global arms trade: commerce in advanced military technology and weapons

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Global Arms Trade: Commerce in Advanced Military Technology and

Weapons

June 1991

OTA-ISC-460

NTIS order #PB91-212175

GPO stock #052-003-01244-8



Recommended Citation:

U.S. Congress, Office of Technology Assessment, Global Arms Trade, OTA-ISC-460(Washington, DC: U.S. Government Printing Office, June 1991).

For sale by the Superintendent of DocumentsU.S. Government Printing Office, Washington, DC 20402-9325

(order form can be found in the back of this report)



Foreword

The recent war in the Persian Gulf has once again focused attention on the proliferationof advanced weapons and the international arms industry. Although Iraq had little or no

defense industrial capability, it was able to obtain a vast arsenal of modern weapons from theSoviet Union, Western Europe, China, Eastern Europe, and a variety of arms producers in thedeveloping world.

Today, the international arms market is a buyers’ market in which modern tanks, fighteraircraft, submarines, missiles, and other weapons are available to any nation that can affordthem. Increasingly, sales of major weapons also include the transfer of the underlyingtechnologies necessary for local production, resulting in widespread proliferation of modernweapons and the means to produce--and even develop--them.

The end of the Cold War has brought profoundly decreased demand for weapons by theUnited States, the Soviet Union, and most European governments. In the United States, andelsewhere, some defense companies are seeking to increase their international sales as part of a strategy to adjust to the new realities of lower procurement budgets and less domesticdemand for their products. But because of worldwide overcapacity in defense production,competition is fierce and sales arrangements are complex, increasingly bypassing government-to-government agreements.

Congress faces two very important and interconnected issues: 1) controlling theproliferation of modern weapons and defense technology and 2) the health of the U.S. defenseindustries. This report, the final product of OTA’s assessment on international collaborationin defense technology, explores the form and dynamics of the international defense industry,the intricacies of technology transfer and equipment sales, and the implications for U.S.policy. An interim report, Arming Our Allies: Cooperation and Competition in DefenseTechnology, was published in May 1990.

This assessment was requested by the Senate Committee on Armed Services and theHouse Committee on Government Operations. OTA particularly wishes to acknowledge theassistance of the Foreign Affairs and National Defense division of the Congressional Research

Service in preparing part of this report.

/fzf/# LAA--- 2

JOHN H. GIBBONSu Director

,..Ill



International Collaboration in Defense Technology Advisory Panel

John S. Toll, Chair President, Universities Research Association, Inc.

David M. AbshireChancellorCenter for Strategic and International Studies

Morton BahrPresidentCommunications Workers of America

Michael BonsignorePresidentHoneywell International

Robert B. CostelloSenior FellowHudson Institute

Jacques S. GanslerSenior Vice PresidentThe Analytic Sciences Corp.

Everett D. Greinke

ConsultantRyusuke HasegawaDirector of Far East AffairsAllied Signal Corp.

Robert J. HermanVice PresidentUnited Technologies Corp.

Robert D. Hormats

Vice ChairmanGoldman Sachs International

Francine LamorielloManager of International TradeKPMG Peat Marwick Co.

Robert G. LunnLt. General, USA (retired)Vice President

Science Applications International Corp.

Andrew J. PierreSenior AssociateCarnegie Endowment for International Peace

Raymond C. PrestonBrig. General, USAF (retired)Vice President Washington OperationsWilliams International

Clyde V. PrestowitzPresidentEconomic Strategy Institute

John D. RittenhouseSenior Vice PresidentGE Aerospace

Richard SamuelsProfessorDepartment of Political ScienceMassachusetts Institute of Technology

James A. TegneliaVice PresidentMartin Marietta Electronics

Richard E. TierneyPresident, Grand Rapids DivisionSmiths Industries Aerospace &

Defense Systems, Inc.

Raymond VernonProfessorJ.F. Kennedy School of GovernmentHarvard University

Dale S. WarrenVice President & Deputy General ManagerDouglas Aircraft Co.

NOTE: OTA appreciates and is grateful for the valuable assistance and thoughtful critiques provided by the advisory panel members.The panel does not, however, necessarily approve, disapprove, or endorse this nqmrt. OTA assumes full responsibility for therepoxt and the accuracy of its contents.

iv



OTA Project Staff—International Collaboration in Defense Technology

Lionel S. Johns, Assistant Director, OTA Energy, Materials, and International Security Division

Alan Shaw, International Security and Commerce Program Manager

William W. Keller, Project Director

Todd M. La Porte

Administrative Staff Jackie Boykin

Louise Staley

Madeline Gross

Congressional Research Service Contributor

Larry A. Niksch

Contractors

P. Robert Calaway

Michael W. Chinworth

Carol V. Evans

Allen Greenberg

Ethan B. Kapstein

Arnold S. Levine

Ariel Levite

Peter H. Rose



Workshop on Arms Transfers to the Middle East

William W. Keller, Chair International Security and Commerce Program

Office of Technology Assessment

Seth CarusWashington Institute on Near East Policy

William ClemensBureau of Export AdministrationU.S. Department of Commerce

Howard M. FishLTV Aerospace& Defense Co.

Richard GrimettCongressional Research Service

Col. James HutchisonInternational Development and Production

ProgramsU.S. Department of Defense

Michael KlareHampshire College

David LouscherForesight International, and University of Akron

Morton S. MillerConsultant

Robert PaceBureau of Politico-Military AffairsU.S. Department of State

Andrew J. PierreCarnegie Endowment for International Peace

Ralph SandersIndustrial College of the Armed ForcesNational Defense University

John T. TylerDefense Security Assistance Agency

NOTE: OTA appreciates and is gratefi.d for the valuable assistance and thoughtful critiques provided by the participants in theworkshop. The workshop participants do not, however, necessarily approve, disapprove, or endorse this report. OTA assumesfull responsibility for the report and the accuracy of its contents.

vi



Acknowledgments

OTA gratefully acknowledges the assistance of individuals in the following organizations for their help in supplyinginformation or in reviewing drafts of this report. The organizations listed do not necessarily approve, disapprove, orendorse this report; OTA assumes full responsibility for the report and the accuracy of its contents.

Aeritalia-Societa Aerospaziale Italiana p.A.Aeromaritirne Systembau GmbHAgency for Defense Development, South KoreaAgusta Aerospace Co.AMP Corp.Association of High Technology Industries for Defense,

ItalyAssociazione Nazionale Industrie Elettrotecniche Ed

ElettronicheAvions Marcel Dassault-Breguet Aviation

Bechtel National, Inc.Betzelt GmbHBoeing Corp.British Aerospace PLCBritish Embassy, WashingtonBrookings InstitutionBrush Welman Corp.C. Itoh & Co.Daewoo Corp.Deutsche Aerospace AG

Dowty Electronic Systems, Inc.Dowty Electronics, Ltd.Elettronica S.p.A.Fabbrica Italiana Apparecchiature Radioelettriche S.p.A.Fiat, Washington, Inc.Fokker Aircraft USA, Inc.French Embassy, WashingtonGeneral Dynamics Corp.General Electric AerospaceGeneral Electric EnginesGerman Embassy, WashingtonHarvard University, Center for International AffairsHollandse Signaalapparaten B.V.Hughes AerospaceHyundai Precision IndustriesIndustrieanlage Betriebsgesellschaft (IABG)International Institute for Global Peace, JapanItalian Embassy, WashingtonJapan Defense AgencyJapan Institute of International AffairsJapanese Embassy, WashingtonJoint U.S. Military Assistance Group, Republic of KoreaKeidanrenKorean Defense Industry AssociationLarep s.r.l.Logistics Management InstituteLucas Aerospace, Ltd.Martin Marietta Corp.Massachusetts Institute of Technology

Matra Aerospace, Inc.Matra Defense S.A.MBB of America, Inc.

McDonnell Douglas Corp.Messerschmitt-Bolkow-Blohm GmbHMinistry of Defence, United KingdomMinistry of Defense, General Armaments Directorate,

FranceMinistry of Defense, GermanyMinistry of Defense, ItalyMinistry of Foreign Affairs, JapanMinistry of Industry, ItalyMinistry of International Trade and Industry, Japan

Ministry of National Defense, South KoreaMitsubishi Heavy IndustriesNational Defense Academy, JapanNational Defense UniversityNATO European Fighter Aircraft Management Agency NBC Corp. North Atlantic Treaty OrganizationNorthrop Corp.Office of the Assistant Secretary of Defense for

International Security Affairs

Office of the Assistant Secretary of Defense forInternational Security Policy

Office of the Assistant Secretary of Defense forLegislative Affairs

Office of the Deputy Under Secretary of Defense forInternational Programs

Office of the Secretary of DefensePanavia Aircraft GmbHParliamentary Committee for Technological Innovation,

ItalyRepublic of Korea Embassy, WashingtonRockwell International Corp.Rolls RoyceS.G. Warburg Securities Inc., JapanSamsung Aerospace IndustriesSelenia Spazio S.p.A.Selenia-Industrie Elettroniche Associate S.p.A.Siemens AGSociety of Japanese Aerospace Companies

Sumitomo Corp.Thomson-CSFToshiba Corp.TRW Overseas, Inc.U.S. Air Force, Office of Legislative LiaisonU.S. Arms Control and Disarmament AgencyU.S. Army, Office of the Chief of Legislative LiaisonU.S. Defense Advanced Research Projects AgencyU.S. Defense Attache Office, United KingdomU.S. Defense Security Assistance Agency

U.S. Defense Technology Security AdministrationU.S. Department of Commerce, Bureau of ExportAdministration

vii



U.S. Department of State, Bureau of Politico-MilitaryAffairs

U.S. Department of State, Office of the Under Secretary

for International Security AffairsU.S. Department of the Air ForceU.S. Department of the ArmyU.S. Department of the NavyU.S. Embassy, BelgiumU.S. Embassy, FranceU.S. Embassy, GermanyU.S. Embassy, Italy

U.S. Embassy, JapanU.S. Embassy, United KingdomU.S. General Accounting Office

U.S. Mutual Defense Assistance Office, TokyoU.S. Navy, Office of Legislative AffairsU.S. OffIice of Defense Cooperation, BonnU.S. Office of Defense Cooperation, BrusselsU.S. Office of Defense Cooperation, ParisU.S. Office of Defense Cooperation, RomeUnited Technologies Corp.Westinghouse Corp.

. . .Vlll



Contents Page

Chapter 1: Global Defense Business and Arms Proliferation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Chapter 2: Dynamics of World Armaments Production, Arms Transfers, and Defense Markets . . . 35

Chapter 3: International Operations of U.S. Defense Firms . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . 47

Chapter 4: European Defense Industries: Politics, Structure, and Markets . . . . . . . . . . . . . . . . . . . . . . . 65

Chapter 5: Israel’s Defense Industry: Evolution and Prospects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85

Chapter 6: Japanese Defense Industrial Policy and U.S.-Japan Security Relations . . . . . . . . . . . . . . . 107

Chapter 7: The Developing Defense Industrial Nations: South Korea, Brazil, India, Taiwan,Australia, Indonesia, and Singapore . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123

Chapter 8: The Defense Industry of South Korea . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131

Chapter 9: The Defense Industry of Brazil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143

Chapter 10: The Defense Industry of India . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153

Chapter 11: The Developing Defense Industries of the Western Pacific . . . . . . . . . . . . . . . . . . . . . . . . 163

Appendix A: List of Acronymns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . q q q 179

ix



Related OTA Reports

. Arming Our Allies: Cooperation and Competition in Defense Technology(OTA-ISC-449)

GPO stock #052-003-01189-l; $5.00 per copy

q Holding the Edge: Maintaining the Defense Technology Base (OTA-ISC-420)

Free summary available from OTA.GPO stock #052-003-01 150-6; $9.00 per copy

. Adjusting to a New Security Environment: The Defense Technology and IndustrialBase Challenge (OTA-BP-ISC-79)

GPO stock W52-003-01225-l; $1.50 per copy

NOTE: Reports are available from the U.S. Government printing Office, Superintendent of Documents, Washington DC20402-9325 (202-783-3238); and the National Technical Information Service, 5285 Port Royal Road, Springfield VA22161-0001 (703-487-4650).



Chapter 1

Global Defense Business

and Arms Proliferation



Contents Page

OVERVIEW AND PRINCIPAL FINDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3Principle Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Why Congress Should Care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . 16The Policy Dilemma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

ISSUES AND OPTIONS FOR CONGRESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20Historical Perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20The Spread of Defense Technology and Defense Industry . . . . . . . . . . . . . . . . . . . . . . . . . 22Global Trade in Advanced Conventional Weapons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Figures Figure Page

1-1. Major Arms Exporters, 1968-87 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41-2. Worldwide Licensed Production of Major Conventional Weapon Systems,

by Country Issuing License, 1960-88 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41-3. Worldwide Licensed Production of Major Conventional Weapon Systems,

by Country Receiving License, 1960-89 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51-4. Arms Exports by Major NATO Weapons Producers, 1978-88 . . . . . . . . . . . . . . . . . . . 51-5. Average Annual Arms Exports, 1982-86, and Arms Exports

as a Percent of Total Arms Production, 1984 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 1-6. Major Arms Importers, 1983-88 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61-7. Estimated Worldwide Licensed Production of Major

Conventional Weapon Systems, 1960-88 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71-8. Licensed Production of U.S. Major Conventional Weapon Systems,

. . . . .

by Country Receiving License, 1960-88 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81-9. Estimated Licensed Production of Major Conventional Weapon Systems

by Developing Nations, 1960-88 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91-10. Arms Exported by Developing Nations, 1978-88 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111-11. U.S. Government and Commercial Sales Deliveries of U.S.

Military Equipment, and U.S. Military Grants, 1978-88 . . . . . . . . . . . . . . . . . . . . . . . . . 121-12. U.S., U.S.S.R., and European Arms Exports as Percentage

of All Transfers, 1984-88 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161-13. World Arms Transfers to Iran and Iraq, 1978-88 q . . . . . . . . . . . . . . . . . . , . . . . * , . . , . . 181-14. Arms Transfers to Iraq by Country, 1984-88 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181-15. Percent of Foreign Military Grants Earmarked by Congress, 1982-91............211-16. U.S.-European Defense Industrial Cooperative Arrangements . . . . . . . . . . . . . . . . . . . 25

TablesTable Page1-1. Selected Weapons Exported by the United States, Soviet Union,

and NATO Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101-2. U.S.-European Defense Industrial Cooperative Arrangements, 1986-89 . . . . . . . . . . . 141-3. Developing Nations’ Arms Exports to Iraq, 1982-89 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191-4. Recent U.S.-Japan Coproduction Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23l-S, French Weapons Transferred to Iraq, 1981-88 . . . . . . . . . , . . . . . . . , . . . . , * * . * . , . , * * . 241-6. Major U.S. Weapon Systems Produced Under License

by South Korea and Taiwan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 271-7. DSAA Field Staff, 1989-92 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31



Chapter 1

Global Defense Business and Arms Proliferation

OVERVIEW ANDPRINCIPAL FINDINGS

The war in the Persian Gulf graphically demon-strated the consequences of extensive internationalcommerce in powerful advanced conventional weap-ons. At the same time, the end of the Cold War andthe accompanying decline in defense spending haveweakened the political foundation for continuingarms transfers and enhanced the economic motiva-tions for international arms sales. Worldwide, thedefense industries face deep recession (and probablepermanent adjustment to much lower levels of pro-duction) brought on by a general erosion of demandand continued strong overcapacity of production.

Governments take widely differing approaches to

the arms trade. Some help their defense companiesseek export markets to compensate for insufficientdomestic procurement budgets. Some nations viewarms sales as an important source of export revenue,away to spread development costs for new weapons,and a source of domestic employment. Others seek to enhance their stature as regional or internationalpowers by building up a capable defense industry.One country, Japan, has prohibited the export of

arms as a matter of public policy.

Traditionally, the U.S. Government has viewedarms sales and transfers primarily as instruments of foreign policy-to exert regional influence, to strength-en alliances, and to oppose the expansion of Communist power. In the past 2 years, somegovernment officials have become concerned overthe likely loss of important elements of the domestic

defense industry as companies adjust to dramaticdeclines in domestic procurement; they have be-come more sympathetic to the desire of U.S. defensecompanies to increase export sales.

lInternational

sales, however, proliferate advanced weapons and

often involve collaborative production arrange-ments with far-reaching consequences.

This situation poses a major national policydilemma—how to balance the use of arms exportsas instruments of foreign policy, pressure bycompanies for greater access to foreign markets,the need to stem a dangerous worldwide arms

buildup, and the increasing proliferation of bothdefense equipment and defense industry. Thisreport, the final product of OTA’s assessment oninternational collaboration in defense technology,explores the form and dynamics of the internationaldefense industry, the intricacies of technology trans-fer and equipment sales, and the implications forUs. policy.

Several factors suggest a review of U.S. policy onarms exports and collaboration in military technol-ogy:

2

q

q

The winding down of the Cold War is exertingan immediate and powerful downward pressureon defense expenditures in the West as govern-ments implement budget cuts and force reduc-tions associated with decreased East-West ten-sions;

The emergence of new centers of advanceddefense industry and technology is acceleratingthe proliferation of modern weapons (andincreasing overcapacity in worldwide weaponsproduction); andWestern nations have helped arm Iraq, the restof the Middle East, and other regions with littleconcern or oversight about the near-or far-termconsequences.

The end of the Cold War has radically trans-formed the structure of international relations andthe environment for international defense business.As the Persian Gulf War and nationalist struggles

l~e Dep~ent of State and the Defeme Security Assistance Agency contend that the United States should use forei~ Saks tO Support cOM.heddomestic production of U.S. weapons systems: ‘‘Unless we adjust to the challenge of an increasingly diverse international defense supply environmen~the United States will be unable to address satisfactorily the legitimate defense needs of our friends and allies, and thereby our ovvq at an acceptable

cost in the coming years. Indeed, the long-term survival of a number of important domestic arms programs are tied to foreign sales: MIA1 Abrama battletar& Blackhawk helicopter, HAWK surface-to-air missile, Boeing 707 aircraf~ to name a few.’ U.S. Department of State and U.S. Defense SecurityAssistance Agency, Congressional Presentation for Security Assistance Programs, fiscal year 1992, p. 6.

%ternational collaboration can take many forms, including but not limited to transfer of technical assistance, codevelopmen~ co- and licensedproductio~ and licensed assembly. It may also involve a variety of business relationships such as revenue sharing, subcontracting, consorthq jointventure, and corporate alliance, among others.

–3–



4 q Global Arms Trade

Figure l-l—Major Arms Exporters, 1968-87

Soviet Union

United States

France

West Germany

United Kingdom

China

Poland

Czechoslovakia

Italy

r’: : : : : : : : : : : : : : :. , , . . .: { : : : ~:)::::

l!!...........,:.:.:.:.::;:j~:j;:+:+:,.,....

120

!#l!

115

Soviet arms export data may

be overstated because ACDA

excludes U.S. military construc-tion programs and many dual-usevehicles, but includes them for

the Soviet Union.

I 1 , , k I

o 10 20 30 40 50 60 70 80

Constant 1988 dollars, billions

s 1968-72 u 1973-77 u 1978-82 u 1983-87

SOURCE: office of Technology Assessment and David J. Louscher, fromdata in U. S. Arms Control and Disarmament Agency, World Military Expenditures and Arms Transfers, various years (Wash-ington, DC: U.S. Government Printing Office).

throughout the former sphere of Soviet influence

attest, it is still too early to fill in the outlines of the

emerging world order. Nevertheless, the threat of

Soviet expansionism is greatly reduced, the possibil-ity of a Warsaw Pact invasion of Western Europe has

been eliminated, and the Soviet Union appears to be

following a policy of restraint in arms exports.

Accordingly, the defense equipment requirements of the United States and its European Allies arediminishing sigificantly. Moreover, a principalreason why the United States transferred weaponsand defense technology to allied and friendly

nations-to counter Communist influence-has beenreduced.

The winding down of East-West antagonisms,however, has left profound uncertainty as to thenature and extent of future military threats to theUnited States, its allies, and its foreign political andeconomic interests. The threat may come from avariety of heavily armed nations that, like Iraq,oppose U.S. interests and forces in places and forreasons that cannot be easily anticipated. It mayconceivably come from reconstituted elements of the Soviet empire. In a multi-polar world the threatof sporadic militarism will be reinforced and magni-fied by the availability of potent weapons and theknowledge of how to make and use them.

Another major factor affecting policy is theproliferation of the defense industries.

3The arms

production and export capabilities of a number of countries have expanded—in the United States,Europe, the Middle East, the Indian subcontinent,South America, and the Western Pacific (see figurel-l). Increasingly, defense trade combines sales of

finished defense systems with transfer of the under-lying technologies and industrial infrastructure neces-

Figure 1-2—Worldwide Licensed Production ofMajor Conventional Weapon Systems,by Country Issuing License, 1960-88

United States

FranceSoviet Union .

West Germany

Israel

ltaly

China

Brazil

,

Toal number of licensesissued (whole bar)

‘ Licenses issued to developing

countries (black section)

, 1 , 1 (, 1

0 20 40 60 80 100 120 140

Number of major systems licensed

10 other countries issuing fewer than 4 Iecenses not shown.

SOURCE: Office of Technology Assessment, from data in StockholmInternational Peace Research Institute, SIPRI Yearbooks, 1970through 1990, World Armaments and Disarmament.

3chs. 3 through 11 document this process.



Chapter 1--Global Defense Business and Arms Proliferation q 5

Figure 1-3-Worldwide Licensed Production ofMajor Conventional Weapon Systems,by Country Receiving License, 1960-89

Japan-.:.:.:-:.:.:.:.:.:.:.:.:.:.:.:.:.:.:.:.:.+.:.:.:.:.

. . .. . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . .. .. . ..

Romania

North Korea . . ... .. . . . ... .. . .. ... . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . ...:-:-:.:.:-:.:.:-:-:.:.:-:.:.:-:.:.:-:.:.:.:.:.:.:.

South Africa ,..... .

. .

. . . .... . . .. .. . .. . . . . . . .. . .. . . . .. . . . . . . . ... .. . .. . . . . . . . . . . . . .. . .. . . . . . . . . . . . . . . . . . . .. . . . . .. . . . .

.

Canada::::::::::::::::::::::::::::::::::::::::::::::::

United States ~.:::::::::::::::::::::::::::::::::::::::::

A u s t r a l i a

West Germany

S w i t z e r l a n d

GreecePakistan

Singapore

Czechoslovakia ‘Netherlands ‘

SwedenIsrael

-:::::::.:-::::::::- .. ... . .. ......

EiiY3s

Gray bars indicate

developing countries

by World Bank criteria

q 18 countries producedfewer than 3 major

weapon systems underlicense. They do not

appear in this figure.~O 5 10 15 20 25 30


SOURCE: Office of Technology Assessment, from data in StockholmInternational Peace Research Institute, SIPRI Yearbooks, 1970through 1990, World Armaments and Disannarnent.

sary for indigenous production (see figures 1-2 and

1-3). (These two subjects—arms sales and technol-ogy transfer-are examined in tandem throughoutthis assessment.) If Congress intends to exertauthority in the arms transfer field, it will have todevelop clear policies regarding the transfer of U.S.-origin defense technology to foreign nations.

Defense companies in Europe produce equipmentfor export markets that is often as good as and

sometimes better than that exported by the UnitedStates.

4European governments often conduct ex-

tensive diplomacy in support of arms sales. In thepast, this has provided strong competition for U.S.

arms exporters, especially in the Middle East, butalso in the Western Pacific. Since 1986, however,U.S. arms exports have increased to a 10-year high,while NATO Europe arms exports have fallen (seefigure 1-4). In 1988, the last year for which completedata are available, the United States exported $14.3billion in arms, compared to $4.1 billion for all of NATO Europe. If this trend continues, it may placethe United States in a position to exert profound

influence on the course of weapons proliferation. Onone hand, the United States may choose to press itspresent advantage, attempting to increase armsexports to the limits of existing markets. On theother hand, as the principal arms exporter in theWest, the United States might decide to exercise

Figure 1-4-Arms Exports byMajor NATO Weapons Producers, 1978-88

16

14

12

10

Constant

1 9 8 8 8dollars,billions

6

4

2

0

w e q --T.,..t

. .

I 1 , 1 1 t I 1 1

1 1 I

1978 1980 1982 1984 1986 1988

Year

SOURCE: U. S. Arms Control and Disarmament Agency, World Military Expenditures and Arms Transfers, 1989 (Washington, DC: U.S.Government Printing Office, 1990), pp. 88, 111.

d’l%eunit~ StatCS Still maintains a lead innext-generation defense technology and systems such as the B-2 stealth bomber and the Advanced ’IhcticalFighter, but it does not export these systems or share the embling technologies.




European counterparts to make such a sale. A majorsale can become a contest between two or moreU.S. companies to see which is willing to sell the

most defense technology at the lowest price.

The proposed transfer of advanced U.S. fightertechnology to South Korea, the Korean FighterPlane, is a case in point. In 1989, South Korea agreedto buy 120 twin engine F/A-18 fighter aircraft from

Figure 1-8—Licensed Production ofU.S. Major Conventional Weapon Systems,

by Country Receiving License, 1960-88

Japan

Italy

South Korea

Taiwan

United Kingdom

West Germany

France

AustraliaBelgium

Brazil

Canada

Netherlands

Sweden

Turkey

Chile

Israel

Argentina

Egypt

Indonesia

Switzerland

Denmark

Mexico

Nigeria

Norway

Peru

Spain

Thailand

South Vietnam

Eq

+:.:.:.:.:.:.:+q. .. . . .. .. . . . . .. . . .

..

1

~::::::::::.:.:.:.:.:

i i im“m“I*

Gray bars indicate developingcountries by World Bank criteria

O 5 10 15 20 25 30


* Countries that also issue licenses


Photo credit: U.S. Army

The Stinger missile, which crippled the effectiveness ofSoviet air power in the Afghan war, is produced under

license by six European nations.

McDonnell Douglas for $5 billion, with 12 planes tobe purchased off-the-shelf, 36 assembled fromU.S.-built kits, and 72 produced under license inKorea. But by 1991, the price had risen to $6.2billion, and the Koreans were demanding sophisti-

cated radar, software, and composite materialstechnologies that the company was reluctant torelease. After nearly 2 years, South Korea broke off negotiations and decided to buy the General Dynam-ics (GD) F-16 fighter instead. GD’s ability to offerthe F-16 at a lower price and to add additionaltechnology, an advanced radar, and air-to-air mis-siles were decisive factors.

10

The United States and Europe routinely transfer agreat deal of advanced defense technology to lessdeveloped nations. In 1988, for example, India,Egypt, Indonesia, South Korea, Taiwan, and Brazilwere producing 43 different major weapons underinternational licensing agreements (see figures 1-9,1-2, and 1-3).

11As a consequence, several of these

nations have attained significant defense industrial

loT)re Washington Post, Mar. 29, 1991, p. Fl; Wall Street Journal, Mar. 29, 1991, p. A3 ; Defense News, @. 1, 1991, P. 4.ll~jorvstems ~msfmedhaveincluded~e U.S. Ml Abrarns&@(to Egypt), theU.S. F-16 fighter and Multiple Lauch Roeket SYstem (to ~ey)>

the German Type 209 submarine (to Brazil and South Korea), the France-German Alpha Jet (to Egypt), the Soviet MiG-27 fighter (to India), theAnglo-French Jaguar fighter (to India), the U.K. Swingfiie antitank missile (to Egypt), the French Super Puma helicopter (to Indonesia), theFrancO-German Milan antitank missile (to India), the German BK 117 helicopter (to Indonesia), among others.



Chapter l-Global Defense Business and Arms Proliferation q 9

Figure 1-9-Estimated Licensed Production of Major Conventional Weapon Systemsby Developing Nations, 1960-88

100 -- --

i . . . . : . . ~ ”

9 0 . .

80 ~~• ~~•Total number of systems produced

under license by developing nations* ““ ““” ““ - ““” ““ “’. .

70 -- --- ~~• - -- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

6 0 - - - - - - . .

Numberof major 50 ---- ~~~~~~~~~~~~ Total systems licensed annually

Number of U.S.-origin(whole-bar)

systems produced ~~•U.S.-origin systems licensed

under license byannually (bottom section)

/ ‘Y’ ~developing nations* .

4

— — - .

--y- ~ .- . . . ..3..< . . . . . . . . . . . . . . . . . . . . . .

/ “- .

10

:;=,~;~~n~L~~:L-:~:np:i-:n:n=o . . . . . . . - . . . . . . . :::::::: . . . . . . . :::::: :::::::. . . . . . . .. . . . :.:.:,:. . . . . . .

. . . . . . . .. . . .

..,...,.. . .

1960 1964 1968 1972 1976 1980 1984 1988

Year license granted

q Estimates based on the assumption that an average system is produced under Iicense for 12 years.

SOURCE: Office of Technology Assessment, from data in Stockholm International Peace Research Institute, SIPRI Yearbooks, 1970 through 1990, World Armaments and Disarmarnent.

capacity and have entered the arms export business.Between 1978 and 1988, the arms exported by Israel,Brazil, Spain, and South Korea amounted to $16billion (see figure 1-10). The multiplicity of sources(both advanced and developed countries) has pro-duced a buyers’ market in which a range of moderndefense equipment is generally available to anynation that can pay for it (see table l-l).

A final factor influencing policy is that many U.S.defense companies are in financial trouble. De-creased procurement budgets and the rapidly esca-lating cost of weapons systems have combined tothreaten the long-term economic viability of manydefense companies as presently constituted. In thepast 3 years, a handful of U.S. firms have collec-tively written off over $3.5 billion in R&D invest-

ments.12

The impact of decreased defense business—large lay-offs and production cut-backs-has andwill continue to be felt in congressional districtsacross the Nation.

13

Some defense executives would like to expandinternational sales and collaborative ventures toincrease their customer base and revenues in adeclining market.

14But they have been hindered by

government ambivalence, by rapidly increasingforeign competition, and by limited demand in manymarkets. International business has been importantto a number of major U.S. defense producers formany years; it will be increasingly critical to somecompanies as U.S. military procurement budgetscontinue to fall in the 1990s. Some importantweapons plants may have to shut down, and defense

[email protected]~eNW~, Feb. 18, 1991, pp. 4! 44.lqfionomicadju~~ent fi &eu.s. defe~~industries and fi~edefemeb~ereq~men~ are~eprincip~ subj@sof two ongoing OTAaasessment.s:

1) “Technology Opportunities for Economic Conversion” and 2) ‘‘Managing the Nation’s Defense Industrial Strength in a Changing SecurityEnvironment.”

h$Not all ~omp~es ~ve adopt~ ~S Straten, ~d for hose hat Mve, it is us@y od y one elementof an ovedl cOrpOrllte pkm tO adjUSt tO CkU3&d

business conditions.



10 qGlobal Arms Trade

Table l-l-Selected Weapons Exported by the United States, Soviet Union,and NATO Europe

Weapons systems United States Soviet Union NATO Europe

Main battle tanks Ml Abrams T-80, T-72M1A1M60 T-64

Fighter/attack aircraft F-16 Falcon MiG-29 FulcrumF-15 Eagle SU-27 FlankerF/A-l 8 Hornet SU-24 Fencer

Missiles Air-to-air AIM-9M Sidewinder AA-8 Aphid

AA-2 AtollAIM-7F Sparrow AA-7 Apex

Antiship RGM-84A Harpoon SS-N-2 Styx

Antitank BGM-71 D TOW-2 AT-4 Spigot

AT-5 Spandrel

SOURCE: Office of Technology Assessment, 1991.

executives argue that international sales could keepthem open. These factors generate strong pressuresfor international collaboration in defense technologyand for export of top-of-the-line military equipment.

Many U.S. defense executives argue that they donot bargain away their best technology. This allowsthem to maintain an edge over the competition forthe next sale, and assures that the United States willalso enjoy a military advantage in the event U.S.troops have to face U.S.-made weapons, or thosederived from U.S. designs, in combat. But theproblem of proliferation is more complex. Advanced

weapons systems—both old and new-emanatefrom many different sources and tend to fuelregional instabilities. Although they have not beenin production for many years, F-4 Phantom aircraft,M-60 tanks, AH-1 Cobra helicopters, SS-1 Scudballistic missiles, and MiG-23 Flogger fighters (toname a few) are powerful weapons that can generatesevere military, political, and psychological pres-sures when transferred to regions where they have

not previously been deployed.

The Persian Gulf War heightened the short-termbusiness prospects for a few U.S. defense compa-

Leopard 2 (Germany)Challenger (U. K.)Leopard 1 (Germany)Chieftain (U. K.)AMX-30B2 (France)Vickers Mk 3 (U. K.)OTO Melara OF-40 (Italy)

Mirage F-1 (France)Mirage 2000 (France)Tornado (U. K., Germany,

Italy)

R550 Magic (France)

R530 (France)Aspide (Italy)Sky Flash (U. K.)Exocet (France)Sea Eagle (U. K.)Sea Skua (U. K.)Penguin (Norway)Milan (Franoe, Germany)

Eryx (France)HOT (France, Germany)Cobra (Germany)Swingfire (U. K.)

Photo credit: U.S. Army (Frank Trevino)

The Patriot, which became a household name during thePersian Gulf War, is produced under Iicense by

Japan and Italy.



\

Figure I-l I—U.S. Government and Commercial Sales Deliveries of U.S. Military Equipment, andU.S. Military Grants,* 1978-88

18 T “ “ ” “ “

16 - -“ -- - ~~ - Total FMS and DCS sales deliveries

14 --

12. ... .

, .. . , .

.“ -/ -. .

Constant 10 - -------- _ ,. - - - . , .- - - - < . ,

1988

.. .

f

.- . .. . - . t .

.dollars, .

- - , .

. .- - - - .. ~- ,billions 8

- - - ,. .Foreign Military Sales (FMS) deliveries

/- - - -, /

/ ’

6 / “/“, .

-// “ - \ -/

4

- /

Direct Commercial Sales (DCS) deliveries /- —————.——

4/“

--— -—.—- ~’\ ‘-‘--_ - -

2 -- ‘ ----/ “ 0 ’ Total grants, including waived- - t -A——

;- - / FMS Financing, MAP and IMET———— ——- - \ ’————————

0I I 1 1

I I

1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988

Year

* Waived FMS Financing credits+ Military Assistance Program (MAP)+ International Military Education and Training program (I MET)

SOURCE: U.S. Department of Defense, Defense Security Assistance Agency, “Fiscal Year Series,” Sept. 30, 1989, p. 2.

accountability to the U.S. Government is less, and

the overall relevance to U.S. foreign policy goals isusually smaller and less direct. Between 1983 and1988, delivery of arms under DCS agreements roseby a factor of 6 to reach $6 billion per year (see figure1-1 1). These transactions were conducted outside of the U.S. Foreign Military Sales program.

U.S. arms exports have become increasingly

contentious in recent years.

18The FSX fighter

codevelopment with Japan, the denied sale of F-15EStrike Eagle fighter-bombers to Saudi Arabia, andthe 1990 proposal to sell over $21 billion of assortedequipment to the Saudis are well-known examples.Compared to just a few years ago, the stakes arehigher and have expanded to include large amountsof money (and jobs), the future health of U.S.defense companies, the transfer of technology with

military and commercial applications, the arming o f

potential future adversaries, and the proliferation of

possibly destabilizing military might.

Principal Findings

Finding 1

As part of their plans for adjusting to adeclining U.S. defense budget, many U.S. defensecompanies are increasing their emphasis oninternational business. This strategy is being

pursued through selling advanced conventional weap-ons to foreign governments, and increasingly, trans-ferring defense technology to foreign companiesthrough licensed production of U.S. equipment and

joint development of new weapons systems. Theinternational operations of U.S. defense companiesexpanded throughout the 1970s and 1980s, andextensive trade and defense industrial linkages wereestablished around the globe. This process is now

being accelerated by a downturn in domestic defense

IsConcern over s~es to the Middle East extends well back into the 1970s. For example, see Mtiew pi~e, ‘‘Beyond the Plane Package: Arms andPolitics in the Middle East,” International Security, vol. 3, No. 1, 1978.



Chapter l-Global Defense Business and Arms Proliferation • 13

Photo credit: U.S. Air Force (M. Sgt. Don Sutherland)

Between 1958 and 1979,5,057 copies of the F-4 Phantomfighter were produced, of which 1,196 were exported to

Egypt, West Germany, Greece, Iran, Israel, Japan,South Korea Spain, Turkey, and the United Kingdom.The F-4 was also produced under license by Japan.

spending and by increased competition from Europeand several developing nations for foreign defensesales.

Finding 2

Expanding international business may increaseprofits for individual U.S. companies, but for U.S.industry overall the benefits are not so clear-cut.International defense industrial collaboration cre-ates competition for U.S. companies both in foreignmarkets and at home. Highly capable foreign de-fense firms, moreover, seek strategic business alli-ances and subcontracting relationships with Amer-ican companies as a means of penetrating the U.S.

market, which is by far the largest and most lucrativein the world (see table 1-2). Some have acquired U.S.defense firms; more often, they demand a share of the production of U.S. weapons systems and transferof manufacturing technology as conditions of im-porting U.S. equipment. Increasingly, internationalcollaboration transfers defense technology to othercountries and results in more foreign-made defensecomponents being imported to the United States.

Photo credit: General Dynamics

The M1A1 Abrams main battle tank is the standard againstwhich all others are measured. However, continued

domestic production of the M1A1 is in doubt, becauseDoD plans to field a Block 3 tank beginning in 2002.The M1A1 is slated for licensed production by Egypt

after 1992.

Finding 3

A distinctly economic component has enteredU.S. international military sales policies in recentyears. In a departure from long-standing practice,high-ranking officers of the U.S. Army and AirForce have recently advocated foreign sales of U.S.equipment—including Ml tanks and F-16 fighter

aircraft-as a means of increasing production tokeep lines open, or to reduce the unit price.

19In

addition, direct commercial sales (deliveries), whichdo not involve the U.S. Government as an intermedi-ary buyer, have increased dramatically (see figure1-11).

Finding 4

Cooperating with foreign industry in the devel-opment and production of weapons builds uptheir indigenous defense industrial capabilities,transferring potent, advanced defense technol-ogy to foreign nations. In 1988, the United Stateswas engaged in transferring the production technol-ogy for approximately 70 major weapons systems toforeign countries, about the same number as ourNATO Allies and the Soviet Union combined (fig-

I% m offlci~ response to a direct OTA query the Army stated tie follom: ‘‘Unless speciilcally instructed to do so by an appropriate official of the Executive branch the Department of the Army will not encourage or promote sales of U.S. made military equipment to any foreign country. Whenit is determined to be in the best interests of the Army, to achieve specitlc stated objectives and benefits to the Army (e.g., to support the industrial base),it is Army policy to obtain such authorization so as to be able to provide support for representatives of U.S. defense industry in their competition forsales of defense articles and services in the global marketplace.”



Table 1-2—U.S.-European Defense Industrial Cooperative Arrangements, 1988-89

U.S. firm Foreign participant Product

1986 DY4 Systems . . . . . . . . . . . . . . . . . . . . . . . .Ford Aerospace . . . . . . . . . . . . . . . . . . . . . .GTE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Hughes . . . . . . . . . . . . . . . . . . . . . . . . . . . . .US West . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Six international teams . . . . . . . . . . . . . . . .

1987Emerson . . . . . . . . . . . . . . . . . . . . . . . . . . . .General Dynamics . . . . . . . . . . . . . . . . . . . .

General Electric . . . . . . . . . . . . . . . . . . . . . .Hercules Aerospace . . . . . . . . . . . . . . . . . . .Martin Marietta. . . . . . . . . . . . . . . . . . . . . . .RCA-FMC-General Dynamics-CSC-General Electric . . . . . . . . . . . . . . . . .Westinghouse . . . . . . . . . . . . . . . . . . . . . . . .

1988Allied Signal... . . . . . . . . . . . . . . . . . . . . . .Atlantic Research.. . . . . . . . . . . . . . . . . . . .Bendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Boeing . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Boeing . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Detroit Diesel... . . . . . . . . . . . . . . . . . . . . .General Electric . . . . . . . . . . . . . . . . . . . . . .General Motors-Allison . . . . . . . . . . . . . . . . .Hercules Aerospace . . . . . . . . . . . . . . . . . . .Hughes . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Hughes . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Lockheed . . . . . . . . . . . . . . . . . . . . . . . . . . . .Lockheed-Sanders. . . . . . . . . . . . . . . . . . . .LA W... . . . . . . . . . . . . . . . . . . . . . . . . . . . .Magnavox . . . . . . . . . . . . . . . . . . . . . . . . . . .McDonnell Douglas . . . . . . . . . . . . . . . . . . . .McDonnell Douglas . . . . . . . . . . . . . . . . . . . .

McDonnell Douglas . . . . . . . . . . . . . . . . . . . .McDonnell Douglas . . . . . . . . . . . . . . . . . . . .Teledyne . . . . . . . . . . . . . . . . . . . . . . . . . . . .Texas Instruments . . . . . . . . . . . . . . . . . . . .Tracer Aerospace . . . . . . . . . . . . . . . . . . . .TRW, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1989Boeing . . . . . . . . . . . . . . . . . . . . . . . . . . . . .DARPA . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Ensign Bickford . . . . . . . . . . . . . . . . . . . . . .General Electric . . . . . . . . . . . . . . . . . . . . . .General Electric . . . . . . . . . . . . . . . . . . . . . .

Hercules Aerospace . . . . . . . . . . . . . . . . . . .Hewlett-Packard . . . . . . . . . . . . . . . . . . . . . .Hughes-E-Systems . . . . . . . . . . . . . . . . . . .Hughes-Lockheed . . . . . . . . . . . . . . . . . . . . .Hughes-Raytheon . . . . . . . . . . . . . . . . . . . .IBM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .ITT- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Lockheed . . . . . . . . . . . . . . . . . . . . . . . . . . . .Lockheed . . . . . . . . . . . . . . . . . . . . . . . . . . . .LAW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .LAW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Martin Marietta . . . . . . . . . . . . . . . . . . . . . . .

McDonnell Douglas . . . . . . . . . . . . . . . . . . . .McDonnell Douglas . . . . . . . . . . . . . . . . . . . .McDonnell Douglas . . . . . . . . . . . . . . . . . . . .

Ferranti (UK)Ferranti (UK)T h o m s o nMBB(FRG), Aerospatiale (Fr)Siemens(FRG)

Agusta(lt)Aselan(Tk) Dornier(FRG),ENSAB (Sp),

Matra(Fr),OTO Malera (It)

Thomson (Fr),VDO(FRG)Intermarine(lt)Dowty(UK)Thomson (Fr), Siemens(FRG),

British Aerospace (UK), SignalPlessey (UK)

Ferranti (UK)British Aerospace (UK)Ferranti (UK)T h o m s o nThomson (Fr),Plessey (UK)

Perkins Engine (UK)GEC(UK)Aerospatiale(Fr)Aerospatiale(Fr)Esprodesia(Sp)Matra(Fr)Uxenz(FRG)GEC(UK)Aerospatiale(Fr)Ferranti (UK)British Aerospace (UK),GPA(lr)GEC(UK)

MBB(FRG)RoyalOrdnance(UK)Eichweber(FRG)T h o m s o nMES(lt)MEL(UK)

T h o m s o nDGA(Fr)British Aerospace/Royal Ordnance (UK)Ferranti (UK)GECRuston (UK)

BAT(lt)Dassault(Fr)MBB(FRG)Aermacchi(lt)MBB(FRG)Siemens(FRG)TRT(Fr)Aerospatiale(Fr)Aerospatiale(Fr)Phillips HSA(Nd)SEP(Fr),AEG(FRG)Dowty(UK)

Matra(Fr)W e t l a n dSogitec(Fr)

Technology transferTargeting podMobile subscriber equipmentRoland l/n missilesNetwork switching systemSDl theaterdefense study

Antitank system helitowPrecision guided munitions

LCD unit developrnentMinesweeper shipbuildingSR antiarm or weaponNATO AAWS bid

Missile approach warner

Electric generators for Airbus 340 and EFAMissile propulsion systemEFA power system (electronic)LCD instrumentationNATO LADS bid

Engines (defense use)Small-medium horsepower turbinesAllison T-406MOA high-temperature materialsAries missilesSDI studyAir defense system bid for lcelandOsprey ASW sonarSA 365 helicopterSATNAV system bidMD-11Mast-mounted sight

Fee upgrade packages30mm ASP systemTank weapon gun simulation systemMOU radar technology exchangeThreat adaptation countermeasurePRC 319 HF/VHF radio

SD lfree electron laserResearch on reactive armorExplosive productsHigh-altitude reconnaissance systemT-700 engines (Blackhawk)

Composite structuresAntenna test equipmentArms verification technologyPATS bidAMRAAM production64 megabit chipU.S. Air Force radio altimeter bidEuroflagLong-termMOU(commercial)FMDS bidERINT missileALFS dipping sonar

Missile/munitions marketingApache AH-64 attack helicopterMission planning system



Finding 8

Photo credit: U.S. Air Force

The F-1 6 fighter is flown by 17 air forces around the worldand is assembled under license by three foreign nations;

2,006 of the aircraft have been produced in the UnitedStates and 510 in Europe.

Finding 6Wide diversity of supply among both advanced

and developing nations has degraded the use of arms transferor their denial—as an instru-ment of foreign policy. The end of the Cold Warhas reduced a prime reason for arms transfers-tocounter those of the Soviet Union. At the same time,however, unilateral U.S. attempts to restrain thearms trade will likely fail because the buyer nation

can find alternative sources with competitive de-fense equipment (see table l-l).

Finding 7

International arms business, in which theUnited States is first among several prominentsuppliers, is building up a dangerously armedworld. In the Middle East, arms imported to theregion have raised the stakes associated with politi-

cal instability and have figured prominently in thecalculations of militant religious regimes and re-gional strongmen. As the Islamic revolution in Iranhas shown, once transferred, modern weapons canoutlast the governments they were intended tosupport. As the war with Iraq has shown, arms mayoutlast the good will of the leaders to whom theywere supplied. Highly armed adversaries make itmore difficult for the United States to protect its

interests, increasingly so in the future if the UnitedStates stays its post-Cold War course of reducing itsarmed forces and defense expenditures.

If the goal is to stem proliferation of advancedconventional weapons and defense technology,multilateral restraint by Europe, the Soviet Union,and the United States is a prerequisite. Becausethese three account for about 80 percent of all armsexports (and a higher percentage of advancedmateriel), an agreement to restrain exports couldhave far-reaching implications (see figure 1-12). Inthe context of a “new world order,” conventionalarms control is clearly an alternative to a continuingarms bazaar, especially to the Middle East. Withoutthe stimulus of a polarizing U.S.-Soviet militaryconfrontation, continued proliferation of arms to theThird World has lost much of its military andpolitical justification. Considering its recent role inthe Persian Gulf crisis, the United Nations may bethe appropriate vehicle to pursue multilateral re-straint of defense exports.

Why Congress Should CareAs the defense industries of the world become

more capable, the problem of proliferation increasesbecause no single nation (or group of nations to date)can control the ultimate distribution of advancedweapons and the technologies necessary to buildthem.

The acquisition of weapons and military technol-

ogy can and does change the balance of power

Figure 1-12—U.S., U. S. S. R., and European ArmsExports as Percentage of All Transfers, 1984-88

NATO Europe

States%

Other 19%

41%

SOURCE: U.S. Arms Control and Disarmament Agency, Wor/d Military Expenditures andArms Transfers, 1989(Washington, DC: U.S.Government Printing Office, 1990), p. 11.

Chapter l---Global Defense Business and Arms Proliferation q 17



among nations. By exporting large quantities of potent weapons, the advanced industrial statescontinue to build up the ability of potentially

renegade or terrorist nations to threaten the use of force and to invade weaker nations. The Iraqiinvasion of Kuwait is the most recent example; if advanced weaponry continues to proliferate at pre-sent rates, it is not likely to be the last. Even thoughthe U.S.-led coalition defeated the Iraqi militarywith unprecedented efficiency and few losses, trans-ferring potent weapons to foreign militaries makes itmore difficult for the United States to reduce the size

and cost of its military and still protect Americaninterests abroad.

The Persian Gulf War also demonstrated thedestructive capability of modern conventional weap-ons; in less than 2 months, coalition forces devas-tated the physical infrastructure of Iraq and killedtens of thousands of Iraqi soldiers. This toll in death,destruction, and human suffering may only be thebeginning. Even with vastly less military hardware,

Iraq’s leadership may still devastate the Kurdish andShiite Moslem populations.

Increasing proliferation of sophisticated weaponsand technological know-how has injected newelements of uncertainty and concern into interna-tional relations. The United States and othermajor exporters are gradually losing control of the weapons transferred as well as the technology

and industry necessary to produce and supportthem. There can be no assurance that the weaponswe and our allies make available to our friends todaywill not be used against us tomorrow. As the Iraqisituation has presaged, arms trade and collaborationwill increasingly influence the environment inwhich foreign policy decisions are made. If othernations had not armed Iraq, the United States mightnot have massed so many forces in the Persian Gulf,

and the necessity of going to war might have beenaverted.

Advanced weaponry and defense technology maynot always be used for the purposes intended or stayin the hands of the regime to which they were sold.The United States alone sent about $11 billion inmilitary hardware to Iran between 1969 and 1979and trained over 11,000 Iranian military officers (see

Photo credit: Hughes Aircrafl

U.S. TOW antitank missiles were captured by the Iraqis

after the August 8, 1990 invasion of Kuwait.

figure 1-13).23

These weapons failed in their pur-pose, i.e., to enhance the stability of a friendly andmoderate regime in the region, and were later usedto wage war against Iraq. The Soviets, the French,and several developing nations supplied the Iraqiswith a vast arsenal (see figure 1-14 and table 1-3).

Those weapons, and U.S. weapons captured from theKuwaitis,

24were then available for use against

coalition forces in the Arabian Peninsula. Futureproposals for defense industrial cooperation be-tween U.S. and European firms will have to beevaluated in light of these circumstances, as well asthe comparative permissiveness of European armsexport policies.

DU.S. Dep~rnent of Defense, Defe~e Sectity Assistance Agency, Foreign A4ilitary Sales, Foreign Military Construction sales ad MlkT Assistance Facts, Sept. 30, 1989, p. 3; and U.S. Department of Defense, Defense Sezurity Assistance Agency, Fiscal Year Series, Sept. 30, 1989,p. 101.

~EX~pleS include u.s.-rnade TOW antitank and Hawk antiaircraft mkih .

l8 q Global Arms Trade



Figure l-13—World Arms Transfers to Iran and Iraq,1978-08

12

10

8

Constant

1 9 8 8 6dollars,

billions

4

2

0

T“-””’-””””””-””””’--”’”””””’-”’--”-”””. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

I Arms transfers to Iraq

I 1 , 1 1

I I

1978 1980 1982 1984 1986 1988

Year

SOURCE: U.S. Arms Control and Disarmament Agency, Wor/d hfi/itary Expenditures andArms Transfers, 1989(Washington, DC: U.S.

Government Printing Office, 1990), p. 93.

As U.S. defense companies adjust to lower levelsof domestic production, some important manufac-turing facilities may be forced to close. Beyond theimmediate economic impact, a great many defensecompanies that supply parts and components may be

adversely affected, with the possibility that theUnited States could lose crucial defense production

capabilities that have taken many years and enormous

investments to achieve. Some defense lobbyists seeincreased international business as a possible partialsolution. But there is also the consideration thatmany buyer nations, especially those with develop-ing defense industries, would likely demand a major

share of production, offsetting U.S. gains. Manyanalysts believe that leaving adjustment of thedefense industries to economic forces may produce,a defense industry profitable for some companies,but unable to meet the future security needs of theUnited States. They argue that in the post-Cold Warera, the Department of Defense must manage thedefense industries efficiently at lower levels of production, and that a policy of selling weapons to

other nations just to maintain the U.S. defenseindustrial base would ultimately fail to address theunderlying problems of overcapacity and reduceddemand for defense equipment.

Increasingly, international business arrangementslead to foreign penetration of the U.S. defensemarket. Typically, a U.S. company (acting as the

prime contractor) subcontracts a portion of a defensesystem to a foreign company. Many foreign defensefirms have established a strong marketing presencein the Washington metropolitan area to monitor theU.S. defense market and cement business ties withU.S. defense contractors. In addition, an increasingnumber of European companies are acquiring U.S.defense firms through foreign direct investment,essentially buying their way into the U.S. market.

Congress has given these activities increasingscrutiny in recent years. Arms transfers constitute amajor element in the continuing struggle betweenCongress and the Executive over how much influ-ence Congress can and should exert over foreignpolicy. The Executive continues to view and usearms exports as a vital and powerful instrument inthe conduct of foreign relations, and Congresscontinues to assent, sometimes reluctantly, while

using its regulatory and oversight powers to influ-ence and circumscribe the foreign policy agenda of the President.

The Policy Dilemma

The state of the international defense businesslinks two issues of current concern to Congress:Controlling the proliferation of modern weapons and

defense technology and the health of U.S. defensecompanies. It is likely that a strong consensus couldbe forged on either issue in isolation; but because of

Figure l-14-Arms Transfers to Iraq by Country,1984-88

China$2.9 bi

\ I \ ‘Bulgaria2%

/ )Soviet Union 52% \ $1b i l l ion

$15 billion Czechoslovakia 2%0

$1 billion

The United States transferred

no arms to Iraq during this period

SOURCE: U.S. Arms Control and Disarmament Agency, M&/d hfihry Expenditures andArms Transfers, 1989(Washington, DC: U.S.Government Printing Office, 1990), p. 117.




Table 1-3-Developing Nations’ Arms Exportsto Iraq, 1982-89

Brazil 66 Astros-11 SS-30 multiple rocket launchers20 Astros-11 SS-60 multiple rocket launchers13 Astros Guidance fire control radars

200 EE-9 Cascavel armored cars300 EE-3 Jacara scout cars

China 4 B-6 bombers (copy of Soviet Tu-16)

72 Hai Ying-2 ship-to-ship missiles (arming B-6 bombers)700 T-59 main battle tanks600 T-69 main battle tanks650 Type 531 armored personnel carriers

720 Type 59/1 130mm towed guns128 C-601 antiship missiles

Egypt 70 F-7 fighter aircraft (Chinese version of MiG-21)80 EMB-312 Tucano trainers (built under Brazilian license)

150 BM-21 122mm multiple rocket systems100 Sakr-30 122mm multiple rocket launchers90 D-130 122mm towed guns96 D-30 122mm towed howitzers

SOURCE: Office of Technology Assessment, from data in StockholmInternational Peace Research Institute, SIPRi Yearbooks, 1970through 1990, WorldArmaments and Disarmament.

the linkage, the steps needed to implement a solutionto one would tend to undermine resolving the other.

Efforts to control proliferation will almostcertainly limit the international sales of U.S.defense companies. Similarly, efforts by U.S.defense companies to expand their internationaloperations will exacerbate the problem of prolif-

eration. The problem cannot be solved by a simplechoice between constraining arms exports at theexpense of a viable U.S. defense industrial base oraccepting an arms bazaar in the developing world inorder to support that industrial base.

However, with U.S. leadership, at least acqui-escence on the part of the Soviets, and coopera-tion by the Europeans, it may be possible to avoid

the potentially catastrophic consequences of armsproliferation to the developing nations. Thiseffort would require multilateral restraint inarms exports. The effects on U.S. industry mightbe mitigated by moving to a scaled-down U.S.arms production in which technological progressis sustained, adequate readiness is maintained,and profits are possible.

There is general agreement that uncontrolledproliferation of advanced weapons is not in theoverall interest of the United States. No one wantsregional instability or potent military threats to U.S.

interests abroad. But there is less agreement on howmuch proliferation is too much, where proliferationis dangerous, and to what extent arms transfers can

be used effectively as tools of foreign influence.If the present level of arms exports is main-

tained, it will add significantly to the prolifera-tion of weapons—both directly, as well as indi-rectly through the transfer of technology andproduction capabilities. One suggested approachto controlling proliferation is to restrict further theaccess of U.S. defense companies to the interna-tional market and letting them adjust as the U.S.

market contracts. In this view, addressing theproblem of proliferation outweighs the businesslosses of some U.S. companies and the localeconomies they support.

Many in Congress (and elsewhere) are concernedabout economic dislocation that will result fromdeclining domestic defense procurement. Manybelieve that U.S. defense companies should diver-

sify their business activities into the civilian econ-omy. Some industry spokesmen have argued thatbecause unilateral restraint is unlikely to stem theproliferation of defense technology and militarymight, the U.S. Government should adopt a policy tohelp--or at least not hinder-defense contractors.They believe U.S. companies should be allowed tocompete vigorously in the international market toincrease their profits and maintain production.

Others contend, however, that increased interna-tionalization means that U.S. defense companieswill continue to sell technology to foreign govern-ments, ultimately undermining U.S. leadership inthe development and manufacture of defense sys-tems—a process that has already taken its toll inmany sectors of international trade. From thisperspective, U.S. defense companies are nationalassets, established to serve the national security,

whose operation is authorized and subsidized bygovernment, and whose products are paid for withpublic funds.

As such, U.S. defense firms are obligated tooperate under different rules than civil manufactur-ers; they are not automatically entitled to participatein unbridled international competition. The devel-opment of a truly multinational defense indus-trial sector, where corporate giants conduct R&Dand manufacturing in many countries of theworld, would because for grave concern. It wouldbe extremely difficult for the United States (or any



tional collaboration, defense industrial proliferation,and the future health of the defense industries in theUnited States.

The Spread of Defense Technology and

Defense Industry

The first three issues presented below address thequestion: To what extent should U.S. policyrestrict or permit the transfer of U.S. defensetechnology to foreign nations? Licensed produc-tion (and other forms of international collaboration)is generally increasing worldwide, and U.S. compa-

nies account for a large share of the defensetechnology being transferred in the West.

39The

implications for the United States of increasingcollaboration, however, vary for different partnersand also depend on the defense policies and level of industrial development of the individual partnernations. Accordingly, this policy discussion ad-dresses three separate cases: Japan, the advancedEuropean defense producers, and certain developing

nations.

Issue 1: Defense Industrial Collaboration WithJapan

Part of the genesis of this assessment was concernin the IOlst Congress over the proposed transfer of U.S. fighter technology to Japan—as part of the FSXcodevelopment agreement. Numerous committeesof Congress held hearings on the advisability of per-

mitting General Dynamics to work closely with Mit-subishi Heavy Industries (MHI) to develop a Japa-nese indigenous fighter. A principal concern wasthat the FSX project might ultimately help Japanbecome more competitive in civil aviation markets.But the debate largely failed to address the moreimmediate questions of whether or not transferringthis capability to Japan would enhance or detractfrom U.S., Japanese, and international security, and

what the impacts on U.S. defense companies might be.

In three respects, Japan is a special case. First, theU.S. transfers more major weapons systems to Japanthan it does to any other nation. Over the pastdecade, Japan has embarked on a rapid defensebuild-up and has developed an extensive defense

industrial sector, drawing heavily on licensed pro-duction from the United States. Because Japan is amajor export market for U.S. defense technology,

the FSX codeveloprnent project represented a deep-ening of already firmly established defense indus-trial ties. It also meant business opportunities forGeneral Dynamics and its U.S. subcontractors.

Second, concerns that Japan might proliferateU.S.-licensed, codeveloped, or derivative defensetechnologies are somewhat mitigated by Japan’spolicy against export of defense equipment. Al-though this policy may change, it is anchored in the

larger U.S.-Japan security relationship, and to theextent this alliance remains stable, Japanese restraintin defense exports will probably be preserved. If,however, trade relations between the two countriescontinue to sour, a new security environment couldemerge in which Japan depends less on the U.S.security umbrella. Change could also result fromdifferent perceptions by the two countries of theirroles and interests in the evolving post-Cold War

security structure. Japan might decide to do whatmany U.S. policymakers have urged for decades:take on more of the burden of its own defense. In thatcase, the United States (and the world) would find aJapan with a strong base of defense technology andan industrial sector fully capable of ramping up pro-duction swiftly in the event it was called on to do so.

Third, the flow in defense technology between the

United States and Japan has been a one-way street toJapan, with few exceptions.

40Supporters of the FSX

project argued that Japan would make advancedradar and composite materials technology availableto the United States under the terms of the agree-ment. While it is still early in the developmentprocess, such reverse technology transfer has notoccurred, and some argue that the Japanese develop-ments in question were overrated in the first place.

In general, government and corporate leaders inJapan appear eager to receive U.S. defense technol-ogy, and at the same time, reluctant to share theirswith the United States.

U.S. policy on cooperation in defense technolo-gies between the United States and Japan should

39see ~$~e u.S. A~~~~a~-. ~du~~ ~d the Trend Toward ~ternatio-tion” ~-gto~ ~: The Aerospace Industries AssOCiatiO~ hlC,,March 1988), p. 6.

@T. ~te, “eg litfle Japanese.~de defeme technolo~ @ been transferred to tie United States. However, a si@lcant but tlllkllown quantity ofJapanese high-technology products (with both civil and military applications) has been incorporated into U.S. defense systems. In general, the degreeof DoD dependence on foreign sources of supply is unknown. See U.S. Congress, General Accounting Oftlce, Zndustn”a2Base: Signzj$cance of DoD’s

Foreign Dependence, GAO/NSIAD-91-93 (Gaithersburg, MD: U.S. General Accounting OffIce, January 1991), passim.




factor in the unique circumstances enumeratedabove and should not ignore lessons learned fromthe FSX experience. Mired in political controversy

from the outset, the FSX project has encounteredunforeseen technical problems and appears to be farmore expensive than its Japanese supporters ex-pected. Some now doubt the project will reachfull-scale production. Many Japanese officials re-main bitter about what they perceive to have beenless than good faith on the part of the U.S.Administration and Congress. They believed theyhad negotiated a firm agreement with the Reagan

Administration, only to have it reopened in anatmosphere of distrust and mutual recrimination.These officials now advocate greater caution, bothpolitically and technologically, making it unlikelyJapan will soon propose another codevelopmentproject on the scale of the FSX. Projects involvinglicensed production (and possibly codevelopment of components) are likely to proceed as in the past.

