CTO Newsletter

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Annual report to congress: Offsets see historic low as COVID-19 takes its toll

US suppliers’ offset activities have reached historic lows. In 2020, the figures declined across almost all metrics, including the number of new agreements, the value of the agreements, and the number of US firms and foreign countries involved. We break down the 26th annual report to Congress on the impact of offsets in the defence trade.

Australia: Offset demands may have “perverse effect” on productivity

Australia’s attempts to promote local industry are hindering military preparedness and undermining industrial productivity, says Rob Bourke, a former economic advisor to the Department of Defence. Domestic builds can be “can be an extraordinarily expensive way to create far fewer jobs than initial impressions.” Bourke’s 12-page report for the Australian Strategic Policy Institute draws on government data and historical trends to compare the costs and benefits of offset obligations.

Polish-British frigates to include technology transfer

Poland’s military modernisation is moving ahead at pace. The country has signed two offset contracts with Babcock linked to the procurement of three multi-role frigates under the Miecznik (Swordfish) requirement.

Thailand to receive Israeli rocket launcher technology

The Thai Defence Technology Institute (DTI) and the Royal Thai Navy’s Naval Research and Development Office (NRDO) are partnering with Israel’s Elbit Systems to develop a localised version of Elbit’s multi-calibre PULS rocket launcher.

Offsets cause mixed feelings among Korean analysts

A report published by the Korean daily Financial News comes to two conflicting conclusions about the costs and benefits of offset policies. The commentary was published on 5 August and features insights from academia, industry, and government-affiliated trade centres.

Bell offers Korea technology transfer despite communication mishap

Bell Textron has submitted a formal offer to the Defence Acquisition Program Administration (DAPA) for the domestic production of AH-1Z Viper attack helicopters. This is reportedly Bell’s third attempt at offering technology after DAPA ignored two proposals sent via email last year, apparently because the messages were not formally addressed to the right individuals.

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Malaysian offset venture accused of bribery and contract inflation

Contraves Advanced Devices (CAD) has come under scrutiny for alleged bribery and misappropriation of funds. Details of CAD's participation in Malaysia’s RM9bn ($2bn) littoral combat ship programme emerged in a declassified 250-page parliamentary report and leaked documents published this month. The country’s anti-corruption authority has gathered sufficient evidence to charge several executives.

China offsets spark concern about industrial competitiveness

China is leveraging its domestic market and production base to acquire advanced technologies and develop “coercive leverage” in critical sectors, argue Nathan Picarsic and Emily de la Bruyère, senior fellows at the Foundation for Defense of Democracies. China has received mounting attention following two major offset deals this year.

Korea updates localisation guidelines, releases priority offset list

Korea has updated its evaluation criteria for local production in offset proposals. The Defense Acquisition Program Administration (DAPA), the agency responsible for Korea’s offset programme, will grant additional points to OEMs that earn cooperation certifications with local firms.

Hungary and Turkey to cooperate on defence and energy

Hungary wants to produce unmanned aerial vehicles (UAVs) and solar panels in-country with help from Turkey. Minister for Technology and Industry László Palkovics announced his plans after meeting with his Turkish counterpart Mustafa Varank in Ankara.

Russia leans on industrial cooperation with Asian partners

Russia is leveraging industrial cooperation to offset the impact of America’s economic sanctions. Within just three weeks, Russian ministers met with their counterparts in India, China, and Iran to promote defence cooperation and technology exchanges.

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Korea clarifies policy on civil offsets

Korea’s Ministry of Trade, Industry and Energy (MOTIE) has confirmed that the Request for Proposal (RFP) for government procurements does not require mandatory export commitments. However, there is a higher chance of approval of the agreement if the foreign company proposes an item that can lead to exports.

Foreign firms complete only 82 percent of Indian offsets

Foreign suppliers have long struggled to navigate India’s bureaucratic hurdles and perform their offset obligations. Indian Minister of Defence Ajay Bhatt was challenged on the subject during a hearing at Lok Sabha, the Parliament of India, on 5 August.

