To thrive in this environment, defense contractors can no longer rely on a classic arm’s-length framework, in which a U.S.-based defense company, for instance, does business with a foreign country only as an exporter of products. Instead, defense contractors will be building closer relationships with more countries: assessing each market individually, deciding which are appropriate to do business with, and designing programs tailored to each country for business development, industrial participation by local businesses, and long-term investment. This is particularly important for U.S. contractors, which are somewhat hamstrung by the strong dollar. As U.S. products become more expensive than similar equipment produced in non-dollar denominated countries, American defense companies will have to “sell” cooperation and collaboration as a valuable benefit that makes it worthwhile and affordable for foreign customers to access U.S. military devices and technology.
Defense ministries are relaxing foreign direct investment constraints and asking defense contractors from outside their borders for commitments to their countries that go well beyond traditional short-term, relatively mild offset agreements (contract-related givebacks in the form of minimal intellectual capital transfers and the use of local suppliers, among many other things). The ministries now want broad-based, explicit, and often extensive skills and knowledge transfer to build up their own industrial and military capabilities and diversify their economies. Their goal is to evolve from being an importer of technology to having the indigenous capability to develop and export their own defense products and services.
One example of this type of deal is the joint venture between Boeing and Tata Advanced Systems in India. The companies have agreed to co-produce Boeing AH-64 Apache helicopter fuselages and other aero structures. The Hyderabad-based production facility will eventually be the sole global producer of AH-64 fuselages. In a similar vein, a Northrop Grumman joint venture in Saudi Arabia is designing systems and technology for high-end security systems to protect critical infrastructure in the area. In this arrangement, U.S.-derived technology and staffers are augmented by Saudi engineers and selected partners from other Saudi defense-related enterprises. In Japan, Lockheed Martin, Mitsubishi, and Sampa Kogyo K.K. have formed a joint venture that will work with government military experts to design combat systems for the Japan Maritime Self-Defense Force (JMSDF). And another Saudi arrangement involves Britain’s BAE Systems, which has a wide-ranging deal to provide electrical engineering know-how, IT systems, and training for both military and industrial development in Saudi Arabia.