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Selling Overseas Is a Two-Way Challenge

June 2011
By Rita Boland, SIGNAL Magazine
E-mail About the Author

 

Personnel at Papa Air Base in Hungary welcome the first of three Boeing C-17 Globemaster III planes to be acquired by the NATO Airlift Management Agency as part of the Strategic Airlift Capability Initiative. Export laws pertaining to defense articles cause frustration for both U.S. companies and foreign clients, but the various sides have different perspectives on the issues.

Foreign Military Sales program regulations cause frustration for U.S. companies and their clients, but other countries see different problems.

The export laws imposed by the U.S. government on defense-related goods and information have been a source of aggravation for U.S. companies and foreign customers for years. Private-sector firms continue to push for changes, and both the enforcement agencies and the current presidential administration are responding. However, interested parties sitting outside the border see several issues that might not be at the forefront for those making the adjustments.

Barriers to foreign military sales (FMS) exist for both sides trying to do business. U.S. companies not only have to go through multiple agencies and defense and dual-use item lists on the domestic side, but they also have to manage business development on the foreign end. The timeline from wanting to sell to a country and actually making a sale is long, with plenty of bureaucracy in the middle.

Chris Griffin is a U.S. citizen currently living in Hungary as he works to help European, African and Asian nations navigate the muddled processes of buying defense equipment from sellers in the United States. An associate at Cask LLC, he aids ministries of defense, helping them work through the stringent legal issues of buying the materials and information they need. Occasionally, Griffin also works in short-staffed U.S. embassies to assist them with the various tasks necessary to make deals happen.

The lengthy FMS process is a major concern to U.S. companies pushing for changes to regulations. Under current U.S. export laws such as the International Traffic in Arms Regulations (ITAR), sellers can be fined and face other penalties when products or information are misused, even once they leave control of the originator (SIGNAL Magazine, January 2011). Griffin offers that rules such as ITAR are a bigger issue for U.S. companies than for clients. “Because I’m more involved in the actual acquisition process, I’m going to assume that the U.S. company has already met those requirements,” he explains. Companies must deal with all the red tape on the U.S. side of the transaction along with the lesser bureaucracy—but potentially much greater dishonesty, depending on the nations involved—on the other end.

When clients make purchasing choices, they have to consider how to procure the most bang for their buck. European Union (EU) countries, for example, can buy a helicopter more easily from an EU company than from a U.S. company. However, construction costs generally are more expensive, so ministries need to weigh production, shipping and other expenditures to find the best overall package. Loyalties also come into play. “The social environment in Europe is to buy from Europe as much as possible,” Griffin explains.

In parts of Asia, Africa and South America, U.S. companies have an advantage and could expand their business with positive results, Griffin believes. He says his firm has spoken to companies interested in expanding into Europe, but he advises them that it might not be the best plan, especially with shrinking budgets. “Right now, look anywhere but Europe,” he offers.

Another area of confusion is Foreign Military Financing (FMF), through which the United States provides funds to countries to buy certain defense goods from U.S. companies. “A lot of businesses hear about FMF, and they think it’s just free money,” Griffin says. “They think countries can get free stuff and the United States is paying for it. That’s not the case. The country still has to prove why it needs it.” He explains that this process is tricky and many guides exist, but the information can be difficult to use for those unfamiliar with the acquisition process.

Wherever U.S. firms try to branch out internationally, they will have difficulties, Griffin believes. The number of agencies involved in regulating exports, as well as complexities such as dual-use products, makes the process confusing and long. The additional worries of fines and other punishments convince some firms that their efforts will be better spent, and safer, if they focus only on domestic customers. “I’m often amazed things actually happen,” Griffin says. From the time a foreign government submits a request, as many as 15 different agencies could be involved in the process.

 

The Australian Department of Defence uses Sikorsky Black Hawk helicopters in support of its missions. Despite the red tape surrounding the sale of U.S. materials to foreign governments, the Department of Defence says it has no trouble procuring the support it needs for its Black Hawks or its Chinooks.

 
Reforms could help ease the burdens, and many are underway. Changes are being implemented to reduce the number of agencies that oversee the processes as well as to create a single, tiered list of items and the restrictions on exporting them. Griffin and many others in U.S. industry believe the new rules will help increase both profits and U.S. competitiveness in global markets.

