International Defense Markets: Seizing Opportunities, Avoiding Common Pitfalls
By Mrinal Menon and Aleksandar D. Jovovic
The past decade has been a period of unprecedented growth in U.S. arms sales overseas. Foreign military sales could reach a record $50 billion by the end of fiscal year 2011.
Annual foreign military sales grew from $8 billion to $38 billion over the last 10 years, and in the past several months alone, the United States has announced a $5.8 billion sale of C-17 aircraft to India, a $6 billion agreement to provide a range of defense equipment to Iraq and a massive $60 billion arms deal with Saudi Arabia. This uptick in international business comes as a welcome respite from dreary forecasts for the U.S. defense industry’s domestic market, and it elevates foreign sales from an often ancillary activity to a major growth opportunity.
U.S. companies looking to expand their footprint abroad are encountering a rapidly changing international landscape. The well-developed markets for U.S. defense products in Western Europe and other NATO countries are lagging as a result of acute budgetary pressures. Instead, the Middle East, and emerging markets in Asia and South America will account for the bulk of major arms purchases over the next decade.
While many top tier defense firms are well versed in the complexities of international sales, for others the imperative of growing their business will force them to confront a host of unfamiliar challenges. Even for the largest defense primes, the shift in emphasis from large platform sales to more diverse systems and subsystems will stress their existing operating models and practices.
Compared to highly regimented and relatively transparent processes in the United States and, to some extent, NATO allies, the defense acquisition practices in many growing markets are a continuing source of frustration for Western firms. Regulations and decision-making processes are often both opaque and underdeveloped, making it difficult to ascertain the playing rules, let alone the requirements for success. Decisions take years longer than expected.
Long a part of international sales, offsets remain a key component of many transactions. While direct offsets tied to building indigenous defense industrial capabilities are still part of the mix, the offset framework has expanded to encompass a broad range of indirect (and barely related) trade and investment initiatives. Depending on the size of the acquisition, offset obligations can be extensive and difficult to discharge. The most successful firms take a proactive approach to offset requirements, seeking to fulfill their obligations in ways that not only satisfy the overall program intent, but also build good will and thus improve their competitive positions over the longer term.
Export restrictions for U.S. technology also are likely to remain major obstacles to international sales. Delays, denials, and uncertainty regarding which technology or technical data can be transferred to foreign countries impose additional costs and delays that undermine the competitiveness of U.S. firms as compared to their foreign competitors.
European firms, as well as less familiar competitors from China, Russia, and Israel, have worked tirelessly over the past decade to build and sustain a solid footprint in key emerging global markets. For example, while U.S. firms are still struggling to determine how best to serve the Indian market, Israeli firms can look back at nearly a decade of remarkable success. Moreover, non-U.S. firms are often quite adept at navigating murky bureaucratic processes, are keyed in to customer preferences, and are unburdened by stringent anti-corruption measures, such the U.S. Foreign Corrupt Practices Act.
Despite these challenges, the allure of new global markets will drive many U.S. companies to try to expand their international business presence. International sales approaches can range from resource-intensive corporate efforts, to opportunistic ventures undertaken by individual business units.
Unsurprisingly, the more aggressive a firm’s international revenue targets, the higher the necessary commitment of resources.
Firms with smaller scale offerings typically elect the tactical route, seeking sales with shorter lead times and greater certainty of fruition. An international footprint that relies heavily on local agents and commission-based sales representatives may prove sufficient to provide exposure and accomplish sales across a number of countries. Conversely a portfolio of large platforms or other high-value items requires a more resource-intensive approach. “Badged” employees and a full time in-country presence are often necessary in key countries to manage long-term capture efforts, and oversee local partnerships, subsidiaries or acquisitions. In-country employees can shape demand and requirements, but engender substantial costs in overhead and leadtime. The most successful firms opt for a calibrated response.
The appropriate human resources, legal, and other internal processes must be in place to vet, hire, and train personnel in foreign countries. Legal teams must be well versed in both local and U.S. laws and export control regulations, which are crucial to correctly interpreting complex acquisition procedures and avoiding costly fines and penalties.
While the international arena will present challenges for most U.S. defense firms, it represents a key avenue of growth at a time of strained domestic defense spending. With forethought and preparation, organizations can capitalize on opportunities in the international market while avoiding pitfalls that many U.S. firms have faced abroad. Mrinal Menon is a senior analyst and Aleksandar D. Jovovic is a senior associate at The Avascent Group. Stephen T. Ganyard, president of Avascent International, contributed to this piece. They can be reached at firstname.lastname@example.org, email@example.com and firstname.lastname@example.org