Approaches to industrial offset and technology transfer are changing in Asian nations
ANDREW DOYLE / SINGAPORE
Just as it seemed that demands for 100% industrial offset against contract value were becoming a standard feature of defence sales in Asia and elsewhere, governments and industry have begun to question whether such generous financial provisions are in everyone's best interests.
The realisation is dawning that most long-term offset commitments are never fully honoured as governments change and oversight inevitably diminishes over time. Added impetus is coming from the new US Administration of President George Bush, which appears not only to no longer support offset provision by US companies, but may even begin to discourage the practice, government sources say.
"The position being taken by the US Government is to disassociate itself from any of those issues which should be handled industry to industry," says one source. "There is a feeling that offset is not in the best interests of the US Government or US industry and the US Government is beginning to discourage the practice. You don't need offset if you've got the best products which can compete on their own merits."
As several Asian nations are demonstrating, however, technology transfer can be used to better equip indigenous aerospace industries for the future. It provides them with expertise to bid for additional work packages on a purely commercial footing, rather than leaving them reliant on rigid offset-related production contracts.
Singapore stand-off
One country in the region, Singapore, has rejected the concept of industrial offset outright, preferring instead to leverage its military purchases to gain the expertise it needs to become a major partner in international aircraft development and upgrade programmes. Bidders in the island state's forthcoming fighter competition will be expected to demonstrate that both their company and their home country's government are prepared to make a long-term commitment to their relationship with Singapore and put forward proposals for technology transfer.
Some of this transfer will result from Singapore's need to understand its chosen product to make full use of its capabilities, although the winning manufacturer will also be expected to support Singapore's efforts to enhance the capabilities of the aircraft and weapon system throughout its service life. Candidates are the Boeing F-15 and F/A-18E/F, Dassault Rafale, Eurofighter Typhoon and Lockheed Martin F-16.
Most other nations in the region do not share Singapore's lack of enthusiasm for industrial offset, mainly because they need a steady flow of work to occupy their more traditional aerospace manufacturing infrastructure. Malaysia, for example, has developed close industrial ties with BAE Systems in a relationship that began as a result of offset on a deal for Hawk training aircraft. As a result, BAE officials believe, Malaysian industry has been able to bid successfully for several other production contracts on a purely commercial basis.
Local Malaysian industry makes leading- and trailing-edge wing parts for all Airbus aircraft types and has responsibility for the design and manufacture of some parts for the UK Royal Air Force's upgraded British Aerospace Nimrod MRA4. Boeing has also invested heavily in Malaysia, supporting the sale of F/A-18s to the air force and civil airliners to flag carrier Malaysia Airlines.
BAE is backing Malaysian efforts to develop the Eagle unmanned air vehicle, which should make its debut at the Langkawi air show in October. The UK company maintains that, while it hopes such a collaboration will boost its chances of clinching more defence contracts, it must still satisfy its shareholders there is a viable business case for participating in the project. Direct offset against future contracts on a case-by-case basis will still be "an issue" for BAE, although the company is "trying to steer away from that".
The Malaysian Industry-Government Group for High Technology (MIGHT) represents the country in the so-called"D-8" group of developing nations which has set the joint development of an agricultural aircraft as one of its goals. The other members are Bangladesh, Egypt, Malaysia, Nigeria, Indonesia, Iran, Turkey and Pakistan.
MIGHT is also involved in the Society of Japanese Aerospace Companies' "Asean Community Airplane" study, which, it says, "provides an opportunity for local aerospace companies to explore collaboration with their Japanese counterparts". Malaysia has set itself the goal of establishing an indigenous aerospace industry capable of designing, developing and manufacturing its own aircraft within the next 20 years under its "Vision 2020" plan.
Meanwhile, industrial offset and technology transfer are playing a pivotal role in the F-X competition in South Korea, where the Eurofighter, F-15K and Rafale are shortlisted for selection, expected by the end of the year. Western manufacturers view South Korea as particularly adept at leveraging a major aircraft purchase to advance the expertise of its domestic industry. "They know how to negotiate," says a source at one of the bidders for the F-X requirement.
Increased offset
In April, the South Korean Government suddenly increased the offset/technology transfer requirement from a previously specified 30% of contract value to 70% after coming under pressure from Korea Aerospace Industries (KAI). Formed through a merger of the aerospace interests of Daewoo, Hyundai and Samsung, KAI badly needs additional work to keep its underused factories occupied. Of the 70% offset value, 40% must be derived from manufacturing work (balanced between military and civil), 35% from technology transfer and 25% from depot-level maintenance of the selected aircraft. But industry sources involved in the South Korean competition say the figure of 70% is "quite large" and suggest that manufacturers would not have been prepared to offer 100% offset.
One of the issues that the bidders are grappling with is South Korea's unusual formula for calculating the monetary value of transferred technology. Under this formula each page of "information related to technology" that the country receives from a manufacturer is considered to be worth $10. Industry is attempting to persuade the South Korean Government to reassess this arbitrary approach as it fails to recognise the practical value in its need to be able to indigenously develop its ownF-16-class fighter aircraft over the next 10 years, including design and test facilities.
KAI is already benefiting from an earlier offset deal agreed with Lockheed Martin following a sale of F-16s to South Korea, which resulted in the two manufacturers collaborating to produce the T-50/A-50 Golden Eagle supersonic advanced jet trainer/light combat aircraft. The first T-50 is due to fly next year.
Role for Lockheed Martin
Lockheed Martin has only a 20% share of the programme. It is acting as a subcontractor to KAI, and is responsible for the T-50's avionics, flight controls and wings, and for technical support. More importantly, perhaps, for the longer-term prospects of South Korea's aerospace industry, 300 Lockheed Martin staff, including 80 engineers, are working on the project in-country. The US company's T-50 programme director, Charles Smith, predicts an export market for 800 aircraft over the next 20 years and says the fighter will be marketed alongside the F-16, F-22 Raptor and possibly the Joint Strike Fighter.
Japan, meanwhile, has traditionally opted to buy the technical data and licences it needs to home-produce foreign-designed military aircraft rather than rely on direct offsets. This approach ensures that its engineers and factory workers are kept occupied but it comes at a price, with aircraft such as the F-16-derived Mitsubishi F-2 support fighter costing at least $110 million each. Hence, US Government sources say, Japan has been showing signs of demanding more in the way of offsets, a development which is going to be hard to reconcile with the new US Administration's apparent reluctance to sanction such arrangements.
One US military official says: "The F-16 has a basic off-the-shelf price, and then the question becomes: 'How much content can you afford to produce yourself?'
"It's not all about technology transfer," he adds. "It's about maximising Japanese content because they don't have the opportunity to market weapons overseas. They want the capabilities and the jobs."
Source: Flight International
