feature article

August 2006

Overseas Companies Adapting to U.S. Market Needs

By Grace Jean

PARIS — With current commitments driving the high demand for military equipment, foreign companies perceive the U.S. defense market to be the proverbial pot of gold.

Though breaking through American bureaucracy and politics to sell wares remains a daunting challenge, industry representatives at a recent international ground warfare conference here say their businesses are becoming savvier at catering to U.S. defense needs.

While European defense budgets remain on a downward slope, U.S. military spending has surged dramatically since the 9/11 attacks. Non-U.S. firms acknowledge that the Pentagon generally buys most major weapons systems from U.S. manufacturers, but many niche areas in the market increasingly are open to international competitors.

From forming partnerships to custom-designing products, companies reveal they use multiple strategies to gain American clients.

“The U.S. is one of the most important markets,” says Yair Atzmon, head of the ground division for Aeronautics Defense Systems Ltd., an Israeli company that produces unmanned aerial systems.

Two years ago, the company formed a “strategic alliance” with a business unit of General Dynamics, based in Falls Church, Va., to market tactical UAVs and other technologies to the United States.

“It’s the most important partnership we have. Without it, we wouldn’t have sold [products] to the U.S. market,” says Atzmon.

Having such a relationship has allowed the company to gain insight into the market and gauge how it can provide better products.

“With friends in General Dynamics, we are adapting to the needs of the United States to respond to the needs of the market,” he says.

That is a different mode of operation for the company, which usually deals with countries that are less familiar with available technological offerings. Often, it is the company informing the buyers of potential products and setting the pace of the market, not the other way around as it is in the States, he says.

“They know exactly what they want,” says Atzmon of the U.S. defense market’s biggest customer — the nation’s armed forces.

Plus, “they have high standards,” adds Aku Salmi, sales manager for SAVOX Communications Ltd., a small company based in Finland.

As a result, learning what those exact requirements are and conforming products to those specifications are mandatory if a product is to succeed, they say.

To get an edge on the market, SAVOX has been putting effort into designing U.S.-specific products so that it can put forth proposals that fit American forces, says Salmi.

“We need to adapt, so it feels good to the U.S. customer. We’re aware of that,” he says.

The company modified one of its communications headsets for use by U.S. Air Force rescue teams and also created a new product as a result of that adaptation, he says.

Manufacturers also need to recognize how buyers will employ their products. A technology can be extremely advanced, but if it doesn’t fit the concept, structure or culture of a nation’s military force, then it can be less useful, says Atzmon.

For example, he says, when the Israeli Army acquired the M-16 rifle from the United States, soldiers quickly discovered that they needed a new strap, because the way they held the guns at attention differed from how the weapon was designed to accommodate its intended users — U.S. forces.

Small details, such as how a product will be operated, can be tricky to anticipate, but they are easy to overcome, he says. Aeronautics’ products are made for English-speaking operators, but in order to sell unmanned systems to Russia, the company had to translate all of its printed texts and digital settings into Russian.

The biggest challenge for foreign companies is winning a contract in the United States, Atzmon says. Rather than trying to demystify the politics of contract bidding, his company focuses on making the best technology and relies on its U.S. partner to do the rest.

“General Dynamics knows better how to handle the contracting process,” he says.

However, finding a partner is not so easy, and finding the right U.S. partner can prove to be a formidable task, says Gilles Servanin of Panhard, a French company that produces military combat and support vehicles. He says the company previously attempted to export a small vehicle to the United States without a partner. Now it is searching for one in hopes of marketing two of its new multi-purpose armored vehicles to the States.

“We are open to any kind of agreement,” he says, even if it means using only customer-specified parts on the vehicles.

But simply because a company establishes a partnership doesn’t guarantee its products will be exported to the United States.

“We look at a lot of products and say, ‘It’s a wonderful product, but we can’t sell it,’ because there’s prejudice in the U.S. market against that particular kind of product, prejudice against the company or country, or there’s an upstart technology that a U.S. firm is offering,” says John “Jed” Dunbar, senior vice president for business development at DRS Technologies, headquartered in Parsippany, N.J.

