What does the Offsets clause mean?

[JayATL]

Regarding MMRCA terms

50 percent of the foreign exchange component of the purchase costs being
defrayed through direct off sets within the Indian aerospace sector.

can you explain in baby steps how offsets works? give some layman examples to understand it. I understand the term offset but I am not getting it ( above)

thanks in advance

 

[Oracle]

Say, India buys $100 million of a defense product from US companies. So, according to the offset clause, $50 million has to be re-invested in Indian defense industries by US companies. This will help Indian defense companies attain indigenous technological capabilities and know-how, as MRCA comes with ToT. Experts in here, please do correct me if I am wrong. Btw, I think it is 30% and not 50%.

 

[Yusuf]

For the MRCA its 50%. I think its 50%. If the contract value is more than 500 Million or something.

 

[JayATL]

thanks fellas, - what I'm not getting is - what is the benefit to the US companies for putting up such a high investment? that's a substantial percentage of a sale.

 

[Yusuf]

Makes india a hub for components. Helps india get high tech stuff. Gives western companies low cost manufacturing base.

 

[Oracle]

thanks fellas and what is the benefit to the US companies for putting up such a high investment? that's a substantial percentage of a sale.

US companies? MRCA has not been announced yet. But whoever wins will have to put up that investment, this is what the clause demands.

Apart from ToT, this might also include production lines being built by the winner in co-operation with Indian companies. This will significantly reduce labor costs. It's a win win for all.

 

[JayATL]

well I think amerika and India and inter change at times. bad habit as for me both = we/ I .

Aha- The cost savings must be it. Because these lines are already in place in the US ( for example) and they have to be built from scratch in India. but it much be more cheaper even so to produce the same aircraft. got it - muy buena amigos, gracias!

 

[zeccor]

does that mean for the mmrca the offset cost to be invested back in india by the vendor will be close to 6 billion dollars ? what kind of re investment are we looking at
1 . technology transfer
2 . factories for spares and parts
is it feasible economically for the company that wins the competition ?