But the bottom line is not the whole story. Increased sharing of goods and information also will aid coalition partners on the battlefield. Griffin entered his current line of work because during his tour in Iraq with the U.S. Army, he saw how different the standards of equipment were between the United States and some of its allies. “They’re not even close,” he says. “It’s important that when we enter into these kinds of conflicts ... that everyone is on the same sheet of music.”

Problems range from interoperability of technological systems to more basic needs. “We have to make sure that if they go into battle with us that their battle armor is going to stop the bullets,” Griffin says. He adds, “There’s a financial reason. Obviously there’s opportunity out there. But also from a military mindset, it’s about making sure that our allies can support us in a meaningful way.”

On the opposite end of that spectrum is concern about U.S. defense products falling into the hands of U.S. enemies or others who would use them to do harm in an uncontrolled way. Events in the Middle East, especially the recent coup in Egypt, drew negative attention to the issue when Egyptian soldiers used nonlethal U.S. goods to subdue crowds. Other examples include selling advanced F-14 fighter jets to Iran before the 1979 overthrow of the shah and providing weapons to Afghanistan to counteract Soviet military operations in that country. Many defense companies’ largest foreign customers, both FMS and FMF, are nations in the Middle East.

The government’s regulations are set with the intent of making the best sales decisions during a current point in time. “Really, all you can do is sell to whom you are able to sell to,” Griffin says. From a business standpoint, he believes, “As long as they’re our ally, and we know they’re not supporting state-sponsored terrorism, and they’re doing the right thing, then I think it’s not a problem.”

Another issue Griffin says he often encounters is far removed from legality. Ministries of defense say they want to buy from certain companies, but the quantities they require are too small for the firms to make the effort. The result is a middleman, known as a reseller, who then charges 30 to 40 percent more for products than the price for the same items transferred directly between manufacturer and purchaser.

Small budgets mean smaller procurements, which result in longer sales timelines. When a ministry of defense with a very limited budget decides it wants to buy, the procurement is a major purchase and the ministry will take a longer time to decide what it wants than will countries that often make these types of deals, Griffin says.

Resellers may make it more difficult for countries to buy products at a desired price point, but they can help manufacturers reduce costs in some ways. For example, when a company decides it wants to branch its sales into a new country, the firm incurs expenses for travel, research and networking. “So, the cost of developing business is astronomical,” Griffin says. It makes more sense for the large company to use a middleman who already has relationships and a physical presence to showcase the goods rather than making a large investment in business development to sell a relatively small amount of product.

Griffin believes knowledge, not law, is the major obstacle for companies trying to close overseas sales. “The biggest problem is they don’t understand the local contracting processes,” he explains. Using Europe as an example, Griffin shares that despite organizations such as the EU and NATO, every nation in those groups is unique. “You can’t approach each country the same way, but it’s a steep learning curve,” he says.

Another area for consideration is the issue of national pride. “Just like the U.S. military wants to buy from U.S. companies, the Germans want to buy from Germans,” and so on, Griffin explains. This again drives businesses toward resellers in each country. “And that’s where companies get in trouble,” he states. “They don’t know who is legitimate. They don’t know what the companies are doing in these countries. In Europe, in many of these countries, you have a lot of corruption.”

Also integral to the understanding of FMS and FMF are the correlations between industry and foreign militaries that can influence world events. Cdre. Patrick Tyrrell, OBE, RN (Ret.), current director of his own company Vale Atlantic Associates, is interested in FMS as a strategic tool. Currently, his main work focus is to provide board-level assistance to companies that want to understand what likely will happen in the geopolitical arena. He also chairs a geospatial intelligence conference. The commodore was involved more directly with FMS during his Royal Navy tenure and immediately afterward when he worked more closely in the defense sector.

He says the recent revolt and power change in Egypt show the effect of U.S. business in other countries. The U.S. government worked with Egypt to provide that country’s military with certain goods, creating a precarious influence over the country and region. Now, everyone waits as the Egyptian military—currently running the country—determines how it views the United States and its offerings.

