Investor's Business Daily January 26, 2007
U.S. Firms Find India Big Buyer In Defense
By Doug Tsuruoka
U.S. weapons and defense technology makers are lining up to cash in on closer military ties between the U.S. and India.
India's Defense Ministry says it will be spending more than $30 billion from 2007 through 2012 importing weapons from foreign nations. It's part of an upgrade of India's armed forces.
Big spending by India on arms follows key defense and other pacts with the U.S. The two nations inked a 10-year defense cooperation pact in June 2005, and in March signed a deal to supply New Delhi with U.S. nuclear power technology.
Some observers say the improved ties between the nations will mean billions of dollars in weapons and gear sales for U.S. companies such as Boeing, (BA) Lockheed Martin (LMT) and United Technologies. (UTX)
"India's new strategic and military relationship with the U.S. is the biggest thing since (President) Nixon went to China," said John Pike, head of defense research firm GlobalSecurity.org.
"India right now offers the big opportunity for Boeing's defense products," said Brian Nelson, Boeing's spokesman for Indian defense sales. "We don't just want to sell products in India, we also want to put down substantial footprints to form partnerships with Indian industry."
Russia Now Top Supplier
U.S. firms also want to knock Russia out of the box as India's top arms supplier. India buys about 70%-75% of its arms from Russia. India's government says it bought about $9 billion in Russian ships, submarines, planes and other equipment from 1993 to 2006.
Expanded U.S.-India ties are also viewed by many analysts as a counter to China, which carried out its first test of an anti-satellite weapon on Jan. 11 and is bulking up its military clout.
The U.S. exported just $300 million in military equipment to India in 2005, mostly anti-submarine aircraft and artillery technology. That figure could swell into the billions as more deals are signed with U.S. firms. India's shopping list is expected to include advanced U.S. fighters, attack helicopters, radar systems and missiles.
Analysts say India's rising reliance on foreign weapons is a tacit admission by New Delhi that efforts to develop more homegrown arms lag.
An influx of U.S. technology in the form of licensed production of U.S. weapons might help India set the stage to produce advanced military technology of its own. India could emerge as a major defense exporter — especially in areas such as military software.
This could further jostle the balance of power in Asia.
The U.S. Congressional Research Service says India outpaced China in arms spending in 2005. It agreed to $5.4 billion deals, compared with China's $2.8 billion.
The main reason China trailed is that it's spending heavily to develop locally designed rather than foreign military products.
Richard Bitzinger, a senior fellow at the Institute of Defense & Strategic Studies at Singapore's Nanyang Technological University, says U.S. firms will have a tough time unseating Russia as India's top arms supplier.
"The Indians have a 40-year history of dealing with the Russians and they can usually demand and get preferential treatment when it comes to price and other terms," Bitzinger said.
The most sought-after deal by U.S. companies will supply the Indian Air Force with 126 multirole fighters at a cost of upward of $10 billion.
Boeing is expected to make a concerted bid to sell the F/A-18 Super Hornet to India. The company, which had $70 billion in sales the past four quarters, is also pushing to sell P-8 maritime patrol planes and Chinook helicopters to India.
Though Russian, French and other makers are vying for the fighter contract, some analysts say Boeing has the inside track due to cozy political relations between New Delhi and Washington.
Another plus is that Boeing Chief Executive W. James McNerney formerly headed GE's (GE) Asia-Pacific unit. He's an old "India hand" who might open doors for Boeing in New Delhi.
F/A-18 Vs. F-16
Foreign planes competing against the U.S. for the contract are the Russian MiG-35, French Rafale and the Eurofighter Typhoon. Pitches for the contract are ongoing.
In addition to politics, the biggest factor helping Boeing is what military experts say is the F/A-18's superiority over rivals. Most analysts say no other nation comes close in matching the targeting, communications, software and microelectronics used in the F/A-18.
India's rival, Pakistan, is expected to buy less advanced F-16 fighters from the U.S. India's ability to pay for a better plane would give it an edge in combat. "The Super Hornet is just a lot more airplane than the F-16," Pike said.
Bitzinger says the deciding factors in any deal involving the F/A-18 will be price and India's right to assemble the planes locally.
Cinching the Indian fighter deal will let Boeing keep the production line for the F/A-18 Super Hornet going after 2012 when the U.S. Navy's expected to phase out the Super Hornet. The plane will be replaced by more advanced aircraft such as the Joint Strike Fighter being readied for the U.S.
Nelson says that if Boeing wins the Indian fighter deal, it's willing to agree that only eight Super Hornets will be built at U.S. plants. The remaining 118 would be co-produced in India under license with Boeing.
India boasts a well-oiled defense industry that churns out a wide range of conventional weapons systems. Players include state-run industries and public-sector companies such as Tata Group.
Over the last decade, India has poured money into developing domestic versions of weapons, without a lot of success. "Their (own) weapons never knocked anything out of the ballpark," Pike said. "They were all over budget and underperforming."
Jim Albaugh, chief of Boeing's defense products unit, said at a press conference in Mumbai last month that the company will try hard in the next decade to make India one of its three top defense markets in Asia. Its biggest markets right now are Australia, Japan and Singapore.
Nelson says Boeing's defense sales to India were nil in 2005. In comparison, the company says its total defense sales in Asia-Pacific in 2005 were about $1.5 billion.
A dozen or so top U.S. defense makers, including Boeing, visited India in 2006 as part of the U.S. Aerospace Industries Association. The AIA is the main lobbying group for the U.S. aerospace industry.
Mark Esper, an AIA vice president, said at a news conference that the group found many chances for U.S. firms to form joint ventures with Indian aerospace makers.
Some say technology tie-ups with U.S. firms may help India develop more advanced defense products of its own.
One area is military software. Though no nation matches the U.S. in developing software for military uses, Pike says India might close the gap. "They are increasingly moving up the food chain," said Pike, noting that India's software industry has reached world-class status.
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