If maintained, the present U.S. policy to permitfrequent transfers of defense technology to Japanwill continue to build up the defense industrial baseof that nation. This, of course, raises the question of the rearming of Japan. Japan has increased itsdefense expenditures in real terms by about 6 percentper year for the past decade, and is by far the largestmilitary power in the Western Pacific. Few believeJapan intends to build its arsenals to levels reached

during World War II. Nevertheless, a key compo-nent of its defense industrial strategy is to producea large number of major weapons at very lowproduction rates, developing the technological know-how and industrial infrastructure that would have toprecede a decision to rearm. If transferring majordefense capabilities to Japan is the intent of Congress, then the present policy should bemaintained. If not, Congress may wish to con-

sider prohibitions on future transfers of defensetechnology.

Japan is able to reap the benefits of much U.S.defense R&D by essentially buying it throughlicensed production, while returning little or nothingto the U.S. defense technology base (see table 1-4).Japanese officials believe that technology is aprecious commodity and, unlike many U.S. defenseindustrialists, they see it as far more valuable than

short-term economic gains. Nevertheless, those who

Table 1-4-Recent U.S.-Japan CoproductionTransfers

F-15J Eagle fighter airoraftFSX fighter aircraftCH-47 D Chinook helicopterKV-107/2A helicopterModel 205 UH-1 H Huey helicopterModel 209 AH-IS Cobra helicopterUH-60J helicopterEP-3C Orion electronic intelligence aircraftM-1 10A2 203mm self-propelled howitzer

Patriot missile batteryMlM-l 04 Patriot mobile surface-to-air missileMIM-23 Hawk mobile surface-to-air missile

AIM-7F Sparrow air-to-air missileAIM-9L Sidewinder air-to-air missileBGM-71 C l-TOW antitank missile

SOURCE: Office of Technology Assessment, from data in StockholmInternational Peace Researeh Institute, SIPRI Yearbooks, 1970through 1990, Wor/dArmaments and Disarmament.

advocate collaboration argue that by transferringdefense technology to Japan, the United Statesenhances that nation’s ability to assume a greater

share of its own defense and that U.S. defensecompanies receive monetary benefits as well. Poli-cymakers will have to balance these benefits againstthe possibility that Japan could change its defenseexport policies, and that if it does, as many U.S.defense contractors believe it will, the United Stateswill have helped to create another major supplier(and a formidable competitor) in the internationalarms market.

Issue 2: Collaboration With Western Europe

The major arms-producing nations of Europe-France, Germany, the U.K., and Italy-have longcollaborated with one another in the

-developmen~

and production of defense equipment. Some haveadopted export-led defense industrial policies, withexports accounting for at least one-third of Europeandefense production.

41European defense companies

axe eager to exchange technology with U.S.-firms,although historically-because U.S. defense tech-nology was far superior-the United States hastransferred a great deal more to Europe than it hasreceived. As OTA has shown, that situation haschanged; for purposes of export and collaboration,U.S. and European defense technology and produc-tion are now roughly comparable. Many transatlan-tic subcontracting and joint-venture arrangements

are now in effect.42

AISee figure 1-5 for 1984 wpOrtS.AZU.S. Con=ss, Office of Technology Assessment, op. cit., footnote 7.

292-877 0 - 91 - 2 : QL 3




Powerful political and economic forces havetransformed the security arrangements of Europeand challenged the continued relevance and viability

of the NATO Alliance itself. Major changes inSoviet policies, German unification, the Treaty onConventional Forces in Europe (CFE), breakup of the Warsaw Pact, economic integration of theEuropean Community, and the Persian Gulf Warhave all helped to undermine the basic assumptionsthat have driven East-West security relations in thepost-World War II period. While much is stilluncertain, many analysts believe Western Europe

will become increasingly self-reliant, eventuallyapproaching security concerns not as individualnations or members of NATO, but from the perspec-tive of an independent, single European approach todefense. Differences in US. and European de-fense industrial and arms export practices willfigure heavily in calculating the benefits and risksassociated with a U.S. policy to permit or restrictthe transfer of U.S. defense technology to West-

ern Europe.In the past, U.S. policies to transfer technology

and arms to Europe were motivated largely bysecurity considerations and military preparationsassociated with the Cold War and the threat of apotential Warsaw Pact invasion of Western Europe.Those policies worked. In the space of a fewdecades, they helped build sophisticated defenseindustries across Western Europe. These policiesalso contributed to extreme peacetime overcapacityin the defense industries of the West and to intenseinternational competition for sales of advancedweaponry.

In reviewing the U.S. policy of transatlanticdefense industrial collaboration and technologytransfer, several factors will be important. Countrieswith whom the United States has collaborated

extensively in the past may in fact transfer weaponsand technology to nations that oppose U.S. securityand economic interests. In the past, Europeangovernments have been willing to export their mostadvanced weapons to a wide range of countries.Although they were not used effectively in thePersian Gulf War, some of the most sophisticatedweapons in the Iraqi arsenal were made in France(see table 1-5).

42It is not impossible that U.S.

Table 1-5-French Weapons Transferredto Iraq, 1981-88

NumberWeapon Type of weapon transferred

Mirage F-l C . . . . .AMX-30 Roland . . .

AM-39 Exocet . . . .ARMAT . . . . . . . . .AS-30L . . . . . . . . . .HOT . . . . . . . . . . . .Milan . . . . . . . . . . .Roland-2 . . . . . . . .R-530 . . . . . . . . . . .

R-550 Magic . . . . .

Fighter/interceptorAntiaircraft vehicle, missile

armedAntiship missilesAntiradar missilesAntiship missilesAntitank missilesAntitank missilesSurface-to-air missilesAir-to-air missiles

Air-to-ah missiles

143105

734 708

1,200 1,6004,800 1,050

257

534 SOURCE: Office of Technology Assessment, from data in Stockholm

International Peace Researeh Institute, SIPRI Yearbooks, 1970through 1990, WbrldArmaments and Disatrnament.

soldiers will again face European weapons on thebattlefield, weapons that may even incorporateinnovations first developed in the United States. If the European nations and the United States are

unable or unwilling to harmonize their defenseexport policies, then Congress may wish toconsider restricting future defense industrialcollaboration with Europe.

Continued transatlantic collaboration in militarytechnology will likely increase interdependence,both in terms of shared technology and with respectto production capabilities. Such interdependencewould deepen penetration of the U.S. market byforeign components and thereby increase U.S. de-pendence on foreign defense equipment and technol-ogy. Dramatic growth in strategic corporate alli-ances and subcontracting arrangements betweenU.S. and European defense companies indicate thisprocess is already under way (see figure 1-16).Recent acquisition of U.S. defense companies byEuropean fins, large defense cooperation staffs atthe European embassies in Washington, and market-

ing offices of European defense firms inside theCapital Beltway also indicate increasing Europeanpenetration of the U.S. defense market.

European governments are unlikely to permit U.S.defense companies to establish a greater presence inEurope that does not entail reciprocal access forEuropean firms. Because the U.S. Government buysmore defense equipment than all of the major

42From 1980 ~ou@ 1987, tie Fr~~~h sold $6.7 bflfion (c~ent do~s) worth of adv~ced w~pons to I.rq, including 143 h!fkage F-lC @h@rS ~d

734 AM-39 Exocet missiles. U.S. Arms Control and Disarmament Agency, World Military Expenditures and Arms Tran#ers, 1988 (Washington DC :

U.S. Government Printing OffIce, 1989), p. 22.

Chapter I-Global Defense Business and Arms Proliferation q 25



defense-producing states of Europe combined, it isunlikely that opening up transatlantic defensecollaboration and trade would benefit U.S. firmsin the aggregate, particularly in a decliningglobal defense market. Over the past several yearsthe defense industries of Europe have consolidated,creating national champions. These defense con-glomerates—such as British Aerospace (BAe) in theU.K. and Deutsche Aerospace (DASA) in Germany—are comparable to the larger U.S. defense contractorsin terms of financial resources, technology, produc-tion, and sales.

Finally, the transatlantic exchange of defensetechnology and the industrial linkages on which itdepends raise additional proliferation concerns.ultimately, the United States exerts very littleinfluence over the weapon systems and defensetechnology of even its closest allies. Increasinginternationalization of the defense industrialbase means that national controls over the distri-

bution of defense systems and technologies be-come weaker. At some point in the weaponsdevelopment process, technology itself becomesfungible, that is, innovations of one companyworking closely with another contribute to thetechnology base and knowledge of both. It thenbecomes possible for either party to build on aparticular development, modify it for differentapplications (both military and civil), sell it in

products to third parties, or transfer it as technologyto others. Proliferation of defense industry andtechnology to developing nations is discussed inIssue 3 below.

Issue 3: Transferring Defense Technology toDeveloping Nations

The developing nations depend far more heavilyon transferred defense technology than do Japan and

the Western European states. Chapters 7 through 11analyze the defense industries of seven nations:South Korea, Brazil, India, Taiwan, Indonesia,Singapore, and Australia. They indicate that li-censed production is a major vehicle for the promo-tion and building up of indigenous defense industrialcapabilities. While licensed production of compo-nents is far more common, several of the nationshave also undertaken extensive production of major

weapons systems in this way.43

Figure 1-16--U.S.-European Defense IndustrialCooperative Arrangements

35 T 33

Number

of teams

30

25

20

15

10

50 1

23

6 7

1986 1987 1988 1989

Year

SOURCE: Lt. Col. Willie E. Cole, Lt. Cd. Richard C. Hochberg, and Comdr.Alfred E. Therrien, Europe 1992:Cata/ystforChange in Defense Acquisition: Report of the DSMC 1989-90 Military Research Fellows (Washington, DC: Defense Systems ManagementCollege, 1990), p. 45.

Increasingly, U.S. industry transfers defense tech-nology to a wide range of developing nations on anad hoc basis in the absence of consistent policydirection. Congress faces a clear policy choice:whether or not (or to what extent) to permit U.S.companies to build up the defense production

capabilities of the developing world. The principalconsiderations on which policy in this area might bebased are discussed below.

Licensed production and other forms of interna-tional collaboration in defense technology are criti-cal to building the defense industries of developingcountries. Many of these nations have very weak

R&D capabilities in defense technology; and theadvanced technology and R&D resources they dopossess are usually dedicated to commercial efforts.Defense companies in South Korea, for example,typically depend on the government’s Agency forDefense Development (ADD) for most of theirR&D, and ADD itself has very limited R&Dfacilities and programs. The long-term strategy of the Korean Government is to draw U.S. defense

companies into cooperative production and R&D

As~dia~ pr~uc~ 21 ~jor conventio~ weapon systems under license; South Kora 16; ‘hiwa~ 13; Brazil and kdonesia, 12 mck AUS~ZU10; and Singapore, 6.




The F-5 fighter has been exported to 32 foreign nations andhas been manufactured in South Korea Taiwan, and

Switzerland.

relationships so that Korean firms can learn fromtheir more advanced partners.

44

In the absence of significant foreign assistance,the indigenous defense industrial capability of mostof the developing nations would cease to expand andmight even collapse. While there is some evidencethat the developing nations are beginning to transferdefense technology among themselves, they are stilllargely unable to produce the technology or absorbthe costs associated with indigenous development of

modern weaponry.45 Because domestic

demand is solimited, most must find export markets to reduce theunit costs even for systems produced under license.For this reason, U.S. restrictions on third party salesof U.S. weapons produced under license is a majorissue for developing countries. They face the sameproblems of overcapacity and high developmentcosts that have plagued the advanced producers-only for them, the problems are more acute.

Industrial linkages between U.S. defense compa-nies and weapons producers in the developing worldhave expanded in recent years. Frequently, suchlinkages are built into the structure of arms sales.What used to be straightforward sales of majorplatforms have now become sales combined witheventual licensed production of all or part of the

weapon in question. These kinds of arrangementscontribute to globalization of the defense industrialbase. Global sourcing may already be making

defense production more efficient, but in the longterm, it will also tend to displace U.S. defensesubcontractors (and U.S. workers) and increaseU.S. dependence on foreign-made defense prod-ucts.

.

Nations with developing defense industries havebrought about a significant expansion of worldwidedefense production capacity, which is not surprising

considering their growing technological and indus-trial presence in international civilian markets.These countries are now entering the internationalarms trade or have active strategies to do so. Some,like Brazil and Israel, have already made theirpresence felt, exporting (respectively) 90 and 55percent of their production (see figure 1-5); others,like South Korea, intend to supply a large portion of their own domestic needs as well as those of their

allies. Most will likely adopt a dual-use approach todefense technology, i.e., seeking to leverage civiliantechnology for defense purposes and producing highquality, but not state-of-the-art, weapon systems.

The United States is now engaged in and negotiat-ing transfer of advanced defense technology to avariety of developing countries (see figure 1-8).These include the M1A1 Abrams tank coproduction

with Egypt, the Korean Fighter Plane (a GeneralDynamics F-16 sale and licensed production ar-rangement), and the Indigenous Fighter Plane withTaiwan (a twin engine fighter based on F-16,F/A-18, and F-20 technology). While the UnitedStates cannot stop these nations from building theirown defense industries, U.S. policy on transferringdefense technology to them will make a very largedifference. Of the 16 major weapons systems

produced under license by South Korea, for exam-ple, 12 were transferred from the United States; andU.S. companies licensed 9 of 13 major foreignsystems being produced in Taiwan. It is unlikely thatSouth Korea or Taiwan would have achieved theirpresent levels of defense production without signifi-cant and sustained assistance from U.S. defensecompanies (see table 1-6).

44For exmple, in tie proposed Kore~ Fi@ter Plane (KFP) projec~ an F-16 fighter COprOduCtiOn agreemen% Souti Kore~ ~dustry e@*rs ‘iU

receive training at research centers in the United States, and General Dynamics engineers will work in Korea to transfer the underlying technologies toKorean companies involved in the project. The Korean strategy is discussed inch. 8.AS~ese conditions my c~ge b the future for countries as their defense industries mature and they gh experience b ~troduc@ Civflh

innovations into weapons systems, particularly in the field of defense electronics.




Some argue that turning off the U.S. spigot wouldnot solve the problem because the defense industrialbase is already global and other nations (particularly

in Europe) could provide the requested items.Clearly, U.S. controls on defense industrial collabo-ration (particularly licensed production and codevelop-ment) would not eliminate the flow of defensetechnology unless coordinated with other advanceddefense industrial states.

As the largest and most advanced producer of defense systems in the West, a U.S.-led diplomatic

initiative to restrict collaboration might slow thepace of defense industrial and technologicaldispersion. It would also place the United States ina position to exert diplomatic pressure on its NATOAllies and the Soviet Union. Working together, theNATO countries and the Soviet Union could stemthe vast majority, perhaps as much as 90 percent,of technology transferred in international de-fense trade (see figure 1-2 above). A possible

approach is discussed below under Issue 4.Global Trade in Advanced

Conventional Weapons

The final two issues address the question: Whatare the key considerations of a policy to restrictor permit arms trade in major conventionalweapons? The Iraqi invasion of Kuwait and subse-quent events have focused world attention on

international transfer (both sales and grants) of advanced weaponry. On one hand, the Bush Admin-istration has proposed major arms transfers, espe-cially to the Middle East; and the Department of State and Defense Security Assistance Agency(DSAA) have argued to Congress that increasedforeign sales are necessary to maintain domesticproduction of important U.S. weapons systems.

%On

the other hand, the Persian Gulf War also appears to

have increased concern among policymakers and thepublic in the United States, Europe, and the SovietUnion that the proliferation of powerful advancedconventional weapons must be restrained. In France,the fact that French soldiers faced French weaponson the battlefield has catalyzed public opposition to

Table 1-6--Major U.S. Weapon Systems ProducedUnder License by South Korea and Taiwan

South Korea F-16 Fighting Falcon fighter (negotiating)F-5E Tiger-2 fighterF-5F Tiger-2 fighterH-76 Eagle helicopterModel 500MD helicopterPL-2 light plane trainerM-101A1 105mm towed howitzerM-109-A2 155 self-propelled howitzerM-1 14-AI towed howitzerCPIC type fast attack craftLCU-1610 type landing craft

PSMM-5 type fast attack craftTaiwan

F-5E Tiger-2 fighterF-5F Tiger-2 fighterF-5F Tiger-2 trainerModel 205 UH-1 H helicopterAIM-9J air-to-air missileAIM-9L air-to-air missileMIM-23B Hawk land mobile surface-to-air missileM-60-H main battle tankFFG-7 class frigatePL-1 B Chienshou light plane

Lung Chiang class fast attack craft


French arms export policies for the first time.47

These differing perspectives are likely to form thebasis of a major policy debate in the 102ndCongress.

Issue 4: The Future of Global Arms Trade

Two principal objections are offered to any U.S.policy to place additional restraints on internationaldefense trade. First, some defense industrialistscontend that international sales are important tosustain selected sectors of the U.S. defense indus-tries at present levels of production and capacity.Most industry analysts agree that U.S. Government

procurement will continue to fall,48

and that foreignmarkets, especially in the Middle East and theWestern Pacific, offer opportunities for growth.Proponents urge government to support or, at aminimum, permit expanded foreign sales to cushionthe effect of declining domestic procurement.

~~ese include tie MIAI Abrws ~ the Blackhawk helicopter, the MIM-23 HAWK suIfaCe-tO-ti mki.le, the F-16 Falcon fighter, tie M-64Apache attackhelicopter, andtheBoeing 707 aircraft, among others. Several of these were deployed effectively in the Persian Gulf Warandare scheduledto go out of production as early as 1993. See U.S. Department of State and U.S. Defense Security Assistance Agency, Congressional Presentation for

Security Assistance Programs, fiscal year 1992, p. 6.d7See The Washington Post, Apr. 6, 1991, P. A17.

‘%ialomon Brothers, “Defense Industry Update-The 1992 Department of Defense Budget: Seventh Consecutive Year of Real Decline Is Cert@Backlogs Will Fall,” Mar. 18, 1991.

28 q G1obal Arms Trade



Many analysts argue, however, that contraction inthe defense industries is now appropriate, givensignificant overcapacity both in the United States

and abroad. The expansion of the defense industriesin the 1980s apparently cannot be economicallysustained into the 1990s. As the potential forhostilities between the United States and the SovietUnion has diminished, large defense budgets havebecome unnecessary and politically unpopular. Inthis view, a smaller, more efficient defense industrialbase can meet the nation’s security needs in thepost-Cold War era.

The Persian Gulf War has provided support for theview that the United States and its allies mustmaintain a collective capacity to respond to large-scale military crises in distant lands. But at the sametime, the crisis confirmed the growing danger of putting advanced weapons in the hands of govern-ments that may use them for nefarious purposes.Indeed, the proposed $21 billion sale of weapons tothe Saudis, and the recent requests by several otherMiddle East states for substantial arms transfers,take on the character of a self-perpetuating cycle.

49

In this cycle, the United States, the Soviets, and theEuropeans must continue to make and export highvolumes of weapons to reestablish regional balancesof power upset by war or by the last round of weapons sales.

The second argument against placing significant

restraints on international defense trade is thatunilateral action, while helpful, will be insufficientbecause the Soviets, Europeans, and other producersof advanced arms would make the sale. Defenselobbyists argue that U.S. industry lost an enormousopportunity when Congress blocked the sale of F-15fighters to Saudi Arabia in the mid-1980s. As analternative, the Saudi Government bought between25 and 30 billion dollars’ worth of defense equip-

ment from British companies in the Al Yamamahagreements of 1986 and 1988. In a worst-casescenario, unilateral U.S. action to eliminate foreignmilitary sales might strengthen the competition atthe expense of U.S. defense companies, perhapsaccelerating a loss of U.S. leadership in a range of defense technologies.

However, U.S., European, and Soviet policymakersare indicating anew willingness to consider restraint

Photo credit: U.S. Navy

The United States agreed to transfer advanced F/A-18(above) fighter technology to South Korea After 2 years of

negotiations, the South Korean Government decidedto produce the F-16 instead.

in arms sales to the Middle East, because of the roleof foreign arms in the Persian Gulf War and the

massive military effort that became necessary todefeat them. In defense trade, governments can exertstrong regulatory controls because government isoften the only buyer, helps to finance R&D andproduction costs through progress payments, andhas the ability to regulate the output and distributionof the product. If the goal is to reduce theproliferation of potent weapons, it can be ap-proached as a matter of public policy through

concerted multilateral action by the United Statesand other nations with similar interests.

Congress could enact stricter unilateral controlsthrough modification of the congressional approvalprocess for foreign military sales and reform of thearms transfer process (Issue 5, below). But this kindof action does not address the fundamental problem-that buyer nations can draw on diverse sources fordefense equipment and technology, and that the

number of such sources is increasing. The process of creating new centers of defense industry (throughincreased technology transfer and coproductionarrangements) will deepen this trend if it continuesin the future.

With these findings in mind, Congress may wishto charge the Executive to set up a blue-ribboncommission to develop a U.S. strategy for multi-

lateral agreements on weapons trade and collabo-@At this writ@ $9.2 billion k- triinsfershas been authorized. As of Feb. 28, 1991, further sales were postponed pending cwlcationmdr~ew

of the political and military situation in the Persian Gulf.




ration-considered in light of U.S. foreign policyinterests and global political stability in a newmultipolar world. Such a commission would report

its findings to Congress and to the President foradditional consideration. Congress may also wish toconsider the option of mandating that such acommission explore the benefits and risks to theNation of entering into multilateral talks, perhapsinitially limited to the major arms-exporting nationsof Europe, the United States, and the Soviet Union.These nations account for approximately 81 percentof all arms transfers (see figure 1-12).

The Persian Gulf situation offers some usefullessons. First, the $2.7 billion in advanced weaponspurchased by Kuwait were of little use in defendingthat nation, and some ultimately fell into enemyhands. Second, the United Nations Security Councilmoved quickly and effectively to censure and enactsanctions against Iraq as a renegade nation unwillingto live by accepted standards of international con-

duct. And finally, the end of the Persian Gulf Warmay improve the opportunity for a comprehensiveMiddle East peace settlement, perhaps includingmultinational regulation of defense trade and collabora-tion conducted within the region.

As President Bush has suggested, the end of theCold War offers the possibility of “a new worldorder, where diverse nations are drawn together in

common cause to achieve the universal aspirationsof mankind: peace and security, freedom, and therule of law. ”

50In this spirit, a congressionally

mandated commission could explore the implica-tions of establishing international agreements andinstitutions to limit proliferation of advanced de-fense equipment and technology.

In the absence of an institutional mechanism toadvocate restraint, however, it is extremely difficultand perhaps impossible for the Executive to resistthe use of arms transfers to further its foreign policyagenda. The U.S. Government maintains an exten-sive bureaucracy in the Bureau of Politico-MilitaryAffairs at the State Department, its embassies, theDefense Security Assistance Agency, the DefenseTechnology Security Agency, and elsewhere, whosepurpose is to conduct international trade in arms

such that: 1) the foreign policy agenda of thePresident is promoted and 2) regulation and appro-

priate security is exercised over the export of defensesystems and technology.

Although extensive guidance for arms transfers isprovided through the Arms Export Control Act andrelated legislation, Congress has not altered thefundamental principle that it is the policy of theUnited States to sell, grant, and otherwise trans-fer large quantities of advanced weapons to othernations. Perhaps more emphasis should be placedon curtailing international arms transfers throughmultilateral agreements as part of a larger strategy to

pursue objectives that contribute to greater worldmilitary and political stability.

Issue 5: Reform of the Arms Transfer Process

There are a number of steps that Congress couldtake to make the arms transfer process moretransparent and accountable for oversight and regu-latory purposes.

For example, Congress could change the way inwhich military assistance, including coproductionand codevelopment, is considered in the authoriza-tion and appropriations process. At present, securityassistance programs are viewed as an aspect of foreign assistance in the international affairs budget.There is, accordingly, a general understanding thatassistance will be extended to allies and others insupport of U.S. foreign policy goals. However,

because security assistance programs cause prolifer-ation of potent weapons and of defense industrialcapabilities, they exert effects on internationalrelations that extend far beyond the immediatesupport of U.S. allies and fiends. Formally sepa-rating security assistance from foreign aid pro-grams in the legislative process would helpCongress to weigh the costs and benefits of eachto the United States.

Another means of achieving better visibility forcongressional oversight would be to require theBureau of Politico-Military Affairs to report regu-larly on the proliferation of conventional defensetechnology and industry, including a regional as-sessment of the relative capabilities of differentnational defense industries. Congress could alsorequire a “proliferation impact statement” toaccompany all proposed arms transfers above a

specified dollar threshold. In addition, Congresscould require DSAA to include an evaluation and

m~esident George Bush “State of the UniOn Message,” Jan. 29, 1991. Reprinted in The New York Times, Jan. 30, 1991, p. A12.

30 qGlobal Arrns Trade



quantitative analysis of collaborative v. off-the-shelf foreign military sales in the annual CongressionalPresentation Document. For major collaborativeprograms, the Arms Control and DisarmamentAgency could also be required to evaluate the extentto which collaboration enhances the defense indus-trial capabilities of the recipient nation relative to itsneighbors or some other standard.

If Congress wishes to assure that the proliferationaspects of large arms transfers are given greaterconsideration, it could establish a high-level non-proliferation office, perhaps in the Bureau of

Politico-Military Affairs or in connection withthe National Security Council. The purpose of such an office would be to review all pending armssales to determine-perhaps on a case-by-casebasis-the degree to which the sale would contributeto proliferation and whether it would increase thelikelihood of political instability or otherwise dam-age U.S. interests according to legislatively speci-fied criteria. If the office found the sale not to be in

the national interest, it could be charged to make thatcase to the President as a part of the public record.

Congress could make security assistance pro-grams more accountable by reforming the congres-sional approval process for arms transfers. Byseparate legislation, Congress could require thatall arms sales above a specified dollar thresholdbe approved by a vote of both houses, thusreversing the present process where a sale can bedisallowed by the same procedure. A potentialproblem is that Congress might then have to bringeach of 120 to 130 major sales per year to a floorvote, a cumbersome and impractical process. Avariation on this procedure would be to batch thedifferent arms sales according to status of therecipient, sophistication of weapons, regional con-siderations, volume of sales, or some combination of criteria. In this way the legislative burden of theapproval process could be reduced.

In recent years, the number of direct commercialsales (DCS) as opposed to foreign military sales(FMS) has increased significantly (see figure 1-11).Congress may wish to take steps to expose DCStransfers to the same level of scrutiny as FMStransfers. Congress may also wish to prohibit DCS

transfers on the grounds that such sales promotedirect international linkages between U.S. compa-nies and foreign firms and their governments, andare not subject to the full regulatory review processthat Congress has mandated for FMS. If Congresswishes to slow the pace of the internationalizationof the defense technology and industrial base,providing disincentives for DCS transactionswould be a useful point of departure.

Congress could also change the informationcollecting and processing structure that results in apattern of specific requests by other countries for

arms. Currently, approximately 950 DSAA fieldstaff members work closely with host countrymilitary and diplomatic personnel to design securityassistance packages that are likely to meet both theneeds of the host country and the political require-ments at the State Department and within DSAA(see table 1-7). In addition, DSAA maintains sepa-rate organizations in 56 foreign countries.

51Because

DSAA field staff are promoted according to how

effective they are in arranging and managing secu-rity assistance programs in specific countries, theyhave a career interest in promoting sales andtransfers of U.S. weapons.

Congress could change this incentive structure bymaking the determination of security assistanceneeds a stand-alone function, to be performed bystaff who are not involved in the implementation of

the program. It might even be desirable to separateout the determination of needs bureaucratically. Thiscould be done by making the Arms Control andDisarmament Agency, or some other State Depart-ment office, responsible for evaluating securityassistance needs of recipient countries, both in termsof equipment and industrial capability. This evacuat-ing group might have its own field staff to reviewweapons transfer requests earlier in the process.

Each year approximately 80 percent of DSAA’Soperating budget is financed through a 3-percent feethat DSAA charges over and above the cost of theweapons that it procures and then transfers to foreigngovernments. This self-financing fee has amountedto an average of approximately $330 million per yearover the past 5 years.

52Because the operating

budget of the agency is tied to the volume of weap-

SIU.S. ~p~ent of Stite andu.s. Define Seeurity Assistance Agency, Congressional Presentation for Securi~Assistance program, fiscal Y=1991, p. 49.SzThis fi~e is deriv~ from data provided by the Defense Security Assista.uw Agacy.

Chapter l--Global Defense Business and Arms Proliferation q 31



Table 1-7—DSAA Field Staff, 1989-92

1991 1992

1989 1990 (estimated) (proposed)Africa . . . . . . . . . . . . . . . 69 66 64 60American Republics . . . 195 190 202 204East Asia and Pacific . . 249 245 239 239Europe and Canada . . . 191 173 157 158Near East and

South Asia . . . . . . . . . 265 261 251 251

Total ... , . . . . . . . . . . 969 935 913 912

SOURCE: U.S. Department of State and U.S. Department of Defense,Defense Security Assistance Agency, “Congressional Presen-tation for Security Assistance Programs, Fiscal Year 1991 ,“ pp.53-54, and U.S. Department of State and U.S. Department ofDefense, Defense Security Assistance Agency, “CongressionalPresentation for Security Assistance Programs, Fiscal Year1992,” pp. 51-52.

ons transferred, there is a powerful incentive forDSAA personnel to make as many sales aspossible, consistent with the law and the policydirection and review it receives from the StateDepartment, White House, and Congress. Congress

could reduce or eliminate DSAA’S self-financingmechanism, thus removing the incentive to maxi-mize sales. At the same time, it would force theDSAA operating budget to come out of generalappropriations, increasing congressional visibilityand control over the agency’s activities.

* * *

There is an emerging consensus that action by anycountry alone to stem the proliferation of modern

weapons and technology is likely to fail. There aretoo many sources of supply, and for most weaponssystems, alternative sources are available. This

situation is partly a consequence of past U.S. policyon collaborating with our allies and friends in theproduction of weapons systems. It is also due, inpart, to the liberal defense export promotion policiesof our European allies. As a result, we are seeingtoday the emergence of an increasingly international

and interdependent defense industrial structure inthe West.

That structure is anchored in a complex set of strategic corporate linkages between U.S. defensecompanies and their counterparts in the advancedindustrial states of Europe and Asia (see table 1-2and figure 1-16). It is now being gradually extendedto numerous developing nations, including Brazil,

Taiwan, South Korea, India, Turkey, Indonesia,Singapore, Australia, and others. The result is loss of control over the dispersion of defense technologythrough the continuous development of new centersof increasingly capable defense industry around theglobe.



Chapter 2

Dynamics of World Armaments

Production, Arms Transfers

and Defense Markets

Contents



Page

THE DEFENSE MARKETPLACE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35DEFENSE INDUSTRIES: STRATEGY AND STRUCTURE . . . . . . . . . . . . . . . . . . . . . . . . 37

. . . .

The United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37Western Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

Figure Figure Page2-1, Western Europe’s 10 Largest Defense Companies, by Sales 1988 . . . . . . . . . . . . . . . . . 40

TableTable Page

2-1. Japan’s 10 Largest Defense Companies, by Sales 1989 . . . . . . . . . . . . . . . . ..........42

Chapter 2

Dynamics of World Armaments Production,A T f d D f M k t



Arms Transfers and Defense Markets

The most important macroeconomic force actingon the defense industries of the West is the generaldecline in military expenditures and procurementlevels that began in the United States and WesternEurope in 1987, and is expected to continue despitethe recent crisis in the Persian Gulf. The mostprominent macroeconomic force is the rapidly risingcost

associated with weapons research, develop-ment, and production. The demand for capital tofinance new weapons programs will exert increasingpressure on most prime contractors to engage incorporate fiances and joint ventures, and in manycases, to enter into mergers and acquisitions. Somedefense firms may also be expected to close.

This chapter provides both an overview of thedefense marketplace and a comparative analysis of the defense industries of the United States, WesternEurope, and Japan. The United States, of course,remains by far the largest market for armaments, andthis is unlikely to change over the next 5 years.However, decreasing levels of procurement in theUnited States and NATO-Europe will create severechallenges for firms that serve national defenseestablishments; the prognosis for Japanese procure-ment is less clear.

l

In drawing comparisons among countries, thischapter describes the defense marketplace in termsof five key indicators: military expenditures, defenseprocurement, defense R&D spending, defense in-dustry employment (not military employment), andarms exports. Military expenditures and procure-ment levels provide the microenvironment fordefense firms. Defense R&D spending indicates thedegree to which countries seek to retain an option toengage in the production of modern weaponry.Defense industry employment trends suggest indus-try expansion or contraction. Finally, arms exporttrends reveal the extent to which cyclical downturnsin defense spending may be offset by overseas sales.Each of these indicators is examined i n t h e a n a l y s i s

of the United States, Western Europe, and Japan thatappears below, but first a brief overview of thedefense marketplace is presented.

THE DEFENSE MARKETPLACE

The defense marketplace mainly consists of governments that purchase military equipment for

their national armed forces from public and privatesector armaments manufacturers. The extent towhich this equipment is purchased domestically orimported varies widely from country to country.

U.S. and world defense spending peaked in 1987,and has declined in each subsequent year. Particularsegments of the defense industry have already feltthe contraction. Shipments of U.S. military aircraftpeaked in 1987, when 1,199 units, at a value of $24billion, were delivered to the armed services and toforeign customers. Since then, sales have fallen by25 percent; in 1989 the industry shipped 1,110 unitswith a value of $17 billion. According to the U.S.Department of Commerce, aircraft orders are pro-

jected to continue their fall until 1992, after which amodest upturn is expected.

2

In principle, decreases in domestic levels of

procurement could be offset by arms transfers. Therecent crisis in the Persian Gulf, for example, mayresult in arms sales for U.S. defense firms of nearly$24 billion over the next 5 years. However, theoverall volume of the arms trade has been contract-ing since 1987.

The United States and Soviet Union supply 65percent of all armaments in world trade (see figure1-12 inch. 1). The armaments they sell have becomeincreasingly sophisticated, while the terms of tradehave changed over time. Whereas in the past themajor arms producers sold only end items off theshelf (often older weapons sold out of inventories),they now engage in licensed coproduction, codevel-opment, and offset arrangements that enable smallerstates to build indigenous armaments industries.

3In

ISee ch. 6 on Japan.W.S. Department of Commerce, Industrial @tkmk 1990 (Washington DC: U.S. Government Printing Office, 1990) pp. 25-26.3u.s. Con@ms, ~lce of TechnoIo~ Assessmen~ Arming Our Allies: Cooperation and Competition in Defense Technology, 0~-ISc-W

(Washington, DC: U.S. Government Printing Oi3iee, 1990).

–35–


turn, these emerging industries, as in Brazil and similarly shed workers. British Aerospace reduced



, g g ,Israel, have found market niches, allowing them tobecome exporters in their own right.

Although the arms trade assumes tremendousimportance as a public policy issue, in macroeco-nomic terms it remains relatively small. During the1980s, world trade averaged around $2 trillion peryear; of that amount $1.4 trillion were manufacturedgoods. Arms exports constituted about 2.2 percent of all exports. Even for a country like France, whichmany regard as highly dependent on arms sales forexport revenues, the numbers provide a different

view. In 1986, France had export sales of $133billion, and arms sales made up only $4.6 billion of the total. Of all the major exporters, it appears as if the Soviet Union may be most seriously damaged bya decline in export sales.

Of course, arms sales are more important whenviewed from the perspective of particular firms orregions within arms-exporting nations. For aero-space manufacturers in particular, exports are often

viewed as critical to industrial health. The Frenchfirmm Dassault, for example, exported over 70 percentof its production, and 32 percent of total Frenchdefense production was exported in 1988.

4With the

overall contraction of defense spending and exportmarkets, narrow interest groups may seek the easingof export and arms transfer restraints.

The changing economics of defense are forcing

firms to restructure operations in preparation forleaner times. One indicator of this change isemployment.

5Between 1987 and 1989, the U.S.

military aerospace industry shed 34,000 workers, or5 percent of its workforce. Notably, this is far lessthan the 25-percent cut in sales that the industryexperienced during the same period, suggesting thatlayoffs were postponed. Indeed, in 1990, McDonnellDouglas alone dismissed nearly one-third of its40,000 workers in St. Louis. Shipbuilding employ-ment has fallen steadily since 1985, and it isprojected that over 40,000 workers will be laid off by1995. The leading European defense firms have

y pits military workforce by 13 percent between 1988and 1989, when 6,000 employees were let go, andthe French firm Matra decreased its defense-related

workforce by 10 percent. Aerospatiale reports that ithas reduced its workforce every year since 1982,with the exception of 1989, when 300 new workerswere hired, most of whom were engineers andmanagers.

6Of the Western allies, only Japan appears

to have increased its defense industry workforce inrecent years.

7

Yet another manifestation of excess capacity in

the defense industry is the increased level of mergerand acquisition activity (this will be discussed ingreater detail below). In 1989 alone the Europeandefense industry witnessed over 30 mergers andacquisitions, while several major deals also occurredwithin the United States, such as Loral’s purchase of Ford Aerospace. To the extent that mergers andacquisitions bring efficiencies to the restructuredoperations, it is almost certain they will also result

in layoffs.

There is, however, an important exception to thisportrait of excess capacity--defense R&D. Publicofficials in the United States, Western Europe, andJapan continue to view certain key technology areasas having insufficient capacity. In Western Europemany new technology programs and projects havebeen undertaken collaboratively, such as JESSI,

ESPRIT, EUCLID, and EUREKA. Technologiestargeted for growth include those associated with theaerospace industry (e.g., avionics, propulsion, andacoustics), computation, and electronics. The Japa-nese have also targeted specific technologies, includ-ing superconductivity, optics, advanced polymers,artificial intelligence, and biotechnology. In theUnited States, the Department of Defense (DoD) hasrecently published a list of 20 critical technologies,

and a plan for promoting development in these areasis now being established.8Among the critical

technologies are advanced materials, semiconduc-tors, artificial intelligence, and biotechnology. These

dAvio~ ~cel DassauIL An~zRepo~ J989; Republic of France, Ministry of Defense, French De$ense Statistics, 1989 (park: b DOCum~tXiOn

Francaise, 1990).%e problems of this indicator, however, should be made explicit. Decreases in overall employment levels may signify greater opemting effi-

ciencies rather than reductions introductive capacity. This is especially apparent in Western Europe, where many defense industries have recently beenprivatized.

6A&ospa~e, “bud R~~” 19*9.TsWie~ of Japa~e ~~wa= C!ornpanieS, Japanese Aerospace in Figures (To@o: Society of Japanese Aerospace Compafies, 19*9).W,S. Departmmt of Defense, Offke of the Secretary of Defense, “Critical Technologies Pla” March 1990.

Chapter 2-Dynamics of World Armaments Production, Arms Transfers and Defense Markets q 37

li t d th li i i t d ith t h l th l ti f b t t th i d t



lists, and the policies associated with technologypromotion, provide evidence that public officialsseek to build new R&D capacity in many defense-

related areas, while s shrinking the amount of excesscapacity in the production of end items.

Overall, however, the macroeconomic environ-ment has not been favorable to the defense industrysince 1985, and further contraction is likely for thenext 5 years. With scarcer resources available fordefense, public policy decisions will play a large partin determiningg which firms and sectors survive, and

which fail. The following section discusses thestrategy and structure of the defense industries in theUnited States, Western Europe, and Japan. Eachregion has particular strengths and weaknesses as itfaces the new economic and security environment.

DEFENSE INDUSTRIES:

STRATEGY AND STRUCTURE

The ability of individual companies to survive andprosper varies greatly. This section briefly describesthe defense-industrial structures found in the UnitedStates, Western Europe, and Japan. Notably, Ameri-can defense firms are the most dependent on defensecontracts for their livelihood, while those in WesternEurope and Japan are better diversified across com-mercial and military sectors. At the same time, U.S.military R&D spending dwarfs levels found else-where in the Western alliance, suggesting thatAmerican firms will not face many foreign competi-tors in the production of next-generation defensetechnology.

The United States

An examination of the prime contractors in theU.S. defense industry reveals the following indus-trial characteristics:

q Concentration: Overall, the U.S. defense in-dustry is no more concentrated than manysectors in the commercial world; the top 100firms account for about 75 percent of overallturnover.

9However, in specific segments the

industry is highly concentrated. Only one firm,for example, produces aircraft carriers; onlytwo firms produce submarines; and only twofirms produce jet engines. Seven firms, how-

ever, produce airframes, a number that may betoo large as aerospace procurement shrinks. In

q

q

q

q

the lower tiers of subcontractors, the industrynaturally becomes more diffuse.

Annual Budget Process: Firms make invest-

ment decisions using a long-term planninghorizon; often 10 years or more. The U.S.Government, however, provides funds for de-fense procurement on the basis of an annualbudget process. As a result, there is a mismatchbetween project planning and budgeting, whichcreates programmatic i n e f f i c i e n c i e s .

Defense Dependence: The prime contractorsdepend heavily on defense work for their

livelihood. Over 70 percent of McDonnellDouglas’ sales come from defense, while virtu-ally all of General Dynamics’ sales weredefense-related. Over $6 billion of Raytheon’s$8.7 billion in 1989 sales were for defense, andfor Martin Marietta the figures were $5.6 out of $5.8 billion. United Technologies was amongthe most diversified of the prime defensecontractors, relying on government work foronly $5.5 out of $19.0 billion in 1989 sales.R&D Intensity: The United States devoted$38 billion to defense research, development,testing, and evaluation in 1988. The major U.S.contractors each spend between $1 and $2billion per year on defense-related R&D, abouthalf of which is government funded. Thismeans that firms must come up with substantialsums of cash from operating revenues in orderto finance their in-house R&D activities. Theability of American firms to generate neededcash varies greatly. Taken as a whole, however,recent changes in tax policy (especially thetreatment of deferred taxes) have greatly con-stricted cash flow, creating major challengesfor defense firms as they look to fund futureR&D projects.

No Growth in Sales: This analysis is borne outby DoD projections. DoD is currently project-ing real declines in several of its most importantprocurement categories, and only marginalgrowth in others.

Declines in defense spending, procurement, andarms sales mean shrinkin. g markets for contractors.The stock market has taken into account the neweconomic environment, and defense stocks have

underperformed the market average by a substantialmargin; the outlook for most defense stocks remains

gJaWucS Gansler, Aflording &#ense (Cambridge, MA: MIT prf3s, 1989), P. 245.


poor. Similarly, the bond market has given several of defense production, and its availability is a distinct



poor. Similarly, the bond market has given several of the prime contractors near “junk bond” ratings ontheir debt.

l0The low stock prices that defense firms

are now experiencing create problems beyond thoseof shareholder value. As capital becomes moreexpensive for fins, it will be more difficult for themto make the investments required for future research,development, testing, and evaluation, since not allthese expenses are reimbursed by government.Further, the decline in equity will make debtfinancing more difficult to obtain, and more expen-sive when loans are actually made. To the degree

that interest expenses eat up operating earnings,firms will have less cash for fresh investment.

This sketch of the U.S. prime contractors suggestsan industry that must shed substantial productivecapacity in the future. Indeed, even during themilitary buildup of the 1980s, the capacity utiliza-tion rates for defense firms were well below thenormal rate of about 80 percent found in commercialenterprises during periods of economic growth.

Munitions and aircraft producers traditionally oper-ate at low capacities; often it is argued that excesscapacity is necessary to support mobilization re-quirements.

11According to a U.S. Air Force study,

those prime contractors and principal subcontractorsresponsible for building fighter aircraft operated atless than 50 percent capacity in peacetime, leavingidle capacity in the event of mobilization. However,capacity is most often measured in terms of utiliza-

tion rates of plant and equipment. Whether defensefirms could find the technical manpower required tomeet a sustained surge is a separate issue, and someargue that the United States has little excess capacityin many technical areas.

l2

The Department of Defense has never issuedspecific guidelines concerning excess capacity; therehas been an absence of documents linking militarystrategy with defense industrial base requirements.But the large excess manufacturing capacity (rang-ing from over 90 percent in the munitions industryto between 30 and 50 percent in most other segmentsof the defense industry) increases the costs of

defense production, and its availability is a distinctdiscouragement to firms that wish to modernize thecapacity actually in use, or to new firms that might

wish to enter defense markets.

13

Given these characteristics of the industry, whathas been its economic response to shrinking mar-kets? First, there has been a trend toward mergersand acquisitions. Prominent examples include Lock-heed’s acquisition of Sanders Associates in 1986,the leveraged buyout of Singer in 1987, and the 1989purchase of Ford Aerospace by Loral. Second, firmshave engaged in multifirm and multinational team-

ing arrangements. According to General Dynamics,

[A]s a result of the increased financial commit-ments required for new weapon systems, the com-pany is developing tearning agreements to competefor new programs. The company is currently teamedwith the Boeing Company and Lockheed Cor-poration to produce two prototypes of the AdvancedTactical Fighter. The Company, teamed with McDon-nell Douglas Corporation, was awarded a develop-

ment contract for the U.S. Navy’s Advanced TacticalAircraft (A-12). Teaming arrangements with compa-nies in other countries are in place for the Ml tank,U.S. Army’s Single Channel Ground and AirborneRadio System and for the FSX fighter aircraft.

14

The objective of such teaming arrangements hasbeen to share the technological and financial risksassociated with R&D and prototype constructionand, in the case of multinational teaming, to enter

foreign markets.

Third, the industry relies on global sourcing,purchasing an increasing number of componentsabroad. According to DoD, the import penetration of defense-related goods and services mirrors theimport penetration of commercial-equivalent goodsand services (with such important exceptions asaircraft). In 1989, for example, defense firms pur-chased 7 billion dollars’ worth of semiconductors.According to DoD, $2.6 billion were imported, or 38percent. This shift to foreign sourcing of defensegoods is relatively new in the American experi-ence.

15

lop~ip FJinnegaq “Industry Remains in Debt Downturu” Defense News, vol. 5, No. 41, Oct. 8, 1990, p. 4.llJolm fi~er and Judith L,arrabee, F’rOdUCtiO~f..~De~ense (Washington DC: National Defense University press, 1980), PP. S-6.lz~rospace~u~tion FOUII&tiOq A~n” Ca’sN& Crisis: The Shor@all in Technical Manpower (ArlingtoIL VA: Aerospace JAIUCatiOnFoundatio~

1989).

‘3Jacques Gansler, The Defense Zndustry (Cambridge, MA: MIT Press, 1980), pp. 56-57.IAGener~ Dmcs Corp., “A.IUMMI Rwo~” 1989.15u.s. Department of Defense, Defense Purchases, d .


compare firms in Western Europe and Japan. Each



Photo credit: U.S. Department of Defense

An M1A1 Abrams main battle tank on maneuvers in Saudi

Arabia. General Dynamics, producer of the Ml tankseries, has arranged for the Ml to be produced under

license in Egypt.

Fourth, defense firms have sought expandedopportunities to codevelop civilian and militaryproducts, and to reduce the existing restrictions oncommercialization of defense-related technology.Indeed, most of DoD’s critical technologies haveboth civil and military applications. Of the criticaltechnologies receiving the bulk of DoD funding, thefour highest priorities—fiber optics, simulation andmodeling, turbines, and composite materials-allhave “near-term, commercial applications in com-mon. . . .’ ’

16

Finally, the industry has turned to its traditionaloutlet during downturns-exports. As suggestedabove, however, exports are not likely to reverse the

trend because a large expansion in foreign sales isnot expected, and defense exports average onlyabout 10 percent of U.S. industry’s sales. The largestmilitary export item, aircraft, has steadily declinedfrom a 1987 peak of $3.6 billion to a 1990 forecastedlevel of $1.4 billion. In 1994, DoD projects ForeignMilitary Sales (FMS) of aircraft to total $1.5 billion,or almost zero growth.

The U.S. industry characteristics and responsesdescribed above provide a baseline with which to

compare firms in Western Europe and Japan. Eachof these areas has distinct strengths and weaknesses.On an individual firm level, it would appear that

some foreign companies may be better able towithstand defense spending downturns than theirAmerican counterparts, given their relative degree of diversification.

Western Europe

With the end of the Cold War, military expendi-tures and procurement levels are now in declinethroughout Western Europe. In fact, defense spend-ing as a percentage of gross national product hasbeen in decline since 1983. Expenditures in NATO-Europe have fallen from their peak of 3.7 percent of GNP in 1983 to 3.3 percent in 1988. Equipmentexpenditures as a percentage of military spendinghave also declined.

However, one fundamental difference distin-guishes European defense firms from those of the

United States: European firms cannot generallysurvive on domestic weapons procurement alone.Many American firms rely on defense for over 90percent of their earnings. Most European companies,in contrast, are far more diversified. British Aero-space relies on defense for 40 percent of corporatesales; Thomson-CSF derives 65 percent of itsrevenues from defense; Matra is 70 percent defense-dependent; while Aerospatiale is only 44 percent

dependent. Notably, in most firms the defensedependency has decreased in recent years; thus, in1987 Aerospatiale relied on military sales for 55percent of revenues, while the figure for BritishAerospace was 70 percent.

A second difference is that most European de-fense firms remain much smaller than their Ameri-can counterparts. In 1989, the largest European firm,

British Aerospace, had defense sales of $5.4 billion;the largest American firm, McDonnell Douglas, soldtwice that amount (see figure 2-l).

The largest European defense firms appear tospend more on R&D as a percentage of sales than doAmerican companies. In some cases, they reachR&D spending levels that rival those found in theUnited States. Thomson-CSF, with defense sales of $4.6 billion, spent over $1 billion on R&D in 1989,

half of which was internally financed. One explana-tion for this is that European firms consciously seek

16u.s. Dep~en t of Defeme, Oftlce of the Secretary of Defense, op. cit., fOOtnote 8, P. 10.



Chapter 2--Dynamics of World Armaments Production, Arms Transfers and Defense Markets q 41

American R&D effort: such is the scene confrontingE ’ d f i d t

18have included strengthening remaining armamentsi d i b i di i i f l b i



Europe’s defense industry.18

The responses to these economic trends have been

threefold. First, Western Europe has experiencedwidespread privatization of defense firms. Whereasin 1975 few defense firms were in private hands, by1988 privatization had become the norm in everymajor country with the exception of Italy and Spain.Recent years have seen the privatization of the giantsof European defense, including British Aerospace,Matra, Thomson-CSF, and MBB. This has facil-itated the ability of firms to sell inefficient or

unprofitable operations, -to consolidate activitieswith other companies, and to engage in widespreadcompetition in a variety of product lines. Further, ithas led the firms to diversify their operations; as aconsequence, the ratio of defense sales to total saleshas, in general, declined throughout the Europeandefense industry.

Second, there has been substantial consolidation.

Between 1987 and 1988, 100 defense acquisitionswere reported in Western Europe; as stated above, afurther 30 major acquisitions occurred in 1989. Of these acquisitions, 70 percent occurred within Eu-rope (mainly within rather than across nationalborders) while 30 percent were transatlantic. If oneobjective of European concentration is to createfirms the size of their American and Japanesecounterparts, this trend must continue. According to

one European study, consolidation at this levelwould require that at least two-thirds of the compa-nies manufacturing major systems be acquired byothers. Consolidation is also made manifest inreductions in industrial employment, as reportedearlier in this chapter.

19

Current European projections suggest a possibleretreat from defense business. Whereas in 1987

Western Europe’s aerospace industry met 28 percentof world demand for military aircraft and missiles,this market share may fall to 23 percent by 2010.Europe’s ailing shipbuilding sector has been forcedto quit defense work. By necessity if not by choice,the Europeans appear to be engaged in a diversifica-tion move away from defense.

Finally, there has been collaboration. The objec-tives of intra-European armaments collaboration

q

industries by promoting a division of labor, increas-ing American purchases of European equipment,

and promoting the standardization of weaponssystems within Western Europe. European collabora-tion has been institutionalized under the Independ-ent European Program Group (IEPG), which hasbeen vigorously led in recent years by Britain’sprocurement chief, Sir Peter Levene. Indeed, inNovember 1988, the IEPG approved an “actionplan” that called for the creation of a “commonEuropean arms market.”

European collaboration has also had a distinc-tively technological element. Among the collabora-tive ventures aimed at technology promotion areESPRIT, JESSI, EUREKA, and EUCLID. The latterhas an explicit military orientation, and collabora-tive projects are anticipated in such areas as artificialintelligence, satellite surveillance and verification,and aeronautics. Collaboration in basic R&D andend-item production have become well establishedthroughout the European Community.

These three responses to the microenvironmentfor defense have given European defense firms adegree of flexibility that their American counterpartslack. They are poised to increase their share of civilian markets and to take advantage of the

economies of scale associated with the SingleEuropean Act. At the same time, they are investingin defense R&D in order to maintain militarycapabilities. While these capabilities will not be asgreat as those found in the United States-theUnited States outspends Western Europe by a 3 to 1margin in defense R&D--they appear at present tobe sufficient given the easing of East/West tensions.Further, since European governments-united or

separately-do not appear ready to allow U.S.defense firms to compete on an equal footing forprocurement contracts, European companies cancontinue to enjoy protectionist walls. Indeed, theycan benefit from protection not only through greaterprofits, but by demanding collaborative, technology-sharing agreements with American firms that seek market access; in short, the Europeans are taking afree ride on U.S. military R&D expenditures.

IWrancois Heisbourg, “Public Policy and the Creation of a European Arms Market” in Pauline Creasey and Sirnon May (eds.), The European ArmsA4arket and Procurement Cooperation (Ixmdon: MacmillarL 1988), p. 68.

19GRIP, ikfemento LX$ense-Desarmuntent 1990 (Brussels: GRIP, 1990).

42 q Global Arm Trade

Japan Table 2-l-Japan’s 10 Largest Defense Companies, bySales 1989 (1988 dollars, millions)



Japan appears to be the sole member of theWestern alliance that views the defense industry as

an expanding sector, although there is considerabledebate in Japan on the long-term trend. Japan’sdefense budget has climbed inconstant 1988 dollarsfrom a 1983 level of $22.5 billion to a 1988 level of $29.0 billion, an increase of 30 percent. Equipmentexpenditures have risen from 26 to 28 percent of thebudget during the same time period. Among theJapanese government agencies engaged in researchand development, the Japan Defense Agency (JDA)

enjoyed the sharpest increase in fiscal year 1988,with a nearly 12-percent budget hike. Further,anecdotal evidence suggests that employment in thedefense industry is rising. Aerospace employment,for example, has climbed by 11 percent over the past5 years. Remarkably, defense agency purchases of aircraft increased by 55 percent over the sameperiod.

That Japan has increased its military capabilities

cannot be doubted. By 1988, Japan had the thirdlargest defense budget in the world. Nonetheless,Japanese defense expenditures were less than 10percent of the comparable amount for the UnitedStates.

While Japan is not an exporter of defense end-items, its domestic industries do provide the Self Defense Forces (SDF) with over 80 percent of their

equipment needs. The largest defense contractor,Mitsubishi Heavy Industries, now derives 17.4percent of its sales from the military, while thesecond largest contractor, Kawasaki, has militarysales equal to 21.5 percent of sales. In comparativeperspective, however, Japanese firms are much lessdependent on defense work than their American orEuropean counterparts (see table 2-l).

Although Japan’s defense industry has onlyreceived close scrutiny in recent years, public policyhas been directed toward increasing its capabilitiesfor quite some time. In 1970, the director general of the JDA (and later Prime Minister), YasuhiroNakasone, published a blueprint defense industrialpolicy entitled “Basic Policy for Development andProduction of Defense Equipment.” In this docu-

Defense salesDefense as percent of

Firm sales total sales

Mitsubishi Heavy Industries . . . . . . . 3,054 17,4Kawasaki Heavy Industries . . . . . . . 1,463 21.5Mitsubishi Electric. . . . . . . . . . . . . . . 938 4.7NEC . . . . . . . . . . . . . . . . . . . . . . . . . . 596 2.6Toshiba . . . . . . . . . . . . . . . . . . . . . . . . 573 2.2Ishikawajima Harima industries . . . . 527 9.9Nihon Seikosho . . . . . . . . . . . . . . . . . 261 26.4Hitachi Shipbuilding . . . . . . . . . . . . . 230 8.5Komatsu . . . . . . . . . . . . . . . . . . . . . . . 198 3.8Fujitsu . . . . . . . . . . . . . . . . . . . . . . . . . 182 3.8

SOURCE: Office of Technology Assessment estimates, derived fromJapan Defense Agency and corporate annual reports.

ment, Nakasone outlined five objectives for theindustry:

q

q

q

q

q

to maintain Japan’s industrial base as a keyfactor in national security,

to acquire equipment from Japan’s domesticR&D and production efforts,

to use civilian industries,to have a long-term plan for R&D and produc-tion, and

to introduce the principle of competition intodefense production.

20

In the same year, 1970, the Ministry of InternationalTrade and Industry designated “aerospace as one of three key technologies for the twenty-first cen-tury."

21

Over the past 30 years, Japan has sought todevelop its aerospace defense capabilities on thebasis of collaborative projects with the UnitedStates. Mitsubishi Heavy Industries undertook thecoproduction of two fighters in the 1970s, the F-4Jand F-15J (both designed by McDonnell Douglas),and in the late 1980s it signed an agreement withGeneral Dynamics for codevelopment and co-

production of a new airplane, the Fighter Support/ Experimental (FSX). This last project generatedsubstantial controversy in the United States over thecosts and benefits of technology sharing with aleading economic competitor.

A distinguishing characteristic of the Japanesemilitary-industrial complex is the dual-use nature of

~cited in G~ler, Afording D@ense, op. cit., footnote 9, p. 312

zl~ckd Samuels and Benjamin Whipple, “Defense Reduction and Industrial Development,’ Chalmem Johnson et al., Politics and%oductiviry(Cambridge, MA: Ballinger Press, 1989), p. 275,




Photo credit: General Dynamics Corp.

The General Dynamics F-16 will serve as the foundation for the Japanese Fighter Support/Experimental (FSX) aircraft, whichMitsubishi Heavy Industries of Japan will produce in injunction with General Dynamics. FSX improvements will include large-scale

composite wing structures and an advanced phased array radar.

basic research and technological development. TheJapanese Government has targeted certain technolo-gies that are viewed as key to both commercial andmilitary enterprise, including those associated withaerospace, artificial intelligence, advanced materi-als, and superconductivity. As a result, Japanesefirms are now important suppliers of high tech-nologies for Western military hardware. For exam-ple, the modular technology used in ship rehabili-

tation is borrowed from Japan, and the bulk of commodity microprocessors are now produced byJapanese fins.

Some American officials and military officersemphasize Japan’s contribution to the ‘‘arsenal of democracy.” One retired U.S. Navy admiral statedin 1987, ‘‘all the critical components of our modernweapons systems . . . come from East Asian indus-

tries. . . . Certainly, the East Asian industries have

really become an extension of our own military-industrial complex. ”

22 While this statement is

clearly an exaggeration, it highlights the growingU.S. military dependence on dual-use, high-

technology products as opposed to technologytransfer or licensed production of Japanese-madedefense components by U.S. companies. Indeed,there are very few examples of the latter.

Despite the dual-use nature of Japanese technol-

ogy, and the relatively small sums (under $1 billion)that JDA devotes to military R&D, the impact of military procurement on key sectors should not beminimized. Nearly 80 percent of Japanese aircraft(in value) were purchased in 1987 by JDA, for a totalof $3.7 billion. Indeed, in the aerospace realm, manyof the technological spinoffs that result from re-

search, development, and production can be ex-

Wited in James Kur@ “The U.S. and the North Pacitlc, “ in Andrew Mack and Paul Keal (eds.), Secun”ty and Arms Control in the North Pacific(130stoq MA: Allen& Unwin+ 1988), p. 35.


pected to come from the military rather than thecommercial side.

easily diversify away from defense. Further, with

their strength in electronics and other technological



In sum, the Japanese defense industry is uniquely

positioned to profit from the future economic andsecurity environment. Should the Japanese continueto view defense as a growth industry, the firms havedeveloped the infrastructure necessary for produc-tion across a wide range of armaments and compo-nents. Should contraction occur, the industries can

g gareas, the Japanese are well equipped to maintain

existing markets overseas and to tap new ones (e.g.,Eastern Europe and the Soviet Union) as possibili-ties arise. While it is unlikely that the Japanese willsoon be producing cutting-edge military hardware,this may prove to their advantage as the Cold Warbecomes history.



Chapter 3

International Operations

of U.S. Defense Firms

Contents Page

US DEFENSE INDUSTRIAL INTERESTS 47



US. DEFENSE INDUSTRIAL INTERESTS . . . . . . . . . . . . . . . . . . . . ......,............47WHY U.S. FIRMS SEEK INTERNATIONAL BUSINESS . . ., . . . . ., *, . . . . ., .,.....,, 48

Defense Electronics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .50Land Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51Military Aircraft . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

THE INTERNATIONAL MARKETPLACE . . . ., ., * . . * . . . *, * . . . . . . . . . . . . . . . . . . . . . . . 53FOREIGN MILITARY AND DIRECT COMMERCIAL SALES . . . . . . . . . . . . . . . . . . . . .56WHAT THE DEFENSE INDUSTRIES WANT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

Figures Figure Page

3-1. Industry Projection of Worldwide Defense Spending, 1990-2000 . . . . . . . . . . . . . . . . . 483-2. Transatlantic Defense Trade, by Value and Ratio, 1978-88 . . . . . . . . . . . . . ..........493-3. Foreign Military Sales v. Direct Commercial Arms Deliveries, 1978-88,..........57

Chapter 3

International Operations of U.S. Defense Firms



U.S. DEFENSE INDUSTRIAL

INTERESTS

The nature of international markets confronts U.S.firms with a variety of difficulties: global overcapac-ity, the demand by foreign customers that U.S. firmsoffset trade imbalances created by large arms sales,

l

and the interest of the United States in checking the

worldwide proliferation of defense technology andadvanced weaponry.

Global overcapacity exists in many sectors of thedefense industries. In civil industry, the typicalresponse to overcapacity is that increased competi-tion drives the less efficient producers out of business. But due to national security considera-tions, the United States and other nations havechosen to subsidize indigenous defense production.

The burden of supporting defense overcapacity hasbeen acute in Europe for many years. As a conse-quence, European governments engage in extensiveinternational collaboration in weapons develop-ment, have adopted lenient defense export policies,and have encouraged their defense companies toproduce simultaneously for national consumptionand export markets. Because of the rapidly escalat-ing costs of weapons systems and reduced produc-

tion runs, U.S. defense planners and industrialistsare now experiencing similar pressures to reduce thenumber of suppliers and to share the costs and risksof development more widely—through domesticteaming arrangements and increased internationalcollaboration in defense technology.

U.S. defense companies that seek to export facestiff international competition. In the 1980s there

were at least nine fighter aircraft planned or underdevelopment, few of which could be expected torecover development costs without extensive for-eign sales.