UK consortium finalises bid for support ship contract

In its search for three new Fleet Solid Support Ships (FSS), the British government is facing a decision between an all-British vessel and an offset-heavy foreign proposal. Team UK, composed of Babcock and BAE Systems, has submitted a bid to supply the ships using only UK-based industry. It faces competition from Team Resolute, composed of Spanish prime Navantia, UK shipbuilder Harland and Wolff (H&W), and British design consultancy BMT.

Details emerge of Poland’s IBCS offset contracts

Despite protracted negotiations and licensing struggles, Northrop Grumman’s cooperation with Polish industry on Integrated Battle Command System (IBCS) modules is now fully underway. Northrop’s technology transfer efforts focus predominantly on systems engineering and software development, especially for system-of-systems engineering and network-centric architectures.

Baykar to build drone facility in Ukraine

Turkish drone manufacturer Baykar is taking steps to build a factory on Ukrainian soil, according to Vasyl Bodnar, Ukraine’s ambassador to Turkey. Baykar has already created a company in Ukraine, bought a plot of land at an undisclosed location, and started developing the facility.

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Eom Dong-hwan appointed minister of DAPA, calls for transparency and accountability

President Yoon Suk-yeol has appointed a new minister to lead the Defense Acquisition Program Administration (DAPA), the agency responsible for South Korea’s military purchases and direct offsets. During his inauguration ceremony, new Minister Eom Dong-hwan highlighted the importance of transparency and due process in Korea’s defence acquisitions. Within days of taking office, Eom hosted his first group meeting about localisation and SME engagement, and signed an export strategy deal with the Korea Atomic Energy Research Institute (KAERI).

Korea signs multi-billion dollar deals with Poland, readies extra defence industry attaché

Poland is looking to buy 980 K2 tanks from Hyundai Rotem, 48 FA-50 light attack aircraft from Korean Aerospace Industries (KAI), and 672 K9 self-propelled howitzers from Hanwha Defense. Amid Poland’s surging defence demands, Seoul is preparing to send another military attaché for defence industry cooperation and localisation.

US launches open general export licenses, prepares for industry cooperation under AUKUS

The United States is taking steps to streamline industrial cooperation with historical allies. Speaking at a joint AIA-ADS event on the sidelines of the Farnborough Air Show on 21 July, representatives from the Directorate of Defense Trade Controls (DDTC) announced a pilot programme for open general export licenses (OGELs) for Canadian, British, and Australian suppliers.

Peru and Argentina to share satellite technology

Peru’s Minister of Transport and Communications, Juan Barranzuela, is in talks with Argentine authorities to jointly design and implement satellite connectivity projects. During a meeting with Daniel Filmus, Argentina’s Minister of Science, Technology and Innovation, Barranzuela emphasised transfer of technology as a condition of cooperation.

Saudi Arabia sets sights on aerospace ventures

Saudi Arabia came out in force at the Farnborough Air Show on 18–22 July. The General Authority for Military Industries (GAMI) hosted the “Invest Saudi” pavilion together with SAMI, the kingdom’s leading defence conglomerate, and World Defense Show (WDS) administrators. Both GAMI and SAMI finalised several offset agreements and hinted at upcoming opportunities for Saudi SMEs.

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Malaysia to impose local content on all drone contracts, signs cooperation agreement with Turkey

Malaysia is planning to make it compulsory for foreign drone suppliers with public procurement contracts to build factories in-country, Prime Minister Ismail Sabri Yaakob has announced. The Prime Minister shared the news after his four-day state visit to Ankara, during which Malaysia and Turkey agreed to cooperate on aviation and unmanned technology.

