Role of offsets in international defence market

The offsets in defence sector originated from the US aerospace industry a couple of decades ago. The countries buying foreign military equipment desired to reduce the dependence on foreign companies by developing their indigenous defence industry.  As an example, the offset programmes executed on account of F-16 international sales benefitted the industry of the buyer countries. Generally, developing nations use offsets to develop their defence industry and to enhance their R&D, and developed nations use it for joint ventures to share the costs and risks involved. 

 

Different countries have different offset policies according to their security needs and developmental goals. There are numerous countries that have benefitted from the offset practices. One of the best examples is South Korea which obtained the rights of co-production of Lockheed Martin’s F-16 and also jointly developed the KTX-2 advanced trainer aircraft. KTX-2 is now poised to be exported to international customers, thus boosting the South Korean defence industry. Recently, South Korean companies participated in India’s advanced trainer aircraft procurement programme and gave a tough competition to global vendors. The South Korean industry has been able to make use of offsets and is now capable of producing destroyer ships, submarines, air defence guns, combat vehicles etc. indigenously. The effective utilisation of offsets has helped South Korea gain a competitive advantage in the global defence market. The offset programmes are managed by South Korea’s Defense Acquisition Program Administration. Another good example of offsets is the Westland Aircraft Company, UK which developed its helicopter industry by entering into a licensed production agreement with Sikorsky and later went on to  produce the Lynx as well as the EH 101 Merlin helicopter indigenously. 

 

Brazil has also been able to make optimum use of offsets by acquiring the defence technologies to meet their domestic military needs. The aim of Brazil’s defence industry is to reduce dependence on foreign countries and increase defence exports. It uses offsets to obtain high-end technology, specifically in the field of aerospace. Aircraft manufacturer Embraer is a leading example of how technology transfer, a highlight of any offset practice, can be utilised to acquire the requisite technologies for meeting the needs of national security. The Brazilian aerospace industry gained substantially from offsets in 1980s through joint venture programmes with Italian companies. Their offset policies are still being refined with a view to help the industry develop latest technologies. In fact, India’s offset policies appear to be following the pattern of Brazil’s offset practices.

 

Taiwan has also utilised offsets to develop its domestic defence industry. The first offset deal was signed with Lockheed Martin in 1993 thus, paving the way for achieving self-reliance in developing defence solutions. Most of the defence equipment and weapons have been procured from the US. Hence, the Taiwan Relations Act, 1979 has been instrumental in maintaining Taiwanese sovereignty. The local defence industry is now capable of undertaking production of fighter aircrafts, main battle tanks, air-defence systems, surveillance radars, missile systems etc. Offset practices are also prevalent in Turkey, Saudi Arabia, Netherlands, Greece, Kuwait, Indonesia, Japan etc.  

 

However, in certain countries, offsets have not been able to meet the expectations of the policy makers. There may be several reasons for non-realisation of expected benefits, including inadequate knowledge, lack of experience and immaturity of the decision makers and other stakeholders. For instance, Malaysia’s domestic defence deals have not been as forthcoming as was anticipated. In 2002, offset contracts were signed on account of procurement of Scorpene submarines. A major portion of the offset obligations were directed towards export of palm oil from Malaysia as compensation. This raised the expectations of the palm oil industry hoping for an increase in exports. However, the palm oil industry could not receive the expected benefits. Some of the developed economies like USA have started expressing their apprehensions towards offsets. They consider offsets to be inefficient, ambiguous, drain on their national resources and susceptible to corruption. Therefore, these developed countries resist and discourage the offset practices.

 

Since independence, India has been importing bulk of its military hardware from foreign nations. Though there were efforts to make India self-reliant in defence production through indigenous R&D, offsets did not figure in the preferred methods of indigenisation. It was only in 2005 that the Defence Procurement Policy (DPP) introduced the offset policy in India to help achieve the aim of self sufficiency. Seven years forth, the offsets policy is still in its nascent stage. There are several anomalies in the policy that need to be addressed before offsets can help achieve the expected goals of industrial growth. 

 

Stricter measures need to be taken to ensure timely and smooth implementation of offset contracts. As for the FDI cap, certain flexibility needs to be provided so that foreign suppliers are encouraged to venture into the Indian market. There seems to be lack of knowledge of the very concept of offsets among policy and decision makers. The Defence Offset Facilitation Agency (DOFA) is a very small organisation which is incapable of handling the complete responsibility of large offset deals due to lack of manpower, limited authority and dearth of expertise. There is a requirement of a more effective and visible organisation that can plan, manage, evaluate, monitor and execute the offset programmes which are in the best interest of the nation.  

 

Different stakeholders i.e., foreign OEMs, the Indian DPSUs and private companies have been trying to accommodate their respective ideas in the formulation of offset policies. Having divergent views on some key issues, every stakeholder wishes to influence the offset policy to favor his own organisation. The concerned policy makers try to incorporate the demands of most of the stakeholders, however it is very difficult to satisfy the needs of everyone. The offset policy is being reviewed by the Government of India and will be declared shortly. There is apprehension in some segments of industry that the new policy may be oriented towards import of technologies rather than transfer of technology. The policy makers should take into account these apprehensions and ensure that the amendments in the offset policy lead to the growth of the India defence industry and fulfillment of the goal of self reliance.   

 

India needs to learn from the successes and failures of foreign countries and modify its offsets policy to derive maximum benefit thereby, achieving the goal of self-reliance. The Indian industry has good potential and capability to absorb the relevant military technologies and undertake military modernisation projects. If the offset programmes are planned and executed effectively, it may lead to expedited defence industrial growth, thus reducing dependence of the country on imports of defence equipment.

 

 

Views expressed are personal