However, Cdre. Tyrrell believes that the FMS and the FMF programs are less straightforward than people might think. Some believe that the processes merely serve as a front for the U.S. government to subsidize its own industry. He explains that countries in competition with the United States, such as the United Kingdom, France and Germany, might view the policies as unfair influence. “I don’t think the Russians or Chinese will think it’s unfair because they’re doing the same things with their stuff,” he adds. “I think there’s a view that the United States isn’t perhaps quite as open about what its aims are as it might be.”

Even without issues such as terrorism or questionable regimes, defense export laws are burdensome, both within the United States and abroad in nations such as the United Kingdom. The commodore believes that both sides have frustrations with the other’s policies. “You know we make these regulations and then we assiduously follow them even when they become absurd,” he states.

At times, the rules have been sources of tension between the close allies. During the middle of the last decade, the Joint Strike Fighter Program ran into trouble when the United Kingdom said it would pull out if necessary changes to procurement were not made. Since then, the United States has signed separate defense-trade treaties with the United Kingdom and Australia, its two staunchest partners.

A spokesperson with the Australian Defence Force says U.S. export laws do not affect Australia adversely in the context of acquiring the capabilities needed to support its warfighters. Administrative processes have improved over the past few years, including the time frames to process various deals. The country is pleased with the reforms underway, believing they will improve a range of extant issues and benefit Australia. The recently ratified Australia/U.S. Defense Trade Cooperation Treaty is expected to reduce a range of administrative overheads that exist under current ITAR arrangements, the spokesperson says.

Australia’s Department of Defence also states that it has had access to what it needs from U.S. companies. In the case of its Black Hawk and Chinook helicopters, it has obtained all the support necessary in accordance with ITAR. Limitations exist on what intellectual property the U.S. government will release, but these restrictions have not caused problems.

Defense export controls in Australia are similar to those the U.S. government is working to implement. One organization—the Defence Export Control Office—administers all the Australian regulations. Also, Australia uses only the Defence and Strategic Goods List to regulate items, as opposed to the separate lists currently under review in the U.S. system.

Nonetheless, bureaucracy is not limited to the United States. Cdre. Tyrrell explains that it causes problems within the United Kingdom too. “I think we just have to grow up and be sensible,” he says. “We just don’t like to be sensible. People are so frightened to come out and say, ‘We need to make an exception here.’” By rationalizing regulations, deals could happen faster and therefore more cheaply no matter who is conducting the business. The commodore would like to see simplified processes that allow parties to take advantage of the opportunities that exist.

Part of rationalization is understanding that providing large platforms does little good if countries are unable to procure necessary support technologies. Foreign militaries have problems because they buy large pieces of kit, but they are unable for various reasons to implement the command, control and communications systems that make them work properly and interoperate with other forces. Cdre. Tyrrell says people involved with these issues need to ensure the provision of balanced capabilities. The concern is less serious for major NATO allies, but other nations with less sophisticated infrastructure might be forced to resign equipment to sit and rust.

Overall, the commodore believes that most countries have little problem with U.S. FMS and FMF and the issues they address. He says the U.S. government wants to help U.S. companies, to affect relationships with the United States and to exert influence over defense procurements for various reasons. “People recognize why it’s being done,” he says. “I don’t see that as a major problem.”

However, the revamping of regulations continues to grow in importance as technology changes at an increasingly rapid pace. Cdre. Tyrrell echoes Griffin’s concerns that unnecessary delays have serious ramifications on the coalition battlefield. “Absolutely improving processes is important to world security,” the commodore says. “We need to be able to react much faster ... somehow, you’ve got to be able to do that while maintaining the integrity and the answerability that those sorts of positions demand.”

He believes others will follow where the United States leads, and that path should be toward the best capabilities for all, whoever designs them. Reducing delays and deliberations would cut legal and general management costs, thus reducing procurement prices significantly, he explains.

WEB RESOURCES
ITAR: www.pmddtc.state.gov/regulations_laws/itar_official.html
Joint Strike Fighter Program: www.jsf.mil
Cask LLC: www.caskllc.com
Australian Defence Export Control Office: www.defence.gov.au/strategy/deco