2The same holds for fully deployed

systems. The French Air Force can only afford 35Mirage 2000 fighters per year, but Dassault, thecompany that produces them, needs to sell about 75

to 80 per year to make a profit. Moreover, competi-tion will not come exclusively from our allies;countries like Czechoslovakia, Bulgaria, and theSoviet Union, whose defense industries were amongtheir few dynamic sectors, may sell armaments toincrease their stores of hard currency.

Foreign customers—including the developingcountries-are demanding more of their suppliers.

One U.S. defense executive noted that in foreignsales “there is no longer any such thing as anunsophisticated customer. ” Few foreign nationswill buy weapons off-the-shelf from U.S. firms orelsewhere if there is an option to produce all or partof the system at home. To make a sale, U.S. defensecompanies must offer a variety of incentives, rang-ing from offsets to licensed production and jointventures that permit a high degree of local content.

Increasingly, U.S. defense executives face difficultdecisions concerning how much proprietary technol-ogy to share with foreign partners and how to adapthardware developed for the U.S. military to differentrequirements. In this respect, the U.S. defenseindustry is still relatively parochial; U.S. weaponryis designed with the Department of Defense (DoD)in mind, and DoD managers largely determine thedesign of systems that firms may subsequently

market overseas.

The ability of U.S. suppliers to make foreign salesdepends as much on U.S. arms transfer policy as oneconomic factors. The United States is the onlymajor Western supplier whose arms export policieshave been primarily motivated by political consider-ations. Even though economic factors are gaining inimportance and U.S. arms transfers dwarf those of

Europe, U.S. Government regulation still exerts alimiting influence on international sales of U. S.-made defense products. This takes the form of exportrestrictions on defense items and technologies thatmight be militarily useful to potential adversaries,foreign policy restrictions aimed at specific coun-tries, prohibitions against certain sensitive technolo-

l~e tem C(offseK’ is ~~ t. CoVm av~e~ of arrangements by which sellers direct new or additional purchases to the industry of the buyingmtionas part of the sale agreement. Direct offsets are directly related to the product delivered to the customer, such as producing a component of the systemin question. Intiect offsets consist of the purchase of unrelated products or services.

Z’rhese ~CIU& tie A&~Ced ‘l?ictical Fighter, Israel’s Lavi, Northrop Corp.’s F-20 Tigersha.dq the FSX (Japan), the Korean Fighter p~e, thelhiwanese Indigenous Defense Fighter, the Cheetah (South Africa), the Grippen (Sweden), the European Fighter AircmfL and the Rafale (France). TheLavi and the F-20 were canceled, and several of the others are in trouble.

-47–

gies, and a number of international agreements andtreaties.

Figure 3-1—industry Projection of Worldwide DefenseSpending, 1990-2000



The largest potential markets for U.S. defensefirms appear to be the Middle East and the PacificBasin (see figure 3-l). Petrodollars will continue tofund the acquisition of advanced weaponry by avariety of Middle East states. Sales of U.S. militaryequipment to NATO Europe more than doubledfrom $1.8 billion in 1978 to $4.2 billion in 1988.

3

(See figure 3-2.) As the European market becomesmore integrated, however, U.S. defense sales are

likely to decline. While U.S. defense firms will notautomatically be locked out of Europe, competitionwill be intense, probably requiring extensive collab-oration with European firms, offset incentives, andreciprocal access to the U.S. defense market.

U.S. defense industrialists and government offi-cials recognize that the days of high-volume, off-the-shelf foreign sales of major systems are over. Many

countries that desire U.S. equipment cannot afford it,and future U.S. financing will likely be difficult toobtain. Countries that can afford U.S. weapons, andto whom the United States would sell, like Japan andthe European NATO nations, would rather buildtheir own. Finally, sales to countries like SaudiArabia that can afford what they cannot build arepolitically controversial in the United States. Toincrease foreign business, firms will have to plan for

the occasional large sale, the internationalization of their operations, and follow-ups to existing sales.

Industry representatives and some governmentofficials complain that the Department of Defensehas tended to restrict the export of technologiesintended for commercial products; that the Depart-ment of State can deny a license for the export of munitions without explanation; and that the Depart-

ments of State and Commerce do not coordinatepolicies in controlling the export of so-called dual-use technologies-those that have commercial andmilitary applications. Nor are these purely intera-gency difficulties. Within the Defense Department,many potentially direct commercial sales go thegovernment-to-government Foreign Military Saleroute because a Defense agency or military Servicemandates it.

350

300

250

Constant 2001988

dollars,

billions 150

100

50

0

~.... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

United NATO Pacific Middle

States Europe Rim East

s 1990 u 1995 R 2000

SOURCE: Major U.S. defence company.

WHY U.S. FIRMS SEEK

INTERNATIONAL BUSINESS

With defense budgets declining and few major

development programs on the horizon, many U.S.

defense firms will seek additional foreign business.

According to one industry association, total defensespending in real, inflation-adjusted terms may dropby 8.5 percent in fiscal 1991, with defense procure-

ment dropping by as much as 21 percent.4Industry

projections point in one direction: while the UnitedStates controlled about 62 percent of the totalnon-Communist world aerospace market in 1988, itsshare may drop to 53 percent by 2000 and to just half

by 2010. For U.S. defense firms to survive, let aloneprosper, without reorganization or industry-widerestructuring, they will have to make foreign sales alarger part of their business-provided that govern-ment policy permits it. U.S. Government policy maybe the single most important factor influencing theinternational prospects of U.S. defense companies,especially those that are beginning to think in termsof designing systems with foreign sales in mind.

sA t &e sme tie, NAT() Europe deliveries to the United States increased from $300 million in 1978 to $800 million in 1988.d~ese me tie es~tes of the EIwmnics Industry Association’s lo-year defense forecast. EIA predicts that in real terms total defense swnm

will drop by4 to 6 percent a year through 1996. See “Defense Budget SmaUer ‘l%m Before WWII,” Forbes, vol. 146, No. 11, Nov. 12, 1990, p. 31.

Chapter 3--International Operations of U.S. Defense Firms q 49

Constant 1988

Figure 3-2—Transatlantic Defense Trade, by Value and Ratio, 1978-88



Constant 1988dollars, billions

5

4

3

2

1

0

Ratio of value of arms deliveries

& between North America and

r ’ \

NATO Europe (right scale)*

Ratio

. . . . . . . . . . . . . . . . . . . . . . . . . .

Arms transfers from:

North America to

n. . . . . . . . . . .. . . . . . ... . .

NATO Europe (gray column), -~~~ -“--

NATO Europe to::::::::::::::::::::::. .

12

10

t8

6

4

2

0

1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988

Year

qExample: in 1978, value of arms delivered from North America to NATO Europe was 5 times greater than from NATO Europe to U.S

SOURCE: Office of Technology Assessment,from data in U.S. Arms Control and Disarmament Agency, World Mi/itaWfipenditures and Arms Transfers, 1989(Washington, DC;U.S. Government Printing Office, 1990).

Many of the larger U.S. firms will start from a

small foreign business base. Others, like Boeing andMcDonnell Douglas, are heavily involved in inter-

national markets, particularly the market for wide-bodied jets; they derive 45 and 23 percent of theirrevenues respectively from foreign sales, the bulk of

which (especially for Boeing) are in civil aviation.

But other major firms have a much smaller foreignpresence: Grumman (5 percent), Lockheed (6 per-

cent) and Rockwell (16 percent) are typical in thisrespect. When such firms compete for business in

overseas-particularly European-markets, they are

at a disadvantage when compared to local firms with

substantial operations on the ground. Europeanfirms tend to integrate defense and civil business

more successfully than American fins, and Euro-

pean industrial policies create greater barriers tomarket access for U.S. defense companies.

- . . .

U.S. firms face other obstacles to winning foreign

business. The first is lack of access to capital thatalso hinders their ability to compete in U.S. mar-kets.

5Defense firms have found it increasingly

difficult to raise funds for expansion in capitalmarkets. Because Wall Street does not regarddefense as a growth business, firms must pay higherrates to attract investors wary of the risks involved

in purchasing their debt. This problem is com-pounded by many defense fins’ inability to explain

to shareholders and potential investors preciselywhat their most sensitive programs are.

Weak capitalization of even the major defensefirms makes them vulnerable to takeovers andmergers. Moreover, some companies that mightcompete successfully in foreign markets are divest-ing their defense businesses, whether to preventthem from depressing their stock prices, concentrateon their core businesses, or pay the costs offending

5ufie the Otha ~. obS~cl~s, ~~ch we s~itive to reg io~ Conditions, lack of a~~s to cqiti is a general obstacle to overseas tXpWISiO1l.

Regardless of which markets U.S. firms seek to penetrate, they must be able to raise capital, whether through issuing new stoclq raising funds fromcommercial banks, getting government financing, or selling a portion of the company to investors in return for an infusion of capital.


off hostile takeovers. For reasons like these, FordMotor Co. and Goodyear sold their aerospacedivisions and Honeywell spun off its defense busi-

offset declining business at home. Companies alsoassert that they benefit from foreign governmentsubsidies and that sharing risks for new develop-



divisions and Honeywell spun off its defense businesses.

6

A second obstacle is the increasing competitionthat U.S. firms face from foreign producers in suchpotentially lucrative businesses as defense electron-ics. Fueled by the consolidation of the Europeandefense industry, companies like Daimler-Benz,Thomson-CSF, and British Aerospace offer productlines competitive with U.S. weaponry and tailored totheir customers’ needs.

By contrast, most of what U.S. firms sell overseasis equipment originally designed for the U.S. mili-tary and then modified for export purposes. U.S.weapons sold overseas are often somewhat lessadvanced and have less capable black boxes thanthose sold to the U.S. military. An executive whosecompany has been quite successful in exportingdefense equipment explained that his company “isnot in the business of designing systems for foreigncustomers. It designs systems for U.S. customersthat can be sold overseas. What you have in stock atany point in time is what you offer to foreigncustomers.

U.S. defense industry’s performance in fixed-price development programs raises further doubtsabout its ability to compete overseas; Lockheedwrote off $300 million in losses on the P-7 anti-

q

submarine patrol aircraft, McDonnell Douglas swal-lowed $72 million in overruns on the C-17 cargotransport, and the Navy canceled its $50 billion A-12stealth fighter program, for which McDonnellDouglas and General Dynamics were the primecontractors. Some analysts believe these losses andwriteoffs will degrade the ability of the U.S. defenseindustry to compete, and that industry maybe losingthe know-how it once had to develop next-gener-

ation weapon systems.Despite these obstacles, many U.S. defense exec-

utives report they need more foreign business toensure profitability and, in some cases, survival.They argue that foreign business lowers unit costs of production and increases returns on research anddevelopment, and that foreign sales will help to

subsidies and that sharing risks for new developments is increasingly necessary, because of theescalating costs of major new weapons systems.Many defense executives believe that if only govern-ments—foreign and domestic—would get out of theway, U.S. industry could dominate world defensemarkets.

Industry spokesmen tend to minimize the dangersof proliferation of modern weapons and the spreadof advanced defense industry and technology. As

one industry representative suggested,The best thing about the Persian Gulf War is that

it established American weaponry as the standard forthe region for many years to come and, of course, theUnited States will have to replace much of theordnance and equipment expended in the war.

Defense Electronics

Most electronics firms contacted by OTA think they can hold their own in both domestic andinternational markets. In domestic markets, individ-ual firms believe they can greatly expand shares of a declining market, tailoring semiconductors boughtfrom merchant suppliers for applications such asradar, jamming, night vision, and guidance andcontrol systems for warheads. In international mar-kets, U.S. firms see robust international opportuni-

ties for upgrades and retrofitting.7

In both markets,advanced electronics add value to aging weaponsystems; one executive remarked that “a $250,000black box can protect a $9 million helicopter.” Butto the extent that a large domestic market remainsavailable, defense electronics firms may feel lesspressure than the makers of aircraft and land systemsto expand abroad.

While many executives think the potential for

international business is enormous, they recognizethe difficulties in gaining market share. Europeanfirms like Thomson-CSF and the Deutsche Aero-space unit of Daimler-Benz are prepared to gohead-to-head with U.S. firms for electronics busi-ness. There are fewer and fewer U.S. products forwhich alternate sources cannot be found; in any case,

@f course, one firm’s divestiture is another’s acquisition. Thus Lorr& a major supplier of defense electronics, acquired the Ford and Goodyearoperations as well as Honeywell’s Electro-Gptic division. It fmced the acquisitions by selling off unwanted assets and borrowing the rest.

TSee “DefenseBudget Smaller ThrmBefore WW’fI,’ op. cit., foomote 6. Such a switc4 the article continues, will mean less spending on the StrategicDefense Initiative, more light forces, and new fast cargo ships for the Navy.

Chapter 3-international Operations of U.S. Defense Firms .51

European governments prefer European suppliers.8

Many electronic systems embody the kind of ad-vanced technology that triggers export controls and

GD asserts that international sales would enableit to continue tank production. The company claimsthat it has a firm commitment for 555 M1A1 tanks



vanced technology that triggers export controls and

reviews by the Defense Technology Security Ad-ministration, the DoD agency charged with review-ing licensing applications for selling controlleditems to proscribed destinations. The electronicsbusiness is also sensitive to the worldwide decline indefense expenditures that began in 1987.

9

Land Systems

Land systems like tanks and armored personnelcarriers are at the other extreme from electronics.Makers of tanks and other heavy land-fightingequipment, who have traditionally oriented sales tothe European front during the Cold War, will not farewell unless they can find international markets.

The experience of General Dynamics (GD),which produces the M-1 main battle tank, isinstructive. In the absence of significant foreignsales, GD contends that by 1993 it will have to shutthe Detroit, MI, Lima, OH, and Scranton, PA plantsthat produce the M-1. Company representativesargue that international sales can rescue these plants,preserve an important part of the defense industrialbase, and improve the U.S. balance of trade. Intestimony before Congress, GD representatives pre-dicted dire consequences if the United States termi-nated production of the M-l.10

GD contends that the United States would faceenormous costs in reopening M-1 production lines,once the plants were shut. By GD’s estimates,closing the plants would cost the government $200million, weaken the tank design and engineeringcommunity, and force 15 percent of vendors in-volved in tank production out of business. Accord-

ing to the company, it would take 48 months and costanywhere from $500 million to $1 billion to restartthe industry from a cold base. While some industryanalysts dispute these figures, they agree that if M- 1production lines close down, it would be difficult torestart them with less than a year’s notice.

11

that it has a firm commitment for 555 M1A1 tanks

for Egypt and that Congress had approved the sale of 315 M1A2 tanks to Saudi Arabia before the outbreak of the Gulf War. According to company officials,filling these orders would also position GD to sellthe Ml to the United Kingdom, which was review-ing both the Ml and the Challenger 2 designproposed by Vickers PLC.

12With the Lima and

Detroit plants kept open, GD officials believe theycould fill these and other foreign orders and still

meet existing commitments to the U.S. Army.Whatever may be said about foreign competition,

the M-1 remains the world’s premier battle tank andthe weapon of choice for those countries that canboth afford it and gain U.S. approval to purchase it.To that extent, the implication of GD’s argument—that foreign sales could maintain M-1 productionlines-may be valid.

But making domestic production depend onforeign sales would create many problems. Analternative strategy to produce M-is and comparablesystems in smaller quantities would obviate the needto find overseas markets, avoid the risk of having tosell there in order to recover R&D and productioncosts, and mitigate the overcapacity problem. Theproposal to use foreign sales as a way to sustainexcess M-1 production illustrates a fundamental

policy dilemma facing the U.S. Government. Theprimary purpose of the U.S. defense industries is tomeet U.S. military and national security require-ments. A policy and an industrial structure thatdepends on foreign sales to make the manufacture of defense systems profitable (or even possible) wouldcreate strong pressures on DoD and the StateDepartment to approve foreign sales that could notstand on their own merits.

Military Aircraft

U.S. aircraft and engine manufacturers are alsocounting on international business to keep produc-tion lines humming. GD originally tooled to build216 F-16s per year; for several years, it was building

SM its lg8g rcport, tie D~e~ policy Adviso~ Committee on Trade obsenmd that “there are few U.S. products or twtiologies which ~ not nowavailable from other sources.” Defense Policy Advisory Committee on Trade, Year-End Review, 1989, p. 10.

%ick Whiting, “Tracking the Changing“ Defense Electronics Market” Electronic Business, vol. 16, No. 17, Sept. 3, 1990, p. 31.lopr~ared statement by General Dynamics for House Appropriations Subcommittee on Defense, Jmc 21, 1990 P. A.ll~c Dcfitis, ~~~y ~= out M1 AS Budgets s-” G~Ve~~n~fiC@Ve, VO1. 22 , No. 8, Au@t 1990, p. 92 .lz’rhe British Govement wa s also reviewing the French LeClerc and the German bopard.


300 planes a year at its Fort Worth and overseasplants, a figure that has dropped to 72 and may fallas low as 48, according to a Congressional Budget

Europe, Japan, Israel, South Korea, and othernations with sophisticated defense needs. Mostcountries wish to be as self-sufficient in defense



, g g gOffice estimate. Thus GD’s Fort Worth Division iscounting on foreign sales, which now account for 40percent of revenues.

Many suppliers of aerospace systems find them-selves similarly situated. It now costs between $1and $2 billion to develop an advanced aircraftengine, and considerably more for a fighter planelike the Advanced Tactical Fighter. Under suchcircumstances, firms are increasingly forced to enter

into domestic teaming arrangements and to seek international joint ventures and sales.

13For U.S.

markets, teaming enables the partners to sharedevelopment costs that neither could handle alone.International teaming and joint ventures might helpcover development costs and allow U.S. firms accessto markets that might otherwise be closed to them.They may also help to ensure an up-front commit-ment by a foreign government to a minimum

purchase of a jointly produced weapon system.Reasons such as these led General Electric and theFrench firm SNECMA to establish CFM Interna-tional, which is developing the CFM56 engine;Textron to team with Boeing to develop the V-22Osprey; and McDonnell Douglas and British Aero-space to collaborate on the Harrier AV-8B verticaltakeoff-and-landing plane and the T-45 AdvancedJet Trainer.

The history of U.S. aerospace exports has fol-lowed a well-defined pattern. Most early interna-tional sales did not involve much foreign companyparticipation. As foreign customers became moresophisticated, they demanded direct offsets, copro-duction, or both. Thus early F-15 sales to Israelinvolved 25 percent offsets, while the last fiveinvolve 50 percent. In the case of Japan, McDonnellDouglas negotiated two major licensed coproduc-tion agreements with Mitsubishi Heavy Industries,the second of which is for the production of 217F-15J aircraft through 1995.

U.S. firms have accepted collaboration in variousforms because it is often the only way to sell to

production as possible. To this end, countries (andcompanies) insist on collaboration as soon aspossible (often with direct offsets of components) inlieu of direct buys. That is why U.S. firms concedethat it is basically unrealistic to expect Japan or theEuropean nations to buy finished systems.

Many U.S. firms assert that technology transferissues are red herrings. Because planes like the F-15,F-16, and F/A-18 are fully developed fighters, they

contend that no transfer of development technologyis involved. According to industry sources, theproposed sale and licensed production of 120 F-16fighters to the Korean Air Force involves normalU.S. Government controls and licensing procedures,offset credit requirements will be limited to 30percent, and there will be no “directed buy-backs” —that is, U.S. purchases of componentscoproduced by the Koreans

14Most defense firms

assert that, even in the absence of U.S. Governmentcontrols, they would not license their most advancedtechnologies to other nations.

However, coproduction always leads to the trans-fer of some manufacturing technology and oftenstimulates the development of indigenous defenseindustries. DoD has been sufficiently concernedabout the risk of transferring sensitive technologiesto South Korea that it prepared a list of items thatmust be procured as U.S. industry-supplied enditems through government-to-government ForeignMilitary Sales (FMS). The initial “FMS Must” listincluded engine hot sections, computer source code,inertial navigation hardware, and classified radarhardware technology. Thus, while DoD attempts tostem the transfer of sensitive technologies to foreigncustomers, the very nature of coproduction makes itdifficult to avoid such transfers.

Second, there is consensus that for all the con-straints associated with arms transfers, internationalbusiness is still very profitable for U.S. firms.Whether the transfer occurs through foreign militarysales arranged by DoD or through direct sales to the

IJNo on e is yet su=esq that n~t generation systems such as the AT F should be designed with export markets in *d.Idundm a U.S.-Korean M~orand~ of Understanding, negotiated with McDonnell Douglas’ F/A-18 in mind, the Koman Fighter ~gram wo~d

occur inthreephases. Phase I would entail the sale of 12 off-the-shelf aircraft under a Foreign Military Sale; under Phase II, Korea would buy 36 U. S-builtkits and assemble them under license; in the f~ phase, for 72 aircraft most of the components would be built in the United States and assembled inKorea under a limited commercial license. Similar terms will likely obtain under the new agreement South Korea has made with GeneraI Dynamics forproduction of its F-16 fighter.

Chapter .$-international Operations of U.S. Defense Firms . 53

end user, firms engage in the business because theycan make money. One large contractor claimed thatalthough foreign sales were only 11 percent of

These trends axe already firmly established, as

McDonnell Douglas’ collaboration with BritishAerospace on the Harrier II and T-45 trainer and



revenues, they accounted for 25 percent of profits.For another firm, the figures were 15 and 33 percent;while an executive in the electronics group of onelarge firm asserted that international sales accountedfor 40 percent of the group’s profits, about 20percent of total business.

Many of the larger firms contacted by OTAbelieve that foreign business will be important totheir continued profitability. The lack of new

domestic defense business and the risks associatedwith getting what remains have made foreignbusiness even more attractive. Executives at U.S.firms believe that they can win foreign business.Going after it presupposes several things: a willing-ness to engage in joint ventures, to accept somekinds of offsets even if they make little economicsense, and to license technology that maybe close tostate-of-the-art. U.S. firms recognize that, in collab-

orating, they may be nurturing future competitors.But as one U.S. executive remarked: “Everyone youdo business with is a potential competitor.”

THE INTERNATIONAL

MARKETPLACE

According to industry sources, there are threeforeign markets whose size and buying power make

them attractive to U.S. defense fins: Europe, thePacific Rim, and the Middle East, with most of theprospective business expected from the latter two.Although U.S. firms continue to market in Europe,the obstacles they face are formidable. These includethe consolidation of the European defense industry,leading to firms like the Daimler-Benz group,Thomson-CSF, General Electric PLC (U.K.), andAerospatiale, which offer a full line of defense

products; and the reluctance of European govern-ments to accept outside suppliers unless they canoffer a product clearly superior to anything Euro-pean firms can provide.

15In this environment,

outside firms must collaborate to have any chance of winning contracts.

General Electric’s CFM venture with SNECMAsuggest. The T-45 is especially interesting becauseit is being built in the first instance for the U.S. Navy.Collaboration gives McDonnell Douglas access toforeign capital and positions it to sell the product to

other countries. British Aerospace is responsible forthe airframe, Rolls Royce for the engines, HughesAerospace for the aircraft simulators, and McDon-nell Douglas for systems integration and produc-tion.

l6

More than the Americans, the Europeans acceptthat they are producing both for indigenous marketsand for export. Their own markets are too small toabsorb the quantities their manufacturers mustproduce in order to recover their R&D and produc-tion investments. Marketplace realities dictate that

the same firms that collaborate with U.S. companieson European procurements will compete with them

for contracts elsewhere.

The history of France’s Mirage III and Mirage2000 fighters illutstrates how the need to exportdrives arms production. In 1977 Dassault-Breguetproduced 162 Mirage IIIs, only 44 of which wereprocured by the French government; the other 118were exported. The same holds for the moreadvanced Mirage 2000. Since the French Air Force

can only afford 35 of these aircraft per year, thecompany must find other buyers for the additional75 to 80 planes it produces annually. Orders fromIndia, Egypt, Greece, Morocco, and the United ArabEmirates have permitted economies of scale inproduction. With the French Government preparedto underwrite only 80 percent of the indigenousprocurement costs of weapons, the balance andprofit must come from foreign sales.

17

Even when blessed by government, U. S.-European collaboration can be risky. Some of themost ambitious cooperative ventures are in serioustrouble. The Advanced Short-Range Air-to-Air Mis-sile is in jeopardy as the U.S. Air Force prepares towithdraw from the program; both Hughes Missile

.lsIt ~m ~~ ~omidmation tit led tie British Gove~ent to choose Wmtin@ouse’s AWACS ra~ system over British Aerospace’s Nfid ontechnical grounds. The other factor was that Westinghouse offered 130 percent offsets.

16me p~a~ ~ ~~ T~s progr~ ~Ve formed a joint ~eting ~mmittee to &XUSS hlt(XlltltiOlld SdeS OppOrhldkX.

17~omtion on Mirage III and 2000 from David J. Louscher, “Patterns of Demand and Supply of Weapons Systems,” a presentation prepared forthe Workshop on Arms Transfers to the Middle East.j O’IA, Intermtional Security and Commerce PrograQ Sept. 21,1990. Several of the fighter planescited in footnote 4, as well as France’s UClerc main battle tauk, will also require foreign sales to recoup their R&D and production costs.


Systems Co. and BAe are presenting an alternativeto Britain’s Ministry of Defense to revive theprogram. Similar problems affect the production of Patriot missiles in Italy, as funding constraints there



threaten Raytheon’s collaboration with Fiat Aviazi-one and Selenia. All of this is in addition to theproblems of those European ventures that have someU.S. content, above all the European Fighter Aircraft(EFA). Germany has requested analysis of thepotential cost of withdrawing from the EFA pro-gram, while Italy is seeking additional funding tocover its share of R&D.

U.S. firms doing business in Europe will be

fortunate to maintain the business they have. Givenglobal overcapacity, the pressures on Europeangovernments to maintain their defense industrialbase, and the acquisition of smaller European firmsby the larger ones, U.S. firms will find it difficult toincrease their current market share. The efforts of theIndependent European Programme Group to pro-mote armaments cooperation have also affected U.S.prospects. One U.S. executive noted that while IEPG

‘‘was intended to make European firms moreefficient, locking the United States out was asecondary, but welcome, effect. ’

Pacific Rim nations, including Japan, presentgreater opportunities and other difficulties. BothJapan and the Republic of Korea have sophisticatedproduction capabilities, although Japan, with itsformidable R&D infrastructure, is by far the larger

18 Even more than with theand more important.

Europeans, weapons transfers to Japan, South Korea,and possibly Singapore, Indonesia, and Taiwan raiseissues of technology transfer. Both Korea and Japanhave growing indigenous defense industries; andalthough Japanese policy does not currently permitthe export of arms, many U.S. executives told OTAthey expect that by the end of the decade Japan willbe a major competitor, especially in defense elec-tronics.

The long-term prospects of U.S. firms in thePacific Rim are problematic. Their traditional role assuppliers to Japan and South Korea is an advantage;it may well lock out European fins, since manyJapanese and Korean weapon systems are producedto U.S. specifications. But the FSX controversyraises the issue of whether-and if so, for how much

Photo credit: Raytheon Co.

Raytheon Co.’s Patriot missile defense system is producedunder Iicense in Japan and Germany, and Italy has

negotiated to produce it as well.

longer—these nations will be willing to depend onoutside sources for weapons development.

According to a General Accounting Office offi-cial, the sale and licensed production of advancedU.S. fighter aircraft with South Korea is only the firstphase of an ambitious program to develop anadvanced indigenous armaments industry. The sec-ond phase would be a follow-on codevelopment,while the third would lead to an indigenous fighter.Although many observers consider these goalsunrealistic, several U.S. defense industry executives

lg~Jap~esedef~epro~s, seeu.s. Congress, Office of Technology Assessment, Arnu”ng OurAllies: Cooperation and Competition in ~efe~e

Technology, OTA-IS(X49 (Washington+ DC: U.S. Government Printing OffIce, May 1990), ch. 4, pp. 61-72. For South Korea see ibid., app. D, pp.111-113.


conceded that Korea could become a significantproducer of aircraft parts and components in theworld market.

relies on a single supplier country, as it did on Franceuntil the 1967 Six Day War, it faces the risk of beingcut off if political conditions change. The Israeli



The Middle East is the largest and most problema-tic remaining armaments market. According to theU.S. Arms Control and Disarmament Agency, in1988 the region as a whole imported about $15billion in arms, accounting for 31 percent of all armstransferred that year.

l9Between 1984 and 1988 the

Soviet Union supplied about one-third of all armsimported to the region, with the United States (18percent) and France (14 percent) second and third,

respectively. During the 1984-88 period, Iraq, SaudiArabia, Iran, and Syria were the region’s largestimporters.

20

In selling to the Middle East, the United Stateswill face competition not only from Britain andFrance, but the Soviet Union and the People’sRepublic of China as well. The competition will beshaped by the fact that, except for Israel (and to some

extent Egypt), none of these countries has anindigenous development, production, or supportcapability. In effect, when the United States orBritain sells to Saudi Arabia, each must provide acomplete weapons package that includes spare parts,logistic support and other support services. U.S.companies, however, may enjoy a significant advan-tage in the future, because of the performance of U.S.weapons in the Persian Gulf War.

Israel presents a special case because it is the onlyregional power with a major defense industrialcapability. It is also the only country with which theUnited States has an agreement for directed offsets;that is, U.S. suppliers to Israel agree to purchasespecified offset amounts of equipment from Israelifirms. Further, Israel has tried to develop its ownweapon systems even when, in the view of some

industry and DoD officials, it would have mademore sense to buy products off-the-shelf from U.S.suppliers.

There is, then, a certain tension between Israel’sdefense needs and its willingness to rely on outsidesources to satisfy them. To the extent that Israel

desire for indigenous production capacity is thusmotivated by more than nationalism; up to a point,it is a rational response to the political realities itfaces. Chapter 5 of this report provides a detaileddescription and analysis of the Israeli defenseindustries.

The problems U.S. officials and suppliers facewith Saudi Arabia are of a different order. Withvirtually unlimited amounts of cash, the Saudis arein a position to buy what they want—if not from theUnited States, then from elsewhere. In connectionwith the 1986 and 1988 Al Yamamah sales byBritain of 25 to 30 billion dollars’ worth of weap-onry to the Saudis, one observer noted:

The fact that Saudi Arabia-a country that 20years ago would only have been able to buy obsoletestock from the arms manufacturer’s bottom drawer—

is able to buy such modern weapons is a mark of howrapidly the market has changed. As the Saudi dealclearly showed, the amount of leverage that thesupplier countries can now impose on the buyingnations is much less. In many respects, power hasnow moved from the seller to the buyer. Hardbargains can be struck and barter is the commoncurrency.

21

More than in the European and Pacific markets,

the effects of U.S. sales to the Middle East will ripplethroughout the region. Sales of F-16s to Belgium andthe Netherlands raise no major political issuesbecause they conflict with no other regional securityinterest; even the proposed F-16 fighter sale to SouthKorea is fairly straightforward inasmuch as thethreat to that country is clear-cut.

22But a sale to the

Saudis must be weighed against other, equallyimportant regional interests. To counterbalance theSaudi sale, the Administration announced that it wasimmediately sending Israel two Patriot air defenseunits, as well as a promise of more munitions, 15F-15s, and 10 CH-53 Sea Stallion cargo helicopters.Thus a sale to one country triggers sales to others inthe region.

1~.s. AI-IIIS Control and Di sarmament Agency, WorZdiUilitary Expenditures undArms Transjers 1988 (Washington DC: U.S. Government Printingoffice, 1990), PP . T, 75.

~.S. clients included Saudi Arabi~ which bought $5.8 billio~ Israel ($6.1 billion), Egypt ($2.8 billion) and Jordan ($0.5 billion). Ibid., p. 9.zlJ~es A&un,s, Engines o~war: Merchants o~~eath and the New Arms Race (New Yor& NY: The Atl~tic Monthly fiess, 1990), P. 126.~’r’he debate over the FSX presents a difftient kind of issue, since that debate focused almost entirely on technology tra~fer rd.her tin the miliw

merits of the plane.

292-877 0 - 91 - 3 : QL 3

56 . Global Arms Trade

FOREIGN MILITARY AND

DIRECT COMMERCIAL SALES

U S foreign and national security policies shape

Further, the purchaser pays only the actual cost toDoD, plus a 3-percent fee for DSAA, with profitscontrolled by the Federal Acquisition Regulations.And once U.S. equipment is deployed overseas,



U.S. foreign and national security policies shapethe procedures by which weapons are actually sold:foreign military sales negotiated by the DefenseSecurity Assistance Agency (DSAA) and directcommercial sales by U.S. firms. This section re-views the impact of both on U.S. defense firms.

23

The merits of each procedure matter because eachhas its own effects on the overall pattern of activitiesin international defense business.

An FMS is a government-to-government transac-tion in which a foreign government transmits a letterof intent to purchase a specified weapon system. Itis similar to a domestic procurement inasmuch as thesame regulations cover both. Following a Planningand Review cost analysis, DSAA may then issue aLetter of Offer and Agreement setting forth the termsunder which the equipment will be sold, followed bythe procurement and delivery of the items requested

by the foreign government.

Increasingly, foreign governments are willing todeal directly with U.S. suppliers, although FMSremains the principal conduit for the export of U.S.weaponry. Figure 3-3 illustrates that while directcommercial sales deliveries have increased dramatic-ally, they have not yet superseded FMS as theprincipal means of transferring arms to foreignbuyers. In general, however, such figures should beused cautiously. While DSAA tracks FMS, forwhich it is the lead agency, the main data on directcommercial sales deliveries are derived at second-hand from U.S. Customs figures made available tothe State Department.

Although the FMS process is not difficult tograsp, its effects on the domestic arms industry arecontroversial.

24There are some clear advantages

from both the buyer’s and seller’s perspective. AForeign Military Sale is a cradle-to-grave processmanaged by DSAA. The weapons package assem-bled by DoD guarantees “single vendor integrity" —the same parts over the life of the weapon system.

And once U.S. equipment is deployed overseas,

foreign governments have access to DoD stocks intimes of emergency. Some foreign governmentsactually feel more comfortable with a process inwhich DoD handles all the paperwork. Finally, theDSAA field staff of DoD Security AssistanceOfficers, while not defense equipment sales repre-sentatives, do serve to promote U.S. arms transfersindirectly. For DSAA, the presumption is that theUnited States will sell a system to a foreign

government if it can. Such indirect marketingassistance can be quite valuable to U.S. defensemanufacturers.

25

Direct commercial sales also have advantages.Company-to-company negotiations cut procurementlead times, enable the supplier to tailor the packageto its customer’s needs, and allow the customer tobuy new equipment directly from the production

line. For U.S. defense companies, the direct sale isthe process of choice. One major exporter noted thatthere are three conditions that enable it to make aprofit on international sales: 1) if it can sellcommercially, 2) if, as with Israel, the foreigngovernment does business with the U.S. supplier ona direct commercial basis and pays more than theU.S. Government would, or 3) if a foreign countrybuys spare parts directly from the supplier.

Through an intricate division of labor, DoD andthe State Department make security assistancepolicy. Once the President certifies a country aseligible to buy U.S. weapons, State determines whatmajor sales may be made. This determinationinvolves extensive consultation with DSAA fieldstaff on foreign countries’ requirements, with theDefense Technology Security Agency, and with theServices. If agreement on the desirability of the

transaction is reached, State then issues the munitionexport licenses required by the International Trafficin Arms Regulations. DoD determines what equip-ment is available for sale, administers the FMSprogram, and implements the funding of FMS and

~F~r ~ ~ef d~~@~n of howWS and fi=t comerci~ s~es work see OTA, Ar~-ng Our A/lies, op. cit., footnote 18, app. B, “Techniques andMechanisms for Cooperation’ pp. 96-101.

~011 tie adv~~ges and disadvantages of FM S and direct commercial sales, see U.S. Department of Defense, Defense Security Assismce Agency(DSAA), “A Comparison of Direct Commercial Sales and Foreign Military Sales for the Acquisition of U.S. Defense Articles and Services,” August1989.

fiu.s. securi~ assistance efforts to promote U.S. defense equipment sales are minor compared to those of the United K@dom ~d Fmce, ~~ of which have very active government defense sales organizations.




percent surcharge may also have the effect of motivating DSAA to promote defense sales ingeneral.

companies can still make more money on foreignthan on domestic business because they are spread-ing their freed overhead over a larger base-not tomention the importance of foreign contracts that



U.S. defense manufacturers claim further that theFMS system is inflexible because customers canseldom get pricing information in less than 90 days.Countries might also want flexible waivers andguarantees, which are almost impossible to getthrough DSAA.

28Even where DSAA is willing to

leave the choice of FMS or direct sale up to thecustomer, one of the Services might add a proviso tothe export license requiring that it go FMS. Many

sales that are nominally direct have as many as adozen provisos attached requiring that some compo-nents or subsystems be sold government-to-gov-ernment.

Defense firms also assert that an FMS makes itmore difficult for them to negotiate offsets with thecustomer, since DoD will not pay for offsets as partof an FMS. Instead, they must be negotiatedseparately by the purchaser with the contractor.

Most U.S. contractors view offsets as a necessarycondition of doing business with certain countries. If the U.S. Government prohibited U.S. companiesfrom offering offsets, it would effectively cede manymarkets to foreign suppliers. Moreover, contractorscan do several things to dilute the impact of offsetson their profits, such as trading offset credits withother firms or overestimating the dollar value of thetechnology they are transferring. One contractor

contacted by OTA put the matter this way: ‘‘Anoffset is an evaluation of what’s valuable; in otherwords, we get the work done overseas because it’scheaper than doing it at home. ”

29

There remains the question of whether FMS anddirect sales can be regarded simply as economictransactions. Viewed purely as commercial agree-ments, either route may appear cost-effective de-pending on the buyer’s degree of sophistication, thelevel of support he desires, and the price he isprepared to pay. Even with an FMS agreement,

keep production lines open long enough for domes-tic sales to resume.

But to view weapons exports in such terms isperhaps to miss the point. DSAA exists not so muchto improve the U.S. trade balance as to furthercertain national security and foreign policy interests.One of these is to promote foreign procurement of U.S. defense equipment consistent with U.S. secu-rity objectives; another is to prevent the export of sensitive technology that might fall into the hands of current or potential adversaries. For this reason, theUnited States negotiates government-to-govern-ment Memoranda of Understanding when suchtechnologies are included in weapons transfers. Itwas likewise for reasons of national security that, innegotiating the sale of F/A-l 8s to South Korea, DoDplaced certain items on a government-tc-govern-ment ‘‘must list” (i.e., made them subject to FMS)and prohibited directed buybacks. (Similar condi-tions are likely to be imposed on the newly proposedF-16 sale to South Korea.)

It is, however, legitimate to ask whether DSAAand DoD are the proper fora for balancing concernsabout arms proliferation against the perceived need

to strengthen the defense industrial base. Given itsmission, DSAA is not likely to have an arm’ s-lengthrelationship with its suppliers. After all, an FMS saleis a contract with a domestic supplier. And whateverproblems firms have with the process, it representsa sale that might otherwise not be made. Moreover,FMS surcharges, which amount to approximately

$330 million per year, fund Service military assist-ance programs and support DSAA operations .30

There may be a conflict of interest inherent in asituation where an agency reaps a surplus from theindustry it regulates.

xsome~s ~wactiom ~cludecross.leve~ga ~ements, by which country funds on deposit in the FMS trust tid c~bemoved between seP~ateFMS purchases or to and from special holding accounts. Where a direct commercial sale normally has a fixed price, a cross-leveling agreement givesthe buyer greater flexibility in meeting changing requirements. See the Defense Security Assistance Agency (DSAA), “A Comparison of DirectCommercial Sales,” op. cit., footnote 24, p. 18.

z~or data on offse~, see Exewtive Office of the l%esiden~ Office of Management and BudgeC O@ets in A4iZitary EXpOTtS (wmhgtOm Dc: ~lce

of Management and Budge~ December 1988).%this contexg it should be noted that DSAA has experienced serious problems in administering DoD’s FMS trust fund. DSAA’S failure to develop

a system to correct accounting deficiencies in the FMS program led DoD to transfer responsibility for the system from DSAA to the Air Force in July1988. See U.S. General Accounting Office, Financial Integrity Act: Inadequate Controls Result in In@ective Federal Programs andBillions in Losses,GAO/AFMD -9Q1O (Gaithersburg, MD: November 1989), p. 33.


WHAT THE DEFENSE

INDUSTRIES WANT

environment within which export control policy ismade has changed. In January 1990 the StateDepartment replaced the Office of Munitions Con-trol with a new Center for Defense Trade based in the



Industry complaints about Foreign Military Salesare only part of a broader critique of the exportcontrol regime that appears to have outlasted theCold War that established it. The defense industry’sposition is that the government has a legitimateinterest in protecting the defense industrial base bypromoting arms exports. As expressed by theDefense Policy Advisory Committee on Trade(DPACT), an industry group that consults with the

Secretary of Defense and the U.S. Trade Representa-tive, “the wisest policy for government to pursue isto ensure that mechanisms are in place which willenable industry to keep ahead, both technically andeconomically, of the foreign competition. ’ ’

31

For all the obstacles U.S. firms face in sellingoverseas, they have one great advantage. With theSoviet threat now almost irrelevant, the UnitedStates has become, almost in spite of itself, the

world’s largest arms supplier and the one with thebest products. For economic as well as strategicreasons, a case can be made-aria is being made-that the government has much to gain by supportingU.S. arms exports.

DPACT’s position is best considered in light of U.S. export controls. The State Department imple-ments the Arms Export Control Act of 1976 through

the International Traffic in Arms Regulations, whichare based on the U.S. Munitions List maintained byDoD.

32The Export Administration Act of 1979

(EAA), as amended, controls the export of dual-usetechnologies that could significantly augment themilitary capabilities of an adversary. The CommerceDepartment’s Bureau of Export Administrationadministers the EAA.

33

Of these agencies, the State Department hasperhaps been the quickest to recognize that the

Bureau of Politico-Military Affairs. Comprising anOffice of Defense Trade Controls and an Office of Defense Trade Policy, the Center combines licens-ing and enforcement with the setting of policy forcommercial defense trade.

Thus, the new Center serves two related purposes.First, as State Department officials made clear, theDepartment concluded that “complaints about the

understaffing and underfunding of [the Office of Munitions Control] were entirely legitimate.’ ’

34The

number of licenses OMC handled had risen from20,000 annually in the early 1970s to 60,000 adecade later, before falling back to 54,000 in 1990.On one level, then, the Center’s purpose was one of administrative consolidation: to reduce backlogsand increase efficiency by bringing more resourcesto bear.

But the 1990 reorganization was also designed toreduce unnecessary impediments to defense trade.The State Department has endorsed the position thatit should support U.S. defense trade, whether bymore timely processing of export license applica-tions or by enjoining personnel in U.S. missions topromote purchases of U.S.-made military equip-ment, as a July 1990 memorandum by DeputySecretary Lawrence Eagleburger directed.

Yet the export control regime remains, in mostrespects, what it has been for the past two decades.It is complex, geared to political and militaryconditions that no longer exist, and open to thecharge that it penalizes domestic suppliers withouteffectively controlling the worldwide dispersion of defense technology.

Even those who administer export controls findthe process difficult to grasp; and as one regulator

slDefense policy Advisory Committee on Trade (DPACT), Year-End Review, Op. Cit., fOOtIIOte 11, P. 4.sz~e latest Vmsion of tie IT= is published in 22 CF’R 120-130 (November 1989).ss~ mid-November 1990 President Bush pocket-vetoed a bill amending the EAA tit wotid hve:

. created an essentially license-fkee Coordinating Committee for Multilateral Export Controls (CoCom), the principal forum for devising commonexport control among Western Alliance members. In effect, U.S. companies would not have needed licenses to export to CoCorn countries;

. created a statutory licensing regime for missiles and chemical and biological weapons, and imposed sanctions against the United States andforeign countries for violating controls;

qgiven “good” East Eu.ropeancountries unlimited access to telecommunications equipmenq and

. tied the U.S. Munitions Control List to the CoCorn Munitions List.

34u.s+ DW~ent of Stite, Bureau of politic@ Mili~ Afffis, De~en~e Trade News, vol. 1, No. 1 (wmhingto~ DC: Center for Defense Trade,March 1990), p. 5.




Finally, the industry would prefer more direct MOUs are often negotiated where coproduction orcommercial sales instead of FMS. Government-to- codevelopment are not involved. By permittinggovernment memoranda of understanding (MOUs) more direct sales, the U.S. Government would givemake sense where sensitive military technologies domestic firms a competitive advantage over Euro-

i l d i d l i h li



are involved. But some industry sources claim that pean suppliers.

Chapter 4



European Defense Industries:

Politics, Structure, and Markets

Contents Page

ADJUSTMENTS TO NEW STRATEGIC AND ECONOMIC REALITIES . . . . . . . . . . . 65EUROPEAN DEFENSE INDUSTRIES IN A CLIMATE OF UNCERTAINTY .......68REORGANIZATION FOR SURVIVAL: NATIONAL CHAMPIONS

AND MULTINATIONAL CONSORTIA 71



AND MULTINATIONAL CONSORTIA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71U. S.-EUR0PEAN ARMAMENTS RELATIONS IN THE

POST-COLD WAR ERA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78TRANSATLANTIC DEFENSE INDUSTRIAL ISSUES FOR THE 1990s . . . . . . . . . . . . 80

BoxesBox Page

4-A. Security Arrangements in Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .674-B. European Arms Sales to Iraq . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 694-C. European Defense Industrial Restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

Figures Figure Page

4-1. Estimated Licensed Production of Major Conventional Weapon Systems in andfrom Europe, 1960-88 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70

4-2. Licensed Production of European Major Conventional Weapon Systemsby Developing Countries, 1960-88 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

4-3. NATO Europe and U.S. Arms Exports, 1978-88. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 724-4. Daimler Benz Organization Chart, 1990 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ... , 74

4-5. Sales of 12 Largest Western European and U.S. Defense Firms, 1988 . . . . . . . . . . . . . 774-6. NATO Procurement Expenditures, 1978-82 and 1983-88 . . . . . . . . . . . . . . . . . . . . . . . . 80

TablesTable Page

4-1. Major Weapons Procurement Sources in the Major European DefenseIndustrial Nations, 1985-89 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72

4-2. Principal European Defense Firms, 1990 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 744-3. Selected European Defense Industrial Consortia and Joint Ventures . . . . . . . . . . . . . . 75

Chapter 4

European Defense Industries:Politics, Structure, and Markets



The European defense industries, and the rolethey play in the global defense market, are currentlyundergoing rapid mutation. Political and economicchanges in Europe and the Soviet Union, whilereducing tensions that have made defense coopera-tion necessary, have also made it increasinglydifficult for NATO to function as a U.S.-Europeandefense industrial coordinating structure. Europemay be headed toward a consolidated security anddefense pole independent of the United States,despite setbacks to European integration caused bythe Persian Gulf War.

European economic integration has forced signifi-cant changes in the structure and activities of European defense fins. At the same time, defenseproduction overcapacity, falling defense budgets

associated with the end of the Cold War, andShrinkingng defense export markets have caused a deeprecession in the defense industries worldwide. Thesefactors have catalyzed profound structural reorgani-zation of the European defense industries. Finally,the Iraqi invasion and occupation of Kuwait and theresponse of the U.S.-led coalition has presented theworld with much more complex security and defenseindustrial problems than imagined in the days

following the fall of the Berlin Wall.

European firms are increasingly competitive withthe United States in a wide range of defensetechnologies, both in terms of price and quality, andthey face strong pressure to export these systems.But more important, worldwide distribution of European weapons poses considerable security prob-lems for the United States, as demonstrated in the

Persian Gulf War. In the future, U.S. defenseplanners will have to pay greater attention to defenseagainst weapons produced by our allies, but used bythird parties.

Changes in the European defense industries are,therefore, of considerable importance to the study of the global defense business and the challenges itpresents the United States. This chapter focuses firston the security context of European armamentsproduction, and then turns to the economic and

structural changes that affect European defensefirms and how they do business.

ADJUSTMENTS TO NEW

STRATEGIC AND ECONOMIC

REALITIES

The decline of Soviet power in Central Europe,the unification of Germany, and the Persian Gulf War are events that could scarcely have beenanticipated a short while ago. The hitherto orderlypreparations for the economic integration of West-ern Europe into a single integrated market at the endof 1992 have been thrown into disarray by recentevents. The outbreak of war with Iraq has increasedconcern about Germany’s place in Europe, raised a

new dimension of the perennial “burden sharing”issue, called into question European arms exportpractices, and exposed deep tensions among NATOmembers. Anew Europe is in the process of creation,but what its ultimate form and substance will beremain clouded in the rush of events.

It appears beyond question, however, that theWarsaw Pact cannot be reconstituted as a serious

menace to the security of Western Europe.

1

Thus theSoviet threat to NATO’s central front, which hasdominated U.S. and European strategic thinkingsince the end of World War II, has been virtuallyeliminated in the course of 1 year. This implies aseries of political and economic consequences thatdirectly affect the environment in which the Euro-pean armaments industries operate.

The Conventional Forces in Europe (CFE) negoti-

ations are scheduled to continue, and circumstancesare such that both the United States and the SovietUnion may be constrained to draw down from thecentral front both in larger numbers and earlier thanlimits set by negotiation. The spreading economicand social disorganization within the Soviet Union,and the demise of Soviet-controlled regimes inEastern Europe make it doubtful that the Soviets willbe able to maintain large numbers of effective forces

in Central Europe. Over 100,000 U.S. troops in the

Ion Apr. 1, 1991, tie Warsaw Pact w= fody dksoIvd.

-65–


NATO area have been transferred to the PersianGulf, and are unlikely to return in view of thereduced Soviet threat and domestic budgetary pres-sures. This is likely to remain true despite the fact

that U.S.-Soviet negotiations under CFE have re-



that U.S. Soviet negotiations under CFE have recently been clouded by unilateral Soviet changes inpreviously agreed troop counting arrangements com-bined with a souring of bilateral relations followingSoviet repression of independence movements in theBaltic republics.

Western European public support for militaryspending, which at least by U.S. standards has neverbeen strong, has been low throughout most of the lastdecade. The current shift in the balance of power inCentral Europe will put further downward pressureon Western European military budgets, as attentionshifts to the social and economic challenges of European integration and dealing with the ravagedeconomies of Eastern Europe. By one estimate, totalEuropean defense spending will fall from $147.4billion in 1990 to $145.1 billion in 1995, withoutconsidering the effect of inflation;

2assuming a

5-percent rate of inflation, this comes to about $112billion in 1990 dollars, a 23-percent reduction.

The effect of the war with Iraq on Europeandefense spending will probably be small, given themodest European military contribution to the coali-tion. Furthermore, as U.S. force allocations forNATO decline under budget pressures and the needfor redeployments to meet military contingencies in

Iraq and elsewhere, the “burden sharing” argumentfor maintaining Western European military budgetsat current levels loses much force.

Germany has proposed to reduce its forces from445,000 to 370,000 troops (including East Germanforces) and is set to pay the Soviets about $7 billionfor housing and other costs associated with therepatriation of Soviet forces now stationed in the

former Democratic Republic. Furthermore, lack of acredible Soviet threat has eroded some support forcontinued involvement in the European FighterAircraft (EFA) consortium beyond the R&D phase,a project that had as its military justification arequirement to counter sophisticated Soviet MiG-29fighters. In addition to costs of reunification, Ger-many will be thrust into the lead in regionaleconomic rehabilitation of Eastern Europe, both to


The NATO Stinger man-portable anti aircraft missileprogram, for which Dornier and Diehl are the maincontractors, is supplying weapons for Germany,

Belgium, Greece, Italy, the Netherlands, and Turkey.Switzerland is also producing the Stinger. GeneralDynamics began development of the system in the

early 1970s, and it was first deployed inWest Germany in 1981.

protect its extensive commercial investments and toforestall waves of immigration that would inevitablyaccompany economic disintegration within the re-gion. All this will put the German budget under greatstrain, and the defense sector is a likely source formuch of the required funds. The 1991 defensebudget presented to the Bundestag reflects a 15-percent decrease from the combined Federal andformer Democratic Republics.

3

The French are also set for a lowering of defenseexpenditures in the light of a diminished Sovietthreat perception. The French "Armees 2000’ forcerationalization plan proposed by former DefenseMinister Jean-Pierre Chevenement to respond tolessening tensions calls for “a lessened rate of risein defense appropriations, and a continued decline introop strength.’ Defense spending in 1990 declined

~iovanni de Briganti and Theresa Hitchens, ‘‘War Further Pinches European Defense Firms, ” D@ense News, vol. 6, No. 6, Feb. 18, 1991, p. 15.S“Germans Trim Budget,’ D@ense News, vol. 6, No. 8, Feb. 25, 1991, p. 2.

Chapter 4-European Defense Industries: Politics, Structure, and Markets q 67

Box 4-A—Security Arrangements in Europe

Large uncertainties about the future of NATO, in particular the political will and economic ability of the UnitedStates to continue spending hundreds of billions of dollars for European defense in the face of a rapidly receding

Soviet threat, and the as yet undefined role of a reunited Germany within Europe, have given rise to muchl ti b t th d f E it t Alth h th it i t t f h



, y y p , gspeculation about the need for new European security arrangements. Although the security interests of eachEuropean state differs in detail, the tasks facing European defense planners generally are:

. assuring that Germany—now the strongest state on the continent—will be closely bound politically andeconomically to the rest of Western Europe;

qcontaining the threat posed by highly armed and unstable Islamic regimes spread across the North Africanlittoral, through the Persian Gulf, and beyond;

. bringing the newly democratic states in Eastern Europe and the Soviet Union into a more normal economicand security relationship with Western Europe.

There is as yet little agreement among the major European powers as to the priorities of these tasks and theinternational modalities best suited to accomplish them.

France, which appears to be most worried about the emergence of a strong and independent Germany, wishesto speed along both the economic and monetary unification of Western Europe, and involve Germany in a defenserelationship centered perhaps on the European Community (EC) or a drastically modified NATO essentially underEuropean control. In line with this policy, France has been one of the chief catalysts for sponsoring intra-Europeanindustrial and arms cooperation through the Independent European Producers Group (IEPG) and through technicalcooperative programs such as BRITE, JESSI, EUCLID, etc.

For its part, Germany perceives advantage in moving quickly on economic union under the EC but at the same

time has strong commercial and strategic interests in Eastern Europe and the Soviet Union. It thus appears to manyGermans that activating and strengthening some European forum more inclusive than the EC, such as the nowlargely dormant Conference on Security and Cooperation in Europe or the Western European Union should receivehigh priority as well. The United Kingdom is the most reluctant of the major European powers to cede political anddefense autonomy to a centralized European authority, although its fragile economy is now so dependent on thecooperation and prosperity of partners on the continent that it can only delay, but probably not decisively alter, theestablishment of a new European security framework.

5 percent in real terms from 1989 levels, and perhaps 1990-91 to 3.4 percent in 1993 -94.5 Defense pro-15 percent more in 1991. In fact, some members of curement has aleady undergone significant trim-the French parliament are now concerned that force ming under Sir Peter Levene, who has cut subsidiesreductions already have gone too far and that combat to defense contractors, stiffened competition, andreadiness is threatened.

4French troops committed to promoted defense industry consolidation. His claim

Germany will decline from 50,000 to 35,000 over is that henceforth the procurement executive is to bethe next year. However, the full measure of French guided by the principle of “value for money,”feeling will not be revealed until the next defense although significant purchases of non-British equip-program law debate in Parliament in October, 1991. ment (apart from U.S. AWACS) have not yet

materialized. Officials at the U.K. Ministry of

The British military likewise plans significant Defense claim that procurement practice changes are

reductions in defense expenditures and troop levels. now resulting in cost savings of about 30 percent.

In June 1990 orders were canceled for an additional33 Tornado aircraft and after a major defense review The future mission and structure of NATO inin August 1990 the reduction of the British Army of post-Cold War Europe is currently under review.the Rhine to 50,000 troops in 1991 was amounced. The general sentiment on both sides of the AtlanticDefense budgets are set to decline in real terms, and is that a continued U.S. military presence in Europewill fall from 4 percent of gross domestic product in would lend “stability” in a time of unprecedented

4Jaeques Isnard, “French ‘Arm= 2000’ Plan: A Dfieult Balancing Aet,” Aviation Week& Space Technology, vol. 133, No. 10, Sept. 3, 1990,p. 65.

S“U.K. Defense s~nding TO D~line Despite Gulf War,” Aviation Week & Space Technology, VO1. 134, No. 6, Feb. 11 , 1991, P. 26.


change, but it is by no means certain that NATOcould be restructured to meet this new, if somewhatnebulous, mission.

6Two main issues will require

resolution. First, while Germany has pledged itself

to continue membership in NATO, it remainsunclear whether the present or succeeding German

Milan, HOT and Exocet missiles; top-of-the-lineMirage fighters; and sophisticated production fa-cilities for chemical weapons-were predominantlyof European provenance. Since the invasion of

Kuwait, public attention to events in the PersianGulf have been the source of an unceasing stream of



punclear whether the present or succeeding Germangovernments can withstand popular demands thatGermany should be cleared of nuclear weapons.This, in the view of even some strongly Atlanticiststrategists, could be the final blow for NATO, atleast as presently constituted.

The second and possibly more important issueconcerns new goals for NATO. The United Statesproposed last year that NATO discuss both itsreorientation to more political or social ends andcoordination of its military activities with suchout-of-area states as Japan. These have not met withmuch resonance by the Western Europeans, who inthe 40-odd year history of the Alliance have resistedU.S. attempts to widen NATO’s sphere of interestbeyond Europe proper.

7

While the debate between the “wideners” and‘‘deepeners’ of the various proposed loci forEuropean security cooperation continues, the Per-sian Gulf War aroused the attention of Europe, andin particular France and Italy, to the threat posed byArab nationalist and fundamentalist states armedwith advanced imported weapons (see box 4-A). Theuncoordinated and tentative collective response of the Western Europeans to the Persian Gulf events

has pointed up the political and administrativedifficulties the Europeans have in consulting ondefense affairs outside Europe.

Perhaps of even greater importance is that themost dangerous weapons in the Iraqi arsenal con-fronting Western forces in the area-improvementsin the Scud missile to strategic ranges; thousands of

pGulf have been the source of an unceasing stream of revelations highly embarrassing to European govern-ments, past and present (see box 4-B).

EUROPEAN DEFENSE

INDUSTRIES IN A CLIMATE

OF UNCERTAINTY

Unlike the defense markets of the United States orthe Soviet Union, European defense markets areindividually too small to support purely domesticdefense industries.

8This has led to three main

developments.

First, European defense firms are required toexport substantial quantities of defense equipment inorder to gain the production efficiencies and costreductions that lead to affordable armaments and

research and development. This strategy was suc-cessful in a time of expanding markets, as during themid-1970s to early 1980s, but with declining de-mand, the extensive production capacity built upover this period can no longer be supported.

Second, the search for ways to extend productionruns and fired increasingly expensive research leadsto international collaboration, particularly with close

political allies. In the past, the United States was theprincipal partner for European defense industries,but due, in part, to U.S. restrictions on the export of U.S.-originated technology, Europeans have turnedto each other and to developing nations as collabora-tion partners (see figures 4-1 and 4-2). In general, theEuropeans do not buy as much from the UnitedStates as in the past.

GNATC) is reportedly comidering a c-e from a fonvard deployment strategy to a “forward presence” strategy, in which a Small numkr of @@J’trained and mobile troops in either national or multinational units will be able to respond to crises. The new strategy counts on air transport to quicklyshift troops and tanks into defensive positions while reserve forces are mobilized. This may be combined with mtional specialization on some tasks,which would reduce costs and provide political benefits for countries that find it diffkult to commit front-line troops in a crisis. Michael MechrmL“Reduced ThreaL Budgets Driving NATO to New Strategy as Europe Tries To Unify,” Aviation Week & Space Technology, vol. 134, No. 11, Mar.18, 1991, pp. 66-67.

TA.s for nonmili~q NATO activities, tie U. S.-inSpi.red Committee for the Challenges of Modern Society (NATO CCMS), which sponsors ProJatsranging from health care to environmental protectio~ remains rather a side-show, and is sometimes criticized for infringing on matters best left tononmilitary intermtional organizations, such as the Organization for Economic Cooperation and Development (OECD).

SFor example, fighter and attack aircraft production becomes profitable only after over 600 planes have been built, due to the time required to learnto build them (learning curve) and the associated economies of scale. At the same time, European countries, even the largest have requirements for muchsmaller quantities. For example, in the European Tbrnado attack airplane consortiw the United Kingdom maintains in its current arsenal only 310,

Germany 326, and Italy 97 airplanes. Similar numbers obtain for other collaborative aircraft projects, such as the European Fighter Aircraft (EFA). Inthe same vein, the French Air Force has only 246 of approximately 670 Mirage F-is produced through 1986, while the rest were exported to at least10 foreign countries.

Chapter 4--European Defense Industries: Politics, Structure, and Markets q 69

Box 4-B—European Arms Sales to Iraq

Revelations of the nature and extent of German industrial involvement in developing Iraqi capability toproduce weapons of mass destruction have provoked wide public comment. Over 80 German firms, including such

respected enterprises as MBB and Karl Zeiss, have been implicated as suppliers for Iraqi unconventional weaponscapability. The Karl Kolb firm has been identified as the principal contractor for the Iraqi nerve gas plant at Samara,



p y p p q g p ,perhaps the largest in the world. Beyond the exposure of extreme German laxity in the enforcement of its exportcontrols, evidence has emerged that governmental assistance was provided for some of the most dangeroustechnology exports to Iraq, such as the compressors used to improve the range of the Scud missile.

1

With $3 billion in sales for such items as Mirage fighters and Exocet missiles, the French have been the mostprominent western supplier of complete weapons systems to Iraq. The Iraqi invasion of Kuwait provoked somethingof a crisis in the French Government, eventually leading to the dismissal of Defense Minister Jean-PierreChevenement, a founding member of a French-Iraqi friendship society. Before leaving government, Chevenementprovided an interesting historical sidelight on the sale of the Osirak reactor to Iraq, which the French had steadfastly

declared to be solely capable of nuclear research. Referring to the former prime minister at the time of the sale,Chevenement declared: “Let Mr. Chirac be asked about the circumstances in which he authorized a certain numberof big contracts, including the nuclear one in 1975. ”

2

Besides France and Germany, other European countries shown to have made significant weapons or strategictechnology sales to Iraq include Italy, Spain, Greece, and Austria. Thus far, only Austria-which sold 200 artillerypieces to Iraq that may well be superior to any in the coalition arsenal-appears to have launched a fill-fledgedinvestigation of possible misconduct by top government and industry officials.

