RichardAboulafia.com 

:: May 2008 Letter ::

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Dear Fellow Technology Transfer Skeptics,

Seeking hope in these troubled times? As usual, look no further than Australia. The Australian military, whose procurement practices are among the most professional and transparent in the world, has taken a major step. They have renounced weapons sale offsets. As with vegemite, boomerangs and national cliché creation, Australia leads the way.

Ever since the first offset (the hill people demanded local assembly of the spears they purchased from the cave people…before they used the spears to kill the cave people), politicians have demanded work for local industry, jobs, or technology in exchange for their arms purchases. The politicians and their constituents think they’re getting a free lunch. In reality, all they’re getting is higher prices, confused weapons procurement decisions and opportunities for corruption. Offsets are a very popular self-inflicted wound.

Australia is the first country to realize this. In an April 18th speech, Australian Secretary of Defence Procurement Greg Combet declared: “On industry policy…We will not be mandating local content or implementing an offsets program. In most cases these programs had limited success, with minimal effective transfer of technology and skills to local industry. Time and industry policy have moved on and we must find ways of engaging Australian industry within a competitive market context.” (This highly unusual example of smart government can be found at http://www.minister.defence.gov.au/2008/080417.doc.)

If you’re looking for more positive news, you can indeed look further than Australia. Go a few latitude lines west and look at Malaysia. According to Wendell Minnick, reporting in Defense News (May 12), Malaysia’s offset practices have enabled commission-seeking brokers to encourage dumb procurement decisions without any tangible gains for national industry. The result: “a hodgepodge of equipment that looks more like a UN yard sale” than a modern streamlined military. This has resulted in a call for offset reform in Malaysia. That’s nowhere near as good as offset abolition, but if you can’t be like Australia and make stupid policies disappear, you can at least admit you have a problem.

Looking back over decades of offset foolishness, you can characterize their misbegotten and dysfunctional offspring in three ways (these ways are far from mutually exclusive):

1. Misguided Industrial Policy Harbinger. Think about the dozens of local aerospace companies around the world that were created or nurtured by offsets. Did Greece, South Korea, Taiwan, or Turkey actually enjoy a net gain from HAI, KAI, AIDC, or TAI? They may or may not be good companies, but they were expensive to create, and it is very unlikely that these countries’ economies would have developed any differently without them. Also, defense companies are quite capital-intensive, so each job created comes at a very high price.

2. Kleptocratic Fiefdom. Dictatorships, juntas, and deathsquadocracies love local military companies, since they also love kickbacks. They also love to maintain weapons autonomy in case more respectable countries won’t sell them tanks and thumbscrews. Indonesia’s IPTN was a good example. Pretty much anything in Latin America started this way.

On a related note, offsets blur the line between honest weapons transactions and corruption. Arms buying governments can’t demand bribes. They can, however, demand offset-related work contracts to be given to companies owned by their friends and relatives under circumstances that would make Tony Soprano blush.

3. Temple of Inefficiency and Waste. The most common offset: A wheel-replication project involving a superfluous second production line and the associated superfluous jobs moved to the customer’s turf. It sounds innocuous, but smart weapons sellers raise their prices to cover offset costs, so the buying country’s taxpayers foot the bill. Unit costs rise too, so the military customer can afford fewer planes, tanks, nuclear warheads, etc.

That third offset example can skew weapons procurement decisions. Look at the ongoing tanker wars that are turning the Washington defense scene into a charred hellscape. Both competitors sent a mixed message: “Our product is best for the warfighter. That’s what the contest should be about. Of course, you could also choose our tanker because we’re going to create lots of jobs.” Buying a weapon because it’s best for the military is one thing. Buying a weapon because it’s best at creating jobs is a different thing. The two should never, ever be confused.

Still, EADS is carrying out its promise to move A330 tanker and freighter production work to Alabama. Actually they got lucky — a second twin aisle jet line is wasteful, but at least they’ll profit from the weak dollar. For serious unluckiness, watch the F-35 contractors place offset work in euro-zone, pound-zone, and perhaps yen-zone countries.

In the commercial world, the WTO’s ATCA provisions rule that civilized countries can’t demand offsets for jetliner buys. But that doesn’t stop jetliner manufacturers from placing work abroad to gain market access. As McDonnell Douglas found out in China, this is often a seriously bad idea.

Airbus looks set to learn exactly the same lesson with an A320 line now being set up in China. China, of course, has been too smart to give Airbus anything. Since the A320 production line deal was signed, Chinese carriers have continued to buy planes from both manufacturers in roughly equal numbers. In fact, since the line deal was announced Boeing has sold Chinese airlines 242 737s, the A320’s direct competitor. Like any offset program, the China A320 line is an expensive waste of time and money.

So join me. Let’s make the aerospace world a better place. When you hear “offsets,” don’t think of a clever way for governments to extract work and technology in exchange for arms buys. Think of stupidity, waste, and sometimes corruption. Better still think of offsets as the Fifth Horseman of the Apocalypse. If we can slay that mounted fiend, everyone will be much better off.

While we’re waiting for the other quality militaries to follow Australia’s, this month’s Aircraft Briefing updates include a new Military Transport overview, plus updates of the A400M, C-130, ATR, UH-60, SH-60, CH-53, Hawk, and MB339. Have a good month.

Yours, Until My Countertrade Proposals Work Out,
Richard Aboulafia

 

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  ~  Last updated on January 08, 2006