force, and foreign contractors must generally invest 30% of a deal's value back into India through offsets. In the recent case of the medium multi-role combat aircraft competition provisionally awarded to Dassault of France, the offset value is 50% of what could end up being a $10-20 billion deal for Rafale fighters. Other recent deals with large offsets include $1.2 billion for six Lockheed Martin C-130Js, $2.1billion for eight Boeing P-8I maritime patrol aircraft and $1.78 billion in 2011 for 10 C-17s.
NEW SET OF RULES
But now India has changed the rules, with a 38-page document released this month. Foreign suppliers are still sifting through the details, but have been generally positive. Ron Matthews, an offsets expert at Singapore's S Rajaratnam School of International Studies, says the latest policy is part of an Indian move to broaden an overly rigid offsets policy set in 2005 to go beyond defence and include high-technology sectors including homeland security and commercial aerospace. One industry source says a revision that allows parties to change an offset project following its approval is a major improvement. This is especially relevant for offset deals involving high-technology systems. The revisions affect a number of other key areas. One major change is the use of "multipliers" designed to encourage the transfer of high technology. The new policy also lends a hand to India's small and medium enterprises. Direct export, foreign direct investment, and technology transfers to such firms through a non equity route will receive a higher weighting compared with a contractor's offset obligations.
"Generally, the new policy is along the lines of what we expected, allowing for a greater flexibility both in terms of what areas come into play, as well as the time scales allowed," says a New Delhi- based defence industry source who welcomes the introduction of value multipliers, of 1.5x if the offset partner is a small or medium sized company and 3x for high technology components: "It is wise to encourage high-technology transfer, as opposed to shifting expired technologies. "The use of multipliers gives the government a powerful tool to direct investments into areas they deem as most prioritised at any given time."
Another industry source, however, feels offsets have a "huge impact" on the profitability of defence deals in India. He also notes that western defence contractors have spent decades and countless billions developing intellectual property, and need to be rewarded for sharing this know-how. "We are not going to throw away our IP for the sole purpose of meeting offset guidelines," he says. One way to balance the impact of offsets on profits would be to require offset partners to pay franchise fees or royalties on technology transfer arrangements.
BIG BUCKS TALK LOUDEST
Ultimately, though, India's appeal as the biggest export prize should trump such concerns. As Matthews sums up the situation: "Given all the industrial weaknesses that India's defence sector labours under, including excessive bureaucracy and a constrained private sector, it nevertheless enjoys that greatest advantage of all in ensuring offsets will work: the scale of procurement. This is so huge it will force foreign vendors to concede to attractive offset arrangements. "The lure of the deal outweighs the pain of losing unimaginable revenue and profit."
Source: Flightglobal Magazine 28Aug
The world's biggest military importer wants more than hardware from foreign suppliers.
It is difficult to overstate the importance of India to the world's big defence players. As western powers sharply reduce defence expenditure, India beckons as the world's biggest importer. Its airforce operates largely obsolete types, while across the Himalayas regional rival China is determinedly upgrading its airpower and aerospace industry.
Aside from the competitive cut and thrust of international arms sales campaigns, one key challenge facing defence aerospace players in India is offsets – the requirement,typically set by developing nations, that a certain percentage of the value of an import deal be locally sourced, to soften the balance of payments impact and/or develop local technical capability. In India, these deals amount to big money; the country's 2012-2013 defence budget of $34.8 billion includes $8.7 billion for the air force, and foreign contractors must generally invest 30% of a deal's value back into India through offsets. In the recent case of the medium multi-role combat aircraft competition provisionally awarded to Dassault of France, the offset value is 50% of what could end up being a $10-20 billion deal for Rafale fighters. Other recent deals with large offsets include $1.2 billion for six Lockheed Martin C-130Js, $2.1billion for eight Boeing P-8I maritime patrol aircraft and $1.78 billion in 2011 for 10 C-17s.
NEW SET OF RULES
But now India has changed the rules, with a 38-page document released this month. Foreign suppliers are still sifting through the details, but have been generally positive. Ron Matthews, an offsets expert at Singapore's S Rajaratnam School of International Studies, says the latest policy is part of an Indian move to broaden an overly rigid offsets policy set in 2005 to go beyond defence and include high-technology sectors including homeland security and commercial aerospace. One industry source says a revision that allows parties to change an offset project following its approval is a major improvement. This is especially relevant for offset deals involving high-technology systems. The revisions affect a number of other key areas. One major change is the use of "multipliers" designed to encourage the transfer of high technology. The new policy also lends a hand to India's small and medium enterprises. Direct export, foreign direct investment, and technology transfers to such firms through a non equity route will receive a higher weighting compared with a contractor's offset obligations.
"Generally, the new policy is along the lines of what we expected, allowing for a greater flexibility both in terms of what areas come into play, as well as the time scales allowed," says a New Delhi- based defence industry source who welcomes the introduction of value multipliers, of 1.5x if the offset partner is a small or medium sized company and 3x for high technology components: "It is wise to encourage high-technology transfer, as opposed to shifting expired technologies. "The use of multipliers gives the government a powerful tool to direct investments into areas they deem as most prioritised at any given time."
Another industry source, however, feels offsets have a "huge impact" on the profitability of defence deals in India. He also notes that western defence contractors have spent decades and countless billions developing intellectual property, and need to be rewarded for sharing this know-how. "We are not going to throw away our IP for the sole purpose of meeting offset guidelines," he says. One way to balance the impact of offsets on profits would be to require offset partners to pay franchise fees or royalties on technology transfer arrangements.
BIG BUCKS TALK LOUDEST
Ultimately, though, India's appeal as the biggest export prize should trump such concerns. As Matthews sums up the situation: "Given all the industrial weaknesses that India's defence sector labours under, including excessive bureaucracy and a constrained private sector, it nevertheless enjoys that greatest advantage of all in ensuring offsets will work: the scale of procurement. This is so huge it will force foreign vendors to concede to attractive offset arrangements. "The lure of the deal outweighs the pain of losing unimaginable revenue and profit."
Source: Flightglobal Magazine 28Aug