3The leadership of other European

governments have been less forthcoming on the issue to date. While the Kohl administration has offered Israel $300million, presumably in reparation for damages caused by Scud attacks, it has been essentially silent on thegovernment’s role in arming Iraq.

4French President Mitterrand seems to have attempted to convert previous arms

sales to Iraq into an asset, noting that these ‘add moral weight to France’s entry into the coalition. The ambiguousFrench position in the coalition has been highlighted by such incidents as its support of Iranian cease-fire initiatives,limitation of French air strikes to Kuwait, and delays in providing the United States with information on French armssales to Iraq. In contrast, President Gorbachev has issued a frank apology for the Soviet arms supply to Iraq, whichin retrospect appears to have been considerably more discriminating than the Europeans concerning strategic andnonconventional weapons.

IThe West German firm Havert received $1 million in Hermes export guarantees for the compressor. See Marc Fisher, “GermanyPledges $5.5 Billion More Toward Gulf War,” The Washington Post, Jan. 30, 1991, p. A23. West German officials claim that Hermes is a

self-financed, private insurance operation. However, as with Export-Import Bank guarantees, the insurer of last resort is the government.%ited in “French Minister’s Stand On War Draws Criticism,” The Washington Post, Jan. 24, 1991, p. A30. France and the United States,among others, voted for the U.N. resolution conde rnning Israel for destroying the reactor in 1981.

q~ e Aush-ians already had under investigation illegal sales of the same artiUery to Iran, produced by the state-owned Voest comp~y.Officials indicted include former chancellor Fred Sinowatz. See “Austrians Convicted of Arms Sales to Ira~” The Washington Post, Feb. 2,1991, p. A14.

4Note, for exmple, statements of top KoN intelligence adviser Bauenschlager ~d former &OnOmiCS ~ster ~sdofl~ “Fron~e’broadcast, Public Broadcasting Service, Feb. 7, 1991. Both underscore that the German Government acted correctly in granting export licensesfor dual-use technology, despite persistent news reports and official U.S. and Israeli warnings that these exports were destined for the Iraqi warmachine.

However, despite the requirement for collabora- of workshares and production to a highly refinedtion to make defense equipment affordable, Euro-pean nations wish to maintain as much as possible

their own defense industries, both to assure them-selves access to defense technology for nationalsecurity and for domestic industrial and tradereasons. The solution, developed over several dec-ades, is that countries permit their defense fm s to

collaborate on specii3c projects and work out details

degree.

Finally, in the major European defense industrialcountries, France, Great Britain, Germany, and Italy,overcapacity so far has not caused defense fm s toengage in extensive translational mergers or acqui-sitions. Industry consolidation and reorganizationhas taken place for the most part within countries,

and has resulted in the creation of de facto defense


Figure 4-l—Estimated Licensed Production of Major Conventional Weapon Systems in and from Europe, 1960-88

90

80



70

60

Number 50

of major

systems 40.

30

20

10

0

Total foreign production of European

[

weapon systems* (not including U.S.”*)

/

Total European productionof U.S. weapon systems”

K’ ----,.

. . .,‘ --- . - - - -

- - - - . A. .

/ . ‘ . ...

, ‘ “ U.S. systems licensed by European nations (black bar).— --—-. European systems licensed by foreignnations,

1960 1964 1968 1972 1976 1980 1984 1988


* Estimates based on the assumption that an average system is produced under license for 12 years.

** U.S. production of European systems is negligible: only 7 systems produced from 1965 to 1987.

SOURCE: Office of Technology Assessment, from data in Stockholm International Peace Research Institute, SIPRI Yearbooks, 1970 through 1990, World Armaments and Disarmament.

industrial monopolies.9Defense companies in the

other European countries have taken subcontractingroles or have been acquired by defense firms in themajor defense industrial countries, such as France’sGIAT Industries purchase of Fabrique Nationale, theBelgian gun manufacturer.

European defense suppliers currently operate inan atmosphere in which very little can be confidentlypredicted. Their production and research structures,domestic and export markets, profits and employ-

ment are intimately connected to the decisions of governments groping to adjust to the new politicaland economic realities. The European defense mar-ket, already small by U.S. standards, appears des-tined to shrink still further, and R&D investmentsnecessary to field competitive new weapons systemswill become ever more costly.

Consequently, military procurements, at least onthe weapons system level, both in the United States

and NATO Europe are tending increasingly towardsdomestic suppliers (see table 4-l). The Europeanshave long believed that the U.S. direct procurementmarket is essentially closed, and the only way it canbe penetrated is at the industrial level by means of

joint ventures or acquisition of U.S. defense firms(see table 1-1 inch. 1). The major European suppliernations have achieved high levels of autonomy inarms procurements by domestic production andintra-European teaming. Furthermore, it appears that

the principal defense industrial countries of Europehave targeted the smaller defense producing coun-tries, such as the original F-16 countries (Denmark,Belgium, the Netherlands, and Norway) —the onlyremaining U.S. market in Europe for completesystems. The sales of U.S. components may also beaffected, as suggested by the proposed EuropeanCommission directive for a tariff on defense compo-nents.

9An&ew Moravcs&, “m e Emopan Armaments Industry at tie Crossroads, “ Survival, vol. 32, No. 1, January/February 1990, p. 69.

Chapter 4--European Defense Industries: Politics, Structure, and Markets q 7 1

Figure 4-2-Licensed Production of European Major Conventional Weapon Systems by Developing Countries,

India

BrazilSouth Africa



Singapore

Indonesia

Thailand

Egypt

Argentina

South Korea

Pakistan

Philippines

Malaysia

China

Peru

Mexico

Madagascar

Libya

Chile

Algeria

o2 4 6 8 10 12

Number of systems

SOURCE: Office of Technology Assessment, from data in Stockholm International Peace Research Institute, SIPRI Yearbooks, 1970 through 1990, WorldArmaments and Disarmament.

Complicating the problems for the European armsmanufacturers is that exports, on which the Euro-peans rely to a much greater extent than U.S.producers, have become much more difficult (see

figure 4-3). Saturation, developing nations’ debt,lower OPEC revenues, and competition from newlyindustrialized countries have combined to lowerEuropean export performance. European arms ex-ports reached a 10-year low in 1989.

In addition, the Europeans perceive additionalthreats to their traditional export markets from theSoviets and the Eastern Europeans, who desperately

need hard currency and who have large surplusweapons stocks and weapons production overcapac-ity. Beyond these factors, European arms suppliersbelieve that U.S. producers will compete fiercely forShrinkln“ g markets. The war with Iraq, however, mayprovide fresh opportunities for increased sales to theMiddle East, absent agreement among major arms

10 Efforts to promotesuppliers on sales to the region.

such arms control agreements are at very earlystages, but several countries, such as Germany, havetightened their national export control systems. Itremains to be seen whether more comprehensive

agreements will be forged.

REORGANIZATION

FOR SURVIVAL:NATIONAL CHAMPIONS AND

MULTINATIONAL CONSORTIA

Increasing reliance on domestic suppliers has

created substantial overcapacity in defense indus-trial production. The question that faces Europeangovernments and industry is how to organize, on anational and multilateral basis, so that arms suppli-ers are provided some cushion against severe marketuncertainties and to insure that Europe retains acompetitive defense industrial base. The spate of mergers, take-overs, stock-swaps, teaming arrange-

l~e d~isiom of European governments participating in the coalition agfit @ may be seen at kist p-y mOtiVatt?d to prot=t ~ent ~markets or create new ones. The United Kingdom’s wly and staunch lineup in the coalition parallels its interests in Saudi Arabia as the prime customerfor British arms exports. The initial French refusal to bomb strategic targets in Iraq may have been prompted by hopes to retain its privileged positionas weapons exporter to post-war Iraq, and its more recent tilt towards Iran may reflect interest in cultivating further potential arms buyers.

Table 4-l—Major Weapons Procurement Sources in the Major European DefenseIndustrial Nations, 1985-89 (percent)

Country Domestic Codevelopment Coproduction imports

France . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80% 15% 0% 5%

United Kingdom . . . . . . . . . . . . . . . . . . . . 75 15 0 10West Germany . . . . . . . . . . . . . . . . . . . . . 45 25 20 10



SOURCE: Andrew Moravcsik, "The European Armaments Industry at the Crossroads,” Surviva/, vol. 32, No. 1,January/February 1990, p. 66.


Since the mid-1970s, General Dynamics’ F-16 FightingFalcon has been produced in Belgium, the Netherlands,

Denmark, Norway, and Turkey, the so-oalled“F-16 countries.”

ments and other forms of alliance that has swept theEuropean defense industries in the past several yearshas been in response to the overcapacity problem.While the process might appear superficially some-what chaotic, the overall trends have been carefully

guided by governments in the major arms producingstates, and reflect their long-standing economic anddefense priorities (see box 4-C).

The major suppliers-France, Germany, and theUnited Kingdom-are the only nations in Europethat possess the industrial, research, and financialcapacity needed to produce a broad array of com-plete weapons systems. The policies of these coun-

tries dominate the overall arms productions situationin Europe and will determine its future size andshape. Italy stands in a somewhat half-way position.

Figure 4-3-NATO Europe and U.S. Arms Exports,1978-88

, f j ~

I United States arms exports \ h

v ‘ ~. . \ \--- ,10 -- ““” ““. . . . . . . . . . . . . .\ v\,

Constant \

/

\

1988 ~ -, -I’- .’ ‘.- --

dollars,. !

billions I NATO Europe arms exports ‘,

6 +-~ --- . . . . . . . . . . ,

I\

t

4 - . . . . .

2

l “ ”

1978 1980 1982 1984 1986 1988

Year

SOURCE: Office of Technology Assessment, from data in U.S. ArmsControl and Disarmament Agency, World Military Expenditures and Arms Transfers, 7989 (Washington, DC: U.S. GovernmentPrinting Office, 1990),

It has industries that can serve as prime contractor inonly one weapon system (helicopters) and one majorsubsystem (electronics). The other Western Euro-pean states lag behind.

The mergers that have occurred tend to consoli-date at the national level those portions of the armsindustry that governments perceive as both essentialto their survival as major weapons producers andintegral to their overall economic developmentplans. These industries are aerospace, missiles, anddefense electronics, and are closely associated withthe “sunrise” civilian industries (i.e., civil craftand engines, space satellites, telecommunications,

computers, and electronics) that also have beenfostered by governments. The defense and associ-ated civil sector industries are usually merged in a

Chapter 4 European Defense Industries: Politics, Structure, and Markets q 7 3

Box 4-C—European Defense Industrial Restructuring

Strategy Examples

Internal reorganization . . . . . . . . , ., , . . . . . . Fiat (Italy) subsidiaries Gilardini and SNIA-BPG, which each hadsome defense work, restructured to put all Fiat defense activities inone entity.



y

Refocusing on main business . . . . . . . . . . . . . Philips (Netherlands) has sold off its defense subsidiaries, therebyleaving defense.

Cross-equity participation . . . . . . . . . . . . . . . . General Electric Co, (U.K.), Daimler-Benz (Germany), and Wallen-berg (Sweden) have each separately exchanged a small percentage of shares with Matra (France), in order to promote both high-levelconsultation on collaborative ventures and some technology sharing.

Taking over to diversify . . . . . . . . . . . . . . . . . Daimler-Benz (Germany) takeover of Dornier, MTU, AEG, and MBB(all Germany), and their consolidation into Deutsche Aerospace(DASA), British Aerospace (U.K.) acquisition of Rover, RoyalOrdnance, Ballast Nedham, Arlington Securities (all U.K.), andnumerous other British firms.

Creation of new company . . . . . . . . . . . . . . . . British Aerospace and Thomson-CSF (France) may merge theirguided missile businesses in Eurodynamics. Thomson-CSF generalavionics business combined with Crouzet, Sfena, and ElectroniqueAerospatiale (all France) into new company called Sextant.

Strategic alliances . . . . . . . . . . . . . . . . . . . . . . .British Aerospace (BAe) and General Dynamics (GD) (U. S.) have

made long-term commitments, including BAe’s recent failed effort tosell GD’s M1A2 tanks to the British military. United TechnologiesCorp. (UTC) (U. S.) and Daimler-Benz have formed a strategicalliance, one aspect of which is a new jet engine to be developed byUTC’S Pratt & Whitney and Daimler’s MTU.

Internationalization . . . . . . . . . . . . . . . . . . . . . Eurocopter (Aerospatiale and DASA); Eurodynamics (Thomson andBritish Aerospace merger of their respective missile businesses).

Multinational consortia ... , ., ., . . . . . . . . . . Panavia produces the Tornado attack jet (U. K., West Germany, Italy).Eurofighter is developing the European Fighter Aircraft (U. K., West

Germany, Italy, Spain).

large conglomerate or “national champion,” al- equivalent U.K. national champion is British Aero-though mergers with unrelated industries take placeas well. Such organizations generally hold themonopoly on national defense business in theirsectors.

The process of consolidation is typified by recentmergers in the German aerospace industry. Messer-schmitt-Bolkow-Blohm (MBB), itself a product of previous mergers, was united with Dornier to formDeutsche Aerospace, which was then united with theauto giant Daimler-Benz. The new conglomeratenow covers all of the German civil and defense effortin space, aircraft, and missiles

ll(see figure 4-4), The

space, which is also associated with an auto pro-ducer, Rover, and which recently acquired thearmaments producer Royal Ordnance. France stillhas two defense aircraft producers, Aerospatiale andDassault, an independent missile producer, Matra

and a major defense electronics firm, Thompson-CSF. Many observers expect that Dassault, currentlyshort of orders and under serious financial pressure,will soon be folded into Aerospatiale, the state-heldaerospace firm (see table 4-2).

The rush towards national defense industrialconsolidation was provoked by the realization that

1 l~e creation of Deutsche Aerospace was declared illegal by West ~ courts on anti.monopoly grounds, but this ruling was subsequentlyoverturned by the Economics Minishy. At the same time, the government ordered MBB to divest itself of its small naval defense activities, a move widelyconsidered a sop to public opinion. Several German observers have noted to OTA privately that the government was particularly anxious to consummatethe merger with Daimler-Benz to remove from the federal budget the subsidies paid to MBB for its participation in the Airbus consortium.


Figure 4-4-Daimler Benz Organization Chart, 1990

I

Daimler-Benz



I100% 100% 100% 100%

1

Mercedes Corporate

BenzAEG Services

,. ..,... . . . . . . . . . . . ,. ,: .:,.. 4

t i t i

Messerschmitt-

Bolkow-Blohm

I64%

h

100%

Telefunken

Percentages indicate portion owned by Daimler-Benz

SOURCE: Messerschmitt-Bolkow-Blohm.

Table 4-2—Principal European Defense Firms, 1990

Country Aircraft Tanks Missiles Electronics

France . . . . . . . . . . . . . . . . . . . . . . . Dassault GIAT Matra Thomson-CSFAerospatiale AerospatiaIe

United Kingdom . . . . . . . . . . . . . . . British Vickers British GeneralAerospace Aerospace Electric (U. K.)

Federal Republic of Germany . . Daimler Krauss- Daimler SiemensBenz/MBB Maffei Benz/MBB


for the foreseeable future, the European domesticmarket was too small to permit all-out competitionamong prime contractors at either the national orEuropean level. Intra-European teaming amongnational champions thus became the safest and

preferred route to produce new major weaponssystems. To be considered a national champion atleast two conditions must be met:

1. the organization must possess sufficient tech-nological and financial depth to attract partners,and

2. must be able to offer these partners markets nototherwise available to them.

National champions meet these conditions bycombining the relevant R&D resources, adding

financia1 stability through association with a largecivilian sector industry, and providing entree to itsdomestic defense market, and possibly foreignmarkets as well.

These national champions become the partici-pants in European-based defense consortia such asPanavia, Eurofighter, Euromissile, Eurocopter, etc.(see table 4-3). In a typical project, workshares foreach country are apportioned according to howmuch of the final product each country intends topurchase. For example, in the Panavia consortium,which produces Tornado attack airplanes, the UnitedKingdom has 48 percent, Germany has 40 percentand Italy has 12 percent of the workshares, with eachcountry obligated to purchase an equivalent percent-age of a 900 aircraft production run. EFA is similarly


Table 4-3-Selected European Defense Industrial Consortia and Joint Ventures

Consortium/Weapon SystemProject description Firms (percent control) Countries

Alpha Jet

EHlAntisubmarine warfare helicopter

Dassault (50)

Dornier (50)Agusta (50)Westland (50)

France

West GermanyItalyUnited Kingdom



Antisubmarine warfare helicopterEurocopter

Antitank helicopterEurofighter

Tactical fighter

EuroflagTactical transport study

JEHMultirole light attack helicopter study

NH 90NATO frigate helicopter

PanaviaTornado attack aircraft

SepecatJaguar strike aircraft

EuromissileHOT antitank missileMilan antitank missileANS antiship missileRoland mobile antiaircraft weapon systemAir-launched antiship missile

OTOMAT antiship missile

Dragon

Twin gun antiaircraft gun systemSeaguard

Close In Weapon System

MartelAlr-to-surface missile

ApacheContainer weapon system

MobidicModular stand-off weapon

Short Range Stand-Off Missile (SRSOM)

ANIUSD-502Reconnaisance drone

Brevel

Advanced Short Range Air-to-Air Missile

(ASRAAM)

Westland (50)MBB (50)Aerospatiale (50)MBB (33)British Aerospace (33)Aeritalia (21)CASA (13)AerospatialeBritish AersopaceMBB

AeritaliaCASAAgusta (38)Westland (38)Fokker (19)CASA (5)Aerospatiale (35)MBB (35)Agusta (25)Fokker (5)British Aerospace (48)MBB (40)

Aeritalia (12)British AerospaceDassaultAerospatialeMBB

OTO MelaraMatraThomson-CSF

ThyssenContravesOerlikonPlesseyBritish Manufacturing

& ResearchBritish AerospaceMatraMBBMatraAerospatialeDornier

Thomson-BrandtDiehlDornierAerospatialeThomson-BrandtDiehlCanadakDornierSATMBBMatraBritish Aerospace

Bodenseewerk

United KingdomWest GermanyFranceWest GermanyUnited KingdomItalySpainFranceUnited KingdomWest Germany

ItalySpainItalyUnited KingdomNetherlandsSpainFranceWest GermanyItalyNetherlandsUnited KingdomWest Germany

ItalyUnited KingdomFranceFranceWest Germany

ItalyFranceFrance

West GermanySwitzerlandSwitzerlandUnited KingdomUnited Kingdom

United KingdomFranceWest GermanyFranceFranceWest Germany

FranceWest GermanyWest GermanyFranceFranceWest GermanyCanadaWest GermanyFranceWest GermanyFranceUnited Kingdom

West GermanySOURCE: Office of Technology Assessment, from data in Jane’s All the World’s Aircraft, 1990-91, 81st ed. (Surrey:

Jane’s Information Group Ltd., 1880).


rivalry with the United Kingdom on project leaderdesignation and export profit potential. The Frenchdecision to press ahead with its own indigenouslyproduced lightweight export-oriented fighter Rafale

has not yet produced the sales results anticipated.While intra-European alliances among defense



Photo credit: U.S Department of Defense

The French Mirage 2000 is flown by the air forces of AbuDhabi, Egypt, India, Peru, and Greece. France generally

does not cooperate in European or U.S. fighter programs;it has decided to build its own fighter, the Rafale,

now under development.

structured, with the United Kingdom and Germanyeach receiving 33 percent of the workshares, whileItaly receives 21 percent and Spain, a relativenewcomer to European collaborative efforts, will

receive 13 percent. Each nation produces certainportions of the aircraft, but all have their own finalassembly lines. This redundancy is claimed toincrease total unit cost by less than 10 percent, andis considered an acceptable cost for maintaining animportant domestic defense industrial capability.

Once the hurdles of project definition and initialset-up are passed, this mode of organizing appears to

work reasonably well. However, there are difficul-ties. Because domestic employment and balance of payment considerations rank high with each nationalparticipant, workshares are subject to intense scru-tiny (down to two decimal places in the case of Tornado) and force costly and artificial modifica-tions in production plans.

A more serious problem for consortia arises inexport marketing. As a practical matter, the partici-pating country that is designated “project leader”retains control over exports, where prices and profitsare much higher than for units purchased domesti-cally. Such “excess profits” are not shared amongconsortium members, a situation that rankled otherTornado participants when British Aerospace reapeda $14 billion windfall return with its defenseequipment sales to Saudi Arabia. French withdrawalfrom the EFA consortium, while ostensibly overdifferences with other members on mission anddesign parameters, was in essence prompted by

suppliers are intense and complex, and bear aresemblance to the phenomenon of global industrial-ization, there is not yet such a thing as a trulymultinational defense producer. The relationshipsbetween the national governments and their defenseindustries are much stronger and more permanentthan the ties between the industries themselves. Thenational governments in the United Kingdom,France, and Germany subsidize their industries bothdirectly and through preferred defense procure-ments, are active in promoting their industries’exports, and in many cases own stock in theirdefense companies. A brisk movement of managersbetween the national procurement executive and thedefense industries is not only tolerated but actuallyencouraged: as one French Ministry of Defense

official put it, “we have a revolving door and areproud of it.” The differences in government-industry relationships between “free trade” Britainand “statist” France seem more a question of stylerather than substance. They are more alike thanindustry-government relationships obtaining in theUnited States, where the government encouragescompetition among domestic suppliers, controlsmuch more closely their exports, has no industrial

proprietary interests, and discourages revolvingdoor practices.

The net result of the restructuring that hasoccurred thus far makes the European arms suppliersmore like their U.S. counterparts in terms of size (seefigure 4-5). However, the dissimilarity between U.S.and European prime contractors has become morepronounced with regard to the amount of defense

work as a proportion of overall activities: most of themajor European suppliers fall well below the 60 to80 percent range common for the U.S. primes.

The mergers at the European prime contractorlevel appear not to have substantially reducedemployment in the concerned industries. The realtrimming down appears to be occurring at thesubcontractor level, as the primes take on moreself-subcontracting. The European firms that seemto be in the most trouble are the small andmedium-sized organizations heavily dependent on


Figure 4-5-Sales of 12 Largest Western Europeanand U.S. Defense; Firms, 1988 “

British

AerospaceDaimler-Benz

Thomson

q

q

q

emphasis on military specifications in designand production,difficulties in adapting to commercial produc-tion (due to company culture and marketing

practices), andlack of government support for finding new

k t d l t f d t



Thomson

GEC

Aerospatiale

DC Navales

IRI

Dassault

EFIM

Fiat

Philips

Rolls Royce

McD-Douglas

Lockheed

Gen.

Dynamics

Gen. Electric

Raytheon

Rockwell

Hughes

Boeing

Northrop

UTCMartin Mar.

TRW

Western EuropeArms sales as percentof all sales averagefor 12 firms: 17 percent

R.................................................................:-:.:-:-:.:-:-:-:-:+:.:-:..:.:...:.:.:.:./..,.............:.:...:./:...

. . . . . . .

;

United StatesArms sales as percent

of all sales averagefor 12 firms: 40 percent

nl I I.. . .. .. . ... .. . .. . .. .. . ... .. . . . ... .... .. .. . ... .. . .... . . . . . .. . . . . . . . . . . . ...:-:+:+:+: :1 I I I

o 10 20 30 40 50

Current 1988 dollars, billions

s Arms sales u Total sales

SOURCE: Office of Technology Assessment. from data in Stockholm

International Peace Research Institute, SIPRI Yearbook 1990,World Armaments and Disarmament(Oxford: Oxford UniversityPress, 1990), pp. 326-328.

defense contracts that, through weakness in technol-

ogy or financing, are unable to attract teamingpartners. The problems these small firms face areremarkably similar on both sides of the Atlantic:

. dependence on one or a small number of buyers,

q concentration on military technologies,

markets or development of new products.

Sometimes national laws work against the sur-vival of these small and troubled firms. In Germany,for instance, regulations on thresholds for unionorganization make it extremely difficult for firmswith more than 15 employees to reduce employ-

ment. The only alternative for such fins, in the faceof declining sales, is to go out of business. In turn,the regulatory environment has created a niche forextremely small fins, of 14 employees or less,which can be more flexible in adapting to marketfluctuations but are less able to market products orarrange financing.

The “Trimming of European defense productionsurplus capacity is occurring at different rates in the

various defense sectors. The aerospace and electron-ics sectors have thus far been spared major cuts. Thisis due to their close association with the civilindustries that European governments wish to pro-mote, the greater possibility for export sales, andtheir adaptability to meet new defense requirements,such as disarmament monitoring. On the other hand,the more traditional defense industries-armor,artillery, munitions, and naval construction-appearslated for much sharper paring.12

The conversion record of European defense in-dustries to civilian purposes appears to offer fewoutstanding success stories. Selenia, a major Italianelectronics firm, reports it was able to capitalize onits experience in defense air traffic management towin major contracts for civil air traffic controlinstallations. Beyond this rather obvious example,

other defense industry representatives express con-siderable reservations about an easy direct conver-sion from defense to civilian work, emphasizing thedifferences in standards, quality control, quantitiesof production, and marketing practices.

However, since none of the major prime contrac-tors are predominantly reliant on defense work, andthe compartmentalization of defense and civilianoperations of these organizations is not as strict as inthe United States, the chances for civil conversion

lzde Brigand and Hitchens, op. cit., footnote 2, pp. 15, 30.


seems greater in European industries. A DeutscheAerospace representative noted, for example, thepossibilities for synergy with Daimler-Benz autos inthe area of advanced controls display. This type of

cooperation between General Motors and HughesAircraft would be much more difficult to arrange. Ingeneral, European companies aim toward a gradual

and imminent, and that countering it required acredible NATO conventional defense.

The Europeans, on the other hand, and particu-larly the West Germans, saw little difference be-tween a devastating conventional conflict fought ontheir soil and nuclear war and, further, that a fully

ti ll d NATO i ht i d th



g p p gmigration of personnel from defense to the civiliandivisions within the same industrial organization, as

job opportunities arise.

U.S.-EUROPEAN ARMAMENTS

RELATIONS IN THEPOST-COLD WAR ERA

The collapse of the Warsaw Pact threat and theinception of the war against Iraq may lay the basisfor shifting the focus of the transatlantic dialoguefrom preparation for a common defense to control-ling arms exports. Some of the sharpest and mosthotly contested issues developed within the NATO

Alliance over the past 20 years concerned questionsof arms sales, technology transfer, standardization,interoperability, and the numbers, types, and qualityof conventional weapons systems deployed. TheUnited States urged its Western European partnerstowards greater standardization and interoperabilityof weapons and larger front line deployments of armor, artillery, and munitions.

In return, the Europeans complained of excessive

and unwarranted U.S. demands for conventionalarmaments and the imbalance in the ‘‘two-waystreet” of arms sales between the United States andEurope. However, discussion of these issues usuallycould be contained within a relatively small circle of Allied military leaders, their parliamentary counter-parts, and the NATO bureaucracy, all of whom hadstrong professional and institutional interests inavoiding public debates over the basic purposes of

the Alliance.

With the Warsaw Pact threat receding and thedangers of uncontrolled arms exports much inevidence, it becomes clearer that conventionalarmaments policies reflect fundamental differencesbetween the United States and the Europeans, notonly in the military sphere but the economic sphereas well. U.S. participation in NATO was, in themain, directed by strategic and military considera-

tions. U.S. military and political leaders believed thethreat of Warsaw Pact conventional attack was real

conventionally armed NATO might induce theSoviets to believe that a conventional attack mightbe fought in Europe without escalation to a nuclearexchange. Thus, on purely geostrategic grounds,there was a sharp difference between U.S. andWestern European policy regarding conventionalarmaments.

For the frost three decades of NATO’s existence,the Europeans felt themselves to be lagging behindthe United States in both military and civil technol-ogy development. The Europeans believed the pathto regaining material prosperity was through captur-ing international markets for manufactured goods,particularly in the high-tech area. In most EuropeanNATO countries, some form of concerted action by

government and industry was undertaken to catchup. European insistence on licensing and coproduc-tion, rather than purchase, of U.S. weapons systemsbeginning in the 1960s was an important facet of thestrategy of tapping into leading edge U.S. technolo-gies for the purpose of creating a high-tech industrialbase that could eventually compete with the UnitedStates in both civil and military markets (see figure4-l).

The German aerospace industry in the Municharea provides an object lesson in how well thisstrategy has succeeded. The industry was reconsti-tuted there primarily through licensing and copro-duction of the F-104 Starfighter. Building on thisexperience, the industry later was able to participatein production of the all-European Tornado, whichsuccessfully competed with U.S. fighter-bombers in

both NATO and third-country markets. Presently,the industry, now consolidated into the industrialgiant Daimler-Benz-Deutsche Aerospace, is a majorpartner in the development of the European FighterAircraft (EFA), another competitor to present andfuture U.S. military aircraft. A number of the keypersonnel now heading the EFA project in Munichhad their professional apprenticeships on the F-104project, living tributes to the durability of Germanindustrial strategy in the aerospace industry. Fur-thermore, the civil side of the aerospace market wasnot neglected. Daimler-Benz-MBB is also a major




informal discussions among experts and manufac-turers similar to those provided by weapons tradeexpositions. The failure of the Alliance to developsignificant cooperative projects, despite the consid-

erable financial stimulus offered by the 1986 NunnAmendment, is perhaps the most conclusive proof that NATO’s ability to foster transatlantic arma-

Figure 4-8-NATO* Procurement Expenditures,

United States

United Kingdom

West Germany

1978-82 and 1983-88

m:::::::::::::Iixli3x

1



ments cooperation has passed.

However, the failure of NATO to serve as aneffective umbrella organization for European de-fense industrial activity does not mean that Euro-pean defense industries do not thrive. On thecontrary, a great deal of defense industrial develop-ment takes place, for the most part within eachcountry on a company-to-company basis as notedabove.

TRANSATLANTIC DEFENSE

INDUSTRIAL ISSUES

FOR THE 1990s

The United States and Europe present differentstrengths and weaknesses as they enter the post-ColdWar era. At present the United States still leadsEurope in its ability to design and produce the highlysophisticated weapons systems desired by third-country customers. The United States starts with anearly three-to-one advantage over Europe in mili-tary R&D spending. In addition, Department of Defense (DoD) procurement is nearly three times

that of the combined domestic procurements of Western Europe, insuring for U.S. producers asignificant edge in terms of economies of scale overEuropean competitors (see figure 4-6). It is notsurprising that the United States, with an average of $15 billion in arms exports annually, is the singlelargest Western arms exporter.

However, until the downturn in European armsexports, which occurred after the end of the Iran-Iraqwar in 1986, combined Western European armsexports approached and even exceeded U.S. levels(see figure 4-3 above).

Due to the radical restructuring of Europeandefense industries, underway since the mid-1980s,the major European defense industrial nations arenow collectively in a better condition than their U.S.counterparts to withstand the economic and techno-

logical challenges of the 1990s. Almost all theEuropean prime contractors are now embeddedwithin large industrial conglomerates whose mar-

Italy

Canada

Spain

Netherlands

Greece

Belgium

Norway

Turkey

Denmark

Portugal

LuxembourgL t - - L -0 10 20 30 40 50 60 70 80


u Average 1978-82 s Average 1983-88

* Not including France


kets are predominantly in the civilian sector, thus

providing a financial cushion for anticipated weak and erratic domestic and foreign defense sales.These organizations have developed an intricateweb of industrial alliances and teaming arrange-ments with other European producers to take advan-tage of new export opportunities as they arise. The

civilian/defense technology barrier is much moreporous within these organizations than is the casewith U.S. suppliers. This allows civilian sectortechnologies, often more advanced than similardefense technologies, to flow easily into the defensesector. By contrast, many U.S. prime contractorsmust labor under heavy specialization in the defensesector, prohibitions against domestic alliances, andDoD procurement regulations and practices that

make it difficult or impossible for technology to betransferred from civilian to defense purposes, orvice-versa.


European nations have foreign trade policies thatstrongly influence their defense research, develop-ment, and procurement decisions. These policies areconsistent, long-range, and fully articulated, and are

designed to promote the domestic development of such fields as electronics, aerospace, telecommuni-cations, and computers, which are technologies and

All this sharply contrasts with the situation in theUnited States: lack of clear defense industrial goals,concentration of decisionmaking within DoD andthe defense committees of Congress, ambivalence

concerning defense exports, and failure of DoD tomeet the modest tour-of-duty goals mandated byCongress for weapons project managers.



p gbranches of industry with high export potential. Asdiscussed earlier in the case of Deutsche Aerospace,a vital component has been the defense industry:frost as a way to acquire advanced U.S. technologyand know-how, which is then used to displace U.S.imports domestically; and then as a means compete

with the United States in defense export markets andultimately in global civilian high-tech markets aswell.

The United States, too, can be said to practice“industrial policy” of a sort. Every DoD procure-ment is the product of a policy decision, and thesepolicies tend strongly to favor domestic producers.However, there are enormous differences in U.S. and

European approaches. European governments spenda great deal less of their revenues to support defenseR&D and a great deal more to support civilianprojects than does the United States. In the UnitedStates, defense claims on average 28 percent of theFederal budget, compared to only 7 percent forEuropean NATO members.

In Europe, defense procurement and production

decisions are usually the result of government-wideconsultations among the senior permanent bureauc-racy, with the ministries of trade, industry, foreignaffairs, and finance having at least equal voice to themilitary. Defense producers and financial institu-tions, which are frequently wholly or partiallyowned by the government, are also intimatelyinvolved in the planning. The civilian and militaryofficials concerned generally have career-long com-mitments to a defined set of issues.

Also helping to keep long-term strategy on track is the relatively weak role of the European parlia-ments in defense industrial policymaking. Parlia-ments retain the power to set an upper limit on thedefense procurement budget, but this turns out to bea poor tool for influencing basic strategy since thesebudgets are multiyear and there is little or no controlover line items. European parliaments also generallyhave little investigatory power on how these budgetsare expended.

g p p j g

The Europeans value any exports, includingmilitary, for domestic employment, balance of trade,national prestige, etc. However, defense trade hasother peculiar aspects that raise its importance in theEuropean Perspective beyond other export commod-

ities.First, there is the issue of economies of scale and

national sovereignty. The major European powerswish to maintain an independent capacity to produceadvanced weapons systems. Even with intra-European collaboration in production and procure-ment of weapons, the shrinkin“ g domestic marketsand huge R&D costs (estimated at $36 billion for theEuropean Fighter Aircraft alone) lead Europeans to

believe that exports are essential for the viability of their defense industrial base. Second, exports of weapons and weapons production technology canhave large multiplier effects. For example, theU.K.-led sale of Tornado fighters to Saudi Arabiaopened the door to an estimated $40 billion of civilian trade with the Saudis.

Beyond this is the structural issue of the European

defense industrial base. As noted earlier, Europeandefense industries have evolved into national mo-nopolies, closely aligned with their respective gov-ernments. This lack of domestic competition wouldseem a recipe for creeping rigidities in productionand marketing practices. To prevent that outcome,government procurement policies are designed tokeep the industries competitive and hungry forinternational business. The French Ministry of

Defense, for example, will only support 50 percentof defense R&D costs; the rest must be earnedthrough export sales. A related stimulus for keepinga competitive edge in technology is the necessity toremain attractive as a partner for teaming arrange-ments with other European arms producers, again,with the export potential of the collaborative projectbeing a major consideration.

With decreasing East-West tensions, the focus of questions facing defense policymakers in Europeand the United States will increasingly shift from thepredominantly military sphere-how to protect the


Alliance from a direct military threat-to issues inwhich economic and commercial considerationswill play a more prominent role. In particular, armsexports and their relationship to domestic high-

technology employment and the international bal-ance of payments will loom larger in transatlanticarmaments relations. To be sure, as Saddam Husseinhas demonstrated such sales can pose military

threats to the exporting nations. But at least for thepresent these risks are much less than the challengesthat faced the Alliance during the height of the ColdWar. The defense production relationship between

the United States and Europe will thus evolve froma primarily strategic alliance to one in which bothsides may collaborate or compete for defense exportsales or cooperate in limiting such sales



has demonstrated, such sales can pose military sales, or cooperate in limiting such sales.

Chapter 5

Israel% Defense Industry:



Israel% Defense Industry:

Evolution and Prospects

Contents Page

INTRODUCTION AND OVERVIEW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85

CAUSES OF THE CURRENT PREDICAMENT OF THE INDUSTRY . . . . . . . . . . . . . 86Impact of General and Universal Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86

Impact of Israeli Specific Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87READJUSTMENT OF THE ISRAELI DEFENSE INDUSTRY: 1984-90 . . . . . . . . . . . . 89OUTLOOK FOR THE FUTURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91

Meeting the IDF’s Procurement Requirements 91



Meeting the IDF s Procurement Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91Alternative Futures for the Defense Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91

EVOLUTION OF ISRAEL’S DEFENSE INDUSTRIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93From 1948 to 1967 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93From 1967 to 1984 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 941985 to Present . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95

THE CURRENT STRUCTURE OF THE INDUSTRY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95Inhouse Military Organizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95Ministry of Defense Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95Government-owned Corporations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96Public-Sector Corporations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97Private-Sector Corporations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98

DOMESTIC AND FOREIGN SALES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100THE U.S. CONNECTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100

Figures Figure Page

5-1. Change in Israeli Defense Sales and Employment, 1985-89 . . . . . . . . . . . . . . . . . . . . . 895-2. Israeli Defense Exports and Backlog Orders, 1986-89 . . . . . . . . . . . . . . . . . . . . . . . . . . . 92

TablesTable Page

5-1. Israel’s Defense Industries: Main Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 855-2. Basic Data on Principal Israeli Defense Firms, 1989 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86

5-3. Ratio of Exports to Sales for Leading Israeli Defense Companies . . . . . . . . . . . . . . . 875-4. Selected Arms Orders, Deliveries and Licensed Production of Israeli

Weapon Systems, 1986-88 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101

Chapter 5

Israel’s Defense Industry: Evolution and Prospects

INTRODUCTION AND OVERVIEWThe origins of Israel’s defense industry can be

traced to the small clandestine arms manufacturing

the uniquely intimate cooperation between theweapons developers and users in Israel. These salesadvantages more than offset several severe limita-tions of the Israeli defense industry, most promi-



facilities of the Jewish Yishuv in Palestine. Aftergaining independence in 1948, the newly born stateabsorbed these facilities within the Israel DefenseForces (IDF) and the Ministry of Defense (MOD). Itgradually expanded and upgraded these state-owned

facilities to meet the state’s security requirementsand modest industrial capabilities of the time. By1967, Israel possessed an impressive indigenouscapability (for a developing country) for armsmaintenance, retrofit, licensed-production, and insome cases, weapons development as well.

Following the French arms embargo against Israelin 1967, Israel embarked on a highly ambitiouscourse of expanding, diversifying, and modernizing

its defense industry. The goal was to develop anindustrial capability to meet most, and in certainareas all, of the state’s weapons requirements. Tomeet this self-sufficiency goal, a massive investmentof human and financial resources was made in thedefense sector. Consequently, by the early 1970s theIsraeli defense industry, which by this time consistedof many private as well as public corporations, wasable to develop and produce domestically a range of

advanced weapons systems. In addition to a mainbattle tank, a self-propelled howitzer, a jet fighter,missile fast patrol boats, and mini-remotely pilotedvehicles (RPVS), these weapon systems included abroad spectrum of ammunition and firearms, mis-siles, avionics, communications, and electronic war-fare systems. Some of these systems nonethelesscontinued to contain foreign (especially U. S.) com-ponents, most prominently tank and jet engines.

Although domestic arms requirements have beenthe principal driving force behind the industry’sgrowth, its surplus capacity was increasingly di-rected at foreign markets, especially in Latin Amer-ica, Southeast Asia, South Africa, Iran, and WesternEurope. By the middle 1980s, Israel was exportingapproximately $.5 billion in arms per year. Thislevel of exports was achieved largely due to the

reputation of the industry’s products, a reputationthat owes much to the IDF’s combat experience and

nently formidable foreign and domestic politicalbarriers to Israeli defense sales, as well as scarcefinancial resources to support exports through provi-sion of easy long-term credit.

Despite the industry’s export gains, its growth and

diversification peaked in the early 1980s, and hassince 1984 been partially reversed. The industry wasseverely hit by a combination of global as well asIsraeli-specific factors. These consisted of increas-ingly intense global competition for shrinking pro-curement funds, loss of several lucrative foreignclients (initially Iran and ultimately the Republic of South Africa as well), and sustained severe cutbacksin the Israeli defense budget, in particular fordomestic arms procurement. Consequently, since1985 the industry has been forced to undergo apainful readjustment to the new market realities,which has profoundly transformed the industry. Thetotal workforce was cut significantly, sounder finan-cial management techniques were introduced, mar-keting was increasingly reoriented toward the export(most prominently U. S.) market, specialization andconcentration in several military product areas wereemphasized, and modest diversification into civilianproducts was introduced (see tables 5-1 and 5-2).

The readjustment of the Israeli defense industryhas met with considerable short-term success, andby 1990 the industry had accumulated an unprece-dented backlog of orders. Yet current market reali-ties still cast doubt over the industry’s long-termprospects. Further restructuring seems absolutely

necessary for the survival of many Israeli defensefins. Privatisation of certain state-owned defense

Table 5-1—lsrael’s Defense Industries:Main Developments

1985 1987 1989

Total sales (index 1985 = 100) . . 100 99.9 95Exports as a percent of sales . . . 47 55 59Number of workers . . . . . . . . . . . 62,600 61,600 46,500

Sales per worker (dollars) . . . . . . 55,000 56,000 70,000SOURCE: Economic Advisor to Israeli Ministry of Defense.

–85–

Table 5-2—Basic Data on Principal IsraeliDefense Firms, 1989

ExportsTurnover Employees (as a percent

Company (millions of $) (thousands) of sales)IAI . . . . . . . . . . . . . 1,248IMI . . . . . . . . . . . . . 525Tadiran . . . . . . . . . . 654Rafael 355

16.112.1

7.15 8

75634125

most traditional weapon manufacturers (notably theSoviet Union and the United States, the People’sRepublic of China, Germany, and even Switzerlandand Sweden as well). These have come about on top

of the already lenient weapon export policies of other traditional Western arms producing nations(e.g., France and the United Kingdom).

The impact of these supply side developments on



Rafael . . . . . . . . . . . 355Elbit . . . . . . . . . . . . 158EI-Op . . . . . . . . . . . 104Elisra . . . . . . . . . . . 104Ordain... . . . . . .. 67Rada . . . . . . . . . . . 22Ziklon . . . . . . . . . . . 20

5.81.81.20.90.50.20.2

25622841558261

SOURCE: Economic Advisor to lsraeli Ministry of Defense.

corporations is under discussion, although its pros-pects seem slim given the diminishing attractivenessof defense business. Thus, the most likely futurecourse of development for the industry is furtheracceleration of earlier trends toward diversification,domestic consolidation, product specialization, andcooperative international ventures, especially with

U.S. corporations.

CAUSES OF THE CURRENT

PREDICAMENT OF THE

INDUSTRY

The Israeli defense industry has experiencedconsiderable turbulence since the early 1980s. Theperformance of the industry has been adversely

affected by a combination of broad international aswell as unique Israeli developments.

Impact of General and Universal

Developments

Over the past two decades, the international armsmarket has changed from an oligopolistic sellers’market to a highly competitive buyers’ market. Thistransformation has come about as a result of several

interrelated developments affecting both the supplyand demand for defense equipment.

One supply-side development has been the emer-gence of many new weapons producers (especiallyin Southern Europe and the developing countries), aswell as the growth in size, diversity, and sophistica-tion of already established defense industrial pro-ducers (e.g., Brazil, India, and Israel). Anotherimportant development has been the liberalizationand commercialization of arms export policies of

The impact of these supply-side developments onthe structure of the market was enhanced consider-ably in the 1980s by a decline in the global demandfor conventional arms. This decline was caused bya combination of economic constraints on armsprocurement and diminishing defense requirements.

The economic constraints are attributable in part tolower oil revenues, higher social welfare expendi-tures, and the diminishing purchasing power of defense budgets caused by the rapidly escalatingcosts of modem weapons systems. The lowerrequirements for weapons may be traced to easing of interstate tensions in several prominent global andregional contexts.

The transformation of the international armsmarket has had a profound impact on the patternsand terms of weapons trade. Specifically, upgradingexisting platforms and purchase of defense technol-ogy (through licensed production and other businessarrangements) occurs in place of much new procure-ment. In addition, extensive countertrade (barter andoffsets) provisions and generous long-term financ-ing have become the norm in procurement of defense

equipment, especially by developing countries. Fi-nally, bilateral and multilateral international jointventures for development and production of defenseproducts have grown significantly in both numberand importance. They are commonly sought as ameans to diminish the rapidly mounting risks andcosts inherent in new weapons development and tosecure access to both technology and foreign mar-kets. This process has been made possible by a lower

degree of product differentiation as well as thegrowing potential for customization through modifi-cation of software and sub-systems rather thansubstantial alteration of basic platform design.

These developments have exerted significant andadverse influences on the Israeli defense industry.The overall decline in demand for arms came aboutprecisely at the time that the indigenous Israeli armsindustry had become increasingly dependent onexports (see table 5-3). Moreover, by virtue of its

Chapter 5--Israel’s Defense Industry: Evolution and Prospects • 87

Table 5-3-Ratio of Exports to Sales for Leading IsraeliDefense Companies (percent)

1985 1989

Israel Aircraft Industry (lAl). . . . . . . . 60 75Israel Military Industries (lMl). . . . . . 81 63Elbit . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 62Radar... . . . . . . . . . . . . . . . . . . . . . . 49 61Rafael 40 25

political sensitivities or U.S. pressures (e.g., SouthAfrica and Iran). Sales restrictions on transfer tothird parties of defense products containing U.S.components (e.g., Israeli-made jet fighters or tanks

using American-made engines) also apply.

Operational and security requirements constitutea further barrier to Israeli companies seeking to

t f th i d d i di



Rafael . . . . . . . . . . . . . . . . . . . . . . . . . 40 25

SOURCE: Economic Advisor to Israeli Ministry of Defense.

small size, limited resources, and minuscule civilianmarket, Israel found it exceptionally difficult toprovide long-term financing and countertrade op-

portunities to support the export drive of its defensecorporations. Joint ventures and technology transferhave also proven especially problematic for Israelidefense-firms due to the combination of Israel’spolitical isolation and its tight secrecy requirementson defense technology.

From an Israeli perspective, the only positiveaspect of these trends has been the ascendancy of

defense systems modernization and upgrading. Here,rather than in the production of main combatplatforms, Israeli defense corporations have a rela-tive advantage over their foreign competitors, anadvantage stemming largely from the extensiveoperational and combat experience available to theindustry through the IDF.

Impact of Israeli Specific Factors

The growth of the Israeli indigenous arms indus-try has always been constrained by severe structurallimitations on the size of both the domestic andforeign markets for its products. The domesticconstraints result from the limited size of the localarms market, whereas the foreign market constraintsare grounded in Israel’s political isolation.

Israeli companies and products are politicallybarred from entering a sizable segment of the globalarms market-the Arab nations and most of theIslamic world. In addition, other potential markets inEurope and the Far East are strictly off-limits for anydefense product bearing a clear Israeli identity or areeasily traceable to Israel. Similar if slightly lesssevere inhibitions also apply in these regions to jointventures involving Israeli companies. Moreover,Israeli defense corporations are prohibited fromselling many products (and to several prominentpotential foreign clients), due either to Israeli

export some of their more advanced indigenousproducts to certain lucrative but politically unrelia-ble foreign customers. Finally, Israeli companiesface broad protectionist tendencies prevailing insome of the world’s largest arms markets (the United

States, Western Europe, and Japan).The cumulative effect of these factors is to restrict

severely the share of the arms market accessible tothe Israeli defense industry, even before economicand industrial considerations are introduced. These,in turn, further complicate the picture for theindustry.

Some of the more salient features of the Israeli

arms industry that affect its export prospects are itssize and complexity. The tremendous post-1967growth in size, diversity, and sophistication of Israel’s defense industry has been driven almostexclusively by domestic defense requirements. Still,this growth was initially beneficial to the industry’sexport potential as well, enhancing its appeal as aviable alternative supplier to the major powers whohad originally dominated the market.

By the mid-1980s, however, the industry’s sizeand sophistication began to dampen its exportpotential. By this time Israel was sinking much of itsenergy and resources into the production of maincombat platforms, which it could not export due topolitical restrictions. Moreover, by virtue of theirsophistication, many of the industry’s products nolonger appeared suited to Israel’s traditional custom-ers in the lower end of the market, whereas thepotential customers for the more advanced productsseemed to lie in politically problematic markets forIsrael (western Europe and the United States).Furthermore, Israeli defense corporations would nolonger vie for small but profitable specialized nichesin the market, but choose to compete for the bigcontracts, which inevitably pitted Israeli defensecorporations against some of the industry giants,s e v e r e l y“ “ curtailing profit margins in the process.Finally, entry of many new suppliers into the lowerend of the market, many of which enjoy the benefit

292-877 0 - 91 - 4 : QL 3


of cheap labor, have largely displaced Israeli compa-nies from some of their more profitable traditionalexport product lines (e.g., mortar, tank, and artilleryammunition).

All of these export-related problems of the Israelidefense industry deepened in the 1980s. This hasbeen the result of the overall developments on theinternational arms market, continuation and exacer-

establishment was engaging in unusually heavyoperational activity, initially in the context of thewar in Lebanon (1982-85) and the Palestinianuprising in the occupied territories (since 1987).

Although the operational costs in each case amountedto several billion U.S. dollars, the Israeli defenseestablishment was forced to absorb some of the costswithin its already depressed budget. But despite the

d f b d t i i i th l



te at o a a s a et, co t uat o a d e acebation of the Israeli industry’s specific structuralconstraints, and finally the loss (due to politicalfactors) of two of its most highly valued clients(initially Iran and then, gradually, South Africa aswell). The “peace dividend” of recent develop-

ments in Europe looms on the horizon as anothermajor setback to the Israeli defense industry. TheFederal Republic of Germany, in particular, was thelargest Western client of the Israeli defense industry.In the wake of reunification of Germany and theconclusion of the Conventional Forces in Europe(CFE) talks, this market may deteriorate as well.

The adverse developments on the export front

have coincided with bleak economic conditions inIsrael. Since the early 1980s, the industry hasincreasingly depended on foreign sales for itsprosperity, in some cases even for the survival of firms. The economic situation in Israel has not onlyundermined the defense industry’s domestic salesbut has also, in many cases, deprived the industry of one of its leading export leverages—the so called“IDF stamp of approval” for its products attained

through prior sales to the IDF.Rising government deficits, inflation, and foreign

debt coupled With heavy cumulative investment inmodernizing and expanding the ranks of the IDF inthe post-1973 Yom Kippur War period have forcedsuccessive Israeli governments since 1983 to cut andthen freeze the local component of the Israelidefense budget. The budget was cut from an annualaverage of roughly $3.2 billion from 1973 until 1983

to roughly $2.6 billion per year since. During thesame period the second component of the Israelidefense budget—U.S. military aid-has remainedlargely stagnant, frozen at the level of approximately$1.8 billion per year. In real terms, it has declinedsigntificantly particularly in comparison to the rap-idly escalating costs (above and beyond inflation) of defense products.

The decline in both components of the defensebudget took place at a time when the defense

severe defense budgetary crisis since the early1980s, the IDF order of battle was only cut back slowly and modestly during this period. Conse-quently, it was defense procurement that absorbedthe cost of the defense budget crisis.

Two factors contributed to the financial crisis of the Israeli defense industry. One is the diminishedbuying power of the depressed Israeli currency.Most of it is naturally spent on salaries, infrastruc-ture, operations, and the like. The other is the U.S.stipulation that most of its aid to Israel (all but

$400-$450 million in offshore procurement funds)be spent on procurement of American goods. Israeli

defense procurement thus had to be increasinglyreoriented toward U.S. sources. Recently, budgetaryconstraints have tightened to the point that the IsraeliMOD finds it necessary to divert to U.S. suppliers’purchases of certain items it has traditionally boughtlocally. This diversion has been deepened by thegovernment’s economic policy, which has heldconstant the rate of exchange between the Israelicurrency and the U.S. dollar for extended periods

while inflation and labor costs have been steadilyrising at an average rate of roughly 15 percent. Theadverse impact of this policy on the indigenousindustry’s competitive edge in general, and oncompetition with U.S. suppliers in particular, isclear.

The burden of the defense budget crisis of the1980s was not allocated evenly within the indige-

nous defense industry. Certain government-ownedcorporations (Israel Aircraft Industries (IAI) and toa lesser extent Rafael) were spared some of the cutsand/or compensated for much of their losses. IAI, inparticular, enjoyed preferential treatment due to itsstrong domestic political clout. It has been receivingby far the greatest share of the offshore procurementcomponent of U.S. military aid to Israel, initially forthe Lavi jet fighter project, and since cancellation of

the Lavi in 1987 for some of its substitutes. Mostpublic and private defense companies were, conse-

Chapter 5--Israel’s Defense Industry: Evolution and Prospects q 89

quently, quite severely hit; many of their contractswere stretched, scaled back, or terminated outright.

READJUSTMENT OF THE

ISRAELI DEFENSE INDUSTRY:1984-90

Signs of the crisis awaiting the Israeli defensei d t id t i th l 1980 Y t it

through 1987 Israeli defense exports exceeded $0.5billion, and the industry had accumulated an unprec-edented backlog of orders exceeding $3.5 billion.Furthermore, between 1985 and 1989 the industry’s

exports rose sharply from 47 percent to roughly 60percent of total sales. Yet the profitability of muchof the arms exports was at best marginal. Theindustry, primarily state-owned, had put on fatd i th i hi h it t d tl i th



industry were evident in the early 1980s. Yet itsmagnitude and severity, its underlying causes, andmost importantly, its enduring nature, were notinitially understood. Defense budget cuts werewidely believed to be transient; many defense

industrialists expected to be compensated for themwithin a year or two. Moreover, hefty financingprofits (facilitated by an inflation rate of 600 to 800percent) permitted many defense firms to gloss overoperating losses. Thus, it was not until at least 1984that tight defense budgets were seen as a permanentcondition. The successful introduction, at that time,of a government economic plan to curb inflationeliminated almost overnight the paper financing

profits of the industry, adding a sense of urgency tothe need to readjust quickly.

One major factor affecting the adjustment strategyof Israeli defense firms was the widespread percep-tion that global arms markets would provide amplebusiness opportunities. The frost reaction to thedomestic sales crisis consequently was an intensearms export drive. This drive was undertaken byindividual firms with strong encouragement andbacking by the Ministry of Defense. The Minister of Defense at the time, Itzhak Rabin, made it clear tothe defense industry leaders that he thought the‘‘industry was oversized for Israel’s needs’ and that‘‘only those who would export would survive. ’Even Rafael, the Israeli company that most closelyresembles an American national laboratory, wasforced to go beyond R&D to full-scale production

and ultimately to exports as well.To improve the industry’s export prospects, the

Ministry launched an intense diplomatic drive topromote sales to and industrial cooperation with theUnited States through a series of Memoranda of Agreement (MOAs) and Memoranda of Understand-ing (MOUs). Similar, though less intense effortswere directed at West Germany and (according toforeign press reports) South Africa. The arms export

drive met with considerable short-term success, atleast in terms of the volume of sales. From 1984

during the years in which it operated mostly in thesheltered environment of the captive domesticmarket. But the new budget realities precludedcontinued government subsidization of domesticarms manufacturers and forced significant decreases

in government R&D support.

Facing intense competition in the global defensemarketplace, the defense industry was forced toaccompany its export drive with intense efforts toreduce costs and increase efficiency. For example,industry cut back dramatically on investments andcorporate-financed R&D budgets. The former havedeclined by roughly two-thirds between 1985 and

1989, while the latter dropped on average by roughly40 percent. In addition, over the 1985 to 1989 period,the defense industry has reduced its workforce byapproximately 25 percent (from a total of 62,600 to46,500) while only experiencing a 5-percent drop intotal sales (see figure 5-l). Average annual sales peremployee in the industry have consequently risenduring the period from $55,000 to a somewhat moreacceptable level of $70,000. This figure fails to

Figure 5-l-Change in Israeli Defense Sales andEmployment, 1985-89

100 Defense sales

9 0 - -

501985 1986 1987 1988 1989

YearSOURCE: Economic Advisor to Israeli Ministry of Defense.


reveal considerable variance in efficiency betweenthe individual firms in the industry, which rangesfrom below $50,000 to over $120,000 in sales peremployee. Finally, in order to overcome cash flow

problems, many Israeli defense corporations haveincreased their presence in foreign financial mar-kets, and, in isolated cases, in the U.S. stock marketas well.



For its part, the Ministry of Defense has assistedthe industrial readjustment process by exercisingleverage (as client, and in certain prominent casesowner as well, of defense manufacturers) in order to

streamline the industry. Seeking to eliminate waste-ful domestic competition, it has applied pressure onindividual corporations to sell out, merge, and/orform joint ventures with other Israeli companiesoperating in the same areas. These efforts have metwith partial success, the most prominent case beingthe merger of the mini-RPV operations of Tadiranand IAI into one company, Mazlat, which wasinitially jointly owned and ultimately completelytaken over by IAI. The MOD has also labored tocapitalize on Israel’s political clout in the UnitedStates and the IDF’s appeal as a sizable andprestigious client in order to secure valuable indus-trial offsets for, and joint ventures with, Israelicompanies. These efforts, however, have attainedonly a modest degree of success, mainly due toIsrael’s dependence on U.S. grant-in-aid for the bulk of its military procurement.

As for the impact of the readjustment process onthe industry’s product lines, two developments areapparent in the post-1984 era: specialization anddiversification. The industry has been forced toabandon the domestic production of main combatplatforms, a dramatic reversal of the pattern estab-lished since 1967 of intensive cultivation in Israel of self-reliance in development and production of allmajor weapons systems. The process, which hadculminated in indigenous production of a modern jetfighter (the Kfir) and a light utility transport (Arava),missile boats (Sa’ar 4 and 4.5), tanks (Merkava Mark 1,2, and 3), and a self-propelled howitzer, has cometo an abrupt end. With the cancellation of the Lavi

jet fighter program in 1987, the Merkava tank remained the sole locally produced combat platform,and even its production was significantly scaledback. In the future, industry will likely concentrateon development and production of diverse military

Photo credit: U.S. Navy

The Israeli Aircraft Industries (lAl) Kfir delta-wing tacticalfighter was developed from the French Mirage V airframe

after the French arms embargo of Israel in 1987. Theaircraft began flying in 1974, and212 have been produced.

From 1985 to 1989, the U.S. Navy and Marine Corpsleased two squadrons for use as aggressor aircraft in

training, and flew them under the designation F-21A. In1989, France agreed to sell to IAI five SNECMA engines,to be used in place of the airplane’s General Electric J79

engines. This was part of a renewed effort to marketKfirs without U.S. export restrictions.

components and subsystems, as well as a compre-hensive upgrade and modernization capability.

The second major product related development in

the 1985 to 1990 period pertains to the industry’s

experimentation with diversification to civilian prod-

uct lines. These range from card-operated publicphon es (Israel Military Industries (IMI)), to diag-nostic medical instrumentation (Rafael), civilianaerospace (IAI), and computer accessories (Elbit).

This course of action has been pursued with littleenthusiasm and considerable apprehension. TheIsraeli Government’s civilian R&D support budgetis small. In addition, most Israeli arms manufactur-ers lack prior experience in a truly competitive

environment, much less in dealing with the civilianmarketplace. Some defense companies are stillrecovering from misguided, half-hearted past en-deavors in the civilian market (e.g., Rafael inelectro-optics, IAI in executive jets, and Soltarn inpots and pans). There is widespread concern amongdefense industrialists that when it comes to market-ing civilian products, Israeli companies do not enjoythe same reputational advantage that they have

acquired in the defense area.

Chapter 5--Israel’s Defense Industry: Evolution and Prospects . 91

OUTLOOK FOR THE FUTURE

Meeting the IDF’s

Procurement Requirements If a comprehensive Middle East peace settlement

cannot be reached, Israel’s arms requirements in the1990s are unlikely to fall below the level of the

qualitative edge against its opponents. Severe domes-tic resource constraints coupled with the rapidlyescalating cost of new weapons systems mandatethat the IDF stretch to the limit the operational life

of existing systems. The actual implication of thisrequirement is that the IDF, like many of itscounterparts around the world, would be spending inthe future considerable and growing resources onmaintenance modernization and upgrading of its



preceding decade. Despite the United States’ leadingrole in the Persian Gulf War, Israel will continue torely on the IDF as its ultimate guarantor of security.And the IDF, in turn, will seek to acquire anuninterrupted supply of diverse state-of-the-art mili-tary hardware in order to preform its missions. Thisleaves open the question of how the IDF will meetits future hardware requirements.

Many analysts expect that most future weaponssystems procured by the IDF will come from theUnited States. This expectation, however, is predi-cated on several critical assumptions. First, it isassumed that the IDF will adhere to its traditional

doctrine ascribing a critical role to mobility. Thisseems a reasonable assumption given the IDF’sreluctance to introduce anything but moderate changesin its doctrine to accommodate the ascendancy of firepower over mobility on the battlefield. Whilefirepower requirements could conceivably be satis-fied by indigenous sources, the same no longer holdstrue for main air, sea, and to a lesser extent landcombat systems. These, with the exception of a main

battle tank, are no longer produced domestically,and will therefore have to be imported in the future.

Assuming further that the nature of U.S.-Israelipolitical and security ties will not be fundamentallyaltered, Israel will continue to import almost all of itsforeign weapons systems from the United States.Israel, for its part, is unlikely to seek any fundamen-tal change in its intimate security cooperation with

the United States. The United States might conceiv-ably do so, however, for a combination of domesticand foreign policy reasons. Short of a profoundchange in U.S. policy toward Israel, affecting eitherthe magnitude of military aid and/or the willingnessto sell arms, a significant reorientation of Israel’sdefense procurement is highly improbable.

Two additional aspects of the IDF’s weaponsrequirements will affect Israeli procurement. First,

the impact of resource constraints, and second, thestrong emphasis on operational autonomy and a

maintenance, modernization, and upgrading of itsexisting weapons systems. This is where the secondrequirement comes in. In order for the IDF to enjoyoperational autonomy, overcome foreign exportrestrictions on supply of state-of-the-art military

equipment to Israel, and still maintain a qualitativeedge, Israel will likely expand its capacity to carryout maintenance and upgrade work locally.