The U.S. defense industry’s close ties to the political process — not unlike the industry-government connection seen in many countries — make it a natural deterrent to some companies that aspire to export products into the market, says Lt. Col. Jochen Reinhardt, a procurement officer for the German Army. Standing next to ARTEC’s new eight-wheeled armored vehicle, Boxer, which has been acquired by the German and Dutch armies, Reinhardt says the chances of exporting such a vehicle to the United States are quite slim as a result.

In an era of acquisitions and mergers, when large defense companies buy up smaller ones on a regular basis, international partners can become ensnared in situations that turn allies into unwitting competitors.

France’s Giat Industries pursued a partnership with United Defense Industries Inc., in 2004 to help market CAESAR, its 155 mm 52-caliber wheeled self-propelled howitzer, to the U.S. Army and Marine Corps. However, when the United Kingdom-based BAE Systems acquired United Defense the following year, the CAESAR program rammed heads with an artillery system being offered by BAE Systems. Rather than have two howitzers competing against each other, BAE Systems focused on its homegrown project, which subsequently won the joint Army-Marine Corps contract.

Pierre-Andre Moreau, managing director for Giat’s artillery sector, says the company is frustrated over the lost opportunity for CAESAR in the U.S. military.

“This system could have been key for U.S. forces,” he says.

The company remains focused on delivering its howitzer to the French Army and promoting the product in Australia. While it recently signed a contract to export the system to the Thailand Army, its future in the U.S. market remains uncertain.

“Due to the situation, we would not come back to the States without someone else,” says Moreau.

An industry source says one potential customer could be the Marine Corps Special Operations Command.

Buying up American companies, as BAE Systems has done, is one way to ensure a viable presence in the market, says Fred Marion, president of the surveillance and reconnaissance group at DRS Technologies.

BAE Systems’ success lies in part with those acquisitions and its agreement with the Defense Department to protect sensitive information by keeping its North American offices firewalled and separate from its overseas entities, he says.

By manufacturing systems in their U.S. locations, foreign companies also satisfy the “buy American” mandate.

“I think the influx from the outside will continue,” says Marion, with large foreign companies increasingly setting up shop and purchasing U.S. businesses.

“Every major company in Europe, in Israel, all over the world, probably look at the U.S. with a very envious eye, because this is where the requirements are, this is where the activity is, and it’s a good market,” he says.

Smaller companies, too, have their eyes on the market. While they may not have the buying power of large corporations, they recognize that having partners inside the country with a persistent presence can be most beneficial.

“You need to have antennas there,” says SAVOX’s Salmi. His company has “antennas” in Ohio, through ProComm Americas Ltd.

These overseas companies have pinpointed the secret to doing business in the United States, say U.S. industry officials.

“You really have to have a great contact, or a great product. There’s got to be something here that opens the door. You can’t just walk in,” says Marion.

Partnerships with U.S. companies can benefit both parties, says Dunbar of DRS. “It’s a two-way street. We want people after our products and their markets, and in exchange we’re offering our market to them,” he says.

Still, some companies say they feel that they don’t have much to offer to the U.S. defense market. Italy, like other countries, has developed a future soldier system that it wants to export to other European nations, but not to the United States, because its industry can provide better equipment than Italian companies can offer, says Stefano Livi, of Galileo Avionica, one of several defense companies under Finmeccanica, Italy’s largest industrial conglomerate of military technology manufacturers.

“We are at a lower level,” and Italy cannot compete with the huge U.S. defense budget that allows numerous companies to work on many products, including the U.S. Army’s future soldier ensemble, he says. Industry representatives agree that the U.S. market won’t continue to grow at the same rate as it has during the past five years. The future lies instead in the global market, with an emphasis on homeland security.

“Every time we have a downturn in the domestic market — which we can expect to see probably in the next couple of years in the United States — people will gravitate rapidly to the international market, thinking that that’s where they can replace all of those opportunities that they may not have anymore,” says Marion.

But it will be a very difficult market, he adds.

Not only will there be more competition, says Giat’s Moreau, but there also will be more producers out there marketing similar wares. The key to success will be to maintain knowledge and expertise a few steps ahead of those competitors, he says.

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