Posted by: John Elliott | February 6, 2008

Lockheed leads American defense companies into India

The American government is rightly pleased about a $1 billion order that has just been agreed with India for six of Lockheed Martin’s Super Hercules C-130J military transport planes that will be used by the Indian army and air force. This is India’s first large order with an American defense company and it comes at a time when its traditional – and massive – defense ties with Russia are under increasing strain.

India has for decades been reluctant to buy defense equipment from America, fearing Congress’s power to block deliveries if it did not approve of Indian military activity or policy at some time in the future. This attitude has been changing in the past couple of years when ties between the two countries have improved dramatically – notably with talks on a nuclear deal, though that is now making little progress.

“With this sale, India is telling us it’s ready to buy top-quality U.S. equipment on its merits,” says James Clad, the Pentagon’s deputy assistant U.S. secretary for South and Southeast Asia. “It positions us to be in the Indian defense market for years to come”. But India’s worries remain, and they will affect how it behaves on other orders, and especially on a $10 billion fighter jet contract where Russian and European companies are bidding against America’s Boeing (BA) and Lockheed (LMT).

The significance of the C-130 order as a breakthrough in defense sales should not be over-stated because there was no rival aircraft on the market. India urgently needs the four-engine C-130 because it does not have a medium-sized transport aircraft that can land on short airstrips. Currently it relies on large and cumbersome Russian IL-76 transport planes and smaller AN32s, whose limitations were demonstrated during the mountainous border conflict with Pakistan in 1999 at Kargil. So it decided to negotiate a government-to-government deal without going out to international tender for the C-130s, which will be delivered from 2011, subject to final price negotiations.

For Lockheed, the deal is important, not only because it brings in $1 billion of business, but because the company will be able to demonstrate to the Indian government and air force how it handles orders. This will include meeting Indian government offset arrangements, which require a supplier to spend 30% of a contract’s value in India. There could also be further orders for two or more aircraft.

Boeing hopes to be in a similar position soon if it can clinch an order for its P-8 maritime reconnaissance aircraft. Other American companies such as Honeywell (HON), GE (GE), Raytheon (RTN), Northrop Grumman (NOC), Pratt & Whitney, United Technologies (UTX), Bell Helicopter Textron, and General Dynamics (GD) are actively chasing orders and tie-ups with Indian defense companies.

The C-130 order has upset Russia, which wanted to offer an upgraded – but not comparable – AN-32 if there had been an open tender. The complaint marks the current strained relationship between India and Russia, which have been traditional allies since India’s independence.

With over $14 billion orders currently in progress for military aircraft, ships, rockets launchers, helicopters and other equipment, Russia is India’s largest defense supplier (followed by Israel), and India is its biggest customer. But the easy days, when Russia saw India as an essential customer and was prepared to meet the county’s demands for specialized equipment and knock-down prices, are over. Late last year it infuriated India by saying that it was doubling the price of an old aircraft carrier, the Gorshkov, that it is refurbishing for the Indian navy.

Russia now has other significant defense customers and wants market prices. But it is not offering India competitive back-up services on quality, training, and spare parts, and this is seriously affecting the operational efficiency of the Indian armed forces. “The Russians now want to sell arms not at ‘friendship’ but commercial prices, without providing ‘commercial’ quality of after-sales service,” Kanwal Sibal, a former Indian foreign secretary and ambassador to Russia, wrote in the Indian Express newspaper yesterday.

This leaves the door open for American companies – led by Lockheed – to show what they can do. But they will have to overcome the problem that there is no history of trust between the two countries. As Sibal put it in his article: “Russia is a trusted partner and trust in defence matters has to pass the test of time and of difficult circumstances”.


Responses

  1. The C-130 deal was easy because the choice for India was limited. However it will be very tough for Lockheed to sell the F16 as they are already selling those to Pakistan. US neeeds to realise that Indians will not be willing to purchase substantial quantities from a company which is a long term supplier of its adversary. Buying F16 will mean subsidising purchases of our western neighbour. At the same time US should realise that India will not be willing to become over depndent on US Military supplies and become another Turkey/Greece or Egypt where Washington decided its strategic policy.

  2. India’s overwhelming dependence on the erstwhile USSR was due to a combination of factors which included India’s enchantment with socialism, America’s obsession with pulling India into its orbit, artificially cheap Soviet products which were offered without an unacceptable strategic compromise from a non-aligned India, and America’s terribly short sighted ‘honeymoon’ with Pakistan.

    The break up of the USSR changed things dramatically and commercial considerations came into play, without a corresponding improvement in the quality of spares support which had always been unsatisfactory.

    Opening of doors to American companies is a long overdue and welcome step. Not only will it ensure that India can get the best available equipment in the world, it will also reduce its critical dependence on just one source.

    The Americans would do well to appreciate India’s sensitivities and prove that they too are sensible enough to look more at the business angle of defence supplies rather than trying to leverage them to brazenly bulldoze the country into accepting America’s world view.

    http://www.vinodksharma.blogspot.com

  3. I think it is a time of changing times. India now realises that it needs to develop its military power overtly along with successes in its economic prowess. Keeping all eggs in the same basket is not being prudent – spreading yours risks and buying/building with offsets is a smart thing to do. Spending all that money ($50+ Billion) over 5-7 years will ensure that the Indian military can project its capability and ensure stability in its reagion (Middle East to South China Sea) of influence and align itsself for like minded powers for then self interest of market oriented democracies. Time has come for India to find its place amongst equals and the world is watching.


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