Alternative Futures for the Defense Industry

Many of the original Israeli rationales for thedevelopment of a comprehensive and sophisticatedindigenous arms industry still pertain today. How-ever, two factors that have influenced the shape of the industry have changed significantly over the pastdecade. First, domestic demand for its products hasboth declined and undergone a profound change innature. And second, the global arms market has alsobeen markedly transformed. The future of theindigenous arms industry lies in systematic readjust-ment to the new market conditions. The Israelidefense industry today is significantly leaner and

more efficient than it ever has been. Its successfulforeign marketing effort in recent years has left itwith a backlog of orders that could serve to cushionits restructuring process (see figure 5-2). Yet withoutmore drastic restructuring of the industry, its futuremay still look bleak. As the Director General of theIsraeli MOD, Maj. Gen. (ret.) David Ivri, hasrecently observed, the industry must complete itstransformation over the next 3 years, since by that

time it will have largely exhausted its currentbacklog of orders. This leaves the industry with littletime in which to maneuver.

Given these constraints, the Israeli defense indus-try might embark on a number of different courses.Several involve extension and intensification of thereadjustment efforts already underway. These in-clude tighter financial and risk management, im-proved efficiency and productivity, more conserva-

tive corporate R&D policies, continued emphasis onexports, specialization in specific market niches, and


diversification into civilian product lines. For mostIsraeli defense firms, decreasing the share of militarybusiness in their overall activity will be critical tolong-term survival. Israeli aerospace manufacturers

(e.g., IAI and Elbit), who have long maintained apresence in the civilian market, are finding thetransition to civilian products easier to make, despitethe formidable political barriers to Israeli participa-tion in collaborative (especially European), nonde-

Figure 5-2—lsraeli Defense Exports andBacklog Orders, 1986-89

190

T s180

t /170

tBacklog orders

/

160

t / 150

I d /



( p y p )fense, projects. Elbit has already attained a 50:50civilian to military sales ratio (up from a 30:70 ratioseveral years ago), while the much larger IAI isstruggling to increase civilian sales from 12 to 20

percent of its business.Other Israeli defense firms, especially those in

military electronics, are finding it more difficult tomake the transition, but they are also less pressed todo so. Indigenous R&D and production capability intheir area is considered essential not only for Israel’ssecurity but also for the country’s long-term indus-trial growth. Moreover, demand for their products isunlikely to fall. Still, rising R&D costs and risks

associated with the global arms market enhance theimportance of economies of scale. Consequently,even Israeli companies in defense electronics areexperiencing growing pressures to consolidate theiroperations. Elbit’s much-publicized negotiations forTadiran’s electro-optics subsidiary E1-Op is a case inpoint. Such transactions, however, have provendifficult to make in the heavily unionized parts of Israel’s economy, as the abortive merger of Elisra

and Tadiran’s Systems Division has clearly demon-strated.

Israeli firms in the traditional and specializedmilitary areas such as armor casting (Urdan), mortar,artillery, and ammunition production (Soltam andIMI), and military R&D (Rafael) face the mostdaunting challenges. They experience far moredifficulty in making the transition to civilian prod-

ucts. For them, selling out, scaling back operations,or, in extreme circumstances, even closing downparts or all of their military production lines maywell be the only way to go.

Privatization of the key state-owned defensecompanies is unlikely given the combination of secrecy requirements and the unattractiveness of defense business in the current market conditions. Inthese cases, changes in the legal status of certainparts of the state-owned arms industry may lead to

Index t /140

t /

loo

1986 1987 1988 1989

Year

SOURCE: Economic Advisor to Israeli Ministry of Defense.

a more competitive spirit, as well as greater financialand operational autonomy. A change in the status of

IMI from direct MOD ownership to government-owned corporation (similar to IAI) has long beenexpected, and only delayed by last minute technicalproblems. Rafael may well follow suit before long.

Ultimately, however, the future of the entireIsraeli defense industry hinges on specialization and

joint ventures. Specialization in market niches suchas missiles, defense electronics, unmanned aerial

vehicles, and upgrade and retrofit work is necessaryto capitalize on the industry’s strength withouttaxing its resources. The industry will have toconcentrate on these areas in order to meet thecountry’s security requirements, as well as to takeadvantage of its exceptionally skilled engineeringcapability, the extensive combat experience of theIDF, and the intimate relationship in Israel betweenweapons designers and users. On the other hand, the

industry will have to forego activity in many otherareas, especially those that are highly capital inten-sive and therefore certain to strain Israel’s limitedfinancial resources. Furthermore, in the future, theIsraeli defense industry will have to stay clear of products whose clear political identification withIsrael renders their foreign sale impossible.

Joint ventures are increasingly common in thecontemporary global arms market. Until recently,however, Israeli defense firms have taken part in

Chapter 5--lsrael’s Defense Industry: Evolution and Prospects q 93

only a handful of such business ventures. Jointventures between Israeli and European companiesare rare and will, in all likelihood, remain uncom-mon in the foreseeable future. But joint ventures in

the defense field between Israeli and American firmsare growing in number and importance. For Israelicompanies they have proven essential in order topenetrate the U.S. arms market, and in some cases toacquire technology as well Their principal appeal

competitive edge tied to combat experience. Be-cause few Israeli systems were deployed in thePersian Gulf War, their effectiveness in combatcould not be evaluated. At the same time, many

American, British, and French systems were testedin the war and, consequently, might be furtherrefined. The enhanced appeal of these foreignweapons deployed in the 1991 war is likely to makemarketing of Israeli-made weapons more difficult in



acquire technology as well. Their principal appealfor American companies, on the other hand, seemsto lie in their potential for enhancing market cloutthrough access to off-the-shelf products, specializedIsraeli military technology, and invaluable IDF

operational and combat experience, although thislast factor will become less important in view of U.S. experience in the Persian Gulf War. Thecooperation between Mazlat and AAI (mini-RPVs),Tadiran and General Dynamics Electronic Systems(SINCGARS), Rafael and Martin Marietta (air-to-ground missiles and reactive armor), IAI and Lock-heed (advanced tactical ballistic missiles or ATBMs)as well as TRW (UAVs) are just a few examples.

Finally, a word regarding the impact of the Gulf crisis and war on the Israeli defense industry. It hasled to a significant short-term increase in the localcomponent of the defense budget as well as in theforeign military aid to Israel from both the UnitedStates and Germany. These funds have aided severalexisting procurement programs and the addition of several new ones. Moreover, some of the lessons

learned about key weapons systems in the course of Operation Desert Storm are also likely to trigger neworders of both indigenous and foreign weapons. Theappeal of several Israeli systems already underevaluation by the U.S. military (e.g., UAVs andmine clearing equipment) might be enhanced inview of the lessons likely to be learned fromOperation Desert Storm.

Yet, side by side with these largely positive

developments for the Israeli defense industry, sev-eral adverse consequences are also anticipated.These include an inevitable medium-term decline inthe local defense budget now that the Iraqi threat toIsrael has diminished considerably, at least forseveral years. The defense budget is also likely to bethe target of growing demands for resources fromother parts of the economy, particularly thoseassociated with absorption of massive immigration

to Israel. But the most important setback to theIsraeli defense industry will come from the loss of its

marketing of Israeli made weapons more difficult inthe future. This constitutes a significant setback inan era of declining defense procurement budgetsworldwide.

EVOLUTION OF ISRAEL’SDEFENSE INDUSTRIES

From 1948 to 1967

The roots of the Israeli defense industry predatethe founding of the state, with the “Haganah”weapons producing facilities of the early 1940s.These underground facilities gained legal status in

1948 and formed the nucleus of Israel’s modern daydefense industries. After Israel gained independ-ence, and well into the 1950s, its frost Prime Ministerand Minister of Defense David Ben-Gurion wasinstrumental in creating the infrastructure for theexpansion of these facilities and the creation of newdefense industries.

In his budget message to the Knesset in August

1949, Ben-Gurion spoke of the need to promotedomestic production of weapons to avoid depend-ence on outside sources. During the early 1950s,regional and international conditions contributed toa growing sense of the imperative to expand Israel’sdefense industries, and the Tripartite Agreementplayed a central role in this respect. Ben-Gurionfaced opposition to the idea of an indigenous defenseindustry, which was based on economic considera-

tions. By 1953 Ben-Gurion made a number of keydecisions that pushed Israel toward greater self-reliance in the area of weapons production:

The expansion of TAAS (Israel Military Indus-

try), principally a light arms and ammunition

Reorganization of R&D component of the IDFand Defense Ministry. Ben-Gurion removedthe Science Corps from the IDF and placed it

(greatly expanded and modified) under the jurisdiction of the Defense Ministry, as Emet.


q

q

This research and plarming division later evolvedinto Rafael.

Approval of the establishment of an airplanemaintenance plant, Bedek, which later became

the Israel Aircraft Industries (IAI).

Approval of Defense Ministry’s creation of Tadiran, the Israeli Electronics Industry.

Th t bli h t f B d k d T di d th

From 1967 to 1984

A major push forward in the direction of autono-mous weapons and aerospace industries came with

the gradual deterioration of French-Israeli relationsin the early to mid- 1960s and finally the Frenchweapons embargo in 1967 and 1968. The Frenchembargo came at a time when Israel had attained adevelopment capability which could be carried overi d i I h F h d i i



The establishment of Bedek and Tadiran and theexpansion of IMI in the early 1950s occurredwithout either significant foreign sources of capitalor technological cooperation between Israel and anydeveloped industrial nation. The expansion of theseindustries and the establishment of new industries,however, were facilitated by West German repara-tions, as well as by Israel’s collaboration with Francein coproducing weapons and technology, whichbegan in 1956.

Between 1956 and 1967 the IAI increased themaintenance and repair service that characterized itsearly years and also began development of theGabriel sea-to-sea missile. In 1957 IAI decided toproduce the first jet training plane, the FougaMagister, under license from France. Tadiran andIAI also began development of communications andcontrol systems for the IDF, as the existing systemswere found to be deificient following the 1956 war.Along with IAI and IMI, Rafael developed a seriesof air-to-air missiles (Shafrir), a meteorologicalrocket (Shavit II), and the Luz air-to-ground missile

series. The systems developed were tailored toIsrael’s needs and contributed to reducing depend-ence on external powers.

There was constant tension, which began in the1950s and increased during the 1960s, between theMOD and the IDF in arms production. While theIDF preferred to purchase foreign weapon systemsthat were less expensive, tested and proven, and had

a shorter delivery schedule, the MOD maintainedthat Israel had to pay the price for arms independ-ence. This same controversy was reflected within thegovernment itself: the tendency within Ben-Gurion’s political camp, Rafi, was to advocateexpanding domestic industries, while members of acompeting faction, Mapai, favored greater relianceon foreign purchases. Nevertheless, the defenseindustries became firmly entrenched during these

years.

into production. In response to the French decisionto halt the delivery of 50 Mirage V fighter airplanes,Israel decided to proceed with the development andproduction of the Kfir jet fighter. Similarly, whenfive already-paid-for Sa’ar missile boats were pre-vented from leaving Cherbourg in France (althoughthey were later brought to Israel in a specialundercover mission), Israel recognized the need tobuild its own missile boat, and decided to build theReshef class fast attack crafts Sa’ar 4 and 4.5.

The British Government’s decision in 1969 tocancel an almost completely negotiated agreementfor the supply of British Chieftain tanks, and U.S.refusa1 to supply Israel with modern M-60 tanksprompted the decision to build the Merkava, de-signed for the IDF by General Israel Tal, with crewsafety a paramount concern (development and pro-duction plans became operational only after 1973).However, all engines were either exported to Israelprincipally from the United States reproduced locallyunder license.

Israel’s defense industry was initially concernedwith more modest undertakings such as mainte-nance, repair, upgrades, modfifications, and licensedproduction. But after 1967, on the basis of experi-ence gained in these areas, Israel initiated indige-nous design of major weapons. The principal indus-tries as well as many smaller companies initiatednew projects and expanded production of weaponsystems.

Israel increased investments in R&D funds by 300percent between 1967 and 1972, and the number of employees in the defense sector almost doubled.After 1973, the defense industries continued toexpand production, and began to export arms at aprofit. Israel became a major supplier of militaryelectronics and communications equipment andadvances in missile technology, which included

IAI’s Gabriel Mark III antiship missile and a number

Chapter 5--lsrael’s Defense Industry: Evolution and Prospects q 95

of air-to-air missiles, placed its electronics industriesat the forefront of the field.

During this period Israel and the United Statesincreasingly cooperated in producing technologi-

cally advanced weapon systems. Following the 1973War, Israel became aware of the growing importanceof sophisticated weapon systems, yet the high cost,complexity, and rapid rate of technological changein these systems made it difficult to develop and

its orders from its own industry and reduce R&D inorder to keep within the defense budget.

THE CURRENT STRUCTURE

OF THE INDUSTRYThe relationship between the defense industries

and the Ministry of Defense is historically close, andthe four largest firms today—IAI, IMI, Rafael, andMASHA (Renovation and Maintenance Centers-



y pproduce all systems locally. Cooperation with theUnited States in this area was formalized in anumber of Memoranda of Agreement. The frostsignificant defense production MOA was signed in

1979. It enabled Israeli firms to participate in U.S.Government contract bidding without the hindranceof Buy American legislation; this MOA also pro-vided for cooperation in military R&D.

While the foundations of an indigenous defenseindustry were laid during the 1948 to 1967 period,the years until the mid-1980s were characterized byexpansion and increased production in the defense

industries, which has helped Israel realize partialindependence in this field; this includes the ability toproduce those weapons most susceptible to embar-goes and boycotts, the ability to incorporate incre-mental technological innovations in large-scaleweapons systems, and the ability to produce weap-ons designed particularly for local requirements.

1985 to Present

This period is perhaps best characterized as thedefense industry’s retrenchment and restructuring.The most salient aspect has been the cancellation, orcutback of several indigenous R&D and productionprograms for major combat platforms. These includecancellation of the financially overambitious Lavi

jet fighter project by IAI in 1987, cutbacks inproduction of the Merkava tank, cancellation of local production of missile boats and submarines,

and termination of development of an indigenouslydesigned 155mm self-propelled howitzer, Sholef.

The state of the industry during this period is bestreflected in a statement made in June 1987 by thenIsraeli Defense Minister Yitzhak Rabin, who warnedthe defense industries that the days of indigenousproduction were over; they would have to reducetheir size, develop new markets for export of

domestic production, and become more efficient. Asfor the Ministry of Defense, it would have to reduce

MASHA (Renovation and Maintenance Centers-IDF)-are still closely tied to the Israeli Govern-ment. Nevertheless, there are nuances of ownershipwithin these government-owned firms, and today’sIsraeli defense industries also include public andprivate sector corporations. What follows is abreakdown of the defense industries according toownership, as well as a brief profile of some of thelarger industries.

Inhouse Military Organizations

MASHA-the Renovation and Maintenance Cen-ters within the IDF Logistics Branch—is a prime

example of military defense industrial production.One of these Centers has specialized since the 1950sin renovation of armored combat vehicles (WorldWar II halftracks and Sherman tanks). The manufac-ture of the Merkava was assigned to units within thisCenter, and since 1978 MASHA has concentrated onproduction of the Merkava main battle tank. Whilemanufacture of most of the tank’s parts was subcon-tracted, MASHA is in charge of the assembly.

Ministry of Defense Companies

This category includes those companies under thedirect jurisdiction of the Defense Ministry. Today,the only company left with this standing is Rafael, asIMI had its status changed in late 1990. Rafael isIsrael’s weapons development authority, whosetraditional task has been to develop state-of-the-artweapon systems. Rafael develops and manufactures

missiles, guided and unguided weaponry, electronicwarfare equipment, C

31 systems, simulators, thermal

imaging devices, and add-on armor for main battletanks and armored personnel carriers. Rafael hasdeveloped over 100 different weapon systems for theIDF since 1967.

Rafael has been among the companies hardest hitby lowered defense budgets in the 1980s. Rafael has

traditionally turned over production of its productsto IMI and IAI, but in the 1980s Rafael was


increasingly forced into production, exports, and toa lesser degree a search for civilian markets in orderto sustain its workforce. With a highly so-phisticated and highly paid workforce, Rafael hasfound the transition difficult. The company’s cumu-

lative losses until 1988 were $150 million, and in1989 alone its losses rose by $85 million.

As a consequence, Rafael cut its workforce from7,500 to 6,000 and experienced severe union prob-lems as a result of these layoffs The State Comptrol

a marked decrease in foreign orders due to the factthat other countries have entered its market. TheMOD spokesman in early 1989 confirmed that be-tween 1986 and 1988 IMI’s revenues were cut as acumulative result of three factors: the rise in cost of

local material (in dollars), the reduction of MODorders, and the slump in international markets,which caused a reduction in export demand, produc-tion over capacity, and lowered prices.



lems as a result of these layoffs. The State Comptrol-ler’s Report of July 1990 found that Rafael was notmeasuring up as a viable business enterprise, havingfailed to formulate and implement a long-term

rehabilitation strategy. Domestic sales for 1990stand at $265 million, defense exports were $110million, and commercial sales were $5 million.Rafael’s current order backlog is $450 mill ion.Projections for 1994 place domestic sales at $290million, defense exports at $210 million, and com-mercial sales at $50 million. In mid-March 1991,Rafael’s General Manager Moshe Peled claimed thatin order to remain competitive, Rafael will requireyearly sales of $550 million. Moreover, in light of the company’s difficulties, he added that if Rafaeldoes not succeed in laying off an additional 800employees, it will face a difficult future.

Government-owned Corporations

This category includes firms such as IMI, IAI,Israel Shipyards Ltd., and Bet Shemesh Engines Ltd.

IMI is Israel’s most veteran defense industry, withits roots in the prestate years. Its mission is to keepthe IDF as independent as possible of externalweapons supply sources. It manufactures light arms,ammunition, tank guns, military bridging equip-ment, air fuel tanks, artillery rockets and launchers,chaff/flare and aerial decoys, and other materiel.Among the weapons produced are the Uzi machinegun and the Galil rifle. Because of the nature of IMIproduction (emphasis on ammunition and lightarms), the company has been extremely sensitive toregional conflicts and wars, with production peaksduring periods of war.

The crisis that hit the Israeli defense industries inthe mid- 1980s led to a reduction of IMI’s workforcefrom the February 1985 peak of 14,615 employees,to 11,500 in late 1990. From 1986 to 1989, IMIsuffered losses in the range of millions of dollars—

$100 million in 1988 alone. It has also suffered from

In February 1991, IMI formulated a plan foradditional personnel cutbacks of approximately1,000 employees over the next few months (roughly9 percent of the total workforce), due to the

continuous decline in activity and the slump inexports. While exports for 1990 reached $450million, the expected amount for 1991 is a mere

$300 millon, a decrease of 33 percent. IMI will mostlikely record losses for 1991.

Israel’s largest corporate employer, IAI, wasestablished as Bedek Aviation in the early 1950s tomaintain Israel’s Air Force aircraft, but gradually

evolved into a full-fledged aerospace industry. Animportant milestone was the licensed production of the French Fouga Magister jet trainer in the late1950s and early 1960s, which provided it withessential production experience, setting the stage foran autonomous aircraft design and production capa-bility. Today IMI concentrates on aerospace, elec-tronics, and naval systems, and is comprised of overa dozen separate plants, including the Engineering

Division, Aircraft Production Division, Elta, MBT,and Bedek Aviation.

Cancellation of the Lavi and earlier defensebudget cuts resulted in major cutbacks at IAI in thesecond half of the 1980s. The total workforce wasreduced from 22,500 employees in 1986 to 17,500 inmid-1988 (3,300 as a direct result of the Lavi), andby early 1989 the workforce was further reduced to

16,000 employees. Yet despite the difficulties, IAIhas been relatively sound financially, primarily dueto foreign military export opportunities and thetransition to space-oriented and civilian markets,which currently account for roughly 15 percent of itsbusiness. IAI hopes to raise this to 20 percent by1995. In the wake of the Lavi cancellation, IAIcontinues to be active in the new combat aircraftbusiness; moreover, the company turned its efforts

to modernization and upgrade, unmanned aerial

Chapter 5--lsrael's Defense Industry: Evolution and Prospects q 97

vehicles, and continued development of electronicsand avionics, missiles, and space technology.

Total sales for 1990 reached $1.6 billion, withexports of $1.4 billion. Orders for 1991 stand at $3

billion, and a projected 80 percent of total sales areexpected to be exported. While the IAI seems to berecuperating well, the company’s program for thedevelopment of an executive aircraft, Astra, hasbeen critical. IAI has been accused of unrealistic

help the company expand its capacity to produce thePW 1120 engines. In January 1985, Pratt&Whitneyacquired 40 percent control of the company (58percent remained in the hands of the MOD, and 2

percent was owned by the late French industrialist J.Shidlovsky), but Bet Shemesh Engines still facedfinancial difficulties. Senior officials threatened to

resign and place the company in receivership unlessunions representing the 1,300 employees agreed toa plan to fire 400 to 500 workers Bet Shemesh’s



forecasts concerning the market value of the jet.

Israel Shipyards Ltd. is Israel’s shipbuilding firm,and it deals in ship construction and repairs (Sa’ar 4

and 4.5 missile boats). Israel Shipyards has builtnaval products both for Israel and for export. Thecompany faced financial difficulties in the late1980s, following the termination of all major navalproduction contracts, and the absence of new civil-ian construction activity. It nonetheless proceeded todevelop the Shaldag attack craft, which it was hopedwould improve its fortunes. The Israeli Navy,however, refused to buy the Shaldag without even

testing it and continued to prefer the IAI-producedSuper Dvora. In mid-1990, Chief-of-Staff Shomronpromised to appoint a team to test the patrol boat,and in early 1991 it was tested, although the IDF stillrefused to purchase it. The U.S. Coast Guard,however, is considering buying 50 Shaldags to usein its war on drugs. Toward the close of the decadeIsrael Shipyards’ financial situation stabilizedthanks to extensive cost-cutting measures, as well as

an infusion of much maintenance and overhaul work (including work for the U.S. Navy 6th Fleet).

Bet Shemesh Engines, devoted to developing,manufacturing, and repairing jet engines, originallymanufactured and assembled Marbore VI turbojetsfor the Israeli Air Force’s Tzukit version of theFrench-made Fouga Magister trainer, and latermanufactured portions of the General Electric J79engine-power, which powers the Israeli Kfir fighter.Bet Shemesh Engines is currently owned 58 percentby the Government, 40 percent by United Technolo-gies, and 2 percent by the Education Fund. Between1985 and 1987 the company had problems with Pratt& Whitney over the licensed-production of the PW1120 engine destined for the now-defunct Lavi jetfighter project.

In the early 1980s, Bet Shemesh suffered heavy

losses and the board of directors claimed that thegovernment was not investing the promised funds to

a plan to fire 400 to 500 workers. Bet Shemesh slosses reached $55 million by the end of 1985, andits cumulative debt reached $65 million in 1987.

Consequently, in early January 1987 the Israeli

Government appointed a receiver to run the com-pany (an arrangement similar to Chapter 11 in theUnited States). Following the cancellation of theLavi project, Pratt & Whitney, which originallyinvested $10 million in the company, consideredpulling out but ultimately decided to stay in. Since1987, Bet Shemesh Engines’ workforce, level of activity, and operating losses have decreased, but thecompany’s future remains uncertain.

Public-Sector Corporations

This group of defense industries highlights aunique aspect of the Israeli economy in general:these are firms owned by the major trade union,Histadrut, and are controlled directly by Koor, theindustrial holding company owned by Histadrut.Here one finds Soltam, Tadiran, and Telkoor.

Soltarn is a weapons and ammunitions factoryspecializing in mortars and artillery weapons. Arecent agreement between its two principal share-holders, the Zeldowitz family (which held 26percent of the company’s stocks) and Koor, hasresulted in the transfer of Soltarn to full Koorownership. Soltam is one of the companies thatsuffered from the smaller defense budgets in thesecond half of the previous decade. Soltam had itsbest year in 1978 with exports of mortars, artilleryweapons, and shells reaching $94 million ( mainly tothe Shah of Iran). Khomeini’s rise to power reduceddemand from the world market and increasedcompetition created difficulties for the company,and while in the early 1980s it recovered somewhat,since 1984 there has been a drastic decrease in sales.

In 1987, Soltam’s deficits increased due to a

change in the IDF procurement policy. In an attemptto save the company massive cutbacks were pro-


posed, which led to severe tensions between man-agement and the nearly 2,400 workers. These labordisputes reached a peak in August 1987, and sincethen 1,800 employees have been fired. The mostrecent labor dispute broke out in late July 1990

following plans to fire a further 180 employees fromthe remaining 580. Nevertheless, in late 1990Soltam had orders of $30 million, a large portion of which were already in the factory’s stock, and thisgrowth in orders may help the company reach

ti l b l

traditionally the ratio of defense exports to sales tothe Ministry of Defense stood at 50:50, projectionsfor 1991 show that $200 million will be directed toexport and only $120 million will be sold to the IDF,about a 60:40 split.

Another variant of the public sector corporationsare those run by a kibbutz, a collective settlement; anexample of this type of corporation is the Nezer-Sereni Metal Works, which produces vehicle chas-sis.



operational balance.

Tadiran, traditionally Israel’s largest producer of electronics, specializes in both civilian and military

communications equipment. Tadiran deals in threeareas of military production: communications, elec-tronic warfare systems for the Air Force, Navy, andIntelligence Corps that are developed and producedin Tadiran’s subsidiary Elisra, and electro-opticalsystems produced through El-Op. The civilian sectorof Tadiran is comprised mainly of consumer elec-tronics and telecommunications. As a result of defense budget cuts, Tadiran’s defense section has

been losing money, while the civilian sector—whichcomprises more than 50 percent of total activity-isregistering hefty profits.

In the mid-1980s, Tadiran experienced financialdifficulties in its defense sector due to a slowdownin its traditional export market, and cutbacks inorders from the Israeli Signal Corps. In 1988,Tadiran in conjunction with General DynamicsElectronics Division was selected to supply SingleChannel Ground and Airborne Radio System(SINCGARS) equipment to the U.S. Army. Theselection nonetheless entailed complications forTadiran, as the company was required to make heavyoutlays both in preparation for production in theUnited States and in anticipation of future contracts.Other Tadiran military projects include battle man-agement simulators, work on Strategic DefenseInitiative projects, and ground stations for UAVs.

Data on Tadiran from 1986 and 1991 show thatthe workforce has been cut from 13,000 to 6,500.Total sales registered for 1986 were $620 million,while projections for 1991 reach $700 million. Thedivision between defense and civilian sales showsthat while in 1986 more was directed to the defensemarket ($360 million v. $260 million), in 1991expectations are that $380 million will be civilian

and only $320 million defense-oriented. While

sis.

Private-Sector Corporations

This category includes privately owned firms thatproduce military materiel for the defense establish-ment. Examples include Elbit, Urdan, E1-Op, andRada. Funding for private sector corporations oftencomes from the Israeli and American stock marketas well as from the large banks. Some of these firmsare owned by Klal-an industrial conglomerateowned by Israeli banks (more than half of Urdan’sstock, for example, is owned by Klal).

Elbit is Israel’s largest computer systems houseand exporter of computer-based products and sys-tems; its shares are traded on the Tel Aviv Stock Exchange and over-the-counter in the United States.Elbit deals in airborne, ground, and naval systems,and advanced battlefield systems. For example, aninnovative sensor for the detection of chemical war-fare material produced by Elbit was used for the firsttime during the Persian Gulf War. Elbit also de-

velops, manufactures, and markets a variety of civil-ian systems and products ranging from imaging radi-ometer systems to computer products and services.

Elbit is one of the few defense companies not tohave had a crisis in the mid- 1980s, mainly due to itshigh proportion of civilian sales. Elbit formulatedthree strategic goals: acquisition of companies thatcomplement Elbit’s activity in the military sector,

such as the proposed takeover of E1-Op, jointventures with American and European companies,and investments in the civilian sector. Elbit’s 1990takeover of 70 percent of the stock of Elscint, aproducer of medical equipment, was a major step inthe direction of greater civilian production.

Data from the past 3 years illustrate Elbit’sfinancial soundness. Total revenues for 1988 were

$158 million with a backlog of orders of $316

million; sales outside Israel came to $98 million and

Chapter 5--Israel’s Defense Industry: Evolution and Prospects q 99

domestic sales reached $60 million. Elbit recordeda record-high profit of $22 million for 1990, ascompared to $13 million in 1989; moreover, Elbit’sincome from the civilian market made up 57 percentof the company’s total income (as compared to 23percent in 1989). Elbit derived 45 percent of its 1990revenues from Elscint, and over 80 percent of therevenues came from export and international sales.Elbit is currently taking steps to further strengthenits position in the U.S. market.

over $82 million went to export and $40 million WaS

local.

Rada focuses on air force ground support equip-ment, avionics, computers constructed to military

specifications, automatic test equipment, and com-puterized control systems. Rada is one of the fewindustries to gain from the worldwide defensebudget cuts, as it produces test and maintenanceequipment; Rada participates in avionics upgradesi f h i i i d i i h ld



p

Urdan, comprised of several autonomous opera-tions, produces items principally in metal and steel:

armored steel castings, tank and armored vehiclessuspension parts, tank upgrading kits, mine clearingsystems, ammunition trailers, and various spareparts. Urdan suffered heavy losses in the past 4years, about $7.5 million in 1990 alone; a largeportion of the losses are related to the shutdown of its American subsidiary Lebanon Steel Corp. inSeptember 1990. Moreover, Urdan sells mainly tothe Israeli MOD and the U.S. Army, but the MOD

has not committed itself beyond April 1992 andhasn’t specified a minimum of Merkava tanks that itwill buy from Urdan. Long-term sales contracts withthe U.S. Army end in late 1991, and additionalcontracts are uncertain at this point. The chassis thatUrdan produced for the Patriot missile were sold atwhat turned out to be a significant loss; while atechnical success, it was a financial failure.

Urdan, one of the defense industries most in needof a transition to civilian markets, has few resourceswith which to do so. Urdan will undoubtedly find itdifficult both to expand its clientele for existingproducts and to find the resources to developproducts with which to enter new civilian markets.

E1-Op, half owned by Tadiran, specializes inoptical products, night vision technology, and laser

technology (including tank fire control systems,thermal imaging and image intensification sightsand systems, aerial and marine systems, and sightsand optomechanical products). One of the smallerdefense firms, with a total of 952 employees as of early 1991, E1-Op’s sales from 1986 to 1990 havebeen on the rise, from a recorded $83 million in 1986to $129 million in 1990. The proportion of exportversus local sales has changed quite significantly

over the past 5 years: while in 1986$37 million wasdirected to export and $47 million was local, in 1990

in most of the avionics industries in the world.

Another private defense industry that has recentlybeen successful is Eagle Military Gear Overseas.

This company produces and markets different typesof armored vests, battle vests for infantry units,armored corps, demolition squads, medical corps,naval commandos, etc., nuclear biological andchemical warfare (NBC) equipment, and variousaccessories. For the 6 months preceding November1990, Eagle recorded earnings of just under $1million, as opposed to losses of roughly $1 millionfor the 14-month period ending on May 31, 1990.

Eagle presently has orders that reach roughly $80million and has more than 500 employees in its 1U.S. and 2 Israeli plants. Following the Gulf War,there has been increased interest in Eagle’s NBCprotective gear in both the United States and Israel.

Thus, the largest Israeli defense firms (IAI, IMI,and Rafael) are still closely tied to the government.The privately owned defense industries are much

smaller, although they are relatively successfuldespite the constraints and competition posed by thelarger state-owned companies.

The past 5 years have been characterized bydefense budget cuts and a decrease in MOD ordersfrom local defense industries, which have resulted inserious economic difficulties for most of thesecompanies. While 5 years ago the defense firms

together employed a total of 60,000, today less than45,000 remain. These difficulties have pushed thedefense industries toward increased exports andredirection of production to the civilian market. Notall industries have been able to deal with thetransition successfully, and in addition to personnelcutbacks, a number of plants have been forced toshut down. Paradoxically, those companies thatneeded most to shift to civilian and export markets

are also those with the fewest resources with whichto do so--for example, Soltam and Urdan.


Other companies, such as IAI and Elbit, havefound the transition much easier. In spite of thedifficulties, on the whole the defense industries haveadapted themselves to changing realities. Exportfigures, for example, show that while in 1984, 70

percent of defense industry products were sold to theIDF and only 30 percent directed to export, towardthe close of the decade the situation was reversed.

DOMESTIC AND FOREIGN SALES

D i i id d h i i

extremely high degree of self-sufficiency in certainkey areas of military procurement.

Most products of the Israeli defense industryoriginally developed for domestic consumption are

also sold abroad, the two principle exceptions beingMerkava tanks (as distinguished from certain tank components) for which there have been no foreignbuyers, and certain sensitive systems that are oftenexported in somewhat downgraded versions. Animportant export item of the industry has been the



Domestic arms requirements provided the origi-nal rationale for development of an indigenous de-fense industry in Israel. Consequently, the industry’sproducts and output have traditionally been orientedtoward the IDF. Senior IDF officials have been re-luctant to rely on domestic procurement, especiallyfor those products that could be obtained elsewhereeither sooner or with more certainty regarding per-formance and ultimate cost. But their reluctance wasfrequently overruled by a powerful combination of high-level political support for the development of an indigenous defense industry, and foreign restric-tions on arms sales to Israel. Furthermore, over timesome of the military’s opposition to domesticprocurement has also dissipated, due to severalimpressive indigenous weapons developments.

Thus, after a modest beginning in the 1950s, theindustry has increasingly become the most impor-tant source of defense products and services for theIDF. Early on, the indigenous industry assumedmost maintenance and retrofit services for the IDF

and embarked on the domestic production of ammu-nition, light arms, and automotive parts as well.These were initially supplemented with World WarII British and Korean War-era U.S. surpluses as wellas new French materiel. Gradually, the Israeliindustry also made inroads into additional and moresophisticated areas. It has embarked on licensedproduction and ultimately development as well, forthe IDF, of communications gear, electronic war-

fare, radars, avionics, missiles and rockets, as well asself-propelled artillery, mortars, tanks, jet trainersand fighters, and naval craft. Its products haveentered the IDF ranks in increasing numbers in the1970s and 1980s, side by side with new U.S.-madearms that began to flow to Israel in the mid-1960s.As a result of the development of the indigenousdefense industry and the severance of defense tieswith France, Israel attained in the post-1967 era an

Gabriel surface-to-surface missile, several models of which have been sold abroad. Other Israeli devel-oped products that have met with significant export

success include several types of missiles, sophisti-cated tank and artillery ammunition, fire control,radio communication, and electronic warfare sys-tems, mini-remotely piloted vehicles (RPVs), andlight arms (see table 5-4).

The most important foreign markets for the Israelidefense industry have traditionally been in LatinAmerica and Southeast Asia. They were partiallydisplaced by Iran (under the Shah), South Africa,

and certain West European customers in the 1970sand early 1980s. This pattern changed course againin the 1980s with the loss of the Iranian market (inthe early 1980s), the imposition of a ban on newarms sales to South Africa (since 1987), and thetightening defense cooperation between Israel andthe United States. Consequently, in the latter part of the 1980s the United States emerged as the singlemost important foreign customer of the Israeli

defense industry.

THE U.S. CONNECTION

The relationship between the Israeli and U.S.defense industries in the 1980s (especially the latterhalf of the decade) was characterized by increasedcooperation on common projects (U.S. firms teamedwith Israeli firms or used them as subcontractors)and by growing defense exports from Israel to theUnited States. Since February 1987, Israel has beenpermitted to compete for Pentagon contracts as amajor U.S. non-NATO ally; moreover, Israeli com-panies have entered the American market alsothrough direct contacts with branches of the U.S.Armed Forces.

Israel has benefited from the dollars or barterproducts obtained in return for defense exports, as

Chapter 5--Israel’s Defense Industry: Evolution and Prospects .101

Table 5-4-Selected Arms Orders, Deliveries and Licensed Production of Israeli Weapon Systems, 1986-88

Arms transfers from Israel

Number Weapon Year YearRecipient ordered name Type ordered delivered Number

United States . . . . . . . . . . . . .

Argentina . . . . . . . . . . . . . . . .

Chile . . . . . . . . . . . . . . . . . . . .

37

1 2

1

120

1330

Kfir-C1PopeyeHave Nap

B-707-320CShafir

Kfir-C7M 4 Sherman

- , . --- --- ---- --FignterAntiship missileAntitank guided missile

TransportAir-to-air missile

FighterMain battle tank

1984-861986

1986-88

19851986

19881987

1985-87

19871987-88

19871988

1987

256

14

1

60

30



Colombia . . . . . . . . . . . . . . . .

Ecuador . . . . . . . . . . . . . . . . .

Paraguay . . . . . . . . . . . . . . . .

Lebanon . . . . . . . . . . . . . . . . .

Liberia . . . . . . . . . . . . . . . . . . .

Cameroon . . . . . . . . . . . . . . .

Sri Lanka. . . . . . . . . . . . . . . . .China . . . . . . . . . . . . . . . . . . . .

Thailand . . . . . . . . . . . . . . . . .

Fiji . . . . . . . . . . . . . . . . . . . . . .

Papua New Guinea . . . . . . . .

3014122

1696

36181834

10

18

1233

M-4 Sherman

Kfir-C2

Kfir-C7Barak launcher

Barak

Shafrir-2

IA1-201 Arava

BTR-60PM-1944 100mmT-54

IAI-201 Arava

IAI-202 AravaKfir-C7

Dvora ClassMapats

Bariel-2

IAI-202 Arava

IAI-201 Arava

Main battle tank

Fighter

FighterShip-to-air missile Iauncher

Ship-to-air/surface-to-air/point defense missile

Air-to-air missile

Transport

Armored personnel carrierTowed gunMain battle tank

Transport

TransportFighter

Fast attack craftPortable antitank missile

Ship-to-ship missile

Transport

Transport

Licensed production of Israeli weapon systems

1987

1981

19861984

1984

1986

1985

198719871987

1984

19851985

1985-871986

1987

1986

1984

1987

1986-87

1987

198719871987

1985

1987-88

1988

19841985

30

12

96

1818183

12

12

12

Number Weapon Year YearLicensee ordered name Type ordered delivered Number

United States . . . . . . . . . . . . . EL/2106 Point defense radar 1983Popeye Antiship missile 1987

South Africa. . . . . . . . . . . . . . 96 Gabriel-2 Ship-to-ship/surface-to-ship 1984 1986-88 36missile

12 Reshef Class Fast attack craft 1974 1978-88 9

Taiwan . . . . . . . . . . . . . . . . . . Gabriel Ship-to-ship/surface-to-ship 1978 1980-88 48missile launcher

Gabriel-2 Ship-to-ship/surface-to-ship 1978 1980-88 375missile

NOTE: Blank spaces denote information not publicly known.

SOURCES: Office of Technology Assessment, from data in Stockholm International Peace Research Institute, SIPRI Yearbooks, 1986 through 1989, World

Armaments and Disarmament.

well as from the closeness of the military relation- Weapons and Infrastructure Development Author-ship (Israel became a major partner in the Strategic ity, a factor that pushed Israel to cooperate was theDefense Initiative). The United States has benefited growing cost and complexity of technologicallyfrom Israel’s ability to fill essential technological sophisticated weapons systems, epitomized by can-gaps at short notice, and to provide off-the-shelf cellation of the Lavi fighter. A drawback of Israel’sweapons, as well as from the fact that IDF weapons penetration into the U.S. market is that it is usuallysystems are battle proven. According to Brig. Gen. in partnership with U.S. companies, with production

(ret.) Uzi Eilam, current head of the Israeli MOD’s usually carried out in the United States; thus, while


these projects are lucrative to the Israeli companies,they do not necessarily create more jobs in Israel.

The formal aspect of the U.S.-Israeli cooperationin defense production finds expression in a series of

Memoranda of Agreement and Memoranda of Un-derstanding signed by the governments of the twocountries. These MOAs and MOUs provide the legalauthority for U.S.-Israeli cooperation in R&D, forIsraeli companies’ attempts to secure U.S. defensecontracts, and for Israeli participation in large-scale

Israel once the bidding process has been completed,if an Israeli firm had been identified as the lowestbidder. Israeli sales to the U.S. Defense Departmentrose significantly under the new MOA, and anindependent defense industrial relationship was

established between the two countries.

A special MOA was signed in May 1986 toprovide a comprehensive basis for participation of laboratories, research centers, defense industries,and other entities in Israel in SDI research. This



defense projects, most notably SDI. The following isa brief review of the important MOUs and MOAs incooperative defense research and production.

U.S.-Israeli military technological cooperationbegan in 1971 with an agreement between the twocountries for the United States to provide technicalinformation and assistance for arms production; thisdid not lead to agreements for coproduction. In fact,under the Carter Administration, Israel regularlyreceived compensation for having been deniedcoproduction agreements. Cooperation with Israelwas opposed in Congress because of concern that theUnited States might be aiding potential competitorsto U.S. industries. The Reagan Administration wasmuch less reluctant in this regard, and the mostsignificant defense MOAs and MOUs were signedduring the Reagan Presidency.

The first significant defense MOA between theUnited States and Israel was signed in 1979, duringthe Carter Administration, and may be seen as a

reward to Israel for having concluded a peace treatywith Egypt. As mentioned above, this MOA enabledIsraeli defense firms to participate in U.S. Govern-ment contract bidding, and also provided for cooper-ation in R&D. But, unlike the MOUs signed betweenthe United States and NATO countries, the U.S.-Israeli MOA was not comprehensive. Only a speci-fied number of defense items (initially 500) were notto be subject to Buy America restrictions. Moreover,

actual implementation of the 1979 MOA wasproblematic in terms of the domestic sensitivities tonon-American procurement.

In early 1984, this MOA on security matters wasrenewed and expanded. It aimed to facilitate Israelimilitary exports to the United States, allowed forfreer Israeli access to the U.S. market by increasingthe number of categories open for Israeli bids, and

prevented U.S. officials from vetoing deals with

MOA was followed by several more, as well asactual contracts involving more than $200 million(programs include the Arrow ballistic missile de-

fense system, the Israeli Test Bed, and work on thearchitecture of such a system). In February 1987Israel was declared a major non-NATO ally, and inDecember of that year an MOU was signed thatcovered R&D, logistics support, and additional SDIwork, and brought Israel’s status on cooperation inline with NATO countries. It generally enabledIsrael to compete on an equal footing with U.S. andNATO companies for U.S. contracts, gave Israel

more latitude to sell weapons to the United States,and elevated Israel to a trade status previouslygranted to only two other non-NATO allies—Sweden and Australia.

Beyond Israel’s participation in SDI, which hasprimarily been between IAI and the StrategicDefense Initiative Organization, Israel’s most inti-mate relationship with the U.S. Armed Services has

been cooperation on Navy and Marine Corps projects. This includes the leasing of two Kfir (F-21)squadrons for aggressor squadrons, the sale of mini-RPVs and mobile bridging equipment, IMI’sPortable Mine Neutralization System (POMINS) II,and laser range finders for U.S. Marine CorpsAH-lW Cobra helicopters (El Op, IAI withKollsman). Israel’s relationship with the U.S.Army has also been close, and has consisted of

sales of mortars, radio communication (includingSINCGARS), tank launch bridging equipment, anda plow bulldozer system for BMY’s Counter Obsta-cle Vehicle. The least amount of cooperation hasbeen with the U.S. Air Force. To date it includes onlythe Have-Nap (AGM 132) air-to-ground missile dealwith the Strategic Air Command (Rafael with MartinMarietta), although the Tactical Air Command isalso currently evaluating the procurement of the

same missile.

Chapter S-Israel’s Defense Industry: Evolution and Prospects . 103

Recent cooperation between U.S. and Israelidefense firms includes a $200 million contract forIAI to improve F-5 jets produced by Northrop, theAdams Mobile Defense System jointly produced byGeneral Dynamics and Rafael, and data-transferequipment for F-16 jets that Rada ElectronicsIndustries produced for General Dynamics. The U.S.Congress recently awarded $53 million for thecontinued development and purchase of IAI lasersystems for U.S. Marine Corps’ super-Cobra heli-copter (for 1991) A subsidiary of Eagle in the

Finally, IAI, in a joint venture with TRW, is con-ducting test flights of the future unmanned aerialvehicle (UAV) that it wants to sell to all branches of the U.S. military. Following the successful employ-ment of IAI’s Pioneer UAV in the Gulf War aboardU.S. Navy battleships, procurement of additionalPioneer mini-RPVs is being seriously evaluated bythe U.S. Navy.

Thus, the main features of the cooperation be-tween U.S. and Israeli defense industries are the



copter (for 1991). A subsidiary of Eagle in theUnited States has received an order for protectivecoveralls and tents (against nuclear biological andchemical warfare) for $14 million.

Elbit has received a $10 million order fromGeneral Dynamics for the supply of avionics sys-tems until 1992; this deal was concluded as part of General Dynamics’ commitment to offsets in Israelin the framework of the agreement to supply F-16sto the Israeli Air Force. Rafael and Martin Mariettaare jointly contenders for a large contract for reactivearmor for the new Bradley Armored Fighting

Vehicles. If Rafael and Martin Marietta win, 50percent of production will be carried out in Israel.

following:

1. Outright procurement from Israeli defense in-

dustries has risen over the years; yet in mostcases it is done in collaboration with U.S.companies, with the actual production carriedout in the United States.

2. A significant amount of activity has resultedeither from direct or indirect offset agreementsincorporated in the major IDF contracts withU.S. companies.

3. To date there have been relatively few joint

ventures in R&D, although there are early signsthat joint activity in this realm is on the rise.

Chapter 6



p

Japanese Defense Industrial Policy

and U.S.-Japan Security Relations

Contents Page

INTRODUCTION AND OVERVIEW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107THE COLD WAR IN ASIA AND JAPANESE SECURITY DEBATES . . . . . . . . . . . . . 109

A Brief Review of Japan’s Defense Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109The Defense Budget Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111

THE MARKET FOR DEFENSE EQUIPMENT IN JAPAN . . . . . . . . . . . . . . . . . . . . . . . . 112THE MARKET FOR U.S. EQUIPMENT AND TECHNOLOGY IN JAPAN . . . . . . . . . 114THE ARMS EXPORT ISSUE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114JAPANESE SELF-SUFFICIENCY IN DEFENSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116

Research and Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116Future Collaboration in Defense Technology With Japan . . . . . . . . . . . . . . . . . . . . . . . . . . 117



Japanese Attitudes on Collaboration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117Possibility of Another FSX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118

Box Box Page

6-A. Japanese Military and Dual-Use Technologies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119

Figures Figure Page

6-1. Estimated Japanese Licensed Production of U.S. Major ConventionalWeapon Systems, 1960-88 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108

6-2. Defense as a Percent of Total Industrial Production in Japan, 1980-87 . . . . . . . . . . . 113

TableTable Page

6-1. Japan’s Defense Budget Fiscal Years 1955-90 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111

Chapter 6

Japanese Defense Industrial Policyand U.S.-Japan Security Relations

INTRODUCTION AND OVERVIEW

Over the past 30 years the U.S.-Japan bilateralsecurity relationship has been directed toward thepotential threat posed by the Soviet Union and otherCommunist powers in East Asia. Now that the Cold

critical consideration in discussions of cooperativeprojects with Japan.

The increased emphasis given economic issues bythe United States is exerting considerable stress andmay eventually undermine the security relationship

i h J P i d i i i h d d



pWar has ended, there are strong political pressureson Japan, both internal and external, to reducedefense spending. However, many Japan DefenseAgency (JDA) officials believe that qualitativeimprovements have offset quantitative reductions inSoviet forces in the region. Indeed, some believe thatgreater uncertainties in international relations arguefor retention of increased self-defense capabilities.Others argue, instead, that Soviet aggressiveness isreduced and that Japan must moderate its defensebudgets accordingly. These differences have led to

an intense policy debate within Japan over theappropriate types and levels of defense spending.

A number of factors complicate long-term plan-ning and create doubts about the future of thebilateral security relationship with the United States.Perhaps most important, the United States is sendingmixed signals to Japan regarding its intentions in theregion. On one hand, the United States continues topressure Japan to assume more of the cost of its owndefense. Many Japanese officials view this as anindication that the United States may not remainfully committed to the bilateral security treaty,

l

producing uncertainty for Japan and justifyingadditional defense spending. Japan’s reluctance toprovide support for the United States in the PersianGulf War has highlighted what many in the UnitedStates still feel is a free ride on defense for Japan. On

the other hand, when Japan does slate money fordefense, this is sometimes criticized in the UnitedStates, in part because it is viewed as being driven byeconomic factors, not genuine security concerns.This claim was a prominent element of the FighterSupport Experimental (FSX) debate and remains a

with Japan. Previous administrations had pursuedeconomic and defense issues in isolation, in order toensure that economic frictions did not harm security

cooperation. With the Bush Administration, such aseparation no longer appears possible. Indeed, secu-rity increasingly is defined in economic terms by theUnited States, leading to apprehension in Japan thatthe United States will reduce opportunities forcooperative programs and that existing efforts,notably the FSX, will be delayed.

Collaboration in military technology with Japan

has been a one-way street for decades. Massivetechnology transfers have taken place from theUnited States to Japan under existing programs (seefigure 6-l). Licensed production of a variety of typesof U.S. military aircraft has contributed to thedevelopment of a core of Japanese companies skilledin diverse aspects of aircraft production.

2These

programs have also stimulated critical industriessuch as electronics and materials through generous

technology transfers.

In the past, U.S. policymakers have recognizedthe economic implications of these transfers but feltthey were justified because of their military benefits.Recently, however, the economic disadvantages of those programs have been viewed in a more criticallight. For example, the FSX fighter codevelopmentprogram remains controversial. The failure to pro-

duce a two-way technology flow has led to a broadquestioning of the value of these programs to theUnited States. More importantly, cooperative de-fense production programs, coupled with indigenousefforts, have transferred to Japan a high degree of self-sufficiency in defense production.

l~e Tr~ty of Mutual Coopemtion and Security of 1960. A second fundamental document embling U.S.-Japan defense cOO-On is the Mutu~Defense Assistance Agreement (MDAA) of 1954. For the purposes of this discussion, references to the security treaty will mean either the 1960 treaty,the MDAA, or both.

zA~~t p~uced ~ J~~ include the Bell UH-lH Heuy helicopter, he Bell AH-IS CO ~ helicopter, the mkh~ P-se mOll patrol @)he,the Boeing 107 Model II helicopter, the Boeing CI-M7 Chinook helicopter, the McDonnell Douglas Model 500D helicopter, the McDonnell DouglasF-4E Phantom jet fighter, the McDonnell Douglas F-15J and F-15DJ Eagle jettlghter, and the Sikor~ S-61, S-61A, and S-61B helicopters.

–lo7–


Figure 6-l—Estimated Japanese Licensed Production of U.S. Major Conventional Weapon Systems,* 1960-88

16

1

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..................................................

14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ........................................

12Total number of U.S. licensed systems. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

in production in Japan**

Number 10. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .



!

of major

systems 8

A “ ” ” ” ” ” ” ” ” -” ” ” -” -” ” ” ” ” ” ” ” ” ” ” ” ” T ” ” ” ” ” ” ” ’ ” -” -

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ............ ......

4

: : / ~

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S. systems licensed annually by Japan . .

2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

o I I I 1 1 I I I I I I I 1 I I

1960 1964 1968 1972 1976 1980 1984 1988


q Japan license-produced major systems only from the U.S.‘Estimates based on the assumption that an average system is produced under license for 12 years.

SOURCE: Office of Technology Assessment, from data in Stockholm International Peace Research Institute, SIPRI Yearbooks 1970 through 1990, WorldArmaments and Disarmament.

Japanese defense planners argue that the momen-tum achieved over the past decade must be contin-ued in order to assure minimum self-defense capa-

bilities. Japanese industry has invested heavily indefense production and would like present fundinglevels continued to allow sufficient time to restruc-ture in the event that greater spending becomespolitically unsupportable.

The outcome of these deliberations will affectJapanese security policies for at least the nextdecade. The defense buildup that has taken placeover the past 15 years resulted from a carefullycrafted set of compromises. Reversing or modifyingthose compromises could require an equally broadpolitical consensus that will influence defense budg-ets in the future. Abrupt fluctuations in Japan’sdefense budget, either toward expanded or reducedfunding, are unlikely given the domestic politicalprocess.

Several large-scale procurement projects will be

affected by this debate, including full-scale produc-tion of the FSX fighter aircraft, licensed production

of the Multiple Launch Rocket System (MLRS),acquisition of Airborne Warning and CommandSystems (AWACS), over-the-horizon (OTH) radar,

and mid-air refueling tankers. Domestic develop-ment programs could also be affected, althoughindustry and JDA are both lobbying for higher R&Dspending. Some companies have already begunadjusting their production strategies. The domesticJapanese defense market could be restructuredsignificantly in the coming decade.

Japanese industry lacks incentives to share tech-

nology with the United States in collaborativedefense programs. For Japanese firms, technology isviewed as a precious commodity that should not belicensed indiscriminately but should be accessed andabsorbed whenever possible. Japanese industry viewsthe United States as the competition, so the motiva-tion to cooperate by transferring technology recipro-cally is limited. American interest in collaborativeprojects is also uncertain; the continuing difficulties

associated with the FSX project have generatedresentment in both countries.

Chapter 6--Japanese Defense Industrial Policy and U.S.-Japan Security Relations . 109



The FSX experience is pushing industry andgovernment in Japan toward even greater reliance ondomestic capabilities. Several independent R&Dprojects have been launched, aimed ultimately atself-sufficiency in complete systems and towardenhancing negotiating leverage vis-a-vis the UnitedStates and other potential foreign partners. Theseinclude a medium-range, surface-to-air missile toreplace the U.S.-designed Hawk and computers to

replace IBM computers in the F-15 fire controlsystem.

Japan continues to prohibit the export of completeweapon systems. This policy is likely to remainintact for the foreseeable future, because it involvesfundamental foreign policy considerations, not sim-ply economic factors. However, it is likely thatJapanese firms will exert increasing influence ondefense policies in the future because defense

development will rely increasingly on dual-usetechnologies whose control by government policiesremains unclear.

Despite pressure to liberalize defense exportsfrom some defense producers, the government of Japan enforces a prohibition against exportingcomplete defense systems. Component exports areanother matter, especially for components embody-

ing dual-use technology. Even though constraints onthe export of complete weapon systems mightremain in effect for decades to come, Japanese firmscould still build a sizable defense-related businessthrough component exports. This could take placewithout a change in current government policies.

THE COLD WAR IN ASIA AND

JAPANESE SECURITY DEBATES

A framework of policies has resulted in 15 yearsof steady but limited growth in Japan’s defensecapabilities. These policies are now coming underscrutiny as Japan debates whether the securityenvironment for the coming decades will grow moreor less hostile.

A Brief Review of Japan’s Defense Policy

In Arming Our Allies, OTA published a detailedanalysis of Japanese defense policy. The principalelements of that policy are summarized below.

3

. Article 9 of the Constitution. The so-called‘‘no war clause’ that renounces the use of forceto settle international disputes. Japanese paci-fism and Article 9 have reinforced one anothersince the end of World War II.

3S= U.S. Cowess, ~lce of Technolo~ Assessrmq Arm”ng Our Allies: Cooperation and Competition in Defense Technologies, 0~-ISC-449

(Wafd@zton,DC: U.S. Government Printing ~ce, May 1990), ch. 4.

11O qGlobal Arms Trade

Reliance on the United States for defense.The laws that govern Japan’s defense establish-ment prohibit the country from entering intocollective security agreements. The bilateralsecurity treaty with the United States is the only

defense or security agreement entered into bythe government since the end of World War II.Although calls have been issued to reevaluatethe treaty,

4it still serves as the basis for the

bilateral security relationship. Forty-five yearsof practice have led the Japanese defensecommunity to rely heavily on the United States

Japanese defense spending by stipulating thatthe defense budget could not exceed 1 percentof that fiscal year’s estimated gross nationalproduct (GNP). This provision was eliminatedin 1986, and was replaced by quantitative

acquisition levels stipulated in 5-year defenseprocurement plans. In practice, however, spend-ing is still limited to about 1 percent of GNP.Because of intense policy debates now underway in Japan, it is possible that explicitspending restrictions could be put into effectagain



community to rely heavily on the United Statesfor planning, equipment, technology, and otheraspects of its overall defense structure.

Restrictions on the use of military forces.These include legislative prohibitions, consti-tutional provisions and/or cabinet statementsprohibiting overseas troop deployments? limit-ing weapon procurements to defensive systems(as opposed to offensive weapons), and ban-ning a military draft.

The nuclear prohibitions. Japan has opposedthe possession, introduction, or manufacture of nuclear weapons. This policy is supported bothby legislation (e.g., in the Atomic Energy Law)and Cabinet policy statements. Equally strictprohibitions exist for the manufacture of bio-logical and chemical weapons.

Weapons export limitations. As a matter of policy Japan does not export weapons, militarytechnology, or weapons manufacturing capa-bilities to other countries. However, becausethe Japanese definition of weapons is narrowlydrawn, the policy has been weakened by theexpanding use of dual-use technology in weap-on production. Nevertheless, this policy haseffectively curtailed exports of complete weap-on systems and remains a fundamental elementof Japan’s security posture.

Peaceful uses of space. Japanese policies callfor the peaceful use of space. Its participation inStrategic Defense Initiative research is viewedas consistent with this position.

Quantitative spending limitations. In 1976,the Cabinet instituted a spending cap on total

again.

Japan’s defense policymaking has also been

affected by government policies emphasizing eco-nomic development over rearmament, and by differ-ing views of the external threat throughout thepostwar period. At the end of World War II, Japan’seconomy was devastated, and economic recoverywas the highest priority. U.S. defense collaborationpolicies with Japan sought in part to further thiseconomic development by contributing to indige-nous defense production capabilities through licens-

ing programs.

6

The 1976 National Defense Plan outline estab-lished a common rationale for defense procurementin the subsequent decade and, for all practicalpurposes, issues of threat perceptions were set aside.Japanese views toward the Soviets hardened in theearly 1980s, however, particularly with the invasionof Afghanistan and the Soviet downing of civilianKorean Airlines flight 007 in 1983. However, with

the dramatic changes that have taken place globally,especially in Eastern Europe, these attitudes towardsthe Soviets are now being reappraised.

The Japan Defense Agency insists that the Self-Defense Forces must maintain their current capabili-ties in the event that changes in the Soviet Union arenot permanent. Defense officials note that whileSoviet force levels might decline in the Asian region,

the quality of those forces remains high and contin-ues to pose a military threat to Japan. They addfurther that the present levels of Japanese defensecapabilities were outlined in 1976, a period duringwhich the government had officially anticipated a

4S=, for eqle, Keiichi Kawanasl@ “Time lb Re-~“ e the Security Treaty, ” Japan Economi”c Journal, Apr. 21, 1990, p. 9; Chikayo Mogi,“Growing Doubts Over Security Treaty With U.S.,” Kyodo News Service, cited in Foreign Broadcast Information Service, Dai2y Report: East Asia,FBIS-EAS-90-118, June 19, 1990, p. 1; “Rethinking the Japan-U.S. Alliance,” Japan Echo, vol. 17, No. 1, 1990.

%e IGtifu Government with&ew legislation introduced in late 1990 to allow overseas deployment of noncombatants from the Self-Defense Forcesin peacekeeping operations organized and sanctioned by the United Nations.

Gu.s. congr~s, OffIce of Technology Assessment op. cit., footnote 3, pp. 61-62.

Chapter 6--Japanese Defense Industrial Policy and U.S.-Japan Security Relations . 111

continuation of detente between the superpowers,7

and thus more, not less, defense expenditure isrequired.

JDA and other parts of the government may also

wish to hedge against planned U.S. troop reductionsin Japan in case they lead to a long-term trend towardtotal withdrawal from the country. In February 1990,Secretary of Defense Richard B. Cheney reassuredJapan of the U.S. commitment to the country and theregion as a whole despite plans to withdraw 10percent of the U.S. military forces from Asia.

8In

Table 6-l-Japan’s Defense Budget, Fiscal Years1955-90 (billions In current yen)

PercentBudget change from Percent

(Yen, billions) previous year of GNP

1955 . . . . . . . . . . . .1965 . . . . . . . . . . . .1975 . . . . . . . . . . . .1980 . . . . . . . . . . . .1981 . . . . . . . . . . . .1982 . . . . . . . . . . . .1983 . . . . . . . . . . . .1984 . . . . . . . . . . . .1985

134.9301.4

1,327.32,230.22,400.02,586.12,754.22,934.73 137 2

-3.39.6

21.46.57.67.86.56.66 9

1.781.070.840.900.910.930.980.980 98



p yeither case, continued U.S. retraction would forceJapan to assume a greater share of its defense

requirements.

These views are not held uniformly throughoutthe Japanese Government. In mid-1990 Prime Minis-ter Toshiki Kaifu took the position that the Sovietthreat facing Japan no longer warranted the spendingincreases of the past 15 years (see table 6-l). Heinstructed JDA to take “changes in the internationalsituation” into account in preparing its 1991 budget.

Consequently, Japan’s defense spending in fiscalyear 1991 will rise only 5.5 percent.9While this

amount was still high, it represented a symbolicvictory for the Kaifu Government, as JDA hadsought a 6- to 7-percent increase. Furthermore, thegovernment decided not to initiate major newprocurement programs for at least another budgetcycle.

The Defense Budget Outlook

The 1991 budget initiates a new 5-year defenseprocurement plan that will increase defense spend-ing in real terms by an average of 3 percent annuallyfor the 5-year period. Despite the insistence thatfront-line equipment will be reemphasized in thecoming plan, a number of new systems are underconsideration. These include Boeing E-3 AWACS,

mid-air refueling tankers, additional Aegis systems,

1985 . . . . . . . . . . . .1986 . . . . . . . . . . . .1987 . . . . . . . . . . . .

1988 . . . . . . . . . . . .1989 . . . . . . . . . . . .1990 . . . . . . . . . . . .1991’ . . . . . . . . . . .

3,137.23,343.63,517.4

3,700.33,919.84,159.04,402.3

6.96.65.2

5.25.96.15.5

0.980.991.00

1.011.060.990.99

aBudget request submitted to Ministry of Finance by Japan DefenseAgency, pending Cabinet approval.

