European Union Limits Offsets

July 2, 2009 by Matthew Potter · 1 Comment
Filed under: Business Line, Events, production program 

Offsets are the practice of when one country buys a system or services from a company in another they require that company to invest in their economy. They are not uncommon in the defense business. Right now India especially has very strict offset rules that have led to some controversy.

The European Union announced yesterday some rules to make offsets more targeted and defense related among its member countries. In the past some country’s have requested offset investment in their civil economy rather then in defense work. Normal procedure is to buy services, parts or maintenance related to the contract awarded.

The new rules require that the offsets be defense related. They also limit the total value to no more then equivalent to the awarded contract. Most often offsets are some percentage of the value so these rules are not to onerous. The EU has moved recently to tighten up competition among the various countries penalizing Italy for favoring their own internal industry over other available sources for example.

The offset rules announced will probably have limited effect since many of the projects are already shared among a variety of suppliers such as the Typhoon. If there is a decline in defense spending and the number of large contracts available there will probably be more efforts to expand competition and restrict protectionist policies.

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Budget Woes Affecting Key Canadian Modernization Program

May 21, 2009 by Matthew Potter · Comment
Filed under: Boeing, Business Line, Canada, Companies, Contract Awards, Countries, Events, Military Aviation, Proposal, Restructuring, production program 

Canada has suffered from a shortage of internal lift capability both strategic and tactical. The government had decided to purchase sixteen CH-47F Chinook helicopters to provide the tactical lift capability needed in Afghanistan. Operations there require substantial helicopter forces and the high and hot conditions need big, powerful aircraft.

Now there is a report that Canada may look at reducing the number of aircraft procured due to the budget problems facing all of the world’s governments. The contract with Boeing is still in negotiation so a change like this of cutting two aircraft bringing the total to fourteen is certainly easier then after the award. The total cost savings though may not be that much unless other customers can be found for the two aircraft. The more you buy of something the cheaper they are so reducing the buy to save money may cause a slight cost increase in the ones remaining.

Unfortunately Canada is now joining Britain with its Typhoon problems were the lack of money available is starting to affect military procurement programs. Discretionary spending in budgets is limited and weapons spending is one area that may be cut. If the world’s economy doesn’t turn around soon we will see more of these program changes. The start will be nibbling around the edges and then whole programs finally being ended.

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England Looking At Harder Line On Typhoon Buy

May 12, 2009 by Matthew Potter · Comment
Filed under: Business Line, Companies, Contract Additions, Countries, EADS, England, Events, Germany, Military Aviation, Restructuring, Saudi Arabia, Spain, production program 

Update — It was reported on Monday that the expected penalties and cancellation fees related to the UK’s buy in this round for the advanced aircraft will be over two billion pounds ($3 billion or so). This amount of money may make it more feasible to purchase the aircraft. While penalties are capped at the two billion figure there would still be termination fees. The economic effect of ending the program would also be substantial as there are several thousand jobs in the UK that rely on the program. The decision on this effort will not be easy for the Brown Government already facing a dire financial situation.

As we wrote about previously England’s budget struggles are causing it to rethink the upcoming contract buy of Typhoon fighters. If England does not participate fully in the third option then either the other countries will have to renegotiate the prices most likely to a higher number. England does have the option of ending their participation in the multi-national contract but would have to pay substantial termination fees that might end up higher then the cost of buying the aircraft.

The interesting thing is that it was England worried that some of the other participants may have left the contract that worked to have the high fees put in the contract. England is trying a third option where most of there scheduled buy will go to Saudi Arabia rather then to them allowing some savings. The Brown government like Obama in the U.S. is facing trying to pay for a large economic stimulus package as well as increased social spending. This has put pressure on a military budget already suffering from the combined campaigns in Iraq and Afghanistan. Like Obama is doing one way to save money is to end large procurement programs to save defense spending. They can either be stopped in development or less units can be bought, like the F-22. Unfortunately the less you buy the more they cost so total savings may be limited.

If England does renege on this contract there will be significant future issues with their partners and for the Eurofighter consortium.

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UK Signs CLS Contract for Typhoons

March 5, 2009 by Matthew Potter · Comment
Filed under: BAE Systems, Business Line, Companies, Contract Awards, Countries, England, Events, Military Aviation, logistics, production program 

The British government awarded BAE a contract to provide Contractor Logistics Support (CLS) for its Typhoon fighters. DefenseNews reports that the base contract is for five years, but may be extended up to another ten. The British have been moving towards more use of contractors to provide training and maintenance for their aircraft over the last few years. This contract is worth about $600 million. A separate contract to provide support for the aircraft’s engines is required with Rolls-Royce.

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