PARIS — Technology transfer and offsets are increasingly standard requirements of emerging markets, which seek to build up their defense industrial bases as part of economic development plans.
Demands by countries such as Brazil and India for the transfer of technology to set up local assembly of the Rafale may be acceptable to large companies such as Dassault, which builds the fighter jet, Colas des Francs said.
About 10 large companies, such as EADS, Nexter, MBDA, Safran and Thales, dominate the French land arms industry, but about 4,000 small and medium-sized companies depend on them for work.
Producers in countries such as India, which has a pool of information technology engineers, are building high-quality weapons, rather than cheap and basic products. The Indian variant of the Mi-24 attack helicopter was equipped with a thermal imaging camera and other sophisticated onboard equipment absent from the original Russian aircraft.
The United Arab Emirates demanded a local investment offset of 120 percent of the value of an unspecified French arms contract, Colas des Francs said.
Offset deals not only take production work away from French subcontractors and suppliers, but also provideaccelerated access to knowledge and skills that allows companies in the client country to compete in world markets, he said.
For instance, Renault Trucks Defense sold the Véhicule Avant Blindé armored troop carrier to Indonesia. Despite a no-export condition on that deal, the Indonesian model was found for sale in foreign markets, Colas des Francs said.
Offsets are common on civil contracts, such as China's demand for an Airbus 320 final assembly line.
Producers in countries such as India, which has a pool of information technology engineers, are building high-quality weapons, rather than cheap and basic products. The Indian variant of the Mi-24 attack helicopter was equipped with a thermal imaging camera and other sophisticated onboard equipment absent from the original Russian aircraft.
Turkish industry also is producing increasingly sophisticated arms, Colas des Francs said.
'Do You Want To Sell or Not?'
It is no longer possible to export a sophisticated weapon system without an offset and technology transfer arrangement, an analyst here said.
"The question is: Do you want to sell or not?" said Loïc Tribot La Spière, chief executive of think tank Centre d'Etude et Prospective Stratégique.
But even with the setting up of a foreign production line, not every subassembly or component part will be sourced from abroad, so there is a case-by-case approach. For the parts that will be made overseas, time is needed to establish the new supply lines, Tribot La Spière said.
The offset requirements should be seen as a "stimulus for innovation," pushing the supplier to climb the value chain and stay competitive, he added.
Even without the demands of a foreign offset deal, prime contractors would be pushing subcontractors in that direction, driving suppliers to "a pursuit of technological excellence," Tribot La Spière said. That pressure forces the supply chain to look for tomorrow's technology to stay in business.
As technology transfer is a standard requirement, the difficulty for exporters is to "play the game" while retaining control of key technology, particularly in the design area, which allows their customers quickly to become competitors, said research fellow Hélène Masson of think tank Fondation pour la Récherche Stratégique.
Offset agreements require prime contractors to get close to local subcontractors, or create a supply chain from scratch by bringing in local partners, she said.
"It's in this context that established subcontractors find themselves effectively excluded from the benefits of export con-tracts, unless they follow them abroad and create a local subsidiary," Masson said. "That's possible for large equipment makers, but a lot more difficult for small and medium-sized companies."
The demand for technology transfer in export markets is part of the "rules of the game," Thales CEO Luc Vigneron told journalists Feb. 16 at the company's technology day, a showcase of some 100 research and development projects.
"Accepting the rules of the game means we have to innovate further," he added. "We at home have to work on the next generation."
Asked if India could build an active electronically scanned array radar, Thales chief technical officer Marko Erman said, "Not in the very near future, but who knows?"
Erman later added, "To our knowledge, only France and the United States have operational actively scanned radars, but studies are being done in India."
India seeks 50 percent industrial offset and is in exclusive talks with Dassault to buy the Rafale, which operates a Thales RBE2 active scanned radar, to fulfill its multibillion-dollar program for a multirole fighter aircraft.
Export markets offer alternative sources of research and technology funding, given the defense budget cuts in European markets, Erman said.
The European Commission is working on a regime aimed at discouraging offset requirements among its member states. Poland, Spain and the East European countries still require offsets in foreign trade deals.
Arms manufacturers such as General Dynamics European Land Systems, Panhard and Rheinmetall are members of the European Club for Countertrade and Offsets, which acts as a forum and think tank on industrial offsets.