SOURCE: Japan Defense Agency, Defense of Japan (various editions).

and MLRS, probably under a licensed productionarrangement involving the U.S. firm LTV and

Nissan Motor Co. It is possible that a productiondecision on the FSX fighter aircraft will also bereached. Two important coproduction programs willend during the 5-year period: the McDonnell Douglas/ Mitsubishi Heavy Industries F-15J program, and theLockheed/Kawasaki Heavy Industries P-3C pro-gram. The end of both programs will have asignificant effect on domestic companies.

l0

Planning is further complicated by the continuedsensitivity surrounding defense discussions, particu-larly with respect to the United States and the U.S.Congress. The negative publicity and arduous nego-tiations surrounding the FSX project caused Japa-nese government and business interests to feel thatthe U.S. Government dealt poorly with Japan byinsisting on revisions in the agreement reached bythe Reagan Administration. For Japan, the FSX was

a fait accompli that should not have been re-

m. w SUOIQ “ “Heiji Taisei’ Iko e no Shomondai” (“Various Issues Related to the Transition to a ‘Peacetime Posture’ “), Gunji Kenkyu (Japani14iZitary ReL:v), September 1990, vol. 25, No. 9, pp. 20-40.

8A lo-percent reduction in forces would amount to 12,000 troops. Of these, 5,(WI to 6,000 are expected to be Mtidrawn from JaPU l~v@3approximately 50,000 U.S. servicemen in the country. The strategy behind these plans is outlined inU.S. Department of Defense, Off3ce of the Secretaryof Defense, “A Strategic Framework for the Asian PacificRim Imoking Beyond the 21st Century,” 1990, Secretary Cheney’s speech to the JapanNational Press Club of Feb. 23, 1990, can be found in Hon. Richard B. Cheney, “ToRemain in Ask” Speuking ofJapan, vol. 11, No. 114, June 1990,pp. 1-8.

%rbara Wanner, “Growth in Defense Spending Trimtn cd,” JEIReport, No. 30B, Aug. 3,1990, p. 5; “’Ibkyo Slows Down Defense Buildup AmidGlobal Changes,” JEIReport, No. IB, Jan. 11, 1991, pp. 8-11.

l~udget drafters ~dd maintain c~ t spending levels by stretching payments for major systems over longer periods than is now common.~ically, JDA pays for a system over a4-yearperiod. That period could be extended to 5 or 6 years in order to keep current outlays under control. Thiswould generate huge future obligations, however, which would strain future budgets.


responsibilities (in the Persian Gulf War, for exam-ple) and to assume vacancies left by U.S. forces inJapan. To some Japanese defense officials, both of these trends justify higher defense spending and alsocast doubt on the role of the bilateral security treaty.

The United States has announced selective troopreductions, but has reiterated its commitment toJapan in particular and to Asia as a whole. TheUnited States remains aware of its role as the honestbroker in the region and that significantly expandedJapanese defense capabilities would be viewed as ath t b th ti i th W t P ifi




The F-15E is claimed to be the world’s preeminentfighter currently in production. The McDonnell Douglas/Mitsubishi F-15J and F-15DJ program, which began in

1980, is slated to end during the 1991-98 Japanesedefense procurement plan when FSX production is

supposed to begin.

examined. Congress’ response to the FSX case wasviewed as protectionist and at times motivated byracial fears or prejudices.

At the core of the defense budget debate is areevaluation of the U.S.-Japan security relationship.The reduced threat now posed by the Soviets invitespolicymakers to reexamine the bilateral securitytreaty and the security relationship it represents.Some critics have called for the abolition of themutual security treaty while others have urged agreater focus on its economic security considera-

tions. (Article 2 of the treaty in fact states that itspurpose is to promote the economic well-being of both signatories.) Furthermore, a wide range of regional security concerns remain that could providevalid reasons for continuing without change thepresent security relationship.

While the Japanese Government remains offi-cially confident of the ability of the United States toextend its military protection to Japan, questionsarise over the credibility of the U.S. deterrent in lightof its economic problems.

11The U.S. Government

continues to call for JDA to assume greater defense

threat by other nations in the Western Pacific.

THE MARKET FOR DEFENSEEQUIPMENT IN JAPAN

The uncertainties of Japan’s defense policy andchanges in its defense market will affect bothdomestic producers and the marketing strategies of U.S. firms. Orders from the previous 5-year programshould sustain business for most major Japanesedefense contractors for several years. For example,commercial and defense orders for Ishikawajima-Harima Heavy Industries, Ltd. (IHI) engines con-tributed in fiscal 1989 to a 10-percent growth inengine order backlogs. Fuji Heavy Industries (FHI)and Kawaski Heavy Industries (KHI) have enjoyedbrisk business due largely to their defense activities.

Maintenance and upgrade programs, such as thosefor the F-15J, are likely to keep many companiesbusy, especially electronics firms as they are tapped

to provide new mission computers, radars, andsoftware packages. If the F-4EJ-Kai upgrade is anyindication, the electronic brains of the F-15Js will bereconstituted primarily with Japanese domestic com-ponents.

12

Upgrade work is not sufficient to sustain otherparts of the defense industries, however. JDA doesnot plan to pursue domestic development of areplacement aircraft for the indigenously producedT-2 trainer, manufactured by MHI and IHI.13 Severalcompanies involved in aircraft production, includingMHI, could suffer if the FSX fighter does not move

llJapan~fe~eAgen~y, D#en~e of J a p a n 1 9 8 8 ~o~o : Jap~Tim~ Coo, Ltd., 1988), pp.6647, and~efe~e ofJa~n 1989 c f b k yO : Japan TimesCo., Ltd., 1989), pp. 77-78.

I@ne of the ~otivatiom for ~~g Jap~~e p- ~ the F-4~ ~ is ~ avoid dispu~s with the unit~ Sates over &ChIIOIO~ flowback. Modifyingexisting F-4s would allow the U.S. Government to claim cost-free flowback under existing Memoranda of Understanding. Replacing U.S. componentsentirely with Japanese components sidesteps that issue, since no modifications are made.

ls~c~el &x~ “Japan May Not Develop Trainers,”Dt#ense News, vol. 5, No. 17, Apr. 23, 1990, p. 1. The T-4 is a brandnew

aircraf~however,that will operate for at least another 10 to 15 years. Replacement is not necessarily an urgent issue. ‘fhere also is suftlcient time for the government to

change its inclinations on a successor aircraft. A new codevelopment program is not entirely out of the question.




personnel shortages and budgetary pressures. Forexample, MHI is planning to focus greater efforts onrobotics and automated systems both in productionand as final systems.

l6Potential applications for the

latter range from observation vehicles and targetdrones to pilotless fighter aircraft.

It is not entirely clear how other firms will reactto the changes in markets. Some companies, espe-cially those affected by the discontinuation of F-15and P-3C production, plan retraining programs toshift workers and engineers into other fields. Onesuch example was the plan of a heavy industry

However, because Japan’s defense market is in astate of flux, the outlook for foreign companies isuncertain over the long term. Many programs thathave served as market drivers for several years—F-15, P-3C, etc.—will terminate, and with theexception of the FSX, there are no new militaryaircraft programs on the horizon. Although theUnited States and Japan have a gentleman’s agree-ment on FSX production, there is no guarantee thatthe aircraft will get beyond the prototype productionstage. If it does, General Dynamics would reap mostof the 40 percent U.S. production work share. That



such example was the plan of a heavy industrycompany to transfer aircraft production engineers

into software projects after 90-day training pro-grams. In general, massive layoffs are not expectedin Japanese defense companies, due to the lifetimeemployment commitment among larger fins: Japan’saircraft industry, which depends on military ordersfor 70 to 80 percent of its entire business, hasmaintained steady employment levels for the pastseveral decades.

Regardless of the adjustments that companies inJapan are likely to make in the coming years,however, future procurement budgets will have animportant impact on the relative mix of defensebusiness and commercial production, and the statusof defense contractors within the Japanese businesscommunity.

THE MARKET FOR U.S.

EQUIPMENT AND TECHNOLOGY

IN JAPAN

Reduced defense budgets in the United States, inEurope, and elsewhere have increased pressure onmajor contractors to look abroad for new sales.Some observers believe that more moderate procure-ment increases in Japan may result in greaterpolitical pressure to buy cheaper foreign systems off the shelf from overseas sources, especially if the yenremains strong against the dollar. Government andindustry are committed, however, to maintaining themaximum feasible level of indigenous productionand development. Therefore, it is likely that tightermarkets at home and Japan’s emphasis on localproduction will force foreign firms to make Japanesefirms more generous technology licensing offers inorder to sell in Japan.

p pleaves few opportunities for other U.S. firms to dealwith Japanese firms. A few development programsare under way, but in some cases (engine develop-ment programs, for example) they are directedspecifically to reduce Japanese industry’s relianceon American sources and in others, such as themedium-range surface-to-air missile project, theJapanese objective is to field a replacement to anexisting American product.

Because ongoing procurement, maintenance, lo-

gistics, and other support items are likely to beemphasized to maintain the present framework of Japan’s Self-Defense Forces, there will be few, if any major contracts available to U.S. producers of front line equipment. Markets will be strong in theelectronics areas as Japan upgrades existing aircraftand institutes service life extension programs. ButU.S. companies will face serious competition fromdomestic firms in the electronics areas. These

contracts are likely to go to Japanese firms unlessforeign companies are willing to consider generouslicensing or codevelopment arrangements.

JDA has accepted the higher costs of localproduction in order to work with Japanese firmsinstead of foreign ones and to enhance the nation’sdefense industrial base. It is unlikely that thisposture will change as a result of global politicalshifts or tighter budgets. Autonomy is a high priorityfor the government, and autonomy ultimately meanslimited opportunities for foreign companies.

THE ARMS EXPORT ISSUE

One concern that continues to attract attention inthe United States is the possibility that Japanesefirms might export weapon systems despite long-standing government policies to the contrary. U.S.

16Nobuyuki Oishi, “DefenseFirms Responding to Cold War’s End” Japan Econom”c Journal, Aug. 4, 1990, pp. 1, 15.

Chapter 6--Japanese Defense Industrial Policy and U.S.-Japan Security Relations q 115

defense contractors have transferred enormousamounts of defense technology to Japan, in partbecause they believed that Japanese f-would notcompete with them in international markets. In thepast, the Japanese business community has exertedpressure on government to liberalize arms exportpolicies. This has led to concern among U.S. defensefirms that a set of political and/or economic circum-stances could combine to break down the policiesthat currently restrict Japanese defense exports.Some U.S. defense contractors argue that significantexports of dual-use components by Japanese firms

making it more likely that Japanese firms could infact compete if they so desired.

17

For the present, export policies remain intact.While corporate economic interests lie with exports,

firms are extremely sensitive to the negative imageof arms exports. MITI guidance documents tobusinesses on export control policies warn repeat-edly of the public relations dangers of arms exports,noting that failure to take public opinion intoaccount in these areas will jeopardize commercialsales. The same documents also warn againstalienating the public to minimize political pressures



indicate that Japan’s arms export policies are out-dated. They believe that Japanese firms have usedthe dual-use loop hole to enjoy significant defensebusiness while adhering to the letter of governmentrestrictions on exports of complete weapon systems.

Japan has articulated policies that restrict dual-useexports, but pressure within the business communityhas risen at times to challenge these policies.Business has argued that by establishing economies

of scale through exports, the cost of JDA’s procure-ments would decline and profits would improve.Exports could be used to strengthen ties withfriendly nations, which would help to establishgreater independence in Japan’s foreign policy.Despite these arguments, however, the only significant liberalization of Japan’s arms export policiesoccurred in 1983 when the government agreed topromote exchanges of defense technology with the

United States. And even here, amount of Japanesedefense technology that has flowed back to theUnited States under the 1983 agreement has beennegligible.

Japan’s export potential in defense is ultimatelytied to the strength of its domestic market. Theparadox is that domestic production must remainconstant or expand moderately in order to limit the

allure of overseas markets. However, continuedstrong funding enhances the competitiveness of thedomestic industry vis-a-vis global players, thus

alienating the public to minimize political pressuresin the Diet (against both business and the bureauc-

racy) .18Japan has demonstrated economically and politi-

cally that it is willing to support a costly yet modestdefense industry that does not depend on exports forsurvival. JDA and industry are willing and capableof developing and producing high-quality compo-nents and complete systems in many areas. Industryhas made incremental improvements in its defense

production that may eventually reduce the cost of indigenous development and production. The classicpattern of moving from import substitution to exportcapability is evident in Japanese defense production,but political decisions have restrained industry’smovement into the export market (in distinct con-trast with its support of industry’s advances intointernational commercial markets). With continuedpolitical conviction, Japan’s leadership should be

able to maintain this policy for the foreseeablefuture.

Japanese firms are not entirely excluded fromforeign defense markets. Vigorous trade in dual-usetechnologies often enables them to skirt the ban atthe component level. Japanese firms can sell dual-use defense components and parts on a company-to-company basis, largely circumventing governmentpolicies on arms exports. It is difficult to assess these

issues in depth because the degree of Japanesemilitary exports is unclear. In the area of aircraftsales, it has been estimated that only $14 million in

. —17sW Keith Bo ~~hbg, “~ny As- F~Potenti~ w~ Threat From Japan,” The W~~hingt~n Post, Aug. 4, 199Q P. A18; ~1~ Smi@

“Security Blanke4° Far Eustern Economz”c Review, July 5, 1990,p. 11. For a Japanese perspective on these issues, see “KOZO Kyogi Izure NkhibeiAnpo ni Fumikomu” (“Structural Talks Inevitably Impact U.S.-Japan Security ’’), Ekonom”suto, Apr. 24, 1990, pp. 44-51.

lgJapan WS~ of International Trade and kdustry, “Factors Affecting Availability of Japanese Dual-Use Technology to U.S. DefenseApplications,” undated planning document. MITI lists five areas influencing the availability of dual-use technologies to the United States: 1) corporatepolicies and the individual world views of companies, 2) export administration regulations, 3) media attention and public opinion, 4) data and patentrights, 5) corporate receptiveness: in light of: “consumer environmen~ you cannot survive a day if you don’t have the media on your side, or withoutpopular support.” It adds that “the bureaucracy cannot sumive. . . if it makes the Diet its open enemy.” The Liberal Democratic Party, it concludes,cannot “defend either [the cabinet or the bureaucracy] if and when public sentiments erupt over defense issues.”




support can be provided selectively to advancedcommercial technologies, enabling private firms toadapt the technology as necessary for defensepurposes.

26A S Japan’s commercial R&D base

grows, SO does TRDI’s.

This strategy limits Japan’s ability to developworld class weapon systems in particular areas, butcurrently Japan does not aim for the best and latestin all areas, as does the United States. Achievingself-sufficiency and effective spin-on and spin-off of technology between commercial and military sec-tors does not require state-of-the-art technology in

ities remain limited. A decision by Japanese compa-nies to restrict market access of (and cooperationwith) U.S. defense companies would heighten trade-related frictions even in the face of reduced militarybudgets in both countries and diminishing East-West tensions.

Japanese firms would like to maximize localcontent in their defense products and at the sametime maintain access to foreign technology andmaterial. Defense contractors in Japan, like those inother advanced countries, seek a strong domesticindustrial and technology base a high degree of



q gyall areas.

27

This is particularly evident in the defense elec-tronics area. In the case of MELCO’s developmentof the FSX active phased-array radar, JDA did notpay for the development of the underlying galliumarsenide chip technology or the production processdevelopment, which lowered unit costs to a feasiblelevel. However, TRDI has supported radar technol-ogy at MELCO at a modest level since 1973, and thissteady support for the military application, lever-aged by the commercial R&D for the underlyingtechnologies, has proved to be a winnin g strategy.

Future Collaboration in Defense

Technology With Japan

Japanese defense firms will likely take one of twocourses during an extended period of tight defensebudgets. First, firms may seek international partnersto assure their long-term survival in commercialbusiness. This has been seen already on a dramaticscale with the MHI/Daimler-Benz cooperative agree-ment and to a lesser extent by IHI’s steps to developa cooperative relationship with General Electric.These types of arrangements could lead to globalrationalization and more extensive technology trans-fers in key industries such as aircraft production.

The other possible course would be to shut outpotential foreign competitors to preserve dwindlingmarket shares at home. This is most likely in areassuch as electronic components, where Japanesecapabilities are generally very high, and less likelyin areas such as aircraft production and systemsintegration, where Japan’s industry size and capabil-

industrial and technology base, a high degree of autonomy, and self-sufficiency.

Japanese Attitudes on Collaboration

Despite the difficulties associated with the FSXprogram, JDA supports continued collaborativedevelopment efforts with U.S. defense fins. Bothindustry and the military feel Japan needs continuedaccess to U.S. defense technology because it does

not have the budget or knowledge to push technol-ogy broadly on all fronts. JDA does not think thatJapanese defense technology or industry pose acompetitive threat to U.S. defense companies, and itdoes not see itself turning abruptly toward theEuropean Community, despite aggressive efforts byEC member nations to sell weapons to Japan. (Someanalysts argue that JDA’s recent acquisitions of European aircraft for the Maritime Self Defense

Forces suggest the opposite.) Japanese officialsbelieve that the scale of FSX was too large to try asan initial codevelopment effort, but that the UnitedStates and Japan will learn together as they proceed.

Japanese industry is generally more interested inselling complete subsystems or components than itis in sharing its technology by licensing or coproduc-tion. Industry simply does not perceive any benefit

in licensing its technology to the United Stateswithout comparable gains. In commercial areas,these gains most often have been in the form of access to distribution networks or a percentage of anexisting market. In the case of straightforwarddefense sales, such exchanges would quickly be-come politically sensitive.

%ompanies canrecwp some of their military-oriented R& D expenses tiom JDA either as a charge against future defense contracts forproductiou

or by an administrative overhead charge similar to the U.S. Industrial Research & Development arrangement.mJapan’st~hnology imports fiJapane~fis~ yem(~ 1988 totaled 366.8 billion yen($2.45 billion), compared to 293.7 b~ony=($l.97b~on)

in exports. See Choy, op. cit., footnote 25, p. 20.


In addition to corporate outlook on technologyexchanges, business-government interactions tendto restrict the access of outside firms to developingtechnologies in Japan, unless those firms developextensive networks over along period of time. TRDI

monitors commercial and dual-use technologythrough routine contacts with company officials andlab specialists. Because TRDI technical staff areessentially lifelong employees, there is little or noopportunity to move between government andindustry. This helps to assure the free flow of information from industry to the government be-cause the possibility of compromising proprietary

security outlook and the difficulty of making thisprogram work to the satisfaction of all. FSX has notturned out to be what its Japanese and U.S.proponents expected. Japanese industry underesti-mated the dimensions of the tasks involved in

developing an entire aircraft, even one based on anexisting airframe. Resources have been stretchedthin in the private sector by the project, to the pointwhere both government and industry are concernedthat it will interfere with the ability of companies todevote sufficient attention to civilian projects, suchas MHI’s Boeing subcontracting work. U.S. Govern-ment officials remain uncertain about the benefits of



cause the possibility of compromising proprietaryinformation is minimized. In this respect, TRDI acts

as an honest broker among Japanese firms and theapplication of their technologies to JDA’s needs.

These mechanisms facilitate communication andcoordination among these interests and help pro-mote cross-industrial transfers. Meetings betweenministry officials and business representatives alsoprovide insights into government R&D initiativesyears in advance, assisting companies with their

long-term marketing and product development strat-egies. Considerable overlap takes place betweenJDA-industry and MITI-industry activities, furtherassuring extensive integration of JDA with thecivilian industrial and technology base.

Possibility of Another FSX

More than any other issue, the possibility of another FSX case arising in the future has shaped

U.S. perceptions and questions about defense coop-eration with Japan. The notion of planning foranother FSX has very opposite meanings, dependingon the audience. For Japanese audiences, anotherFSX implies entering into additional codevelopmentarrangements with the United States that mightprecipitate pressures from Congress across a muchbroader range of trade, technology, and economicissues. For the United States, it means a potential

loss of technology and competitiveness in a criticalindustry through an ostensibly cooperative program.

It is reasonable to ask if another FSX will in factmake sense for either country in light of the current

ment officials remain uncertain about the benefits of potential flowback of Japanese technology to Amer-

ican industry, and as a result are still ambivalentabout participating in the program. The total devel-opment costs were substantially underestimated, andmaking up the difference will be difficult if down-ward pressures on the defense budget persist.

The prospect of another FSX is also limitedbecause of reduced demand in Japan for newfront-line weapons systems beyond those already in

various stages of development or delivery. If peacebreaks out in Asia as it apparently has in Europe, itis questionable whether there will be sufficientpublic or government support for the spendingincreases required to carry out major new weaponsprograms.

U.S. critics of the FSX project claim that theUnited States has not received adequate access toJapanese technology in return for what is beingtransferred to Japan. Others respond that U.S.Government and industry have not been sufficientlyactive in identifying opportunities to exercise thereverse technology transfer path. There have beenthree defense-related U.S. Government technologyassessment missions to Japan, but to date there havebeen no technology transfers resulting from them.

28

Japan has proposed five areas for cooperation, andthe two governments have begun defining arrange-ments governing projects in at least three of the five.At this pace, however, the United States cannotexpect that any more than a trickle of projects will

~Defense Department teams have exarnin ed electr~optics and millimeter wave technology and manufacturing processes. The results of theirassessments were published in U.S. Department of Defense, C)ft3ce of the Under Secretary of Defense (Acquisition) for Research and AdvancedTechnology, “Electr@optics and Millimeter Wave Technology in Japa~” May 1987; and Dr. Clinton W. Kelly et al., “Findings of the U.S. Department

of Defense Technology Assessment Team on Japanese Manufacturing Teehnology,” June 1989. In additio~ a delegation fkom the U.S. Army Materielco remand assessed Japanese technologies in U.S. Army Materiel Co remand “Assessment of Research and Development Opporhmities inDefens&Related Technologies,” U.S. Army Materiel Command, September 1989.


result in transfers of Japanese technology to theUnited States.

One of the primary problems facing U.S. firmsthat would like to collaborate in defense technologywith Japanese companies is the difficulty in assess-ing the current state of Japanese technology. Despitesteps made to rectify this situation, the United Statesremains insufficiently informed on the state-of-the-art in Japan. Furthermore, assessments often con-flict. For example, in the case of the MELCO phasedarray radar, teams from the General AccountingOffice (GAO) and the U.S. Air Force (USAF)reached strikingly dissimilar conclusions regarding

Box 6-A—Japanese Military and Dual-UseTechnologies

The Japanese Government defines “arms” asany of the following items (as stipulated in the

Export Trade Control Order of Japan and the PolicyGuideline of the Government of Japan on ArmsExport of Feb. 27, 1976):

1. Firearms and cartridges to be therefor (in-cluding those to be used for emitting light orsmoke), as well as parts and accessories thereof (excluding rifle-scopes).

2. Ammunition(excluding cartridges), and equip-



reached strikingly dissimilar conclusions regardingJapanese capabilities. GAO found that Japaneseproduction facilities were of “soldering iron vin-tage. ’ ’

29GAO also concluded that the United States

is well ahead of Japan in the critical areas promotedas benefits to the United States for participating inthe FSX project, including wing composites and thephased array radar. In examining many of the samefacilities, technologies, and issues, the USAF teamconcluded in contrast that ‘Japanese facilities areas

modern and well-equipped as anything to be foundin the United States. MELCO’S modular technologyto be used in the FSX radar is not far behind that of the U. S.’ ’

30

Although there is support in some Japanesebusiness and government circles for accelerating thepace of reciprocal technology transfer, there are anumber of specific obstacles to transferring defensetechnology from Japan to the United States. On the

Japanese side, there is 1) a narrow interpretation of the 1983 accord with respect to transfers to theUnited States, 2) a restrictive policy on third-countryresales, and 3) a question of the definition of the term“dual-use” (see box 6-A). Each of these barriers isoutlined below.

There is an elaborate process in Japan for theapproval of technology transfer to the United States,

depending on whether the item if for a purelycommercial, dual-use, or military application. If aproduct is purely commercial, it can be sold underthe normal commercial export licensing system. Intheory, nonmilitary technologies need not be ap-proved for export by the Joint Military Technology

2. Ammunition(excluding cartridges), and equipment for its dropping or launching, as well as

parts and accessories thereof.3. Explosives (excluding ammunition) and jet

fuel (limited to that the whole caloric value of which is 13,000 calories or more per gram).

4. Explosive stabilizers.5. Military vehicles and parts thereof.6. Military vessels and the hulls thereof, as well as

parts thereof.7. Military aircraft, as well as parts and accesso-

ries thereof.8. Antisubmarine nets and antitorpedo nets as

well as buoyant electric cable for sweepingmagnetic mines.

9. Military searchlights and control equipmentthereof.

10. Bacterial, chemical, and radioactive agents formilitary use, as well as equipment for dissemi-nation, protection, detection, or identificationthereof.

According to the 1983 notes, “The term ‘militarytechnologies’ means such technologies as are ex-clusively concerned with the design, productionand use of ‘arms’ “ as defined in the PolicyGuideline of the Government of Japan on ArmsExport of Feb. 27, 1976 and the Export TradeControl Order of Japan. “Arms” by definition “areto be used by military forces and directly employedin combat. The Policy Guideline states further thatequipment related to arms production will betreated in the same manner as arms.

Any other technologies by implication are con-sidered commercial or defense-related (but otherthan military).

~.S.Congress, GemeralAccounting Office, U.S.-Japan Codevelopment:Review of the FS-XProgram, NSIAD-9077BR (Gaithersburg, MD: U.S.General Accounting Oftlce, February 1990), p. 29.

Wnclassifkd executive summary of USAF trip repom May 1990, p. 5.

292-877 0 - 91 - 5 : QL 3


Commission (JMTC).31

In practice, however, mili-tary technologies have been defined by the JapaneseGovernment, and by MITI in particular, by their enduse, not necessarily by their origin or potential forapplications in commercial or military products.

If a product is considered to be dual-use, theJapanese seller is required to obtain a significantamount of information from the buyer regarding theend-use of the item. This includes a certification bythe end user that the item will not be used as aweapon or as part of a weapon. This process is saidto take 1 to 3 months. If the item is scheduled for amilitary application, there is additional scrutiny by

subsystems, and has the effect of discouragingexport applications, both by Japanese and U.S.firms. MITI claims to be trying to reverse thisimpression, but there have been few test cases todate.

A final concern is that U.S. defense systems oftenare shared with other allies, and Japanese regulationsforbid third-country transfers. Furthermore, manyJapanese advanced defense concepts have commer-cial components included in them that are not ownedby JDA. Consequently, Japanese companies thatown the technology may require a royalty or otherpayment in return for their commercially developed



y pp y yMITI and the JMTC. In the past there have been

several cases where dual-use technology transferswere denied by MITI because they specifically wereheaded for a military contract. This situation isparticularly applicable to electronic components and

p y y ptechnology. A suggestion has been made in Japan

that JDA should buy the technology from industry sothat they are in abetter position to negotiate with theUnited States, although the mechanics of this type of arrangement could be costly and cumbersome.

sl~ U.So-Japan Joint wtary Technology Commission (JMTC) was established by the November 1983 notes on technology transfers to facilitateactual exchanges. It consists ofreprcsentatives from Ministry of Intemationalllade and Indusby, the Japan Defense Agency, h9inis~of FomignAffairs,and senior representatives from the U.S. Embassy in ‘Ibkyo. For additional details on the mechanics of tmnsferring technologies utilizing the JMTC,

see U.S. Department of Defense, Ofilce of the Under Secretary of Defense for Research and Engineer@, “Japanese ~tary Technology: Pl12CedlKtXfor Transfers to the United States,” February 1986.

Chapter 7

The Developing Defense Industrial

Nations: South Korea, Brazil,

India, Taiwan, Australia,



India, Taiwan, Australia,

Indonesia, and Singapore

Contents Page

COLLABORATION AND DEFENSE INDUSTRIAL PROLIFERATION . . . . . . . . . . . . . . . . 123Conventional Arms Trade Among Developing Nations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126

Naval Arms Proliferation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127Missile Proliferation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127

Figure Figure Page

7-1. Estimated Licensed Production of Major Conventional Weapon Systems inSelected Developing Nations, 1960-88.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124



\

Chapter 7

The Developing Defense Industrial Nations: South Korea,Brazil, India, Taiwan, Australia, Indonesia, and Singapore

COLLABORATION AND DEFENSEINDUSTRIAL PROLIFERATION

During the period 1970-90, several of the devel-oping nations achieved remarkable growth in theirdefense production capabilities. The expansion of the defense industries has been accompanied by theincreasing sophistication of their military products

appears to complement its regional aspirationswithin Southeast Asia.

Increasingly, economic incentives play an impor-tant role in motivating the newly industrializednations to undertake extensive arms production.These countries argue that indigenous productioncan lead to cost reductions and potential foreignexchange earnings through exports Additionally



—advanced fighter aircraft, tanks, armored person-nel carriers, missiles, and naval craft. Brazil hasdemonstrated its marketing capabilities by exportingintermediate-level weapon systems to many devel-oping countries as well as to the United Kingdom.The production and R&D capabilities of the devel-oping countries have been augmented by licensedproduction agreements and other forms of militarytechnology transfer from U. S., Soviet, and Europeandefense companies (see figure 7-l).

This chapter provides an overview of the variousmethods that the developing nations have used toacquire defense production capabilities. Subsequentchapters (chs. 8-11) examine the defense industriesand policies of South Korea, Brazil, India, Australia,Singapore, Indonesia, and Taiwan.

1These chapters

provide a comparison of the differing manufacturingand export capacities of these counties. The analysisalso reviews substantially increased involvement byU.S. companies in the defense industrial bases of thedeveloping nations.

Defense production in these countries stems froman amalgam of strategic, political, and economicmotivations. Strategic considerations—improvedself-reliance, ensured security of supply, regionalpower aspirations, and local arms races—have ofteninitiated the development of arms industries in thenewly industrializing countries. India’s extensivemilitary buildup has been tied to its regional armsrace with China and Pakistan. Taiwan’s develop-ment of an indigenous fighter airplane may havebeen motivated by its desire for self-reliance in viewof U.S. refusals to sell it sophisticated aircraft.Indonesia’s recent effort to build an arms industry

exchange earnings through exports. Additionally,

defense programs are believed to contribute to thecivilian economy indirectly by providing spin-offsto other industrial sectors, and by upgrading theskills and productivity of the industrial labor force.

The ability of these states to establish indigenousdefense production capacity is conditioned by sev-eral factors. Large amounts of capital are necessaryto establish such a technologically intensive indus-

try. Massive investments are required to buildmanufacturing facilities, create R&D centers, and topay for imports. Additionally, government expendi-tures, through domestic defense procurement budg-ets, are often a prerequisite, given the small size of local markets. Australian defense production, forinstance, has been severely hampered due to itssmall domestic procurement budget.

A second component is a diversified industrialbase. Defense productiom, particularly in the aero-space sector, is one of the most complex manufactur-ing activities, and requires extensive industrialinputs from such sectors as steel, metallurgy, ma-chinery, and electronics. The recent increase in armsproduction among such defense industrializing coun-tries as Singapore and Indonesians explained in largepart by their growing manufacturing capabilities.

A third factor relating to the arms-producingcapabilities of developing countries is the status of domestic scientific and educational facilities. Asevidenced in the subsequent chapters, the armsindustries of India, Singapore, and Taiwan haveprovided the impetus for the creation of institutionsfor scientific research and applied technology.However, the majority of the developing countries

IFor ~ ~y~is of defense pr~uction ~ tie newly ~dus~~fig ~~~es see Cwol Evms, D#ense l%duction in the NZCS: The Case Studies

From Brazil andhdia (London: London School of Economics, Spring 1991), passirn.

–123–


Figure 7-l—Estimated Licensed Production of Major Conventional Weapon Systemsin Selected Developing Nations,* 1960-88

35 . . . . . . . . . . . . . . . . . . . . . ........................................ ...........................................................................Licensed systems in production**

30 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Numberof major 25 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

systems

20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .



120

15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

I f Number of systems licensed annually

1960 1964 1968 1972 1976 1980 1984 1988


‘Brazil, India, South Korea, Indonesia, Taiwan, Singapore, and Australia.q “Estimates based on the assumption that an average system is produced under license for 12 years.


do not possess advanced R&D programs or institu-tions for educating technicians and scientists.

Among the developing nations, strong state involve-

ment through direct ownership of the defenseindustries is frequently a means of ensuring theviability of domestic defense firms. Governmentshave also provided various fiscal and trade incen-tives to help both domestic and foreign defensecompanies reduce their defense production costs.The state-controlled aircraft industries in India,Indonesia, Singapore, and Taiwan are good exam-ples. The Singaporean case also demonstrates that if

a country does not have a sizable government orprivate aircraft industry, it can create one byattracting foreign investment.

The final factor affecting arms production isaccess to export markets, primarily in the developingworld. Arms producing countries like Brazil andAustralia, which suffer from bottlenecks created bythe high costs of production and the small size of

their peacetime domestic requirements, must exportto maintain the economic viability of their defense

industries. In fact, the ability of the developingcountries to tailor defense production to externaldemand, and to compete aggressively in the interna-

tional arms market distinguishes those with long-term production potential.

Most nations with developing defense industrieshave followed a common process to establishdomestic defense production. The acquisition of anindigenous manufacturing capability, or the importof technology or technological know-how, is oftena continuation of direct arms imports. Domesticproduction may begin with the assembly under

license of knocked-down weapons and the manufac-ture of components. Sophisticated equipment, how-ever, continues to be imported. At a more advancedstage, developing countries design and produce theirweapon systems domestically, including compo-nents, while still relying on imports of the moreadvanced technologies, for example, avionics.

A number of factors reconfigured the interna-

tional arms trade in the 1980s. The cumulative effectof these changes has reinforced the arms production

Chapter 7—The Developing Defense Industrial Nations . 125

activities of and technology acquisitions by thesedefense industrializing states. The most importantshift was the erosion of U.S. and Soviet marketshares in the international arms trade in the face of growing competition from West European defense

suppliers.2

As one U.S. defense executive noted,“Not only are the numbers of players increasing, butthrough processes of technology transfer and na-tional commitment, we are finding more aggressivecompetitors out there. ’ The subsequent emergencein the 1980s of a buyers’ market for arms, and theenhanced technological capabilities of developingarms producers, provided the latter with the addi-tional leverage to secure licensed production and

In the past 5 years, defense collaboration hasmoved into the early research and predevelopmentstages with companies cooperating on design, fabri-cation, and application of advanced technologies.This approach, however, is restricted to relatively

advanced arms producers. Brazil’s aircraft industry,for example, has various collaborative internationalarrangements with Italy’s Aeritalia and Aermacchias well as with Argentina’s aircraft industry, FubricaArgentina de Materials Aerospaciales.

Another means to supplement a developing coun-try’s defense industrial sector is through sub-contracts with large international defense compa-



tional leverage to secure licensed production and

offset agreements. Moreover, transfers increasinglyconsisted of military technology, not simply theprovision of finished military weapon systems.

Licensed production arrangements have beenheavily favored by most developing arms producers.In return for the production of proven weaponsystems, governments can conserve foreign ex-change and upgrade their countries’ technological

bases. Licensing is also attractive because of itsinherent flexibility. Agreements can be secured toallow for a broad range of manufacturing activitiesincluding components, subassemblies, or the pro-duction of a complete weapon system and itscomponents.

4Of the developing countries consid-

ered in this report, South Korea, India, Taiwan,Singapore, and Indonesia have relied extensively onlicensed production from foreign companies as a

means of acquiring and expanding their defenseindustrial capabilities.

A second, less frequently used means to acquiredefense-related technologies is through joint ventureagreements and company-to-company teaming withU.S., European, and increasingly other developingdefense industrial nations. The economic advan-tages of collaborative arrangements are threefold:

1. risk sharing and reduction of technical andcommercial processes inherent in the develop-ment of new weapon systems;

2. access to partner’s technology and capital re-sources; and

3. marketing and reputation benefits.

g p

nies. Many U. S.- and European-based companieshave established production lines in the countriesbelonging to the Association of Southeast AsianNations (ASEAN) to take advantage of their lowwages and skilled labor. Companies are also at-tracted to these countries because their locationprovides market access in the Far East. The develop-ment of arms production programs in the ASEANstates of Singapore and Indonesia has been greatly

aided by the defense manufacturing operations of such companies as United Scientific Holdings of theUnited Kingdom, and General Dynamics of theUnited States.

Since the 1980s, defense firms have been forcedincreasingly to provide offsets to secure sales.Although there are many kinds of offset agreements,the most common are direct offsets in which the

purchasing country manufactures and supplies com-ponents in connection with the purchase of a foreignweapon system. These have stimulated the develop-ment of new arms industries, particularly when theforeign company supplies technical data and trainslocal technicians. The offset arrangements betweenGeneral Dynamics and Singapore and Indonesia forthe acquisition of the F-16 enabled these countries tosave foreign exchange and to provide work and

valuable production technology for their domesticdefense industries. Experience gained in such trans-actions often leads to future licensed production andeven to attempts at indigenous development.

An analysis of defense industrialization in Brazil,India, and South Korea and among several Western

*o r data relating to these shifting market shares see Richard Grimme% “Trends in Conventional Arms Transfer to the Third WorlL by MajorSupplier, 1982-1989,” CRS-9@298-F (Washington DC: Library of Cong-mss, Congressional Research Service, 1990).

~uoted in Richard W. Stevenso~ “No Imnger the Only Game in Tow” The New York Times, Dec. 4,1988, p. F7.4Trevor Taylor, “Defenee Industries in International Relations,” Review of International Studies, vol. 1, 1990, p. 61.


Pacific countries shows differing levels of defensemanufacturing and export capabilities. During the1980s, Brazil ranked first or second (after Israel) interms of defense production and exports among thedeveloping countries. Building on international

collaborative and licensing agreements, Brazil’sdefense industries became highly diversified andsophisticated producers of military equipment. ThePersian Gulf and Middle East states such as Iraq andLibya have been the largest purchasers of Brazilianarms. In the Brazilian case, the acquisition of dualcivil and military technologies enabled some Brazil-ian firms (e.g., Embraer) to compete successfully inthe U.S. and European aircraft markets. However,

The Western Pacific countries (reviewed in ch.11) are also heavily involved in defense industriali-zation. The development of arms industries inAustralia, Singapore, Indonesia, and Taiwan hasbeen conditioned by reductions in security assist-

ance provided by the United States and the UnitedKingdom, for example, the British decision in 1971to withdraw its defense forces from Malaysia andSingapore, and the U.S. military withdrawal fromIndochina in 1975. Financial and technologicallimitations have led Indonesia and Singapore espe-cially to concentrate their defense production activi-ties on overhaul, modernization, and internationalsubcontracting, mainly for the aircraft sector. While



while the Brazilian model has encouraged thedefense production activities of other new entrants,it is unlikely to be duplicated successfully. More-over, the international embargo against Iraq hasdamaged the export viability of Brazil’s armsindustry.

India provides a paradoxical example of a countrythat possesses the largest military-industrial-research complex of the developing nations, and at

the same time depends disproportionately on trans-fers of foreign defense technology. Its failed policyof self-sufficiency (because of overly ambitiousattempts to produce sophisticated weapon systems)has necessitated substantial imports from and licens-ing agreements with the Soviet Union and morerecently with West European states.

South Korea’s heavy reliance on U.S. foreignmilitary assistance to meet its security requirementsand to finance U.S. arms imports is gradually beingreplaced by collaboration and coproduction agree-ments with U.S. defense companies. Similar to theexperiences of other developing countries withlarger defense sectors, the growth of South Korea’sarms industry since the 1970s has been closelylinked to a strategy that emphasizes the expansion of the shipbuilding, machinery, and electronics indus-tries. However, unlike many of the other developingcountries, South Korea has pursued partnership withU.S. and foreign defense firms rather than self-sufficiency. Future government efforts to strength-en South Korea’s partnership strategy, such assupplying components to major U.S. aerospacedefense firms and increasing defense exports, greatlydepend on continued U.S. willingness to transfermilitary-related technologies.

the juxtaposition of Australia and Taiwan revealssignificant differences in strategic priorities, bothcountries have sought to improve the future self-sufficiency of their arms industries through collabo-ration with foreign defense firms.

U.S. defense companies are involved in thedefense industries of all the Western Pacific nationsexamined in this report. This involvement includestransfers of technology through licensed production,

joint ventures, and direct foreign investment. As aresult, the defense industries of the Western Pacificcountries are highly import dependent. Nonetheless,these countries are likely to exploit foreign defensecompanies’ growing interest in the Asia-Pacificregion and to secure transfers of technologies thatwill enable them to move from primarily subcon-tracting and direct offsets into licensed production of finished weapon systems.

The ramifications for U.S. foreign policy arisingfrom defense production and exports by the defenseindustrializing countries are far-reaching. The rela-tively unrestrained spread of conventional arms, aswell as naval and ballistic missile proliferation, hasbeen facilitated by U.S. and West European technol-ogy transfers. International efforts such as theMissile Technology Control Regime will have onlylimited countervailing effectiveness because of thegrowth of defense cooperation between developingnations.

Conventional Arms Trade Among Developing Nations

Arms production and exports by countries likeBrazil have had an important effect on the growth of defense trade among the developing nations.

sAs

5SW ~ol v. Ev~, “Rwppr&@ -d world AIDS RO&ICtiO~” SWViVUZ, VO1. 28, No. 2, ~C~APril 1986, PP. 99-118.

Chapter 7—The Developing Defense Industrial Nations q 127

discussed in the subsequent chapters, developingcountries are increasingly purchasing military equip-ment and technology from the defense industrializ-ing countries. Many of these recipients are countriesthat are diversifying their sources of weapons supply

in order to circumvent arms embargoes or simply toreduce the influence of their traditional suppliers.Examples of such recipients among the developingcountries are Iraq, Iran, and Taiwan.

In addition to military hardware, some developingnations are beginning to transfer the technology andinfrastructure necessary to develop defenseproducts. In October 1984, for example, Brazil andSaudi Arabia signed a 5 year military cooperation

Over the past 10 years, Indonesia and Taiwan haveeither licensed-produced or purchased fast attack craft and patrol vessels from West German andIsraeli sources, respectively. (As discussed later,Indonesia’s naval expansion is linked to its monitor-

ing and policing of its Exclusive Economic Zone.)According to the Stockholm International PeaceResearch Institute:

Many of these craft share the following character-istics: twin propulsion systems for economical patrolwith greater speed; . . . sizable and separated storageareas located where they can become magazines;. . .helicopter facilities; communications systems; ex-tensive crew quarters to allow increases in the ship’s



Saudi Arabia signed a 5-year military cooperationagreement for the technical training of Saudi work-ers in weapons assembly and the joint manufactureof the Astros II multiple-rocket launcher. Anotherimportant example is the 1984 licensed productionagreement between Brazil and Egypt for the Tucanotrainer. Of the 120 planes assembled in Egypt, 80were delivered to Iraq and 40 were retained by theEgyptian Air Force. In both cases, financing was

provided by Saudi Arabia through the Gulf Coopera-tion Council.

This trend in conventional weapons trade amongnations of the developing world has significantlyundermined control over weapons trade and regionalconflicts. For example, the Brazilian Government’sban on arms exports to Iran during the Iran-Iraq wardid not deter or prevent Libya—Brazil’s secondlargest arms importer-from supplying Brazilian

spare parts to Iran.6

Naval Arms Proliferation

As indicated in the chapters that follow, India,Taiwan, and Indonesia have been expanding theirnaval capabilities through indigenous defense pro-duction efforts or through off-the-shelf purchases.Situated along strategic sea lanes or at choke points,each of these countries has arrived separately at thesame hardware solutions to their sea-denial defensepostures: missile-firing fast attack craft, helicopters,maritime surveillance aircraft, and submarines.

7

company if helicopter, anti-submarine warfare (ASW),or electronic warfare (EW) operations should ever beundertaken and hard points for the attachment of equipment such as sonars or missile systems.

8

In addition, changes in submarine technologyhave had a profound impact on current navalbalances. The development of air-independent pro-pulsion systems for submarines, which could then bearmed with a missile capability, could threatenaircraft carriers.9 India’s lease of a Charlie I-class,nuclear-powered submarine, and its purchases of West German 209, Soviet Kilo and Foxtrot subma-rines mark a significant jump in India’s navalcapabilities. India would now be better able tocounter the threat it faced in its 1971 war withPakistan, when the U.S. Navy deployed its SeventhFleet into the Bay of Bengal. These acquisitions,along with the induction of a second aircraft carrier,have raised concern about India’s regional ambi-tions.

l0Similarly, Indonesia, which is planning to

build a large naval base on Sumatra for quick accessto the Bay of Bengal, is worried about the IndianNavy.

Missile Proliferation

A relatively new development is the proliferationof ballistic missile programs by the newly industrial-izing countries. Nine countries possess or aredeveloping indigenously surface-to-surface missiles

6veja, Sao Paulo, ()(X. 22, 1986 P. 590

TCo_odore K. R. Meno@ ~~n Navy, “~ World Navies R~c~” Proceedings of the U.S. Naval Insfiwte, -h 1989, p. 89.

sIan Anthony, “TheNavalArms Trade and Implications of Changes in Maritime Law,” SIPRI Yearbook 1988, WorldArmaments andDisarmam.ent(Oxford: Oxford University Press, 1988), p. 275.

%fenou op. cit., footnote 7, p. 94.l~oss H. Munro, “SuWrpoWWI Mm@,” Time (Intermtional edition), vol. 133, No. 14, Apr. 3, 1989, p. 13.



Chapter 8

The Defense Industry

of South Korea



Contents Page

THE ROLE OF GOVERNMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131ACTIVITIES OF U,S. DEFENSE FIRMS IN SOUTH KOREA . . . . . . . . . . . . . . . . . . . . . . . . . . 132SOUTH KOREA’S PARTNERSHIP STRATEGY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133ISSUES FOR THE FUTURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136

South Korea’s Technological Capabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136

Western European Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . 137U.S. Policy ... ... o....... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138

Figures Figure Page

8-l. Foreign Military and Direct Commercial Sales Deliveries from the U.S.to South Korea, 1978-88 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132

8-2. South Korean Arms Imports and Exports, 1978-88 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134



Chapter 8

The Defense Industry of South Korea

THE ROLE OF GOVERNMENT

The South Korean Government has nurtured thedevelopment of a defense industry since the early1970s. Three measures promulgated at that timehave set government policy: a Special Law on theDefense Industry (1973), a Force Improvement Plan(1974) for the buildup of the Republic of Korea(R.O.K.) armed forces, and a Defense Tax Law(1975) to finance the development of the defenseindustry.

weapon systems. Defense firms generally enter thepicture by producing prototypes based on ADD

designs. The ADD also has a role in managing therelatively small amount of R&D carried out bydefense companies.

The South Korean defense industry currentlycomprises some 80 fins, which employ about45,000 people. Of the 80 fins, 44 have over 500employees. The government in recent years has triedto foster smaller and medium-sized companies in the

d f fi ld N h l ll b f i



Government support for defense industries wasrelated to the general government policy in the1970s of fostering investments in such industries asheavy machinery, shipbuilding, steel, and electron-ics. The growth of these industries provided linkagesto developing defense production, as the manufac-ture of weapons became integrated into the broaderproduction of heavy machinery and ships.

The South Korean Government has followed apolicy mixture of pressure and incentives for compa-nies that enter the defense business. Confessionalfinancing-loans at below market interest rates-has been extensive for the defense sectors of suchcompanies. The government has eliminated tariffsand quotas on imports needed for defense produc-tion. Employees of Korean companies involved in

defense work receive exemptions from the militarydraft. The government is prepared to assist keydefense firms that fall into financial difficulties.

1

Pressure and control have been equal to incentivesin government policy. In the 1970s and early 1980s,the government made the financing and licensing of commercial production depend on the willingness of Korean firms to go into defense production. Thegovernment closely manages production levels,

marketing, and the export of weapons and militaryequipment.

The government also dominates weapons R&D.The Agency for Defense Development (ADD) hascarried out most of the research and design of

defense field. Nevertheless, a small number of giantcorporations dominate the defense industry just asthey do in the civilian product sector. Many of thesecorporations, known as the ckaebol, now haveinternational reputations: Samsung, Daewoo, Hyun-dai, and Lucky Goldstar. These corporations pro-duce textiles, automobiles, home appliances, andelectronics products, and engage in ship buildingand construction. Within the defense industry, they

manufacture the majority of systems that SouthKorea produces.

2Many of the smaller Korean

companies in defense work engage mainly insubcontracting to these giants.

Given the size and the range of activities of thechaebol, defense work comprises a small percentageof their business. For example, Hyundai PrecisionIndustries, a division of the Hyundai conglomerate,devotes only 15 percent of its work to defense,according to company officials interviewed in May1990. Many of the component companies of theDaewoo Corp. are involved in defense production,but this amounts to less than I0 percent of Daewoo’stotal business. Defense products comprise about25 percent of the sales of Samsung Aerospace, acomponent of Samsung Corp.

Nevertheless, the chaebol will spearhead the

future of South Korea’s defense industry, and will nodoubt be the leaders in manufacturing new systems.Their role in R&D will likely expand. They willdominate future collaborative and joint ventureendeavors in military production between Koreanfirms and United States or other foreign companies.

Imwg.in Moon and Kwang-il Bark, “Imyalty, Voice, or Exit? The U.S. ‘ildrd-Country Arms Sales Regulation and ROK Count-dingStrategies,” Journal of Northeast Asian Studies, vol. 4, spring 1985, p. 42.

%f.ike HowartlL “Defending the Republic of Korea: Armed Forces and Industry Forge-“

Xnternutionul Defense Review, No. 2, 1986, pp.193-197.

–131–



Chapter 8--The Defense Industry of South Korea . 133


Northrop Corp.’s Tiger II F-5E (foreground) and F-5F have

been built under license in South Korea Switzerland and

Photo credit: U.S. Army

The U.S. M-109 155 mm self-propelled howitzer was first

fielded in the United States in the early 1980s and



been built under license in South Korea, Switzerland, andTaiwan. The F-5 series is one of the most widely used

U.S. military aircraft, with 3,805 having been builtbetween 1959 and 1987.

Joint venture collaborative arrangements some-times have led to subcontracts under which Koreanfirms produce components that go into military andcivilian systems, manufactured in the United States

by American defense firms. Korean firms, forexample, produce several airframe parts for theF/A-18 fighter manufactured in the United States byMcDonnell Douglas. Korean companies also makecomposite materials for the General Dynamics F-16fighter, and produce parts for McDonnell Douglas,Sikorsky, and Bell helicopters. The Daewoo Corp.produced wings for the Lockheed P-7 naval aircraft.The extent of these subcontractor relationships is

unknown. In 1989, South Korea exported $182million in aircraft and aircraft parts.3It is reasonable

to assume that a sizable majority of these exportswent to the United States.

SOUTH KOREA’S

PARTNERSHIP STRATEGY

Like their Japanese counterparts, South Korean

Government and industry leaders seek to increasethe percentage of weapons and military equipmentproduced locally, but they do not appear to aim foran independent defense industry with no foreigninvolvement. Long-term aims, however, are uncer-tain. South Korean leaders speak of a growingpartnership between Korean firms and foreign com-panies, especially U.S. corporations, in producingweapons systems. They seek collaborative relation-

fielded in the United States in the early 1980s, andhas been upgraded frequently since. Assembly of

the M-109A2 version by South Korea’s KIA MachineTool Corp. began in 1983.

ships in which Korean firms assume a progressivelygreater and more equal relationship status with U.S.partners. Korean officials assert that South Koreaneeds an independent capability for maintenance of

its military equipment, for which it currently de-pends on the U.S. military. They believe that theseobjectives should be achieved through an accelera-tion of technology transfer from U.S. companies totheir Korean partners, which will allow Korean firmsto produce more sophisticated components andcomplete systems and be able to provide full serviceand maintenance to systems in South Korea’smilitary arsenal.

South Korean officials have outlined three ele-ments of this partnership strategy. One is to developa significant role for Korean firms as suppliers of components and parts to major U.S. defense firmsthat produce in the United States. South Koreanleaders stress the advantages of Korea supplyingcomponents and parts at reduced costs, as major U.S.defense corporations face declining U.S. defense

budgets, fewer contracts, and a greater need forefficiency and cost-cutting. This, they argue, wouldallow American firms to retain the lead in develop-ing advanced technology while economizing onstandard parts and components through subcontract-ing with Korean companies.

South Korea has instituted an offset policy towardU.S. and other foreign suppliers similar to those of

S“Korea Threatens To Scrap F/A-18 If Classified Technology Exclud4° D@ense Daily, May 18, 1990, pp. 277-278.


Japan and Western European countries to induceU.S. firms to subcontract for Korean-producedcomponents and parts. Under such agreements, U.S.defense companies selling or coproducing in SouthKorea would purchase Korean products at a speci-

fied level. In the now-abandoned F/A-18 coproduc-tion deal, the Seoul Government and SamsungAerospace sought offsets from McDonnell Douglasequal to 20 percent of the expected profit of the U.S.company (plus another 10 percent in indirect sales).South Korean Government and industry officialssaw the F/A-18 transaction as opening opportunitiesfor expanded subcontractor relationships betweenKorean companies and McDonnell Douglas and

presumably have similar expectations in their deal-i ith G l D i th d F 16

Figure 8-2-South Korean Arms Imports and Exports,1978-88

1200 ~.... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

A

I \\ Armsexprk1000 ---------------------------------------------------------

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~oK...........................&........



presumably have similar expectations in their deal-ings with General Dynamics on the proposed F-16coproduction deal.

Exports are a second element of the ‘‘partnershipstrategy,’ and are integral to South Korea’s defenseindustry policy. The Korean Ministry of NationalDefense stated in its Defense White Paper, 1989 thatthe defense industry has no alternative but to turn tooverseas markets.

4

.

Since the late 1970s, South Korea has exportedseveral hundred million dollars of military equip-ment. Annual exports currently run about $100million and comprise mainly munitions and lightnaval vessels. Much of this is Korean-designedwithout U.S. involvement. South Korea’s largestmarkets have been the Middle East, Latin America,and Southeast Asia. This distribution is similar, on

a smaller scale, to the markets of the principalWestern suppliers of arms, the United States, andWestern European countries. South Korean firmshave been able to gain markets through competitiveprices based partly on lower labor costs. Koreanfirms also adopted high quality-control standards fortheir hardware. Moreover, the government has notimposed significant foreign policy restraints on salesto specific countries (human rights, arms control,

and conflict limitation constraints, for example).5

The emphasis on exports stems the the problemof maintaining a profitable defense industry. SouthKorean defense firms have operated at below 60percent of capacity for most of the period after 1984.Government procurement has not been sufficient tobring about a more efficient use of production

1978 1980 1982 1984 1986 1988

Year

SOURCE: Office of Technology Assessment, from data in U.S. ArmsControl and Disarmament Agency, World Military Expenditures and Arms Transfers, 1989 (Washington, DC: U.S. GovernmentPrinting Office, 1990).

capacity, a situation that will continue, especiallysince the emergence of a more democratic political

system in 1987 has produced political pressures onthe government to spend more in the civilian sectorsand restrain defense budget increases. The 1991defense budget contains much higher rates of spending increases for social welfare, infrastructure,and the environment than for defense.

Herein lies the pressure to export, either assuppliers of components and parts to Western

defense firms or as suppliers of entire weaponsystems to developing countries. Foreign participa-tion would enhance the range of potential armsexports, and the involvement of American firms incoproduction would help break down U.S. defenseindustry opposition to the overseas sales of U. S.-designed weapons and equipment from South Korea.South Korean arms exports have fallen dramaticallyover the past several years (see figure 8-2).

South Korea’s inducement to U.S. firms is theprospect of a more competitive position in the worldarms market through coproduction of weapons withKorean industries. South Korean officials cite lowerKorean production costs, which will become in-creasingly important as the world arms marketshrinks in the 1990s, especially if European and

dRepublic of Kore~ Ministry of National Defense, “Defense White Paper 1989, ” p. 167.sMoon ~d Bae~ op. cit., footnote 1, pp. 25-29.

Chapter 8--The Defense Industry of South Korea q 135

Chinese arms manufacturers are able to cut intotraditional U.S. markets in Southeast Asia, LatinAmerica, and the Middle East. According to SouthKorean spokesmen, U.S. firms would control theexport marketing of weapons manufactured inside

South Korea under coproduction deals.6

Technology cooperation in weapons developmentis the third element in South Korea’s partnershipstrategy. R.O.K. Government and industry spokes-men have stated that South Korea needs to producemore sophisticated military equipment in the future.They have spoken of aircraft, missiles, telecommu-nications equipment, and electronics.

7In order to

achieve this, they believe that future Korean-U.S.

McDonnell Douglas reportedly expanded its tech-nology transfer offers after the South Korean Gov-ernment ordered a review of the F/A-18 coproduc-tion deal in October 1990. The government orderedthe review in reaction to McDonnell Douglas’

notification that it had to raise the cost of the projectfrom below $5 billion to about $6.2 billion. The U.S.company reportedly offered expanded Korean par-ticipation in McDonnell Douglas’ civilian produc-tion of jet aircraft. This would have included notonly increased subcontracting but also equity partic-ipation in a joint venture to produce the MD-12, apriority commercial jetliner project.

These concessions were apparently not enough toi f h S h K G h



achieve this, they believe that future Korean U.S.industry cooperation should involve increasing lev-els of technology transfer from U.S. companies totheir Korean partners. Korean officials describeseveral ways for this to come about.

First, there would be established coproductionarrangements under which U.S. companies wouldprovide Korean firms with more sophisticated tech-nology. In U. S.-R.O.K. negotiations over coproduc-tion of the F/A-18 fighter, South Korean officialsreportedly pressed for technology for the radarsystem, certain composite materials, computer soft-ware, and high-heat tolerant parts of the engine.South Korea’s recent decision to switch to GeneralDynamics (GD) and its F-16 fighter stem in partfrom attractive technology transfer terms offered onadvanced radar and the Advanced Medium RangeAir-to-Air Missile (AMRAAM).

Technology transfer constituted an importantconsideration in the South Korean Government’sinitial decisions regarding coproduction of an ad-vanced fighter plane. The government’s initialselection of the U.S. F/A-18 fighter over the F-16 hada military rationale (the South Korean Air Force

reportedly favored the F/A-18 because of maneuver-ability and armaments), and the government at thattime viewed McDonnell Douglas as better suited toassist South Korea’s aerospace industry than GD.

These concessions were apparently not enough tosatisfy the South Korean Government at the newprice. General Dynamics reportedly has offered thesame type of technology transfer package, but foronly $5.2 billion. In addition, the unit cost of theF-16 is only about $18.4 million, compared to $30.8million for the F/A-18, a cost difference that willenable South Korea to buy an extra 25 airplanes.

8

Korean industry spokesmen view the role of theU.S. prime contractor as assisting South Koreanparticipants in the fighter project to design and planfuture aircraft. An official of Sarnsung AerospaceCo., the main South Korean participant in the F/A-18project, stated that the U.S. partner will be asked toassist Samsung in designing an “interim aircraft,”which could be a light transport aircraft, a helicopter,or a subsonic jet trainer.

9General Dynamics has

agreed to provide similar assistance in codevelopinga Korean jet trainer.

The Samsung official also gave a broader set of objectives in the development of an aerospaceindustry: reaching parity with the developed coun-tries in the manufacture of airframes and engines bythe early part of the 21st century, and reaching paritysome time after that in the manufacture of avionics

and other specialized systems and in the develop-ment of advanced systems.10

He also made clear thatgovernment, industry, and the scientific communitywould work together to reach these goals.

6p=k YoW.kooQ ~fRoK-u.s. ~fense bdw~ CooWrtition-Past Achievements and Future -,” pawr pr~~~d at the Fo@ RO~”S”Defense Industry Conference, Jan. 16, 1990, p. 5.

?Ibid.

sRick Wartzma n and Damon Darlin, “South Kore& in a Reversal, Picks F-16 Jet” The Wall Street Journal, Mar. 29, 1991, p. A3.%im Dhoe-sw “ROK-U.S. Cooperative Programs: KFP and=” papex presented at the Fourth ROK-U.S. Defense Industry Conference, Jan. 16,

1990, pp. 13-14.l%id., pp. 12-13.


Second, joint R&D of new weapons or weapons-related technology would be promoted. In 1988, theUnited States and South Korea signed a Memoran-dum of Understanding (MOU) on Defense Techno-logical/Industrial Cooperation. In 1989, Washington

and Seoul signed a second MOU for cooperativeR&D in missile guidance technology in the develop-ment of short-range surface-to-air missiles. This isthe first joint R&D program in defense between thetwo countries.

South Korea’s long-term aim is to draw U.S.defense industries into cooperative R&D with Ko-rean firms. Under the F/A-18 coproduction agree-ment, South Korean industry engineers would have

received training at McDonnell Douglas research

South Koreans have a strong national securitymotive for seeking an independent maintenancecapability. Korean officials believe that South Korea’scurrent dependence on the U.S. military for mainte-nance would leave it vulnerable to equipmentfailures if the United States withdrew its troops fromSouth Korea.

ISSUES FOR THE FUTURE

South Korea’s Technological Capabilities

South Korea’s technological capabilities in de-fense appear to lag considerably behind those of Japan and the Western European countries. (Designand construction of naval vessels is probably thesingle exception.) In general, the gap in defense



g gcenters, and McDonnell Douglas engineers wouldhave worked in Korea with the Korean firmsinvolved in the project.

11Though contract details

have not yet been made public, GD will likely pursuesimilar arrangements.

The South Koreans are aware that U.S. privatecompanies carry out much sophisticated defense-

related research in the United States and thus wouldbean invaluable resource to draw on in developingnew weapon systems. The direct participation of U.S. firms would boost the R&D capabilities of South Korean firms substantially. Korean scientistsand engineers could gain access to U.S. laboratoriesand production facilities that they currently do nothave.

From the South Korean perspective, collaborationin defense R&D would result in both a higher levelof technology in future U.S.-R.O.K. coproductionarrangements and increasing interoperability be-tween the two countries in components and parts. Italso could enhance the cooperative export strategyadvocated by R.O.K. Government and industryofficials.

Third, the South Koreans envisage coproduction

of the F-16 fighter and other modern systems asenhancing the ability of Korean companies toprovide full maintenance of such weapons. Thiscapability would increase if the South Koreans hadknowledge of the technology of such systems. The

single exception.) In general, the gap in defensetechnology appears to be larger than in the civilindustries. In civil technology, South Korean com-panies have benefited from inflows of technologyfrom Japanese firms in electronics, steel, metals, andautomobiles.