Sweden pitches industrial cooperation as Czech Republic mulls fighter aircraft

Sweden is laying the groundwork for industrial cooperation as part of its offer to supply Gripen fighter jets to the Czech Republic. Swedish diplomats have offered to extend the existing lease of 14 Gripen C/D jets almost free of charge and increase cooperation on new platforms, including the Gripen E/F series.

BAE Systems pledges higher local content, Slovakia selects CV90

The Slovak government has signed off on its decision to procure 152 Hägglunds CV90 combat vehicles from BAE Systems and the Swedish Defence Materiel Administration (FMV) through a €1.7bn ($1.7bn) government-to-government agreement with Sweden. The British firm beat out Rheinmetall, GDELS, and Santa Bárbara Sistemas’ offers to supply the IFVs.

Safran and HAL to co-produce helicopter engines

Safran Group and Hindustan Aeronautics Limited (HAL) have signed an MoU to jointly manufacture a new engine for the Indian Multi-Role Helicopter (IMRH). The new joint venture aims to meet future Indian requirements, including the IMRH’s naval variant, the Deck Based Multi Role Helicopter (DBMRH).

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Poland negotiates offset “outside formal procedures”

Poland has embarked on a spending spree for big-ticket platforms, with nearly all deals imposing high localisation requirements. However, offset negotiations are taking place outside of the procedures outlined by the Ministry of Defence’s decision No. 367, the standard route for establishing offset.

Lockheed and Germany negotiate offset for f-35 jets

Germany and Lockheed Martin are discussing industrial participation in connection to the prospective procurement of 35 F-35 fighter jets. “[W]e want to deliver a capability, not just a piece of metal,” says J.R. McDonald, vice president of F-35 business development.

India and France close to concluding talks for indigenous jet engine

India and Safran are making progress in negotiations to co-develop an indigenous combat engine for India’s Advanced Medium Combat Aircraft (AMCA). “Everything [is] almost there, and it is just about to happen,” Air Vice Marshal Hilal Ahmed Rather, the Indian air attaché in Paris, told CTO. The deal would leverage the offset credits accrued from India’s 2016 deal with Dassault to purchase 36 Rafale jets.

Congressman pushes to pass “Buy American” requirements into law

A key member of the House Armed Services Committee (HASC) is pushing to codify recent “Buy American” amendments into law. Donald Norcross, chairman of the Tactical Air and Land Forces subcommittee, is lobbying to increase domestic content thresholds in the annual defence bill for 2023, in accordance with President Joe Biden’s “Make in America” executive order of January 2021.

Volatus looks to offset to take South American markets

Drone services provider Volatus Aerospace Corporation is leveraging offset to secure sales in South America. The Canadian company has formed a joint venture with Peru’s EOLO Drones to target government and commercial customers across South America, the companies announced on 8 June.

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Switzerland reflects on F-35 purchase, moves to amend offset policy

Switzerland will streamline its offset policy by the end of the year, says Simon Hufschmid, head of international law and compliance at the Swiss Federal Armament Office. Speaking to GICA attendees on 17 May, Hufschmid outlined the lessons learned from Switzerland’s F-35 procurement and how the government plans to adapt.

India invites obligors to work with DRDO

Amid a crackdown on penalties and mounting pressure to indigenise production, how do foreign suppliers discharge offset obligations in India? In his presentation at the GICA spring conference, Ankur Gupta, strategy director for international and industrial partnerships for Airbus Defence and Space, proposed an unusual solution.

India and offset penalties: “There are no winners”

OEMs can expect to see an “exponential increase” in penalties in the next five years, says Rajiv Chib, founder of Insighteon Consulting. In his presentation at the GICA spring conference, Chib described the predictions, observations, and recommendations drawn from a recent wargame on India’s offset policy.

Former DoD advisor: US export regulations stifle industrial cooperation

The United States’ export regulations are repressing defence industry cooperation, argues a former member of the Senate Armed Services Committee. Bill Greenwalt, former Deputy Defence Undersecretary for Industrial Policy, suggests that American regulations are stifling innovation and undermining AUKUS.