12

The most advanced weapons produced in SouthKorea suggest the limits of South Korean defense

technology. With the exception of naval vessels,none represent original Korean-designed systems,although the government’s Agency for DefenseDevelopment has succeeded in modifying severalU.S. weapon systems. The bulk of weapons pro-duced in South Korea are assemblies of U.S. or otherforeign components.

The highly touted Korean K-1 main battle tank isan assemblage of components produced in theUnited States, Germany, and France. The compo-nents are relatively advanced, and the South Koreanshave integrated them in the planning and productionstages in a relatively short amount of time. Neverthe-less, even this most sophisticated of South Koreanweapons had no original research and develop-ment.

13

The same situation will likely prevail in the

coproduction of the F-16 fighter. If the previousF/A-18 arrangement is any guide, South Korea willpurchase about 85 percent of the components of theF-16 from the United States, including the mostadvanced components. Korean firms will produce

l%wYong-su, “Korea’s Aerospace Industry,” Korea Herald, Feb. 11, 1990.l~whi ~tsuw f~~mgement co~ict ~d Foreign D&t ~v~~ent:The ~ of Jap~e~ Investment in SOUth Kor~” Co/tiia JOZUtM/

o~WorZd Business, summer 1989, pp. 61-67.

lsBrig. Gen. John C. B*% “Koreans Build Armor Force While U.S. Army Fights Red Tape,” Armed Forces Journal, May 1988,pp. 58-62.

Chapter 8--The Defense Industry of South Korea q 137

the remainder, but some of these are componentsalready used in the U.S. version of the F-16.

South Korea’s push to acquire more foreigndefense technology coincides with a slowing of civilian technology transfer by Japan and other

countries. The government responded in 1990 byannouncing a $40 billion, 5-year (1990-94) programto develop research institutions in companies anduniversities for developing new materials, microe-lectronics, bioengineering, fine chemicals, optics,and aircraft. The goal of the program is to raiseproduction in these fields from $14 billion in 1987to $50 billion in 1994 and $140 billion by the year2000.

Although this program aims primarily at the

Western European firms as potential participants inSouth Korea’s defense industry and U.S. policy ondefense industrial cooperation.

Western European Competition

French, British, German, and Italian defense firmshave emerged as competitors to American compa-nies in South Korea’s defense market. They arereceiving strong support from their respective gov-ernments, whose officials have visited Seoul in thelast 4 years promoting sales and coproduction.

U.S. military officials in South Korea and U.S.

officials in Washington acknowledge that the Euro-peans are offering South Korea more generous terms



g p g p ydevelopment of these technologies for civilianpurposes, it could in time enhance South Korea’smilitary technology in missile guidance, communi-cations and intelligence gathering, computer firecontrol systems, and materials used in aircraft, tanks,and transport equipment.

Most major South Korean corporations have

established new civilian research centers since 1986.To date, civilian-related research has had littleapplication to weapons development; but if thegovernment’s technology plan comes to fruition inthe 1990, linkage likely will emerge, though gradu-ally. The chaebol now are giving more priority tomilitary-related research, which was neglected untilnow because of the low profitability of defensebusiness. The Ministry of Defense likely will fund

industry and university research on the developmentof new materials for the aerospace industry andpossibly other industries.

14

The high-technology program and the govern-ment’s new emphasis on military R&D by Koreanfirms may indicate that South Korea is prepared to“go it alone” in developing military-related tech-nology in the 1990s, if foreign technology is not

available or is denied. If the high-technology pro-gram is successful (there are skeptics who believethe government is overreaching), South Korea’sconditions for foreign entrance into the defensebusiness will rise accordingly.

In addition to the progress of this program, twoother factors will exert major influence on SouthKorea’s defense industrial policy: the emergence of

peans are offering South Korea more generous termsthan those offered by U.S. companies and the U.S.Government. The Europeans are proposing copro-duction deals with extensive technology transferthat, according to these officials, would enableSouth Korean firms to manufacture a high percent-age of components. The Europeans also impose few-er restrictions on South Korea exporting European-

designed equipment to third countries than does theUnited States, and they reportedly offer moregenerous offsets for South Korean purchases of European weapons and systems.

These initiatives have resulted in several majorEuropean sales to South Korea in the last 2 years.South Korea recently announced that it wouldpurchase five or six submarines from Germany.

South Korea purchased several European-madecomponents for the K-1 tank. The French have goodprospects for business in antisubmarine aircraft,light helicopters, and surface-to-air missiles and

other items under an agreement Seoul and Paris planto sign in 1991.

The South Korean Government has shown partic-ular interest in the European-built Tornado fighter,and there reportedly are discussions between SouthKorean and German officials over a possible deal.The government’s view apparently is not to substi-tute the Tornado for a U.S. model for production of the Korean Fighter Plane. Rather, the governmentreportedly wants a squadron of strike aircraft thatwould have the electronic equipment capable of nighttime and precision attacks on North Koreantargets. The Tornado could fit that requirement.

14Bob Johnstone, “Seoul vs. Heavy Meti” Far Eastern Economic Review, Aug. 3, 1989, p. 54.


R.O.K. interest in the Tornado mounted after theSouth Korean Air Force determined that the U.S.F-16 did not have adequate nighttime strike missioncapabilities. This led the government to ceaseconsideration of a retaliatory air strike against NorthKorea for Pyongyang’s blowing up of a SouthKorean airliner in 1987.

Germany has shown greater interest in doing

business with South Korea over the Tornado sinceOctober 1990, including an offer to train R.O.K.pilots in using the plane’s electronic warfare systemsand providing South Korea with classified data onthe systems. The R.O.K. Government at this stagereportedly has not decided finally to seek the

Tornado, and the Germans have made no definiteoffer of the aircraft and technology Nevertheless

ing attractive terms from the Western Europeanfirms, the South Koreans no doubt will try to useEuropean competition to pressure U.S. firms and theU.S. Government to be more forthcoming in theirterms for sales and reproduction.

South Korean Government and industry spokes-men that OTA interviewed in Seoul were critical of U.S. policy on defense industrial cooperation. Theycharge that the United States is stingy in sharingmilitary-related technology and has added newrestrictions on technology transfer. They allege thatU.S. firms provide little help in giving Korean firmsrepair and maintenance capabilities. R.O.K. officialsalso criticize U.S. restrictions on offsets as imposing

higher limitations on offset arrangements withKorean firms than on Western European firms that



offer of the aircraft and technology. Nevertheless,the Korean Government’s view of its missionrequirement likely will grow if North Korea is, asreported, constructing a nuclear facility capable of producing atomic bombs by 1994. This, coupledwith the apparent inadequacy of U.S.-providedaircraft to meet the requirement of an electronicwarfare strike aircraft, soon may give Germany an

opportunity to break into a South Korean weaponsmarket in which the United States has had amonopoly for nearly 40 years.

South Korean purchases of European militaryequipment totaled about $300 million in 1989. It isexpected to reach at least $500 million by 1995. Thisestimate depends on South Korea continuing to give

a general preference to the United States in defensebusiness. Given the array of weapons that the

Western Europeans could offer South Korea, Euro-pean sales could climb above this estimate if Seouldecided to accelerate business with European firms.South Korean officials and U.S. military officials inKorea stated in interviews that younger R.O.K.officers and Defense Ministry officials are attractedby European proposals and are pressing the govern-ment to shift more defense business away from theUnited States and to the Europeans.

U.S. Policy

The South Korean Government and defenseindustry can be expected to encourage WesternEuropean offers of defense industrial cooperationand likely will select European bidders for certainhigh-value military hardware. In addition to obtain-

Korean firms than on Western European firms thatcoproduce U.S. military equipment. They assert thatU.S. “Buy American” regulations prevent SouthKorean companies from subcontracting for compo-nents for U.S. defense firms producing weapons forthe U.S. Department of Defense. They note that theU.S. Government has exempted 18 other countriesfrom these restrictions but not South Korea.

The South Koreans also accuse the U.S. Govern-ment of limiting sales of American fighter aircraftand other weapons systems to equipment that isinferior to systems sold to the NATO countries.South Korean Air Force officers point to twodeficiencies of the R.O.K. version of the 1%15: theabsence of low altitude navigation and targeting

infrared equipment for nighttime missions, and the

absence of the U.S. Sparrow air-to-air missile withits electronic guidance system. The R.O.K. versionof the F-15 does not have the mounting platform forthe Sparrow. The South Korean Air Force, therefore,must use the older, heat-seeking Sidewinder missile.The absence of the nighttime mission equipmentwould restrict South Korea from launching selectiveair strikes against North Korea.

The South Korean press increasingly echoes these

and other complaints. A feature article in the Seouldaily Tong-A Ilbo cited U.S. State Departmentstatistics reputedly showing that offsets to Koreancompanies for the purchase of American militaryequipment from 1980 through 1987 amounted to 46percent of the value of the sales compared to 105percent for Great Britain, 78 percent for Canada, and133 percent for Spain.

15(The same figures, however,

Ispw HYOw.~ “KOr~ ~c~s ~rn tie united States Under Unfavorable T-,” Tong-A Ilbo, AP . ~, 19~s

Chapter 8-The Defense Industry of South Korea q 139

showed a 48-percent average offset sales percentagefor all NATO countries, only slightly above thepercentage for South Korea.)

U.S. officials in Seoul and Washington acknowl-edged in interviews that many of the South Korean

allegations were factual. U.S. military officials inSeoul stated that the missiles and radar systems inF-16 fighters recently sold to South Korea wereout-of-date models or inferior to the missiles andradar systems of F-15s sold to NATO allies. U.S.officials also asserted that the U.S. Government wastightening restrictions on the transfer of military-related technology. They cited the denial of keyR.O.K. requests for technology in the F/A-18 negoti-

ations and the repeated refusal. of South Koreanrequests for technical data for the 105 mm gun used

currently are countered by the security ties betweenthe United States and South Korea, the result of theformidable military threat from North Korea. NorthKorea possesses forces of over 1 million, an army of over 800,000 troops, 540,000 reserves that can be

mobilized within 12 hours, 3,500tanks, and over

4,000 heavy artillery pieces and rocket launchers.The bulk of North Korean ground and air forces arepositioned near the demilitarized zone separating thetwo Koreas. The location of Seoul, only 30 milessouth of the demilitarized zone, complicates SouthKorea’s defense problems.

The R.O.K. Government continues to seek anAmerican military presence in South Korea as a

counterweight and deterrent to North Korea. TheU S defense commitment and the presence of over



requests for technical data for the 105 mm gun usedon U.S. tanks. The U.S. insistence on no more thana 30-percent offset arrangement in the F/A-18negotiations also showed an apparent tightening of U.S. terms.

The R.O.K. and U.S. Governments have been atodds since the early 1980s over South Korea’s desireto export weapons and military equipment producedunder U.S. licenses. U.S. law requires State Depart-ment approval before South Korea exports militaryequipment manufactured under U.S. licenses orcoproduction arrangements. Over some periods, theState Department has denied more than 50 percent of South Korean applications for third country exports.Knowledgeable U.S. military officials in SouthKorea stated in May 1990 interviews that, in the last2 years, the state Department had approved all butone R.O.K. application for export but that the singledenial constituted nearly 40 percent of the monetaryvalue of all the applications.

U.S. officials cite several factors behind theincrease in restrictions: pressure from Congress fortougher terms; reluctance to share advanced technol-ogy because of South Korea’s poor record onprotecting intellectual property rights; fear of com-

petition from Korean exporters to U.S. arms sales tothird countries; and an unwillingness to relax “BuyAmerican” regulations on the purchase of compo-nents by American defense firms until South Koreaopens its domestic market further to U.S. civilianproducts.

On strictly economic criteria, U.S. restrictions andgrowing competition from Western Europe likelywould lead to a U.S. loss of defense business with

South Korea. However, economic considerations

U.S. defense commitment and the presence of over40,000 American troops in South Korea put pressureon the South Korean Government to buy Americanmilitary equipment. After voicing their complaintsabout U.S. restrictions, South Korean officialsacknowledge that these considerations create apreference for defense industrial cooperation withthe United States. U.S. officials assert that they

exploit the security angle in pressuring the SouthKoreans to choose American firms and weaponsystems in procurement decisions. It is uncertainwhether the U.S. security advantage will continuethroughout the 1990s. The North Korean threat mayremain at least until President Kim 11-sung dies.There are no plans at present to remove all U.S.troops, despite the modest reductions in forcestrength recently announced by the U.S. Defense

Department. Nevertheless, the security situation haschanged. North Korea increasingly is isolated as theSoviet Union and Eastern European Governmentsnormalize relations with South Korea. The regimeapparently has undergone a series of policy debatesover how to adjust to the loss of support from alliesand how to respond to South Korea’s proposals forbroadened contacts. The regime has agreed tonegotiations between the two Korean prime minis-

ters and talks with Japan on normalization of relations.

These moves may only be tactical, but thepressures on Pyongyang open possibilities for realchange in South Korea-North Korea relations. Abreakthrough would affect South Korea's defenseindustrial policy in three ways. First, the rate of defense spending increases probably would fall,reducing acquisitions of foreign arms. Second, the

United States probably would withdraw most or all


of its forces. Third, economic considerations wouldgain and security considerations would decline inSouth Korea’s decisions regarding U.S.-WesternEuropean competition for defense business.

Looking beyond an end to the North Korean

threat, Korea (whether reunified or not) is likely toretain a sizable, well-armed military. Korea willremain surrounded geographically by three bigpowers-China, Japan, and the Soviet Union—all of which historically have had aggressive designs onKorea. Security factors thus will weigh heavily inforeign policy. Thus, Korea could have a long-terminterest in defense industrial collaboration with theUnited States, especially if the two countries contin-

ue to be aligned.

C t U S li i d t d t t f d i

prospects of declining U.S. defense budgets makecooperative deals with foreign companies necessaryfor the financial health of the U.S. military aircraftindustry .16 They warn that South Korea may turn toEuropean aircraft producers if U.S. collaboration on

fighter aircraft does not materialize.

Critics of these deals argue that the proponentsmay underestimate South Korea’s ability to developan indigenous fighter by the end of the century if itis able to draw on the technology and productionknow-how of an advanced U.S. fighter manufac-turer. They also assert that even an inferior SouthKorean indigenous fighter could cut into U.S.

markets in developing countries because of lowerprices.



Current U.S. policies do not detract from doingdefense business with South Korea so long assecurity considerations are paramount in overallR.O.K. policies toward the United States. If securityfactors decline in the wake of a relaxation of Seoul-Pyongyang tensions, U.S. policies could bedetrimental to future collaboration. The UnitedStates would have to offer economically competitiveterms, which it apparently does not do comparedwith current Western European proposals.

In the future the United States may have to decidehow important U.S. involvement in defense businessin South Korea is. The debate over the proposedF/A-18 coproduction illustrates this policy issue,because South Korea, with technologically develop-ing industries and relatively low production costs,

could be a prime target of any future internationali-zation of the U.S. defense industry. Proponents of both the F/A-18 and F-16 deals assert that the

The proponents and critics have clashed, too, onthe issue of the U.S. aircraft industry’s role in theglobalization of aircraft production into the 21stcentury. In the case of South Korea, critics accuseU.S. firms of being willing to help that countrydevelop a full-fledged defense and aerospace indus-

try, first by producing parts for aircraft and otherweapons systems manufactured in the United Statesand then by producing aircraft and other weapons inSouth Korea itself. McDonnell Douglas and GeneralDynamics may represent the view of other majorAmerican defense companies when they assert thatU.S. companies must be involved in the globaliza-tion of weapons production. They cite profits to begained from such assistance to countries like South

Korea (in contrast to a likely shrinking U.S. market)and cost reductions from shifting the production of components to countries like South Korea.

IGJeff SJleW, “Con~~s H~s, HS as SeOUI Seeks to Build F@ter Planes,” Wa~hingt~n ~“?zw~, @t. 12, 1989.

Chapter 9

The Defense Industry of Brazil



Contents

PRODUCTION FOR EXPORT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .AIRCRAFT’ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .COLLABORATIVE PROGRAMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .ARMORED VEHICLES.... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .MISSILES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

ORBITA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..*,.*.. . . . . . ,...,.. . . . . . . . . . . .

143143147148149

150150

Figure

9-1. Brazilian

Table

9-1.Brazilian Exports, 1977-88 . . .

Page

Exports,1965-88 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146

Table Page

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144



Chapter 9

The Defense Industry of Brazil

PRODUCTION FOR EXPORT

Brazil emerged in the mid-1980s as the leadingarms producer and exporter among the defenseindustrializing countries, and the sixth largest armsexporter in the world. The Iran-Iraq War, in particu-lar, stimulated arms exports by Brazilian defensecompanies. Iraq has been Brazil’s largest customer,purchasing armored personnel carriers, missiles, andaircraft, often in exchange for oil (see table 9-l).

The termination of hostilities between the twoPersian Gulf rivals in 1988 has had a debilitating

expenditures over the past 20 years have beenrelatively insignificant, averaging 1.3 percent of gross domestic product per year (see figure 9-l). Asa result, the government has used various fiscalincentives and trade policies to promote an eco-nomic environment in which these firms mayoperate.

3The most direct form of government

support is to encourage linkage between the researchinstitutes of the armed forces and the respectiveindustries: the Aerospace Technical Center (CTA)

for the aircraft and missile-related companies, theArmy Technical Center (CTEX) for the armoredvehicle industries and the Naval Research Center



effect on two Brazilian companies, Avibras andEngesa.

lBoth companies are in financial crisis,

despite the conclusion in 1988 of a major arms dealwith Libya. The arms embargo against Iraq hasfurther weakened the ability of Brazil to maintain itsdefense industrial base at 1980s production levels.Not only are Brazilian companies prohibited from

exporting to their favored customer, but negotiationsfor the proposed sale to Saudi Arabia of Engesa’sOsorio main battle tank (an estimated $7 billioncontract) remain suspended.

Clearly the vulnerability of Brazil’s arms indus-tries to fluctuations in the international arms tradetempers the success of the Brazilian defense indus-trial model. Nonetheless, of the leading developing

arms producers (Brazil, India, and South Korea),Brazil’s defense industry is the most self-sufficient.Brazil’s major defense firms have substantial R&Dand production capability, aided by strategic inputsof foreign technology, often through joint ventures.

2

The role of various Brazilian governments in thedevelopment of an indigenous arms industry is anindirect one. Due to budgetary constraints deriving

from massive foreign debt, the government hasprovided little support for these industries throughdomestic defense procurement. Brazil’s defense

vehicle industries, and the Naval Research Center(CPqM) for the naval sector.

In contrast to other developing nations, stateownership of defense industries in Brazil is negligi-ble. With the partial exception of Embraer (a mixedcompany 51 percent owned by the Air Force and 49percent by private-sector shareholders), Brazil’s

defense firms are located in the private transporta-tion and capital goods sectors. The defense sector isdiversified in its R&D and production capabilitiesand includes advanced fighter aircraft, main battletanks, nuclear-powered submarines, and missiles.Although there are over 500 manufacturers of defense-related equipment, three firms have beenlargely responsible for Brazilian defense exports: inaircraft, Embraer; in armored fighting vehicles,

Engesa; and in missiles, Avibras.4

AIRCRAFT

The rise of Embraer (Empresa Brasileira daAeronautic S.A.) from a fledgling company of 595employees in 1970 to the world’s fith largestaircraft manufacturer has been charted by industryobservers and defense academicians alike. The

evolution of Brazil’s aircraft industry has beendriven largely by Embraer’s concern for profitabilityand technological learning.

5Specifically, the indus-

IJ~es Brooke, “G~ Crisis w Brazil in a Tailsp@” The New York Times, Aug. 27, 1990.

Tor an analysis of Brazil’s defense industry see Carol Evans, Dejense Production in the NICS: Case Studies From Brazil and India (London: Thebndon School of Economics, spring 1991), passim.

qsee pa~ce Fr~o Jones, “fiblic Private Partnership: Lessons From the Brazilian Armaments Industry, ” Journal of Interamen”can Studies and World Affairs, vol. 29, winter 1987-88.

4s eeClovis Bfigagad, O Mer~~O & Seguranca: EnSuiO sobre EcOnO~.u Po[iticu @O & J~eiro: E!&tora Nova Fronteir~ 1984).

SRe~to Da@o, “AtidUmia de Armaments Brasileira: Desenvolvimento e Perspectives,” O Armentismo e o Brasil: A Guerra Deles (Sao Paulo:Editora Brasiliemse S.A., 1985), pp. 75-105.

–143–


Table 9-l—Brazilian Arms Exports, 1977-88

NumberCountry

Yearordered* Weapon system ordered Delivered*

Abu Dhabi . . . . . . . . . . . . . . . . . . .

Algeria . . . . . . . . . . . . . . . . . . . . . .

EE-9 Cascavel armored car . . . . . . . . . . . . . . . . . . . . . . . . 1977

198219852

2

3053

40

2

105040

6

EMB-1 11 marine patrol aircraft . . . . . . . . . . . . . . . . . . . . . .EE-9 Cascavel armored car . . . . . . . . . . . . . . . . . . . . . . . . 22

30

33

105040

Angola . . . . . . . . . . . . . . . . . . . . .Argentina . . . . . . . . . . . . . . . . . . .

Belgium . . . . . . . . . . . . . . . . . . . . .

Bolivia . . . . . . . . . . . . . . . . . . . . . .

EMB-111 marine patrol aircraft . . . . . . . . . . . . . . . . . . . . . . 1988

1987-88EMB-312Tucano trainer . . . . . . . . . . . . . . . . . . . . . . . . . . .

EMB-121 Xingu transport.. . . . . . . . . . . . . . . . . . . . . . . . . 1982

HB-315B Gavaio helicopter . . . . . . . . . . . . . . . . . . . . . . . .HB-315B Gavaio helicopter . . . . . . . . . . . . . . . . . . . . . . . .Neiva T-25 Universal . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

19841987-88

1977Canada . . . . . . . . . . . . . . . . . . . . .

Chile . . . . . . . . . . . . . . . . . . . . . . .

EMB-312 Tucano trainer . . . . . . . . . . . . . . . . . . . . . . . . . . . 1983

1982

1980-8119811981

EMB-120 Brasilia transport. . . . . . . . . . . . . . . . . . . . . . . . .

Anchova-dass patrol craft . . . . . . . . . . . . . . . . . . . . . . . . .EE-ll Urutu armored personnel carrier . . . . . . . . . . . . . . .EE-17 Sucuri tank destroyer . . . . . . . . . . . . . . . . . . . . . . . .EMB126 X /



6

206

10

14

120120

2010

110

4120

16

1

1

30

12

300250

80200

38

2013

640150150750

50

3

120

12020

12

488

1

61611

3012

300200

20

38

2013640150250750

EMB126 Xavante transport/counter-insurgency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

T-25 Universal Neiva . . . . . . . . . . . . . . . . . . . . . . . . . . . . .EMB-111 Bandeirante . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Macharen fast patrol craft . . . . . . . . . . . . . . . . . . . . . . . . .

1978197919771977

Colombia . . . . . . . . . . . . . . . . . . .

Cyprus . . . . . . . . . . . . . . . . . . . . .

EMB-126 Xavante transport/counter-insurgency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1982

EE-3 Jararaca scout car . . . . . . . . . . . . . . . . . . . . . . . . . . .EE-9Cascavel armored car . . . . . . . . . . . . . . . . . . . . . . . .EE-9Cascavel armored car . . . . . . . . . . . . . . . . . . . . . . . .

1984-881984-88

1984

Ecuador . . . . . . . . . . . . . . . . . . . .

Egypt . . . . . . . . . . . . . . . . . . . . . . .

EMB-312Tucano trainer . . . . . . . . . . . . . . . . . . . . . . . . . . . 1983

1983EMB-312Tucano trainer . . . . . . . . . . . . . . . . . . . . . . . . . . .(licensed production:30f orEgypt, 80 foriraq

under a Saudi-financed, $180 million loan) . . . . . . . . . 1986

France . . . . . . . . . . . . . . . . . . . . . . EMB-121 Xingu transport.. . . . . . . . . . . . . . . . . . . . . . . . .EMB-312Tucano trainer . . . . . . . . . . . . . . . . . . . . . . . . . . .(contingent order for up to 150 based on reciprocal

helicopter purchase by Brazil)

1981-841988

Gabon . . . . . . . . . . . . . . . . . . . . . . EMB-111 marine patrol aircraft . . . . . . . . . . . . . . . . . . . . . .

EE-9Cascavel armored car . . . . . . . . . . . . . . . . . . . . . . . .EE-11 Urutu armored personnel carrier . . . . . . . . . . . . . . .

1981

19811983-84

Guyana . . . . . . . . . . . . . . . . . . . . . EMB-110 Bandeirante transport . . . . . . . . . . . . . . . . . . . . .Model-412 helicopter . . . . . . . . . . . . . . . . . . . . . . . . . . . . .EE-11 Urutu armored personnel carrier . . . . . . . . . . . . . . .

198519851984

Honduras . . . . . . . . . . . . . . . . . . .

Iraq . . . . . . . . . . . . . . . . . . . . . . . .

EMB-312 trainer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1984-85

EE-3 Jararaca scout car . . . . . . . . . . . . . . . . . . . . . . . . . . .EE-9 Cascavel armored car . . . . . . . . . . . . . . . . . . . . . . . .EMB-312 Tucano trainer . . . . . . . . . . . . . . . . . . . . . . . . . . .EE-3 Jararaca scout car . . . . . . . . . . . . . . . . . . . . . . . . . . .Astros ll SS-30 multiple rocket launcher. . . . . . . . . . . . . .

Astros ll SS-60 multiple rocket launcher.. . . . . . . . . . . . .Astros ll guidance and fire control system . . . . . . . . . . . .SS-60 surface-to-surface missiles . . . . . . . . . . . . . . . . . . .EE-11 Urutu armored personnel carrier . . . . . . . . . . . . . . .EE-17 Sucuri tank destroyer . . . . . . . . . . . . . . . . . . . . . . . .EE-9 Cascavel armored car . . . . . . . . . . . . . . . . . . . . . . . .MAS-1 Cascara air-to-surface missile . . . . . . . . . . . . . . . .

1984-851987-88

19851987

1985-87

1981-881984-881987-881979-811979-811979-81

1981

Iran . . . . . . . . . . . . . . . . . . . . . . . . EMB-312Tucano trainer . . . . . . . . . . . . . . . . . . . . . . . . . . . 1988

“Blanks indicate data nonpublicly available.

Chapter *The Defense Industry of Brazil q 145

Table 9-l-Continued

Number YearCountry ordered* Weapon system ordered Delivered*

Libya . . . . . . . . . . . . . . . . . . . . . . . 825

100100

200

3

450

Madagascar . . . . . . . . . . . . . . . . .

Morocco . . . . . . . . . . . . . . . . . . . . 60

EMB-111 marine patrol aircraft . . . . . . . . . . . . . . . . . . . . . .EMB-121 Xingu transport . . . . . . . . . . . . . . . . . . . . . . . . . .

EMB-312 Tucano trainer . . . . . . . . . . . . . . . . . . . . . . . . . . .X-2180mm multiple rocket system... . . . . . . . . . . . . . . .EE-11 Urutu armored personnel carrier . . . . . . . . . . . . . . .EE-9 Cascavel armored car . . . . . . . . . . . . . . . . . . . . . . . .EE-T1 Osorion main battle tank . . . . . . . . . . . . . . . . . . . . . .EE-9 Cascavel armored car . . . . . . . . . . . . . . . . . . . . . . . .Astros ll SS-40 multiple rocket launcher.. . . . . . . . . . . . .Astros ll SS-60 muItiple rocket launcher.. . . . . . . . . . . . .EE-3 Jararaca scout car . . . . . . . . . . . . . . . . . . . . . . . . . . .Astros ll guidance and fire control system

(denied by Brazilian government) . . . . . . . . . . . . . . . .SS-60 surface-to-surface missile . . . . . . . . . . . . . . . . . . . .

EMB-111 maritime patrol aircraft . . . . . . . . . . . . . . . . . . . .

EE-11 Urutu armored personnel carrier(17 on loan from Libya prior to delivery)

19861986

198619871986198619861978

1986-8819871987

1987-881987-88

1981

1986-87

50

2003015

3450

60



Nigeria . . . . . . . . . . . . . . . . . . . . . 50100

5

Paraguay . . . . . . . . . . . . . . . . . . . 102

1

912

Portugal . . . . . . . . . . . . . . . . . . . .

Qatar . . . . . . . . . . . . . . . . . . . . . . . 20

Saudi Arabia . . . . . . . . . . . . . . . . .

(2&%)

Sudan . . . . . . . . . . . . . . . . . . . . . .

Suriname . . . . . . . . . . . . . . . . . . .

Thailand . . . . . . . . . . . . . . . . . . . .

Tunisia . . . . . . . . . . . . . . . . . . . . .

United Arab Emirates . . . . . . . . .

United Kingdom . . . . . . . . . . . . . .

Upper Volta . . . . . . . . . . . . . . . . .

Venezuela . . . . . . . . . . . . . . . . . .

Zimbabwe . . . . . . . . . . . . . . . . . . .

6

56

130

1

30

30

100

90

(17 on loan from Libya prior to delivery) . . . . . . . . . . .

EMB-312 Tucano trainer . . . . . . . . . . . . . . . . . . . . . . . . . . .EE-9 Cascavel armored car . . . . . . . . . . . . . . . . . . . . . . . .EMB-110 Bandierante transport . . . . . . . . . . . . . . . . . . . . .

EMB-110 Bandierante transport . . . . . . . . . . . . . . . . . . . . .HB-305M Esquilo helicopter (licensed from France) . . . .EE-11 Urutu armored personnel carrier . . . . . . . . . . . . . . .EE-9 Cascavel armored car . . . . . . . . . . . . . . . . . . . . . . . .Roranima Class patrol craft . . . . . . . . . . . . . . . . . . . . . . . .Xavante transport/counter-insurgency . . . . . . . . . . . . . . . .Uirapura . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

EE-11 Urutu armored personnel carrier . . . . . . . . . . . . . . .EE-9 Cascavel armored car . . . . . . . . . . . . . . . . . . . . . . . .

EE-9 Cascavel armored car . . . . . . . . . . . . . . . . . . . . . . . .

EE-9 Cascavel armored car . . . . . . . . . . . . . . . . . . . . . . . .EE-11 Urutu armored personnel carrier . . . . . . . . . . . . . . .EE-72 0sorio main battle tank . . . . . . . . . . . . . . . . . . . . . .Astros ll SS-30 multipIe rocket launcher.. . . . . . . . . . . . .Astros ll SS-40 multiple rocket launcher.. . . . . . . . . . . . .Astros ll guidance and fire control system. . . . . . . . . . . .

EMB-110 Bandeirante transport . . . . . . . . . . . . . . . . . . . . .

EE-11 Urutu armored personnel carrier . . . . . . . . . . . . . . .

EE-9 Cascavel armored car . . . . . . . . . . . . . . . . . . . . . . . .

EE-3 Jararaca scout car . . . . . . . . . . . . . . . . . . . . . . . . . . .

EE-11 Urutu armored personnel carrier . . . . . . . . . . . . . . .

EMB-312 Tucano trainer . . . . . . . . . . . . . . . . . . . . . . . . . . .

1986-87

198619861986

1985198519841984198519801979

19811981

1976-77

1984198519851988

1987-881987-88

1977

1984

1981

1984

1985

1985

EMB-110 Bandeirante transport . . . . . . . . . . . . . . . . . . . . . 1981

EMB-312 Tucano trainer . . . . . . . . . . . . . . . . . . . . . . . . . . . 1986-87

EE-11 Urutu armored personnel carrier . . . . . . . . . . . . . . . 1984EE-3 Jararaca scout car . . . . . . . . . . . . . . . . . . . . . . . . . . . 1984EE-11 Urutu armored personnel carrier . . . . . . . . . . . . . . . 1988EMB-312 Tucano trainer . . . . . . . . . . . . . . . . . . . . . . . . . . . 1988

EE-9 Cascavel armored car . . . . . . . . . . . . . . . . . . . . . . . . 1983

60

5

42

1

3

10

30negotiating

1030

4

3

10

56

30

licensedproduction

1

3030

1

10

‘Blanks indicate data not publiciy available.



Figure 9-l-Brazilian Defense Expenditures and Exports, 1965-66

Constant1985

dollars,billions

4

3

2

1

0

Ratio scale

2.5

2

1.5

1

0.5

0



1965 1970 1975 1980 1985

Year

u Defense expenditures u Defense exports (constant1985 Ratio of defense expenditures to(constant1980 dollars, billions) (left dollars, billions) (left scale) GDP (right scale)scale)

SOURCE: Office of Technology Assessment, from data in International Institute for Strategic Studies, The Military&/ame(kndon: Brassey’s,various years)

and Stockholm International Peace Research Institute, SIPRi Yearbook, various years, Worid Armamenfs and Disarmament.

try has developed using four concomitant ap-proaches:

1. commitment to indigenous design and manu-facture,

2. joint ventures with foreign aircraft producers toacquire and upgrade technological capabilities,

3. phased introduction of domestic components,and

4. product development balanced between mili-tary and civil aircraft for domestic and exportmarkets.

6

Three planes—the Bandeirante, the Tucano, andthe Brasilia-have marked Embraer’s indigenoustechnological advance. The Bandeirante was devel-

oped at CTA in response to the general aviation ricedfor a small passenger and freight aircraft, whichcould operate on the short and often unpavedairstrips characteristic of the country’s interior.Although the Bandeirante is primarily configured asa 19-seat aircraft designed for regional passengerand cargo transport, its design is enormously flexi-

ble. For example, using the same airframe, theBandeirante also comes in versions for air drop,search and rescue, maritime surveillance, and ambu-lance missions.

The export success of the Bandeirante stemmednot only from its design flexibility but also from

Embraer’s strategy of market segmentation andprice competitiveness. For instance, despite itsintermediate-level technical sophistication, the Ban-deirante was exported to both developed and devel-oping countries. By 1990, 500 units had beenproduced and were operating in 24 countries,primarily in the United States (over 147 units), andin Brazil itself.

7

With the success of the Bandeirante, Embraer wasable to establish an international reputation in thecommuter airline market-a base from which it waswell placed to profit from the rapid development of this market segment with its new product, theEMB-120 Brasilia. U.S. carriers presently flying theBrasilia include Texas Air Corp, Britt Airways, and

6~temiew WM I Embraer CQmpany offic~.%mbraer company data.

Chapter 9--The Defense Industry of Brazil q 147

Air Midwest. The two principal attractions of theBrasilia are its performance (its 300 km cruisingspeed makes the Brasilia the fastest in its class) andits price and financing package.

8

With the development of the Tucano turboprop

trainer, Embraer’s first indigenously designed mili-tary aircraft, the company followed its traditionalpolicy of satisfying the domestic requirements of theBrazilian Air Force while targeting an export marketniche. With a low price tag of $1.9 million, and over600 aircraft sold worldwide, the Tucano has becomethe sales leader in the military turboprop trainerfield. The Tucano also was the first military sale bya Brazilian company to a member of NATO. In

1985, the British Royal Air Force selected theTucano over established domestic and Europeancompetitors such as the Swiss Pilatus PC-9 and

while the shares of Aeritalia and Aermacchi are 46.5and 23.8 percent respectively. The Brazilian AirForce will receive a total order of 79 AMXs toreplace the aging Xavantes and Italy’s Air Force willtake the remaining 187.

11

Following the pattern of the automotive industry,the aircraft industry is also becoming more interde-pendent and internationalized, despite its strategicvalue. Embraer has become a subcontractor to otheraircraft industries and has been obliged increasinglyto negotiate offset contracts for its exports. Embraerexecutives argue that offsets are central to ensuringforeign contracts, particularly in the advanced indus-trialized countries, where rationalization of defense-related industries has had important employmentramifications. This willingness to provide offsets

i t t f t i th l f th



p a Sw a C 9 aBritish Aerospace’s Hawk.

COLLABORATIVE PROGRAMS

Embraer has used joint ventures to develop thecompany’s technological capabilities and to offsetthe risks and costs of new production programs.Among these joint ventures, the AMX fighter andthe CBA commuter aircraft programs best illustratethe above strategy.

When Embraer wanted to introduce the Bandei-rante’s successor, a 19-seat, pressurized pusher-propcommuter aircraft, it sought a major joint venturewith Argentina’s Fabrica Argentina de MaterialsAerospaciales (FAMA). The cockpit and the fuse-

lage of the Brasilia will be used, and a new enginedeveloped by Garrett-a “twinprop pusher’ mountedon the rear-will push the plane as opposed totraditional propeller engines that pull the planeforward.

9Production and financing is divided: 67

percent for Embraer and 33 percent for FAMA.10

The project, which has contributed the most toEmbraer's technological development (through spill-overs into other products) and the least in terms of profitability, is the AMX collaborative project withItaly’s Aeritalia and Aermacchi. The Braziliancompany has a 29.7-percent share in the program,

was an important factor securing the sale of theTucano to the British Royal Air Force. Thirtypercent of the aircraft (the wings, landing gear, andcanopy) is made in Brazil and 60 percent isfabricated under license from Embraer by ShortBrothers in Northern Ireland.

12The Tucano is also

licensed-produced by Egypt, though Embraer pro-duces and ships all of the parts to Egypt forassembly. A more recent subcontract arrangementinvolves the manufacture by Embraer of 207 ad-vanced composite external wings for McDonnellDouglas’ new MD-1 1 wide-body trijet. This offset isin connection with Varig’s proposed purchase of anunspecified number of MD-11 aircraft.

13

Brazil’s economy, with its $120 billion debt andits need for exports, is precisely why Embraer has soheavily favored development of products attractiveto its export customers. Embraer also avoided themistake countries starting aircraft industries (such asIndia) have made of relying almost exclusively ondomestic military procurement. The company hasmaintained a balance between military and civilaircraft production from the start. In 1987, for

example, Embraer exported aircraft worth $320million, which represented 68.1 percent of totalproduction. Out of the 31.9 percent that constituteddomestic sales, the civil market accounted for 25.7

8Br~ilia, m e Capiti of the comtry, is built in the shape Of ~ ml~e.9ct~aer Begim ~ke.g N- EMB.123 versio~” Aviation Week and Space Technology, ~t. 13, 1986> P“ 128”

l~raer company ~b.l%mbraer company ~ti.

l~te~iew wi~

Ilmbraer

OfflChl.

lq~teniw ~~ Embr~l. offlc~.


percent. International sales are divided 33.4 percentfor military and 67.6 percent for civil.

14

ARMORED VEHICLES

A few years ago, television viewers saw the

Colombian army storm the justice ministry in anattempt to dislodge terrorists, who were holdingseveral judges hostage. Visible were several Cas-cavel armored cars, part of a fleet of 100 purchasedin 1981 from Brazil’s leading arms export company,Engenheiros Especializados S.A., known as Engesa.

Engesa’s meteoric rise from a small equipmentand transport producer to a major armored vehiclemanufacturer attests to strong private entrepre-neurship, product development through linkage tothe Brazilian and translational transport industries,and to government university research centers as

Engesa’s sales and marketing strategy is pivotal inhelping to explain Brazil’s success in achieving thenumber six position among the world’s leadingdefense exporters. The company has had to over-come many barriers to entry in the highly competi-tive international arms market, not least of which

includes lack of export financing (e.g., that providedby the U.S. Foreign Military Financing program)and lack of military and government sales support.Engesa’s sales and marketing executives attributethe company’s success in export markets to the factthat the company’s sales teams are extraordinarilywell prepared. ‘They have assessed the competitionand its capabilities, they know Engesa’s productcapabilities thoroughly, and team members are

interoperable in terms of their technical and finan-cial backgrounds. ”

18A related factor is the com-

pany’s well-known after-sales support in terms of



and to government-university research centers, aswell as international marketing abilities. Engesa’sexport performance has been remarkable. The com-pany has exported its armored and reconnaissancevehicles to over 20 countries in the Middle East andAfrica. Annual export earnings amounted to over

$53 millon for the 1977-82 period and $122 millionfor the 1983-88 period. l5

In terms of product development, all of Engesa’sarmored fighting vehicles and armored personnelcarriers share the same characteristics: simple andflexible design concepts, low cost, good perform-

ance and reliability, ease of use, and simple mainte-nance. These characteristics are the major sellingpoints of Engesa’s products to its customers in the

developing countries.16

The company’s strong engineering and technicalbase is reinforced through linkages to other military,industrial, and university centers: the EngineeringInstitute, CTEX, National Research Institute, and theInstitute for Research and Technology. Not only hasEngesa tapped into available technological develop-ments in related metallurgical, electronics, andchemical industries, but this form of technologysharing also provides a way of selecting highlytrained and educated future employees.

17

pany s well known after sales support in terms of

guaranteed access to spare parts, training for systemoperators, and maintenance (including front-linerepair during the Iran-Iraq war). Engesa is wellpositioned to take advantage of Brazil’s nonalignedposition in the international system and its affinitywith other developing nations.

19

The Osorio main battle tank (MBT) exemplifiesthe way Engesa approaches development of newweapon systems. First, following the Saudi Arabianrequirement for a light main battle tank, the com-pany conducted a market feasibility study of otherdeveloping countries, where bridges and roads couldnot support 60-ton MBTs such as the U.S. M1A1 orthe French AMX. Second, Engesa searched for thebest available armor, engines, suspension system,electronics, and gears. In keeping with its strategy of finding suppliers who would share the developmentcosts, Engesa succeeded in attracting many interna-tional defense equipment suppliers because theOsorio program represented the only new tank development project in the 1980s and 1990s. Forexample, Dunlop, supplier to the British ChallengerI MBT, was willing to provide the Osorio’s hy-dropneumatic suspension system (which keeps thetank lower on the ground than the more conventional

IADa~ provided by the CO mmissao Valores Mobilizacao, Ri o de Janeiro, 1988-89.ls~gesa company ti~.16sW p~.~r ~ke, CCB~@l: @ forE~~” Arm PrO~Uc~~O~ in ~~e Third ~~~zd, M. BIZOS~ and T. o~son (eds.) (London: T@or & Francis,

1986).IT~teNiew ~~ twwc~ direetor of Enges% August 1989.ls~teniws witi dir=tors Ofmgesa’s commercial and marketing divisions, AU@ 1989.

l~waa MilitaV l%d~cf~ (Sao Patio: Engew n.d.).

Chapter 9--The Defense Industry of Brazil q 149

torsion bar suspension). Within Brazil, Engesa couldrely once more on the translational automotiveindustry, particularly West German companies, tosupply the smaller 85 km/hr engine and the gearbox.

20

The development of this MBT also reflects theinherent difficulties facing a company based in thedeveloping world in moving up the high-technologyladder to the production of more advanced weaponsystems. First, the financial resources required areenormous. Since Saudi Arabia gave the go-ahead forprototype production of the Osorio in 1985, Engesaproceeded to spend $60 million in R&D andprototype development. It had been widely rumored

that Saudi Arabia had provided financial assistancefor the initial R&D costs. (When asked whether suchreports were accurate, company officials said thatth h d t b bl t “ ” th


The Avibras Artillery Saturation Rocket Bombardment

System Astros II multiple rocket launcher deployed by theRoyal Saudi Army during the Persian Gulf War. The unitcan fire rockets from 9 to 70 km with high explosive andcluster munitions. It is known to be in service in Brazil,



they had not been able to “recover” the moneypreviously offered. )21 Despite an announcement inAugust 1989 by the Saudi Government to buy 318Osorios (renamed Al Fahd, the Leopard), the con-tract worth $7.2 billion has yet to be finalized.

22In

April 1990, after laying off 3,000 workers, Engesa

filed for bankruptcy protection.

MISSILES

Since the early 1980s, Avibras has been one of Brazil’s leading export companies. It is a privatelyowned Brazilian firm with a reputation for profes-sionalism, a low-profile image, and great autonomyfrom government agencies as well as from the armed

forces. Avibras’ activities are concentrated in defense-related areas: space research and satellite communi-cations, rocket and missile development, and elec-tronics and chemistry (propellants and explosives).The company is located in Sao Jose dos Campos inSao Paulo state, the center of aerospace activity inBrazil.

The company’s first project was in space designand research. It was contracted by the CTA’SInstitute for Space Activity (IAE) and the NationalSpace Research Institute (INPE) to assist in theSonda I, II, III, and IV experimental sounding rocketand satellite launch vehicle research programs.Avibras contributed its expertise in design, electron-ics (related to guidance), and propellants (special

c uste u t o s t s o to be se ce a ,Libya, Iraq, and Saudi Arabia.

solid fuels). In addition to these space-relatedactivities, Avibras has developed meteorologicalradars and satellite communication antennas and

their associated Earth stations for the IAE’s satel-

lites, which are being launched by the EuropeanSpace Agency. In this respect Avibras has madepossible an important linkage between Brasilsat andIntelsat-the satellite organizations for Brazil andfor the world.

In addition to its space and communications

programs, Avibras is also at the forefront of tacticalrocket and missile production among the developing

nations. Its most important program is the Astros II(Artillery Saturation Rocket Bombardment System),employed against targets at 9 to 70 km, with rocketsof 127mm, 180mm, and 300mm. The latter rocketuses a system consisting of an armored launchvehicle, an ammunition supply, and a fire controlvehicle (all manufactured by Avibras’ Tectrandivision). This system was used extensively by Iraq(Avibras’ largest customer) during its war with Iran,and by Libya. Avibras also markets air-to-groundmissiles and a full line of bombs: napalm, cluster,and runway destruction. In addition, Avibras hasassisted in the prototype development of the SM-70Barracuda coastal defense missile, which is to equipthe Navy’s corvettes, originally indigenously de-

‘Company data.zl~~~iw with EWe~ Commercial/marketing director, AUg@ 1989.22Ro&fi GMOy, “-e pode render ate U.S. 7 M.11.10es,” OEstado do Sao Pazdo, Aug. 22, 1989, p. 11.


signed for Exocet capability. It also has developedthe SS-300 long-range missile, capable of carryinga nuclear warhead, with a range of 170 miles.

Avibras had the largest export earnings in 1987 of any private Brazilian company: over $340 million ascompared to the export earnings of Engesa’s $300million. Over the last 5 years Avibras’ exportsequaled approximately $700 million.

23Avibras has

had increasing difficulty obtaining the necessaryfinancing for the development of new weaponsystems and has sought foreign financing for front-end developmental costs—for instance, the Astros IIwas funded partially by Iraq, and Libya has providedsome financing for the long-range missile pro-granm.

24

ORBITA

O bit i i ti f fi l t d

facilities on Embraer’s land in Sao Jose dos Cam-pos), is largely a paper company, as none of its threemain missile projects—the air-to-air missile MAA- 1Piranha for the AMX aircraft; the surface-to-airmissile MSA-31; and the surface-to-surface anti-tank missile MSS-12 have proceeded beyond the

prototype development phase.

CONCLUSION

Fueled by the Iran-Iraq War, Brazil’s defenseexports peaked during the 1978 to 1986 period. Asubstantial amount of these arms transfers consistedof arms-for-oil transactions.

26Not surprisingly, Bra-

zil’s largest military customers are from the oil-richMiddle East.

Brazil’s defense cooperation agreement with SaudiArabia and Brazilian sales of short-and medium-

i il t Lib d I h d h



Orbita is an association of five aerospace-relatedcompanies, which was formed in 1986. It consists of Engesa and Embraer, each with 40 percent participa-tion, with the remainder divided among threecompanies: Esca, an aerospace company interested

primarily in air traffic control and radar systems with

11 percent; Imbel, the Brazilian Army ammunitionand propellant factory with 5 percent participation;and Parcom, the splinter group that left D.F.Vasconcelos in 1989 at 4 percent.

25The association,

which at present operates from Engesa’s Sao Pauloheadquarters (though it is expected to have its own

range missiles to Libya and Iraq have drawn sharpcriticism from Washington. Sensitive to the poten-tial impact of nuclear and defense technologyproliferation in the region, the U.S. State andCommerce Departments have imposed restrictionson technology transfers to Brazilian defense firms.

In response, Brazil’s Foreign Ministry has arguedthat such measures were initiated primarily toprevent the entrance by Brazilian defense firms intothe higher technology end of the international armstrade, which has been long dominated by establishedU.S., Soviet, and European companies.

27

Chapter 10

The Defense Industry of India



Contents Page

INTRODUCTION ... ... ... ... ... ... ..............*.***+*...**..**....*.*+*++**.*****India’s Military-IndustriaI-Research Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

INDIGENOUS AND LICENSED DEFENSE PRODUCTION ACTIVITIES . . . . . . . . . . . . . .Naval . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Armor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Missiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Aerospace . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Figure

. . . . . . . . .+ . . . . . . . . . * . . .+ . . * . * * * . * . . . . * . . * * . * * *

. *....***.....***.....**+**+******.**+**+*****

. . . . . . . . .

. . . . . . . . .

Figures

. . . . . . . . * . . * * . . . . . . . . * , . * * , * * . * * *+**

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10-1. South Asia Defense Expenditures and Military Force Levels, 1978-88 . . . . . . . . . . . . . . . .10-2. Leading Arms Importers, 1985-88 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10-3. Indian Major Conventional Weapon Import Deals, by Type of Weapon,

1970-90 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10-4. Indian Major Conventional Weapon Import Deals, by Country of Origin,1970-90 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10-5. Indian Licensed Production of Major Conventional Weapons,

. . . . . . . . . . . .

. . . ....*..**

. . . ....**..*

—

153154156

156157

157158

153154

155

155



j pby Type of Weapon, 1970-90

-. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10-6. Indian Licensed Production of Major Conventional Weapons,

by County of License Origin, 1970-90 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10-7. Production of the Defense Research and Development Organization . . . . . . . . . . . . . . . . .

Table

10-1. Indian

155

155157

Table Page

1987- 1988 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156

Chapter 10

The Defense Industry of India

INTRODUCTION

India’s military industrial complex is one of theoldest, largest, and most divers~led in the develop-ing world. The expansion of India’s defense indus-trial capacity, particularly in the 1980s, was largelyconditioned by the South Asian arms build-upamong China, Pakistan, and India (see figure 10-1).The growth of the Indian arms industries was fueledboth by increases in domestic defense spending,which increased from $5.5 billion in 1980 to $9.5

billion in 1989, and by foreign military aid and armstransfers. Pakistan’s receipt of $1.6 billion in U.S.military assistance (1982-87), including the acquisi-tion of the F-16, was met by India’s acceptance of a

Figure 10-1-South Asia Defense Expendituresand Military Force Levels, 1978-88

Constant 1988 Millions of

dollars, billions troops

30 ~- ‘------------------------- ”-””- ““”””” ““ ““-”””-’ ’”””-””””””””-””-””””” “’”’”-””-”T 5

Chinese armed forces (right scale)

1- - - - - - - - - - - - - - - - - - - - - - - - -

/ .

t

- 4 s - — _ -

- \ - - _ — -

Chinese defense expenditures (left scale)2 0 - ‘

-”

-”

- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3



, y p

$1.74 billion arms transfer (1988-93) from theSoviet Union, which included licensed production of the Soviet T-72 tank, MiG-23 interceptor, and theMiG-29 Fulcrum.

1India was the third largest

recipient of arms transfers in the developing world

during the 1985-89 period and the largest nonoil-producing arms importer (see figure 10-2).

Indian defense officials have also argued that thegrowing superpower presence in the Indian Oceanwas a factor motivating its arms build-up, includingthe experience during the 1971 India-Pakistan War,when the U.S.S. Enterprise was deployed in the Bayof Bengal. The introduction of sophisticated arms to

the region is also cited as a stimulus for increaseddomestic production of weapon systems. India’s en-hanced naval capability, which includes submarinesand aircraft carriers, has already affected two of theregion’s six island states, the Maldives and SriLanka. Indian forces suppressed a coup against thegovernment of President Gayoom of the Maldivesin November 1988, and India continues to frustrateSri Lanka’s efforts to suppress its Tamil separatist

guerrillas.

To secure its strategic objectives, the IndianGovernment has established a large scale defenseindustrial sector that includes 9 state-owned defenseindustries, 33 ordnance factories, and 34 R&Destablishments and laboratories. The long-term goalhas been to build an indigenous defense industrial

t15 +“”------------””””--- ---------` "-"" -"-------""---"-""-"--"--"-"`""""""-"-""""""""""t

IIndian armed forces (right scale)

I 1 2

10

5 F""'""--

"""-

"""-

"""'-

-"--

"""""'";-

"""""""""""""":

"E

—— — * ---- — /- - - -A

/ - -

1 . — — / Pakistani armed forces

1

1

““~ ”%”-~””--”~’-””””””””””””” ““-”””-””””’”””” ““”

(r’ght

”sR

’e)”””” ““””

Indian defense expenditures (left scale) / - - - - - - - b - - - ---- —— -- — -- - - - - - - - -

... . — -----------4

, - - - - - - - - - - - - -

---.---””””””... ... -.. ...— ----------- -

0Pakistani defense expenditures (left scale)

1 , ! , I i I 1 , 0

1978 1980 1982 1984 1986 1988

Year

SOURCE: Office of Technology Assessment, from data in U.S. ArmsControl and Disarmament Agency, World Military Expenditures and Arrns Transfers,1989 (Washington, DC: U.S. GovernmentPrinting Office, 1990).

base, capable of supplying a wide range of advanceddefense equipment.

India’s policy of self-reliance in defense produc-tion has been complemented by imports of sophisti-cated weapon systems and related technologiesprimarily from the Soviet Union (see figures 10-3and 10-4 on Indian arms imports and figures 10-5and 10-6 on Indian licensed production activities).The partial success of this strategy is reflected byIndia’s advanced production capabilities (for a

Isee Ron mews , ~~ence Production in Zndia (New r)elhi: ABC Publishers, 1989).

–153–


Figure 10-2-Leading Arms Importers, 1985-88

Iraq

Saudi Arabia

India

Iran

Cuba

Vietnam

Syria

Afghanistan

Angola

m. . . . . . . . . . . . . . . . .

H

E3El

tion program has suffered from the relative isolationof defense-related production activities. There islittle technology spillover into the private manufac-turing sector, and civil industrial input to defenseproduction is negligible.

Since 1985 the Indian Government has encour-aged greater interaction between defense productionand civil industry by promoting private sectorparticipation. For instance, a private firm, Kir-loskars, is providing the diesel engine for the Arjunmain battle tank. The tank’s computer is beingdesigned by Nelco and Bharat Electronics Ltd.(BEL) jointly, and Dunlop is supplying the rubberpads for the tank’s tracks.

The Indian Government has also attempted toincrease exports to offset the foreign exchangeburden created by massive arms imports. Such



Israel

Egypt

PakistanP i

. . . . .

0 1 2 3 4 5 6 7


s 1985 u 1986 u 1987 u 1988

SOURCE: Office of Technology Assessment, from data in U.S. ArmsControl and Disarmament Agency, World Military Expendifures and Arms Transfers, f989 (Washington, DC: U.S. GovernmentPrinting Office, 1990).

developing nation) in all weapons categories: jetfighters, aircraft, and helicopters; main battle tanksand armored personnel carriers; diesel-poweredsubmarines and frigates; ballistic missiles; elec-tronic and communication equipment; and smallarms, artillery, and ammunition.

However, the Indian defense industries remaindependent on foreign technology, particularly sys-tems produced under license from the Soviet Union.In this regard, the mixed experience of India’sdefense industrialization demonstrates that succes-sive licensed production of sophisticated weaponsystems augments but does not guarantee the transi-tion to independent local design and production.Over the past four decades, India’s defense produc-

efforts, however, are hampered by lack of inter-national marketing expertise and by restrictiveprovisions in licensing agreements: for example,India’s export of MiG-21 spare parts to Egypt wasprohibited by the Soviet Union. India has exported

small arms and ammunition to Jordan, Lebanon, andOman, as well as nonarmored vehicles to Malaysiaand Nigeria. The notable foreign sale was the exportin 1983 of eight Chetak helicopters to the SovietUnion.

2

India’s Military-Industrial-Research Sector

Central to India’s military-industrial-research sec-

tor are the nine defense firms and the government’sDefense Research and Development Organization(DRDO). The defense firms are administered by theMinistry of Defense; all manufacture weapons andequipment for the armed forces as well as capitalgoods for the civilian sector. Many of these firmswere established by the British during World War II,while others were located in the private sector andsubsequently acquired by the government (see table

lo-l).The largest state firm is Hindustan Aircraft Ltd.,

whose main aerospace production factories arelocated in Bangalore and Nasik. Another 10 facili-ties are spread throughout 6 Indian states.

Bharat Electronics Ltd. (BEL) is the secondlargest defense firm. Sixty percent of its production(radio, radar, and electronics equipment) is for the

%Mp Mukerjee, “Hi-Tech Players in a Dangerous me of Catcm” Far Eastern Econom”c Review, June 9, 1988.

Chapter 10--The Defense Industry of India q155

Figure 10-3-Indian Major Conventional Weaponimport Deals, by Type of Weapon, 1970-90

Aircraft 1

Misc. 3

SI

29

Figure 10-4-Indian Major Conventional Weaponimport DeaLs, by Country of Origin, 1970-90

Soviet Union 46

United Kingdom 10

France 6

J

United

States 3

~~ÿø Poland 2,,!..,.,,.,..... !,...,,.,,..,,!,.,. . . . . . . . . . . . . . . . . . . . . . . . . . . . ..,.,.. !....,.4...,..,..,.,!. . . . . . . . . . . . . . . . . . . . . . ..,, ..,..,,““’~{~$~”” Others* 4

~ “ : : : ;r: ; ; :a

SwedenWest Germany




Figure 10-5-Indian Licensed Production of Major

Conventional Weapons, by Type of Weapon,1970-90

Armored vehicles 5 Helicopters 3

SOURCE: Office of Technology Assessment, from data in StockholmInternational Peace Research Institute, SIPRI Yearbooks, 1970through 1990, Worid Armaments and Disarmament.

armed forces; the remaining 40 percent is destinedfor the civil market (TV broadcasting equipment and

rminals). The third state-ownedsatellite receiver te

defense company is Bharai Earth Movers Ltd.(BEML), whose products include transport trailers

West Germany


Figure 10-6-Indian Licensed Production of Major

Conventional Weapons, by Country of License Origin,1970-90

Other* 3

q

France 8Czechoslovakia 1

Netherlands 1Switzerland 1

SOURCE: Offioe of Technology Assessment, from data in StockholmInternational Peace Research Institute, SIPRI Yearbooks, 1970through 1990, World Armaments and Disarmament.

and earth moving equipment. BEML is the largestexporter of the nine state-owned defense companies.

India’s naval sector consists of three shipyards:Magazon Docks Ltd. (MDL), Goa Shipyards, and


Table 10-1—lndian Defense Production, 1987-88 (1988 dollars, millions)

Selected defense firms Production Profit before tax Exports Employment

Hindustan Aeronautics . . . . . . . . . . . . . . . . . . . . . . . . . 546 31.0 0.09 43,833

Bharat Electronics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 328 24.0 0.80 19,266

Bharat Earth Movers. . . . . . . . . . . . . . . . . . . . . . . . . . . 431 40.0 35.12 16,151

Magazon Docks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200 28.0 0.00 14,355Goa Shipyards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 -.87 0.03 2,091Garden Reach Shipyards . . . . . . . . . . . . . . . . . . . . . . . 63 –.77 0.00 10,427Bharat Dynamics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 3.0 0.00 1,798Midhani . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 0.26 0.00

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,637 124.9 36.04 109,428

SOURCE: Office of Technology Assessmen, 1991.

Garden Reach Shipyards. Established in 1774 andacquired by the Ministry of Defense in 1960, MDLis India’s preeminent shipyard, capable of buildingwarships such as frigates and submarines, as well ascargo and passenger ships. At present approximately60 percent of the yard’s production is in the civil

Organization operates 42 major laboratories andemploys 25,000 people, of whom 6,000 are scien-tists and engineers.

The DRDO functions as a central coordinatingagency for the execution of defense-related research



60 percent of the yard’s production is in the civilsector, specializing in ship repair, construction of off-shore oil platforms, and floating docks andcranes. Goa Shipyards Ltd. was acquired in 1964 andis a subsidiary of Magazon Docks. It specializes in

ship repair and engineering work. Located in Cal-cutta, Garden Reach Shipyards is engaged primarilyin ship repair and engineering activities, such as themanufacture of air compressors, turbine pumps,diesel engines, and generators. Two-thirds of itsproduction is for the civil sector.

Three relatively small defense firms are engagedin missile production, machine tool manufacturing,and the development of alloys. Bharat Dynamics,

Ltd. has produced under license Aerospatiale’s SS-11-B1 antitank missile. Praya Tools, Ltd. manufac-tures machine tools as well as castings and forgingsused in defense production. Mishra Dhata NigamLtd. (MDNL) was established in 1973 principally toreduce India’s dependence on imported specializedmetals (titanium and tungsten) and alloys for fabri-cating components for the nuclear and aerospaceindustries. It has received significant foreign assist-

ance from France (Creuset Loire and Perchiney -Ugine Kuhlman) and from West Germany (Krupp).

Unlike many other defense producers among thenewly industrializing countries, India has investedheavily in its defense R&~ base to achieve greaterself-sufficiency in defense production, and to reduceimports of foreign technologies. Under the Ministryof Defense, the Defense Research and Development

g y(see figure 10-7). For example, it conducts researchin the fields of aeronautics, combat vehicles, elec-tronics, naval science, metallurgy, and rockets andmissiles. Expenditure on defense R&D as a percentof the total military budget remained relatively

constant at approximately 2 percent until the late1980s, when it jumped to 4.5 percent. This increasewas necessary to support the design and develop-ment of India’s most ambitious defense productionprograms: the Light Combat Aircraft and Helicopterprojects; the Gas Turbine Engine project; and theArjun main battle tank program.

3Additional mili-

tary research is conducted within each defense firm,and by the ordnance factories and universities.

INDIGENOUS AND LICENSED

DEFENSE PRODUCTION

ACTIVITIES

Naval

In response to India’s regional ambitions in the

Indian Ocean, the mission of the Indian Navychanged significantly during the late 1970s. Accord-ing to one analyst:

The original sea control/shore defense orienta-tion, which largely emphasized preserving the integ-rity of India’s coastal waters against a Pakistanithreat, has steadily given way to an assertive navalorientation . . . [The new strategic posture includes]. . . the defense of sea lanes and the preservation of

3Y. Lakshir, Trends in India’ sDefence Expenditure (New Deh: ABC Publishing House, 1988), p. 65




successful May 1989 test flight, India became thefirst developing nation to design and produce anintermediate-range ballistic missile derived fromcivilian space activities.

8The Agni carries a l-ton

payload and is capable of reaching China’s southern

cities; carrying a half-ton atomic bomb, this missilecould hit Beijing (2,200 miles). The Agni programbenefited substantially from foreign technical assist-ance to its sister space program. West Germanyprovided three indispensable missile technologies:guidance, rocket testing, and composite materialhandling and fabrication.

9

Aerospace

While Hindustan Aircraft Ltd. (HAL) success-fully produced the British Aerospace Gnat fighterand its trainer version, Ajeet, as well as the HS-748military/commercial transport aircraft, its attemptst d i d d i di i

bis, and the MiG-27. HAL will shortly produceMiG-29 Fulcrums.

Beg inning in the early 1970s, HAL wanted todiversify and looked to West European aircraftcompanies to license-produce an advanced fighter

and to transfer the technologies related to theirmaterials and components. Of the possibilities-theFrench Mirage 2000, the Swedish Viggen, and theAnglo-French Jaguar, the latter was chosen in 1978.Though HAL has assembled two-thirds of the 116fighter aircraft, attempts to indigenize componentproduction have been frustrated. One of the majorproblems is the preference by the Indian armedforces to purchase weapon systems from abroad.

In an important departure from its role as anassembler of foreign-made aircraft, HAL, with theDRDO, has embarked on an ambitious program tod i d l d d b t i ft f



to design and produce indigenous supersonic com-bat aircraft have failed. One example was thedevelopment of the HF-24 Marut fighter during thelate 1950s and 1960s. HAL designed and eventuallyfabricated the airframe but neglected to develop a

suitably advanced engine. By the time an importedengine (a MiG- 19 Vk-7) was modified and fitted, theplane was technologically obsolete. India has beenforced to abandon its policy of self-reliance indefense production because design or productionproblems frequently resulted in the cancellation of projects (Ajeet), and because of the lack of engineer-ing and quality control expertise.

l0India increas-

ingly has relied on licensed production and outright

procurement of foreign weapons systems. As oneIndian defense scientist quipped, “Every time weneed to develop a better mousetrap, the country hasto import a better cat. ”

11

Strong Indo-Soviet military cooperation has de-veloped in the wake of India’s failed policy of self-reliance in defense production. India is the onlycountry outside the Warsaw Pact to license-produce

Soviet aircraft, and it has gained considerableexperience in the manufacture of the MiG-21/-2l

design, develop, and produce a combat aircraft forthe Indian Air Force (IAF) requirements of the1990s. The Light Combat Aircraft (LCA) project isreceiving considerable design and technical assist-ance from U.S. and European companies. General

Electric has supplied seven F404 engines to powerthe LCA prototypes. These engines are eventually tobe replaced by the indigenously designed andmanufactured GTX-35 gas turbine engine. VariousU.S. companies-Allied-Signal, Litton, and Honey-well-are bidding to provide the LCA’S flightcontrol and other electronic systems. The U.S. AirForce reportedly will provide training, consulting,and test facilities.

12Finally, HAL, in partnership

with Messerschmitt-Bolkow-Blohm in Germany, isin the development phase of an Advanced LightHelicopter program, which will complement theIAF’s squadrons of Chetak (Alouette III), andCheetah (Lama) helicopters.

13

U.S. responsiveness to India’s requests for tech-nology transfers and supplies of critical componentsfor the LCA project marks a significant departure

from the previously strained Indo-American rela-tionship. Some observers believe that if the United

8“Anotherhmg-Range MissileDeveloped,” Zndia Weekly, July 17,1987, p. 10, and Richard M.Weintraub, “IndiaTests Mid-RangeAgni Missile,”The Washington Post, May 23, 1989, pp. Al, A21.

*or a thorough account of West Germany’s participation in India’s ballistic missile progr~ see Gary M.ilhollin, “India’s Missiles-With a LittleHelp From Our Friends,” The Bulletin of Atomic Scientists, vol. 45, No. 9, November 1989, pp. 31-35.

l~te~icws with various defense company OffiC~S.11~~~~: ~digeno~ ~ox Flourish Amid Defense Modmnizatioq” Znternationd Defense Review, VO1. 19, No. 4, 19*6, P. 436.

121an Anthony, “The Trade in Major Conventional Weapons, “ in Stockholm Internationrd Peace Research Institute, SIPRI Yearbook 1989, World

Armaments and Disarmament (Oxford: Oxford University Press, 1989), p. 212.ls~s~ ~w% “~ Forces ~ me Asia pacific Areq” Defence Asia-Pacific, VO1. 2, 1989, p. 25.

Chapter 10-The Defense Industry of India . 159

States establishes a firm foothold in India’s defense Soviet Union. The Soviet Union has sought toproduction program, it may achieve the twin objec- counter this challenge to its strong defense relation-tives of extending U.S. influence and providing ship with India by offering to integrate the LCA’Sexport opportunities for American defense compa- characteristics into the yet undeveloped MiG-35nies, while reducing India’s dependence on the aircraft.



Contents Page

THE DEFENSE INDUSTRY OF SINGAPORE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164Singaporean Defense Industrialization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165Structure of Singapore’s Defense Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167Exports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168

THE DEFENSE INDUSTRY OF INDONESIA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168

Strategic Motivations and Defense Policies . . . . . . . . . . . . . * . * * . . . * . + . . . *, . *, . . . . . . . . . . . . 168Government Promotion Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169Indonesia’s Defense Companies ... ** . . . . . . * * * . * . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170

THE DEFENSE INDUSTRY OF TAIWAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170Taiwan’s Defense Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171Government Promotion of Defense-Industrial Linkages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173

THE DEFENSE INDUSTRY OF AUSTRALIA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174Defense Production in Australia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174

Figures Figare Page

11-1. Defense Expenditures in Four Western Pacific Nations, 1978-88 . . . . . . . . . . . . . . . . . . . . 16311-2. Imports of Major Conventional Weapon Systems by Four Western Pacific

N ti b E ti N ti 1970 90



Nations, by Exporting Nation, 1970-90 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16411-3. Licensed Production of Major Conventional Weapon Systems in Four

Western Pacific Nations, by Type of Weapon, 1970-90 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16411-4. Licensed Production of Major Conventional Weapon Systems in Four

Western Pacific Nations, by Country of License Origin, 1970-90 . . . . . . . . . . . . . . . . . . . . 16511-5. Estimated Licensed Production of Major Conventional Weapon Systems

in Four Western Pacific Nations, 1960-88 . * *, . ., . * . . . . . . . . . . . . . . .,, . * .,, * . *,*,,*.*, 16611-6. Recipients of Australian Defense Cooperation Funds, 1988-89 . . . . . . . . . . . . . . . . . . . . . . 175

Chapter 11

The Developing Defense Industries of the Western Pacific

The development and expansion of domestic armsproduction capabilities in the Western Pacific coun-

tries reviewed in this chapter—Australia, Singapore,Indonesia, and Taiwan-have necessitated substan-tial government investment and procurement (seefigure 11-1). This figure, however, obscures thedisparity in the levels of defense industrializationamong these four countries. One of the primaryreasons for this disparity is their relative access toadvanced arms and high-technology imports. Thesmall size of Australia’s domestic defense industry

may be explained partly by the ready availability of weapons systems from the United States and Eu-rope. In contrast, Taiwan, Singapore, and Indonesiahave more restricted access to foreign arms imports,which has spurred the expansion of their defense

principal arms supplier to the region. Australia,Taiwan, Singapore, and Indonesia have all imported

Northrop’s F5-E fighter aircraft. These same fourcountries also imported the U.S. AIM-9L air-to-airmissile. In addition, C-130 Hercules military trans-port aircraft have been acquired by Singapore,Indonesia, and Taiwan.

The arms production capabilities of these WesternPacific countries also vary in accordance with theirrespective manufacturing bases, military R&D pro-grams, and government policies. Taiwan’s technicalexpertise and diversified industrial base have ena-bled it to develop and build an indigenous high-performance combat aircraft in less than 10 years.The lack of a sufficient technological base andfi i l h l d d Si d



production programs.

Each of these states has been equipped by Westerncountries (see figure 11-2), and there has been

substantial equipment standardization among them,partly because the United States has been the

Figure n-l-Defense Expenditures in Four

Western Pacific Nations, 1978-88

7 T-""

---------" "---------" ""-"" """-" ""-"" --------" -------" ------ ““””

-‘“””

6

5

Constant 41988

dollars,

billions 3

2

1

0

- / -Taiwan / ‘,

- -------------------------------.-------.-#--------- -’------------. ----4# \ /

/ ‘, /L’. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

\ . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

r. . . . . . . . . . . . . ..........................................................................

1- Indonesia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ./ — - \

— - — _ — — - \ \ - .- - -- - - - - -

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . ..- - - - - - - - - -- - - - Singapore

I 1 I t 1 I 1 , , ,1 1 , r , t

1978 1980 1982 1984 1986 1988

Year

SOURCE: Office of Technology Assessment, from data in U.S. ArmsControl and Disarmament Agency, Wor/d Military Expenditures and Arms Transfers, 1989 (Washington, DC: U.S. Government

Printing Office, 1990).

financial resources have precluded Singapore andIndonesia from embarking on similar defense proj-ects. Instead, Singapore’s and Indonesia’s moremodest defense production efforts consist largely of

component manufacture and assembly work for theaircraft, shipbuilding, and ordnance sectors.

The development of the Western Pacific defenseindustries, however, has been significantly aided bythe involvement of and technology transfers fromU.S. and European defense companies throughdirect investment (Singapore), joint ventures (Aus-tralia), and licensed production (all) (see figures11-3 and 11-4). Licensed production activity by U.S.companies is concentrated in the aircraft sector of these defense industrializing countries, althoughmany countries have licensed other types of weap-ons for indigenous production in the WesternPacific. Australia, Indonesia, and Taiwan havemanufactured various helicopters under U.S. li-cense, including Blackhawk, Seahawk, and Bellutility. Germany dominates in the shipbuildingsectors of Singapore and Indonesia, providing li-censes for the production of PB-57 fast attack craft(see figure 11-5).

These countries have also benefited from theirlocation in the lucrative Asia-Pacific market. Sin-gapore’s reputation as a regional aerospace centerwas boosted by its hosting of the 1988 AsianAerospace Show (which included 674 companiesfrom 31 countries) and by the 1989 Defense Asia

exhibition (the frost defense exhibition in Southeast

–163–


Figure 1 l-2—imports of Major Conventional Weapon —Systems by Four Western Pacific Nations,

by Exporting Nation, 1970

Exporting country

United States

ItalyFrance

United Kingdom

Sweden

Israel

United States

Indonesia

Singapore

Belgium

Israel

Netherlands

United States

United Kingdom

Australia

..

Singapore

Taiwan

‘ o

Figure n-3-Licensed Production of MajorConventional Weapon Systems in Four Western

Pacific Nations, by Type of Weapon, 1970-90

Indonesia

Taiwan

Australia

Singapore

M.:.:.:-:-:.:.:-:-:.:-:.:.:.:.:.:.:.:.:.:.:.:.:.:.:.:.:-:.:.:..-.:.:.:.:-:.:.:-:-:.:-:-:.:.:.:.:.:.:.:.:.:.:.:.:.:.:.:.:.

+:0:.:+:+:+:-:.:-:+:.:-:+:+:!:.:.:.:.:.:.:.:.:.:.:.:.:.:.:.:.:.:.:.:.:.:.:...

l---L-L

-.:.:.:.:.:.:.:.:.:.-

0 2 4 6 8 10 12 14



France

Netherlands

West Germany

South Korea

Israel

Switzerland

Yugoslavia

Belgium

United States

United Kingdom

West Germany

France

Canada

New Zealand

South AfricaSweden

Italy

[

... ..+:.:

+:+ ....

Indonesia

Australia ~

D

—

o 5 10 15 20 25 30 35

Number of different types of weapons transferred

Gray bars indicate developing countries

SOURCE: Office of Technology Assessment, from data in StockholmInternational Peace Research Institute, SIPRI Yearbooks, 1970

through 1990, Worlid Armaments and Disarmament.

Asia to be certified by the U.S. Commerce Depart-ment). The continued increase in Asia-Pacific tradeis also likely to bolster the region’s domestic andforeign-based commercial shipbuilding and aircraftindustries.

0 2 4 6 8 10 12 14

Number of different weapon systems licensed

s Shippingu Aircraft u Missiles u Armored

vehicles


THE DEFENSE INDUSTRY

OF SINGAPORE

Although Singapore’s development of a defense

industry since the 1970s has been linked closely tothe country’s industrialization program, strategicconsiderations provided the industry’s initial impe-tus. Singapore is located at the entrance of theMalaccan Straits, which connect the Indian andPacific Oceans—the so-called Gulf-to-Japan route.As an export-dependent economy, Singapore isvulnerable to interruption of its vital trade channels.The country also has been sensitive to regional

developments: the withdrawal of British forces fromSoutheast Asia in the 1970s, the increased Sovietinfluence in the region, the Vietnamese invasion of Cambodia, and the Communist insurgences inThailand, Malaysia, and the Phillipines. In responseto the perceived destabilization of the region duringthe 1970s, Singapore encouraged military coopera-tion within the Association of Southeast Asian

Chapter n-The Developing Defense Industries of the Western Pacific . 165

Figure n-4-Licensed Production of MajorConventional Weapon Systems in Four Western

Pacific Nations, by CountryOrigin, 1970-90

Country oflicense origin

France

West Germany

United States

Italy

Netherlands

Spain

United StatesIsrael

Singapore

West Germany

United Kingdom

United States

United Kingdom

France

of License

H I ! !Indonesia

. . . . . . . .. . . . . . . . . .. . . . . . . . . . . . . . . . ..q:. : . : . : . : . : . : . : . : . : . : . : . : . : . : . : . : . : . : . :Taiwan+:+:... . . . .. .. . q

Singapore

A t li

strong manufacturing base to create the most diversi-fied and technologically advanced arms industry inASEAN.

Singaporean Defense Industrialization

State promotion of defense industrialization hasinvolved various forms of direct and indirect inter-vention in the Singaporean economy. The mostimportant manufacturing sectors are transportation—aircraft and shipbuilding-and electronics. Duringthe late 1960s, the Singaporean Government care-fully promoted the shipbuilding industry, withspecial focus on construction and repair. The gov-

ernment invested heavily in three shipyards:1.

2.

Singapore Shipbuilding and Engineering Pte.Ltd.,

Sembawang Shipyard (which was establishedas a private limited company with 75 percent



France

Sweden

Switzerlandw H ! !Australia

O 2 4 6 8 10 12

Number of different weapon systems licensed

qDeveloping country

SOURCE: Office of Technology Assessment, from data in StockholmInternational Peace Research institute, SIPRi Yearbooks, 1970through 1990, World Armaments and Disarmament.

Nations (ASEAN) and

Defense Arrangement.1

through the Five Power

On a per-capita basis, Singapore is Asia’s thirdwealthiest nation (behind Japan and Brunei). Itsgross national product (GNP) growth over the lastseveral years has averaged 11 percent, the largest inASEAN.

2The country’s economic dynamism is

explained by its export-oriented industrializationstrategy in alliance with U. S., European, and Japa-

nese translational corporations, which were at-tracted to Singapore because of its location andmodern infrastructure. Singapore has used this

3.

as a private limited company with 75 percentgovernment ownership to take over the RoyalNaval Dockyard), and

Keppel Shipyard Pte. Ltd. (which was sepa-

rated from the Port of Singapore Authority toform a wholly government-owned enterprise).3

Singapore also became increasingly attractive as anexport base for Japanese shipping companies.

In addition to these activities, the SingaporeanGovernment directly fostered the active participa-tion of multinational corporations in the country’saircraft industries through financial and tax incen-

tives. For example, companies were exempted fromthe usual 33-percent corporate income tax for up to10 years. Companies such as Pratt & Whitney,Hawker Pacific, TRW, General Electric, Sund-strand, Garrett, and Westinghouse made major directinvestments in component manufacture, assembly,and repair-service work; they were also attracted bySingapore’s skilled low-wage labor. It is estimatedthat Singapore’s wage costs are half those of the

United States or Western Europe; this has resulted inproduction savings of 25 to 40 percent for someaircraft companies.

4

ITIW bhtm~ StXW-@ SSSiStWKX provided by Britain to IVfdaysia and S@aWre wa s k rminated in 1971 and was replaced by a broader regionalsecurity agreement called the Five PowerDefence Arrangements. This security kunework involvesBritaiq Austral@ New Zealand,Malaysi& andSingapore.

Zworld Bank Development Reports (Wiuhingto~ ~: World B@ v~o~ Y=).

3GWRWQ The polit icalEco~myof Singapore’ sI~~”alization: National State andInternational capital (NCW YOrk NY : St. ~fi’s press,

1989), p. 95.

dDaVid Saw, “me Emergence of the ‘1’hhd World~ t Industry,” Military Technology, vol. 4, No. 4, 1988, p. 51.

166 q

Global Arms Trade

Figure n-5-Estimated Licensed Production of Major Conventional Weapon Systems

in Four Western Pacific Nations,* 1960-66

25 — . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

20 -–. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .... ... ....... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total number of licensed systems in production**

15 - -""------" -"-" --"------" "--" --"" -""" -"--" "--"" "'""" "-"--""-"""-""-"-"""""""`-""-""-"'""-"""""""- -“’””””””””-”” . . . . .

Number

of major

systems

10 -- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Number of systems licensed annually

5 - -“”-””””-”---””--”- ---”” --- --”””””-- -“””-” -’”” . . . . . . . . . . . . . . . . . . . .

I I I I



0 I I I I I

1960 1964 1968 ‘“ 1972 1976 1980 1984 1988


“Indonesia, Taiwan, Singapore, and Australia.q *Estimates based on the assumption that an average system is produced under license for 12 years.

SOURCE: Office of Technology Assessment, from data in Stockholm International Peace Research Institute, SIPRI Yearbooks, 1970 through 1990, World Armaments and Disarmarnent.

Foreign investment in the local aerospace indus-try rose from $28 million in 1977 to $480 million 10years later.

5The decision by overseas aerospace

companies to locate their regional activities in

Singapore has been reflected in the dramatic growthof industrial output in the aerospace sector: from $47million in 1977 to $795 million in 1987.

6Many

foreign airline companies now use Singapore as abase for the repair, overhaul, and support of aircraftengines and other systems. In particular, invest-ments by Garrett and Vac-Hyd in the aircraftcomponent industry represented impressive gains intechnology available in Singapore.

7

In order to upgrade technologically the econ-omy’s defense industrial base as well as sustainhigher value-added manufactured exports, the Sin-

gaporean Government has also assisted the electron-ics, fabricated metal, and precision equipment in-dustries. Foreign investment during the 1970s inthese sectors was substantial and included the

location in Singapore of Hewlett-Packard, NationalSemiconductor, SCM, Sundstrand Pacific, and Cin-cinnati Milacron, among others.

After 1979 the Singaporean Government em-barked on a massive incentive program for invest-ments in public and private sector R&D. Liberalcapital depreciation allowances were provided forplant and machinery and subsidized financing for

firms restructuring or upgrading their technologicalactivities. The government also devised a 10-yearMaster Plan (1980-90) to improve the country’stechnological infrastructure. For example, the plan

51bid.

%id.T~or~g t. R~m ~ett~s ~v=~ent h a CSS@ p~j~t embled the company to supply induction hardened P* @ other G~ett P~* in

Europe and the United States. Vac-Hyd implemented a manufacturing process for the heat @eatment of aircraft engine components. R* op. cit.,foolnote 3, p. 134.

Chapter n-The Developing Defense Industries of the Western Pacificq

167

provided for the development of Selectar Air Basefor the aeronautical industries, and for the construc-tion of the Singapore Science Park to accommodatethe country’s major industrial and scientific enter-prises. While direct government R&D expenditureincreased dramatically in the mid-1980s (from 0.4

percent of GNP in fiscal year 1981-82 to 0.6 percentin fiscal year 1984-85), it still lags behind otherdeveloping countries in Asia (South Korea 1.4percent of GNP, Taiwan 1 percent).

8In 1988 the

government launched the International Direct In-vestment program as a means of broadening Sin-gaporean investment in industries that access newtechnologies and international markets for highervalue-added manufactures and services.

Structure of Singapore’s Defense Sector

Singapore’s defense industries are primarily ownedby the government through a holding company,Shoeng-Li. Founded in 1967 as the Chartered

Of the four divisions, Singapore TechnologiesAerospace (STA) is the most prominent. It employ-ees nearly 3,000 people and has 6 subsidiaries. Thelargest of these is Singapore Aerospace Manufactur-ing Co. (SAMCO), which is responsible for mainte-nance and refurbishment of the Singaporean Air

Force’s inventory as well as those of other air forcesin the region. Singapore’s defense programs includerefitting the A-4S-1 Super Skyhawk fighter-bombers with the more powerful GE F404 enginesfor the Air Force; refurbishment and replacement of the avionics system of the C-130 Hercules military/ civil transport aircraft for the U.S. Navy, andassembly from kits of S-211s and AS-332 Aerospa-tiale Super Puma helicopters. Two subsidiaries work

on engine overhaul for Pratt & Whitney, GeneralElectric, and Grumman. Another subsidiary, Sin-gapore Aero-Components Overhaul, manufacturessubcomponents for the General Dynamics’ F-16 andNorthrop’s F5E/F.

11



gIndustries of Singapore, the arms industries werereorganized in 1983 to form the Singapore Technol-ogy Corp. (STC). STC was structured to gain R&Dproduction efficiencies through cooperative resourcesharing and to market Singaporean military equip-ment. STC employs a labor force of over 8,000employees, generates $526 million in annual sales,

g

and is Singapore’s largest domestic enterprise.Because of government funding, it is able topurchase the latest technology to develop defenseproducts in which its subsidiaries have the necessaryexpertise.

l0

Although the Ministry of Defense is responsiblefor STC’S operations, its subsidiaries are run accord-ing to commercial guidelines. STC is composed of four groups:

1. Singapore Technologies Industrial (23 compa-nies),

2. Singapore Technologies Aerospace (6 compa-nies),

3. Singapore Technologies Marine (1 company),and4. Singapore Technologies Ordnance (17 compa-

nies).

STA recently has begun to acquire technology byinvesting abroad. STA through STC has a 2-percentparticipation in Pratt & Whitney’s PW4000 engine

project (more than Japan’s Kawasaki Heavy Indus-tries or South Korea’s Samsung Aerospace). Theengine is already being used to power the A31OAirbus in Singapore Airlines and could also be usedin Boeing 747 and 767 aircraft, as well as theMD-1 1. In January 1988 a joint venture wasestablished between British Aerospace (BAe) andSTA/STC for the manufacture, repair, and integra-tion of BAe components in return for marketing

services.12

In addition to the government-ownedaerospace sector, there are over 25 companies inSingapore’s private sector that manufacture aircraftcomponents and are affiliated with such multina-tional aviation firms as United Technologies of theUnited States and Hawker Siddley of the UnitedKingdom.

STC’s second major division is the Singapore

Shipbuilding & Engineering Co. (SSE). Its produc-tion capabilities have been limited because of therelatively small naval procurement budget and localprivate competition for ship repair work from the

%id., p. 180.

gA~d Forces Journal International, February 1990, p. 67.

loSee “me Singapore Technology Corporatioxx Singapore’s Own Military- hdustid complex, “ Pointer, vol. 11, No. 1, October-Deeember 1984,pp. 12-23.

llBilv~r S- “AsE.AN’s Arms Industries: Potentials and Limits,” Comparative Strategy, vol. 8, No. 2, 1989,pp. 249-264.

12’’ Singapore Shoots for the Sky,’ ’Asiaweek, Mar, 11, 1988, pp. 50-51.


larger Vesper Shipyard. During the mid-1970s SSEbuilt seven TNC-45 fast attack craft (four forSingapore’s Navy and three for Thailand’ s). It is alsoconstructing five Type-62, 500-ton missile corvettesunder license from Germany’s Luerseen Werft. Thenaval ship repair business is expected to increase as

a result of France’s decision to use SSE for repairand overhaul work on its fleets operating in theIndian and Pacific Oceans.

STC oversees Singapore’s ordnance industry. Theordnance sector consists of six subsidiaries, includ-ing the former Chartered Industries of Singapore,Ordnance Development and Engineering (whichindigenously designed and produces the Ultimax-

100 light machine gun), Singapore AutomotiveEngineering, Singapore Computer System, Sin-gapore Automotive Leasing, and Unicorn Interna-tional. Together these companies manufacture small-to-medium caliber infantry arms and their ammuni-tion and provide maintenance and modernization


OF INDONESIA

Among the ASEAN countries, Indonesia pos-sesses the second most diversified and advanceddefense industrial base. Its emergence since the

mid-1970s has been conditioned by the country’sgeostrategic position, in conjunction with a deliber-ate policy of economic and technological moderni-zation.

Strategic Motivations and Defense Policies

Indonesia’s decision to invest in a defense indus-try reflected the government’s aim to reduce depend-ence on other countries for the purchase and supplyof weapons. Accordingly, Indonesia shifted its armsprocurement pattern from heavy reliance on Sovietimports (1958-65) to purchases from the UnitedStates and West European suppliers (1967-76).

14



tion, and provide maintenance and modernizationservices for the Singaporean Army.

Exports

Singapore’s defense exports, including sales of finished weapons systems and subcomponents, areextremely difficult to estimate. As Stockholm Inter-national Peace Research Institute (SIPRI) analystsnote, there are a variety of trade channels: throughSingaporean private defense-related producers; from

Singaporean and other countries’ companiesthrough Unicorn, STC’s export trading firm; andthrough ChartWell, a Singaporean-Chinese tradingcompany. SIPRI reports that companies which haveexported systems through Unicorn include GeneralDynamics; Rascal & Ferranti (U.K.); and Bofors &Ericsson (Sweden). While Unicorn is the obviousconduit for most of Singapore’s defense exports,exports from the other two channels are much harder

to decipher. Singapore’s aerospace exports by STCsubsidiaries were estimated at$116 million in 1988,making the country the largest exporter of aircraftand parts in ASEAN.

13

Indonesia is an archipelago of over 13,000 islandssituated along the straits leading from the Pacificinto the Indian Ocean. Indonesia’s articulation of a

security doctrine of wawasan nusantura is based onits archipelago concept, which posits the indivisibil-ity of land, sea, and airspace within the country’sboundaries.

15

Since its initial formulation in 1957, variousfactors have strengthened Indonesia’s wawasannusantura defense policy. The first was the per-ceived regional threat posed by the emergence in

1975 of a unified and militarily strong Vietnam. Thesecond was the extension of Indonesia’s maritime jurisdictions and its proclamation in 1980 of a200-mile exclusive economic zone, following theprovisions in the Law of the Sea Treaty. (BothIndonesia’s Air Force and Navy have been restruc-tured and equipped with Boeing-737 Surveillers andNomad Search Masters as well as a small frigateforce to defend its offshore oil fields and economic

zone claims.) Third, Indonesia has been concernedabout the continued naval presence of the superpow-ers and India’s expansion of its naval fleet in theIndian Ocean.

13T. (’)Mso~ “me Asean Countries: Low-cost Latecomers,” M. Brzoska and T. Oblsoq eds., Arms Production in the Third WorZd (Lmdon: ‘Ihylor& Francis, 1986), pp. 57-61.

141bid, p. 57.15Do@d E. W&U.hdXx3, “Indonesix Its Defense-Industrial Comple~” in Jsmes Katz cd., The Implications of Third Worki Military

Zndustricdization: Sowing the Serpent’s Teeth (Lxingtom MA: hxington Books, 1986), pp. 165-185.

Chapter n-The Developing Defense Industries of the Western Pacific q 169

Together these strategic concerns and the Indone-sian Armed Forces defense posture, ‘Total People’sDefense System,’ have had a significant impact onthe reorganization of the armed forces and thecountry’s defense production program. The impor-tance attached to Indonesia’s defense sector

stemmed from the national leadership’s belief in thesector’s contribution to both national security andeconomic development. This inseparability is mani-fested by the government’s emphasis on dual-usedefense industries. For example, the impetus forIndonesia’s ambitious aerospace industry derivesfrom civil as well as military objectives.

l6This

industry is regarded as an integral part of thecountry’s broader industrialization plan. As one

Indonesian Minister reasoned:Now look at my country: 13,400 islands, from

west to east a distance equal to that between SanFrancisco and New York. . . . We need aeroplanesand helicopters. We have a huge potential market.

17

In addition to the policy of state-ownership, theIndonesian Government has used a number of infant-industry protectionist measures. It has bannedthe import of small aircraft and ships, and insists thatboth private and public transportation operatorspurchase state-produced equipment. Indonesia’s do-

mestic airline, Bouraq, has been forced to replace itsfleet of Fokker F-50 passenger aircraft with locallybuilt CN-235s designed primarily for cargo trans-port.

l8

In order to expand Indonesia’s defense productionbase, the government has encouraged extensiveinvolvement by foreign corporations in the coun-try’s defense industries. This involvement has oc-curred through transfers of technology, know-how,licensing, offsets, and joint ventures. As a result,Indonesia, like its ASEAN neighbors, is highlydependent on imported designs, components, andtechnical assistance. As figure 11-4 above indicates,Indonesia’s sources of licensed production are the

di ifi d f h W P ifi i I



Such reasoning underpins the defense industrialrationale for Indonesia’s development of its ownairframe industry and design capability to produce

aircraft for the country’s short-to-medium haultransport routes.

Government Promotion Policies

Indonesia’s defense sector consists of eight strate-gic industries, though only four are directly engagedin defense production. These four companies are: PTIPT Nusantura (aerospace), PT PAL Indonesia

(shipbuilding), PT Pindad (small arms ammunition),and Perum Dahana (explosives). In addition, thegovernment runs an R&D institute at the Puspitek Centre in Serpong, whose function is to develop andtransfer new defense-related technologies to thedefense industries. They are all government-ownedand are under the control of the Council of Ministerson Strategic Industries.

The overall costs of subsidizing the defenseindustries are impossible to estimate because theyare classified as strategic industries, and are thusclosed to external review and audit. Analysts gener-ally assume, however, that such high-technologyindustries are funded by off-budget means.

most diversified of the Western Pacific countries. Itsaircraft industry has manufactured helicopters underlicense from U.S., German, and French defensefirms. In aircraft, Indonesia has relied on U.S.,Spanish, French, and Italian technology transfers.Indonesia’s arms industry has benefited consider-ably from such technology transfers, enabling thesector to increase its technological sophisticationwhile bypassing many of the usual developmentalstages.

A corollary to a liberal technology transfer policyis the government’s attempt to generate spillovers

from defense into civilian industries, reinforcing theacquisition of dual-use technologies. The Indone-sian Government has provided domestic and multi-national automotive and electronics industries withfiscal and export incentives to encourage the devel-opment of related technologies and subcomponents.

Finally, Indonesia’s impressive progress in defense-related production has been attributed to the efforts

of Dr. B.J. Habibie, Minister for Research andDevelopment, and director of the Agency for Devel-opment and Application of Technology (BPPT).Habibie, a former technical director of the Germanaerospace giant, Messerschmitt-Bolkow-Blohm(MBB), and an Indonesian national, presides over

16s~b op. cit., footnote 11, PP. 2@-2~

17~~~done~ia~~ MC ~r~t ~d~~,” Southe~t Asia D~elop~nt Digest, JwE-JuIy 1986, p. 20.

ISA~d Forces Journal International, op. cit., foO~Ote 9, p. 62.


Indonesia’s defense-industrial sector, and is creditedwith the development in Indonesia of one of theworld’s best equipped airframe manufacturing facil-ities.

Indonesia’s Defense Companies

The centerpiece of the Indonesian defense indus-try is the state-owned firm, PT IPT Nusantura.Established in 1976 from the Air Force’s Institute forAviation Industry in Bandung as well as fromPertamina’s Advanced Technology and AeronauticsDivision, the company now employs 12,750 peoplewhose average age is only 24 years old.

l9Nursantura

reportedly has produced over 92 commuter aircraft

and 125 helicopters. The company, in keeping withIndonesia’s heavy reliance on technology transfers,has licensed-production agreements with France’sAerospatiale for Super Puma antisubmarine warfarehelicopters, Germany’s MBB for BO-105 utilityhelicopters, Textron in the United States for 412

a small, but useful export market in various develop-ing countries: Thailand purchased five CN-212s,Saudi Arabia bought four CN-235s, Brunei has alsoordered several CN-235s, and Malaysia has pur-chased one Super Puma.

PT PAL, the naval shipbuilding firm, is Indone-

sia’s second major defense concern. Although PTPAL has built fast patrol boats and search and rescuevessels using designs from the Maritime Engineer-ing School, limitations within the shipbuildingsector have encouraged further foreign collaborationand purchases. The yard produces under licenseBoeing hydrofoils (which are fitted with missilecapabilities) and Luerssen/Fulton Marine missilefast attack craft. Despite these achievements, Indo-

nesia’s Navy is reaching ‘‘block obsolescence. ’ Inan effort to sustain a limited modernization program,Indonesia has purchased four former Dutch NavyVan Speijk-class frigates. Still, Indonesia’s agingfleet will require considerable investment by thegovernment if it is to remain committed to modern-



transport liaison helicopters, and with Spain’s Con-struciones Aeronautical S.A. (CASA) for the CN-212 and CN-235 medium transports. Its mostambitious project is the indigenously designedAdvanced Air Transport Plane, the ATRA 90. Thispropfan, 50-passenger aircraft is being jointly devel-oped with Boeing.

20

In July 1989, British Aerospace reached anagreement to increase industrial subcontracts as aresult of Indonesia’s acquisition of various BAeproducts, including the Hawk and the Rapier surface-to-air missile. Other offset arrangements, which

reflect IPTN’s emergence as a competitive over-hauled and aircraft parts manufacturer, includecomponent production for Fokker-100 and F-16aircraft. (The 1986 F-16 offset agreement withGeneral Dynamics ensured Indonesia’s militaryparity with its ASEAN rival, Singapore. )21

The success of the Indonesian aircraft industry isevidenced by the fact that in 1976 only 10 percent of the component parts for aircraft were manufacturedlocally. Today 90 percent are produced either at theBandung factory or by other Indonesian subcontrac-tors. The Indonesian aircraft industry has also found

government if it is to remain committed to modern-izing the PT PAL Surabaya shipyard for navalshipbuilding.

22

The production of small arms and ammunition isbased at the government-owned main factory PTPindad. Pindad manufactures semi-automatic riflesunder license from Pietro Beretta of Italy; M-16s and5.56 assault rifles under license from Colt Industriesin the United States; and FNC rifles under licensefrom Fabrique Nationale Herstal in Belgium. Indo-nesia at present does not produce any guidedmissiles. A factory at Perum Dhana, however, doesmanufacture explosives and rockets.

23


OF TAIWAN

The Carter Administration’s “derecognition” of the Republic of China on Taiwan (ROC) in 1979,because of the overarching U.S. policy objective of pursuing normalization of relations with the Peo-ple’s Republic of China (PRC), drastically alteredTaiwan’s strategic as well as international positions.The United States had been the mainstay of thesecurity of Taiwan since 1954. Taiwan depended

19~*~donesia.s D-c ~ Industxy,” op. cit., footnote 17, p. 22.

%hlson, op. cit., foolnote 13, p. 59.

z~Ar~ Forces Journal International, op. cit., footnote 9, p. 62.

%id., p. 63.23s~k op. cit., footnote 11 , P. 63”

Chapter 11—The Developing Defense Industries of the Western Pacificq

171

heavily on U.S. security assistance, especially armstransfers. Most of these transfers were for aircraft,combat equipment, and missiles. Divested of formalsecurity assistance with the termination of theMutual Defense Treaty, and with a subsequentl-year moratorium on U.S.-Taiwanese arms trans-

fers, Taiwan’s security was increasingly threatened.By 1982 the PRC had augmented its militarycapabilities, reaching a 10:1 superiority over Taiwanin armed forces and conventional weapons. In termsof the naval balance, for example, the InternationalInstitute of Strategic Studies estimates that the PRCis superior to Taiwan in frigates, 37 to 10; in patroland coastal craft, 915 to 73; and in submarines, 93 to4 +

24

Under pressure from congressional supporters of the Taiwan Relations Act, the Reagan Administra-tion recommenced transfer of military equipment,including air-to-ground missiles and armored vehi-cles. It also allowed for the extended licensed

digenous production programs. . . . As such, Amerc-can policy provided both the incentives and themeans for Taiwan to develop a defense industrialcapacity.

25

Taiwan has relied extensively on licensed produc-tion of U.S. weapon systems to supplement the

parallel decline in U.S. grant assistance and tobuttress its own indigenous defense productionefforts (see figure 11-4, above). Throughout the1970s and 1980s, Taiwan has assembled the F-5ETiger II fighter, the Bell 205 UH helicopter, andvarious missiles, including the air-to-air AIM-9J/9Land the Hawk MIM-23 surface-to-surface missile,all under U.S. licenses. Taiwan has also receivedassistance from Israel to develop its missile andshipbuilding industries. It license-produces the Is-raeli Gabriel ship-to-ship missile and the Dvora fastattack craft.

Unlike other East Asian newly industrializingcountries, Taiwan’s indigenous defense production



production of 60 Northrop F-5E aircraft. The admin-istration decided, however, not to accede to Tai-wan’s request for the acquisition of an advanced

tactical fighter such as the F-16, the F-20, or F/A-18,nor the coveted Harpoon antiship missile.

In addition to these strategic concerns, Taiwan’sinternational isolation increased in the early 1980s,as other nations feared strained relations with thePRC should they continue or initiate arms sales tothe island. The ROC was also excluded from variousinternational organizations, including the United

Nations. Though Taiwan still retains security tieswith Israel, Saudi Arabia, South Africa, and SouthKorea, there are limits to the exports by thesecountries of technologically advanced weaponssystems.

In response to these developments, the Taipeigovernment embarked on an ambitious program of “self-reliant national defense. ’ As one analystobserved:

This was made possible by the provision by theUnited States on a selective basis of technologicalinputs and expertise to initiate and advance in-

, g pprogram is driven less by export incentives than bythe strategic threat posed by a PRC naval blockadeof Taiwan’s principal ports (especially Kaohsiung,

which handles approximately 65 percent of theisland’s trade). To deter such an attack by the PRC’Ssubmarine fleet, the Taipei government has investedheavily in the naval sector (antisubmarine warfarecapabilities and surface attack boats, equipped withantiship missiles). Additionally, to maintain theROC’S tactical air superiority over the TaiwanStraits, the Indigenous Defense Fighter (IDF), asupersonic, lightweight fighter, was developed indi-

genously and deployed in December 1989.26

Taiwan’s Defense Companies

Established in 1969 in Taichung, the Aero Indus-try Development Center (AIDC) is a branch of theTaiwanese Air Force and currently employs morethan 3,000 workers.

27Similar to the experiences of

other aircraft producers in the region, the AIDC’s

recent production of its first defense fighter, the IDFor Ching Kuo, is based on a phased developmentprogram. The AIDC’s capabilities grew from main-tenance and overhaul work to the licensed produc-

24~~r~tio~~~ti~te of s~e~c Smdies, The Mizita~Bazance, J99(.).J99J @ndon: B~scy’s, 1990), pp. 149-150, 178. Fora thomughovtiew

of U.S.-Taiwan security relations, see Stephen P. Gillbert, “Safeguarding Taiwan’s Security,” Comparative Strategy, vol. 8, No. 4, 1989, p. 439.

~Janne E. Nolau Military Zndustry in Taiwan and South Korea (lmndon: MZiCtimfitXS, 1986), P. 47.

~For ~ g~ ~ysis _ T~w~’s defense ~licy obj~t iv~ to the ~~@y’ s ~ production pro- S& A. J~es (kegOr, “The Republic of

China on lhiwaQ” in Katz, op. cit., footnote 15.

nsaw, op. cit., fOOtnOte b, P. 49.

172q

Global Arms Trade

tion of various aircraft, principally the Bell UH-lHhelicopter for the Army and the F-5 E/F fighter forthe Air Force.

28

The IDF aircraft, which analysts claim to becomparable to the Northrop F-20, will replace

Taiwan’s obsolete front-line interceptors, LockheedF-104s and Northrop F-5E/Fs. The production costsof this program are estimated at over $1 billion, butfinancing has not been a constraint. The fighter’sshort delivery time would not have been possiblewithout substantial assistance from U.S. defensecompanies, which supplied technical expertise andcomponents. General Dynamics, in consultationwith the government-owned Chungshan Institute of Science and Technology (CIST), helped to designthe airframe (which closely parallels the U.S. F/A-18Hornet). In addition, nearly 100 Taiwanese engi-neers received training and technical assistance atGeneral Dynamic’s Texas facility .29 Other U.S.companies that have supplied components for theIDF program include Lear Astronautics Corp which

extensive construction of oil tankers and large shipsfor export. The development of Taiwan’s indigenousnaval capabilities has been constrained by theNavy’s preferred reliance on imports of surplus oraging U.S. warships.

The CSC shipyards have refurbished nearly 30U.S. destroyers and frigates, retrofitting them withmodern antisubmarine warfare electronics, fire-control systems, and Sea Chaparrel air defensemissiles. CSC also has manufactured the PSMM-MK5 fast attack craft under a U.S. license arrange-ment with Tacoma Boat Building Co. Owing tocomplications arising from subsequent U.S. restric-tions on the required missiles, the shipyard has

switched to producing fast attack craft based on theIsraeli Dvora design. Finally, Taiwan’s CSC ispreparing to construct larger warships, ten 2,000-tonUlsan-class frigates in cooperation with SouthKorea’s Hyundai Shipbuilding Corp., and 8 FFG-7Perry-class frigates with the assistance of the U.S.

31



IDF program include Lear Astronautics Corp, whichprovided avionics integration and the fly-by-wireflight control system; Garrett, which aided the de-velopment of the IDF’s engine (a modified versionof the Garrett TFE-1088 turbofan); and GeneralElectric, which provided the IDF’s “look down-shoot down” capability with its GD-53 Dopplerfire-control radar, a derivative of the AN/APY-67(V) radar.

30

Concurrently, AIDC has invested heavily in theindigenous production of components and engines.AIDC manufactures the Lycoming T-53 engines for

its Bell helicopters under U.S. license. Taiwan’s air-craft industry produces about 40 percent of its re-quired components in conjunction with local privateindustry. Most of its avionics equipment, however,continues to be imported from the United States.

Taiwan’s naval production facility is the state-owned China Shipbuilding Corp. (CSC) in Kaoh-siung. In addition to this large shipyard, Thiwan

possesses extensive civilian shipbuilding capabili-ties. Prior to the recession in world shippingdemand, these shipyards had been engaged in the

Bath Iron Works Shipbuilders.31

Taipei has long considered modernization of its

missiles and access to related electronics technolo-gies of vital importance to the island’s defense. Asa result, Taiwan has sought to improve its air defensesystem and upgrade its current inventory of U.S.AIM-9 Sidewinder, Hawk, Maverick, and NikeHercules systems (among others). The country’smodest missile production program is based atCIST. This R&D center has developed the HsuingFeng, a licensed-produced version of Israel’s Gab-

riel 2 antiship missile, and the Ching Feng, amedium-range, surface-to-surface missile. AlthoughCIST claims to have produced this latter missileindigenously, analysts concur that the Ching Fengwas probably reverse engineered from the Lance, aU.S. missile currently in Israel’s inventory. CISTalso is producing a shorter range missile, the KunWu, an antitank, wire-guided missile (a variant of the Soviet AT-3 Sagger) .32

Equipment for Taiwan’s ground forces is pro-duced under the Defense Ministry’s Combined

?8For ~ ~orou@ ~~y~is of ~wa’~ IDF pro= s= “Fi@tm we ~ T~waq” De$ense Asia-Paci@, VO1. 2, 1989, pp. 4-7.

~Gil~fi op. cit., footnote 24, p. 436.~’ ‘Fighter Made in Taiwa~” op. cit., footnote 29, p. 7.Sl,,Mwm T. s- B~~g wm~ps,$~ D@eme Asia-Pacific, VOIS. 3/4, 1989, P. 10 .

sz~ane’s Defense Weekly, Nov. 17, 1984, p. 890; ~d Shim Jae HoOn, “Chinese Missile Sal~ Sbake ‘lliiwan’s Diplomatic Ties,” Far EasternEcononu”c Review, June 2, 1988.

Chapter n-The Developing Defense Industries of the Western Pacific q 173

Service Forces (CSF). CSF has three departmentsrelated to arms production:

1. the Military Industrial Service, manufacturer of ordnance and related electronics and communi-cations equipment;

2. the Military Vehicles Production Service (alsoknown as the Fighting Vehicles DevelopmentCenter), producer of armored vehicles; and

3. the Quartermaster Service, manufacturer of uniforms, gas masks, parachutes, and othermateriel.

The Military Vehicles Production Service is thelargest and most important of these departments. It

has designed and produced various armored vehi-cles, including an armored infantry fighting vehiclebased on the U.S. M-118 armored personnel carrier,and a light, Type 64 tank derived from the U.S.M-41. Currently, this department is developing amedium-weight main battle tank.

33

In 1973 the Industrial Technology Research Insti-tute (ITRI) was established to promote public andprivate R&D for defense-related applications. TodayITRI is Taiwan’s leading R&D institution and hasplayed a critical role in the development of thecountry’s high-technology defense-related industries.

It both introduces its own R&D products to industryand facilitates transfers of technology through itsextensive network with universities, research cen-ters, and domestic as well as multinational firms.

In an effort to boost private sector involvement insuch critical industries as semiconductors, electron-ics, precision machinery, and metallurgy, the gov-ernment established the Hsinchu Industrial Park in

1980. Modeled after California’s Silicon Valley, thegovernment solicited high-technology firms by pro-viding tax and duty exemptions, and subsidizedfacilities such as factory buildings, transportation,and communications networks. The Park’s locationnear Taiwan’s premier universities is also meant tott t hi h t h fi B 1989 98 fi



Government Promotion of

Defense-Industrial LinkagesThe Taipei Government has actively promoted

export-oriented industrialization in conjunction withdefense production activities through the develop-ment of indigenous R&D as well as through foreigntransfers of technology. Since the late 1960s, Tai-wan’s decentralized science and technology policyhas focused on institution building. The National

Science Council (NSC), created in 1967, has beenresponsible for overall guidance, coordination, andevaluation of R&D activities (including highereducation) in the public and private sectors. Between1977 and 1987, NSC financed between 50 and 65percent of the country’s total spending on R&D.

34

Such financing has been considered necessary due tothe lack of R&D investment by Taiwan’s small tomedium-sized manufacturing fins. Out of the

approximately 2 percent of GDP spent on R&D,primary emphasis is given to engineering fields,accounting for 70 percent of total R&D expenditureduring the 1977 to 1987 period.

35

attract high-tech firms. By 1989 over 98 firms em-ploying 17,000 people had located in the Park. Totalproduction in 1988 was valued at $1.7 billion.

36

The outlook for Taiwan’s continued pursuit of indigenous development of sophisticated weaponssystems is circumspect. For the foreseeable future,Taiwan’s arms industries will remain dependent onforeign suppliers of advanced subsystems (avionicsand engines) and manufacturing technology. Addi-tionally, despite efforts by ITRI, the linkage of applied, private sector R&D to defense-relatedactivities is still embryonic. Further efforts havebeen frustrated because of the country’s “talentgap”—the brain drain to the United States of Taiwan’s highly skilled scientific and technicalpersonnel. Finally, although exports of militaryequipment to regional neighbors could help recuper-ate the heavy investments in defense production,access to such markets is likely to be constrained bythe countervailing pressures imposed by the PRC.

Nevertheless, Taiwan’s strong export performance,especially of mid-tech electronics, will be employedby Taipei as an economic bridge to expand andstrengthen its foreign relations.

33A.J. Gregor, R.E. Harkavy, and S.G. Ne~, “Taiwan: Dependent Self-Reliance,“ in Brzoska and Ohlscq op. cit., footnote 13, pp. 239,243.

34SWW~ter ~old, “science & T~hnology Development in ~w~ ~d SOUth Kor ~ ” A~an ~wv~ , VO1. 28 , No. A, Apfl 1988, pp. 437-450.

sspa~ KC. Liu, Yin@huanLi~ and Hiu-Lin WU, “New Technologies, Indus~, and Trade — The lliiwan Experience,” Zndusoy ofl+ee china,vol. 72, No. 4, October 1989, pp. 23-35, and Industry of Free Chinu, vol. 72, No. 5, November 1989, pp. 7-24.

~Bob Johnstone, “Taiwan’s Hi-Tech Hothouse,” Far Eastern Economic Review, Aug. 31, 1989, p. 47, and “Hi-TechDile+” Far Eastern

Econonu”c Review, May 15, 1986.



OF AUSTRALIA

The 1969 Guam Doctrine and subsequent U.S.foreign policies towards the Asia-Pacific region ledAustralia in the 1980s to reconsider its forward

defense posture in favor of a strategy that empha-sized increased autonomy and self-reliance. Conse-quently, to reduce the country’s heavy dependenceon imports of U.S. defense equipment, the Austra-lian government has attempted to expand its smalldefense industrial base (primarily through increaseddomestic weapons procurement) and to promoteoverseas exports of local defense products. Addi-tionally, the Australian Armed Forces were reorgan-

ized during the mid- 1980s to meet the priorities of first, defending the country, and second, securingAustralia’s sphere of influence in the SoutheastAsian-Pacific region.

As various analysts have pointed out, defenseplanning is exceedingly difficult because, in con-

program with ASEAN states, especially Singaporeand Malaysia. This regional security role has beenreinforced under the Australia-New Zealand-UnitedStates (ANZUS) defense treaty, as well as throughthe Five Power Defense Arrangement (Australia,New Zealand, United Kingdom, Singapore, andMalaysia). Under these security arrangements Aus-tralia has provided training and advisory assistanceas well as joint military exercises and exchangevisits of military personnel. The Royal AustralianAir Force (RAAF) has deployed two Mirage fightersquadrons in Malaysia and has provided P-3Csurveillance aircraft to Singapore and Malaysia.

38

Defense Production in Australia

Australia’s unique strategic position and conse-quently small military procurement budget havedeterred the development of an extensive defenseindustrial base. In addition, with respect to theacquisition of military equipment generally, therehas been a strong predilection by the militarytowards overseas imports especially from the United



junction with the country’s continent size and vastcoastlines, Australia faces no clear, direct militarythreat.

37Instead, Australia’s strategic concerns are

largely regional, deriving from instabilities causedby the Soviet military buildup of the 1970s and byits northern neighbor, Indonesia. Australia’s rela-tions with Indonesia have often been strained be-cause of the latter’s 1963 to 1966 confrontation withMalaysia, and more recently, Timor. Though an In-donesian threat to Australia is not consideredserious, India’s rapid expansion of its carrier-basednaval fleet is of some concern to Australia’s Royal

Navy.

Australia also plays a strong regional role in theSouth Pacific, where smaller nations with morelimited economic and defense resources have lookedto Australia as the region’s policeman. The largestrecipient of Australian military assistance is PapuaNew Guinea, whose territory has been invaded byIndonesian “hot pursuit” raids (see figure 11-6).

In view of potential regional destabilization,Australia has strengthened its defense cooperation

towards overseas imports, especially from the UnitedStates. In the public sector, the dockyards, eightmunitions factories, and one aircraft company con-

tinue to perform the same defense work as duringWorld War II, namely, overhaul and refurbishmentof aircraft and naval vessels and the production of communications and ground force equipment.

39

However, most of Australia’s defense productionactivity is located in the private sector, whichprimarily consists of aircraft-related industries.

Aircraft

The Australian Aircraft Consortium consists of the Government Aircraft Factories, CommonwealthAircraft Corp., and Hawker de Havilland. Thisconsortium is developing a new Australian basictrainer for the RAAF and for export. The Govern-ment Aircraft Factories manufactures the indigenousJindivik remotely piloted vehicle and the Nomadlight transport aircraft.

Hawker de Havilland is the licensed producer of

the Swiss PC-9 trainer. Under U.S. license thiscompany also assembles Blackhawk and Seahawk

3Tsee Robert O’Ne~, “StrategiC Concepts and Force Structure,“ in R. O’Neill and D. Homer (eds.), Australian Defense Policy for the 1980s (St.Lucia: University of Queensland Press, 1982).

38P.D. Hastings, “Austmkn RegionaJ Defence Cooperation in the 1980s,” in ibid., and Australian Senate Standing Committee on Foreign Affairs and Defense, Australians Defense Co-operation With Zts Neighbors in the Asian-Pacl$?c Region (Canberra: Australian Government Publishing Service,1984).

39P. Dibb,Rflie~ OfA~~azia’S&fe~e Capabilities, Parliamentary Paper No. 163 (Canberra: AustralianGove-ent Publkldng SemiCe, 1986),pp. 110-111.



.

176 q

Global Arms Trade

defense industries acknowledged that “despite sig-nificant past expenditure the capabilities and capaci-ties of the Government’s defense factories anddockyards are ill-matched to our strategic needs.”

40

To redress Australia’s inadequate defense indus-trial base in the face of its policy of self-reliance, inthe mid-1980s the government initiated a four-pronged strategy:

1. rationalization of public-sector defense indus-tries;

2. expansion of defense-related R&D activity;3. facilitation of greater private-sector involve-

ment in defense production, particularly in thelocal aircraft, electronics, and shipbuilding

industries; and4. promotion of Australia’s defense exports.

Of the four, R&D investment and exports have beenaccorded the highest priority.

Although Australia’s main R&D organization,h D f S i d T h l O i i

1.

2.

3.

4.

technical and R&D assistance from relatedgovernment departments, including use of gov-ernment laboratories and test facilities;marketing assistance through the AustralianTrade Commission and in concert with defensepersonnel (embassy staff, endorsements pro-

vided by the armed forces, etc.);provision of spares held in the ADF’s inventoryto secure arms export agreements and speeddelivery times;offset credits for potential buyers of Australiandefense products; and

5. joint ventures between Australian and overseasfirms as a means of increasing export competi-tiveness.

41(Hawker de Havilland’s involve-

ment in the McDonnell Douglas MDX heli-copter project is a recent example. )42

These measures were not only directed at securinga market niche for Australian firms in the interna-tional arms trade, but were also implemented tooffset endemic balance-of-payments problems stem-



the Defense Science and Technology Organization(DSTO), has designed a few sophisticated weaponsystems such as the Jindalee radar, its capabilities

are limited. In fact, observers have commented thatDSTO in effect represents a liability because of itslimited interaction and cooperation with those or-ganizations engaged in defense-related R&D (aca-demic institutions, other government R&D organi-zations, such as the Atomic Energy Commission,and high-technology firms). In large part this weak link between government R&D and the defenseindustry results from inadequate government fund-

ing: defense R&D is approximately 3 percent of totaldefense outlays.

Since 1985 the Australian Government, in conjunction with the Ministry of Defense, has instituteda policy aimed at increasing overseas sales of defense products and services. The objective was toestablish Australia as a regional “center of defenseexcellence,” given its already favorable position

within ASEAN and the South Pacific. According toone Australian defense industry analyst such meas-ures include the following:

ming from imports of foreign military hardware.(Approximately 23 percent of the total defensebudget—in 1986-87 A$l.72 billion-is spent onimports of defense equipment and related technol-ogy transfers. )43

To date, Australian defense exports have beenrelatively modest. They vary from A$1OO million toA$500 million per year and consist primarily of small arms and ammunition.

44The largest importers

of Australian equipment are from the industrializedcountries (the United States and the United King-

dom). Still, Australia’s regional neighbors throughthe Defense Cooperation Program have been impor-tant purchasers as well. Indonesia has purchasedSabre aircraft, patrol boats, and Sioux helicopters.Papua New Guinea has imported Nomad surveil-lance aircraft, and Malaysia and the Solomon Islandshave bought 16-meter patrol boats. However, thecombined effects of overcapacity of production inworld arms markets and Australia’s relatively small

and unsophisticated defense sector suggest thatAustralia’s export potential will remain extremelylimited.

%ited in kmond Bal~ “National Security Policy,” in O’Neill and 140rner, op. cit., footnote 37, p. 147. See also Dibb, op. cit., footnote 39.

$lSee Oraeme Cheesemaq “AustralianDefemeExports,” The Puci@c Review, vol. 2, No. 3, 1989, pp. 221-222.

42P. kvis Young, “Australia Abandoning Mind-Set of Fighting OtherGuy’s War,” Armed Forces Journal International, November 1989, p. 46.43*- op . cit., footnote 41 , P. 221.

~lbid., p. 220.

Appendix



Appendix A.List of Acronymns

A-12ABRIACDA

ADD

ADFAECA

AIDC

ANZUSs

APCASEANASWATBM

AWACSBAeBEL

— Advanced Tactical Aircraft— Indonesian Armed Forces— Arms Control and Disarmament Agency

— Agency for Defense Development (SouthKorea)

— Australian Defence Forces— Arms Export control Act— Armored Fighting Vehicle— Aero Industry Development Center

(Taiwan)— Australia-New Zealand-United States

Defense Treaty— Armored Personnel Carrier— Association of Southeast Asian Nations— Anti-Submarine Warfare— Advanced Tactical Ballistic Missile— Advanced Tactical Fighter— Airborne Warning and Command System— British Aerospace— Bharat Electronics Ltd. (India)

DRDO — Defense Research and DevelopmentOrganization (India)

DSAA — Defense Security Assistance Agency

DSTO — Defense Science and TechnologyOrganization (Australia)

DTSA — Defense Technology SecurityAdministration

— Export Administration ActEC — European CommunityEFA — European Fighter AircraftEIA — Electronics Industry AssociationESPRIT — European Strategic Program of Research

in Information Technology

EUCLID — European Long-term Initiative forDefense

EUREKA — European Research Coordinating AgencyEWEX-IMFAMA-

— Electronic Warfare— Export-Import Bank — Fubria Argentina de Materials

Aerospaciales



BEMLBPPI’

BRITE

CASACAITCCMS

CIST

CNAD

CoCorn

CP qMCSCCSCE

CSFCTA

DASADCSDoDDPACT

DRDL

( )— Bharat Earth Movers Ltd. (India)— Agency for Development and Application

of Technology (Indonesia)— Basic Research into Industry Technologyfor Europe

— Construciones Aeronautical SA (Spain)— Conventional Arms Transfer Talks— Committee for the Challenges of Modem

Society NATO)— Conventional Forces in Europe— Chungshan Institute of Science and

Technology (Taiwan)

— Conference of National ArmamentsDirectors (NATO)

— Coordinating Committee on MultilateralExport Controls

— Naval Research Center (Brazil)— China Shipbuilding Corp. (Taiwan)— Conference on Security and Cooperation

in Europe— Combined Service Forces (Taiwan)— Aerospace Technical Center (Brazil)

— Army Technical Center (Brazil)— Deutsche Aerospace— Direct Commercial Sales— Department of Defense— Defense Policy Advisory Committee on

Trade— Defense Research and Development

Laboratory (India)

FHIFMS

FSXGaAsGAOGAITGDGDPGNP

HDW

IAIIDFIDF

IHI

INPE

IR&D

IT’AR

JDAJDFJESSI

JMTC

p— Fuji Heavy Industries— Foreign Military Sales

— Fighter Support/Experimental— Gallium Arsenide— General Accounting Office— General Agreement on Tariffs and Trade— General Dynamics— Gross Domestic Product— Gross National Product— Hindustan Aircraft Ltd. (India)— Howaldtswerke Deutsche Werft Ag.— Institute for Space Activity (Brazil)

— Indian Air Force— Israel Aircraft Industries— Indigenous Defense Fighter (Taiwan)— Israeli Defense Forces— Independent European Program Group— Ishikawajima-Harima Heavy Industries— Israel Military Industries— National Space Research Institute (Brazil)— IPT Nusantura (Indonesia)— Independent Research and Development

— International Traffic in Arms Regulations— Industrial Technology Research Institute

(Taiwan)— Japan Defense Agency— Japan Defense Forces— Joint European Submicron Silicon

Initiative— Joint Military Technology Commission

–179-


KHILCAMASHA

MBBMBTMDAAMDLMDNLMELCOMHI

MLRSMOAMODMOFAMOUMTCRNATONSCOECD

OMC

— — — —

— — —

— — — — —

— — — —

— — — — —

—

Korean Fighter PlaneKawaski Heavy IndustriesLight Combat Aircraft (India)Renovation and Maintenance Centers—Israel Defense ForcesMesserschrnitt-Bolkow-BlohmMain Battle Tank Mutual Defense Assistance AgreementMagazon Docks Ltd. (India)Mishra Dhata Nigam Ltd. (India)Mitsubishi Electric Co.Mitsubishi Heavy IndustriesMinistry of International Trade andIndustry (Japan)Multiple Launch Rocket SystemMemoranda of AgreementMinistry of DefenseMinistry of Foreign Affairs (Japan)Memoranda of UnderstandingMissile Technology Control RegimeNorth Atlantic Treaty OrganizationNational Science Council (Taiwan)Organization for Economic Cooperationand DevelopmentOffice of Munitions Controls

RACE

RDT&E

ROCR.O.K.RPVRSI

SAMCSDISDIOSIPRI

SLEPSSESTASTCTAASTOW

TRDI

U.K.

—

— —

— — —

—

— — — —

— — —

— — —

—

—

Research and Development in AdvancedCommunications for EuropeRoyal Australian NavyResearch, Development, Test, andEvaluationRepublic of ChinaRepublic of KoreaRemotely Piloted VehicleRationalization, Standardization, andInteroperabilitySingapore Aerospace Manufacturing Co.Strategic Defense InitiativeStrategic Defense Initiative OrganizationStockholm International Peace ResearchInstituteService Life Extension ProgramSingapore Shipbuilding and EngineeringSingapore Technologies AerospaceSingapore Technology Corp.Israel Military IndustryTube-launched Optically tracked WireCommand-Link Guided MissileTechnical Research and DevelopmentInstitute (Japan)United Kingdom



OPEC

OTAOTHPD 13

PLCPRCR&D

—

— — —

— — — —

Organization of Petroleum ExportingCountries

Office of Technology AssessmentOver-the-HorizonPresidential Directive on Arms TransferPolicyPrivate Limited CorporationPeople’s Republic of ChinaResearch and DevelopmentRoyal Australian Air Force

U.N.Us .

U.S.S.R.UAVUSAUSAFUSNUTCWEUWWII

— — — — — — — — — —

gUnited NationsUnited States

Union of Soviet Socialist RepublicsUnmaned Aerial VehicleUnited States ArmyUnited States Air ForceUnited States NavyUnited Technologies Corp.Western European UnionWorld War II

U. S. GOVERNMENT PRINTING OFFICE : 1991 0 - 292-877 : QL 3