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Saudi Arabia on corruption in offsets: “There is no mercy”

The Norwegian government is drafting a new version of the National Defence Industrial Strategy. The new policy will be released by the end of the year, according to Åge Skøelv, senior advisor to the Norwegian Ministry of Defence (MoD).

Reciprocal credits permitted for Bahraini and Tawazun projects

Bahrain and the UAE are teaming up to provide suppliers with more opportunities to discharge offset obligations. Foreign suppliers with offset obligations in Bahrain will be able to discharge those obligations in the UAE, and vice versa.

Portugal drifts towards offset

Portugal expects some type of informal industrial participation from its foreign suppliers. Speaking at the GICA spring conference, José Neves, President of the Aerospace, Space, and Defence Cluster, described how the war in Ukraine has reshaped Portugal’s industrial strategy.

Norway to revise industrial participation strategy

The Norwegian government is drafting a new version of the National Defence Industrial Strategy. The new policy will be released by the end of the year, according to Åge Skøelv, senior advisor to the Norwegian Ministry of Defence (MoD).

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DKF Spring Conference: Denmark on victory lap European Commission reviews offset compliance on ad hoc basis

Nearly 150 delegates attended the DKF’s Spring Conference in Copenhagen on 9 May, marking the association’s first in-person event since 2019. The conference provided a targeted overview of Denmark’s offset policy, with a special emphasis on small and medium-sized enterprises.

US approves grant to European allies to buy American weapons, negotiates reciprocal trade

The US State Department has approved a $391m grant to 15 in Central and Eastern Europe and the Balkans to buy American military hardware. At the same time, the US government has started negotiating reciprocal trade arrangements with European allies.

US approves grant to European allies to buy American weapons, negotiates reciprocal trade

The US State Department has approved a $391m grant to 15 in Central and Eastern Europe and the Balkans to buy American military hardware. At the same time, the US government has started negotiating reciprocal trade arrangements with European allies.

India and Russia negotiate countertrade payment mechanism

The Reserve Bank of India and Central Bank of the Russian Federation are working together to create a new mechanism to sustain bilateral trade and banking operations, according to economists at the Export-Import Bank of India.

Indonesia launches holding company, calls for more offsets

President Joko Widodo has launched a new state-run defence industry holding company, Defend ID. The holding is designed to boost Indonesia’s indigenous capabilities and improve the country’s ability to absorb technology transfer. But Defend ID may face challenges with engineering capacity and political infighting.

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Caught between us and Russia, India doubles down on industrial collaboration

India is diversifying its arms imports away from Russia and boosting industry collaboration with Western allies. The Fourth Annual US-India 2+2 Ministerial Dialogue, hosted in Washington on 11 April, emphasised defence industry partnerships and ignited new deals. But shifting to new suppliers may require India to compromise on offsets, industry experts suggest.

US–Korea reciprocal defence trade “cannot be delayed any longer”

Korean experts are urging the incoming Yoon Suk-yeol administration to sign a reciprocal defence procurement (RDP) with the United States. Despite concerns about the resilience of Korea’s defence industrial base, experts believe an RDP is necessary to facilitate joint production and promote Korea in global supply chains.

Experts call for United States to monitor foreign offsets

Industry experts from Georgetown University and Transparency International are calling for the US government to improve transparency around offsets linked to US arms sales. The comments were made during a Forum on the Arms Trade webinar on corruption in the arms industry on 14 April.

Israel publishes offset statistics for 2021

The Industrial Cooperation Authority (ICA) has released an overview of the agency’s offset deals during 2021. The agency signed $926m worth of offset agreements through 183 new agreements.

Spike in defence spending puts Europe at a crossroads

Europe’s decision to boost defence spending has presented governments with two choices: buying weapon systems off the shelf from third parties or doubling down on European collaborative programmes. At the same time, the continent’s new military demands and sanctions against Russia are straining supply chains already squeezed by the COVID-19 pandemic.

Belgian and American firms to build first MRO facility in Morocco

Belgium supplier Sabena Aerospace, Moroccan supplier SABCA Maroc, and American prime Lockheed Martin have signed a strategic partnership with the Kingdom of Morocco to implement the Moroccan joint venture Maintenance Aero Maroc (MAM).

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Malaysia releases offset audit report – recommends new criteria for assessing economic benefits

A general audit by the government of Malaysia has found that the Ministry of Defence (MINDEF) must streamline its implementation of the Industrial Collaboration Programme (ICP). The audit identifies ongoing challenges with contract delays, poor monitoring, and inefficient choice of offset recipients.

Indian parliament calls for greater transparency in defence offsets

In the past five years, 21 of India’s 47 offset agreements have remained unfulfilled, Defence Minister Ajay Bhatt told the Rajya Sabha on 22 March. Bhatt’s comments came after a parliamentary standing committee urged the Indian Ministry of Defence (MoD) to be more cautious and transparent in enforcing offset requirements.

Labour MPs challenge UK government on local production

During three Defence Committee debates this month, British members of parliament grilled Defence Procurement Minister Jeremy Quin over the absence of British industry in major government contracts. Labour MPs faulted the government for prioritising export opportunities over local employment.

Australian industry gears up for munitions collaboration under AUKUS

Australian defence companies are positioning themselves as partners for the guided weapons aspect of AUKUS, the trilateral security pact between Australia, the United Kingdom, and the United States.

Amid US sanctions, China remains open to Russian industry

Despite the US sanctions on Russian defence companies, China is likely to double down on defence industry cooperation, says Robert Atkinson, President of the Information Technology and Innovation Foundation (ITIF).

Egypt: local courts seize jurisdiction over technology transfer disputes

The Egyptian Court of Cassation has ruled that any disputes arising from technology transfer agreements cannot be resolved in foreign-seated arbitration proceedings. Suppliers are advised to ensure that their arbitration agreements comply with Article 87, says Mohammad Rwashdeh, special counsel at the law firm K&L Gates.

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As war in Ukraine persists, Czech Republic races to amend procurement policy

Russia’s military campaign in Ukraine has prompted the Czech Republic to review its industrial participation guidelines, a senior military official informed CTO. The amendments will guide the country’s defence procurement priorities and industry development until 2030.

War in Ukraine reboots Turkish industry cooperation with western partners

Turkey’s balancing act between Moscow and Washington has tilted westward. Following Russia’s military campaign in Ukraine, Turkey has closed the door on Russian defence companies and turned to industry partners in Europe and the United States, marking a substantial change in the country’s defence industrial strategy.

Localisation is king at Saudi Arabia’s World Defence Show

The inaugural World Defence Show saw the signing of 22 industrial partnerships with domestic and international defence companies, the General Authority for Military Industries (GAMI) announced on 7 March. The partnerships totalled SR8bn ($2.13bn) worth of deals, covering direct purchase of military systems, building of production lines, knowledge transfer, and localisation.

US approves major amendment to Buy American Act, includes phased requirements and alternate content tests

The Federal Acquisition Regulation (FAR) has adopted a new rule to boost domestic manufacturing in federal procurements. The rule increases domestic content requirements and imposes price preferences for US components. But the amendment differs significantly from the original proposal.

China to assist Saudi Arabia in building homemade drones

China and Saudi Arabia have agreed to manufacture unmanned aircraft payload systems in the Kingdom with technology transfer.

Germany does about-face, to buy F-35 jets and Eurofighters

Germany has announced its intention to purchase 35 F-35 jets and 15 Eurofighter Typhoons. The country has reaffirmed its commitment to joint European projects, but the Future Combat Air System (FCAS) has stalled in recent months.