Luxner News Inc, Stock Photos of Latin America & the Caribbean

Article Search

Defense Contractors Gunning for New Clients
The Washington Diplomat / February 1998

By Larry Luxner

In mid-December, Litton Industries announced that its Mississippi-based shipbuilding division had won a $315 million contract with the Venezuelan government to overhaul and modernize two Venezuelan Navy frigates.

Three weeks ago, Brazil announced it would pay $70 million for 20 A-4 Skyhawk helicopters to be deployed on its aging Minas Gerais aircraft carrier. And now, Lockheed-Martin and Boeing are licking their chops in anticipation of a juicy Chilean contract for fighter jets that could be worth up to $1 billion.

As late as 1995, such deals would have been unthinkable. The Washington political establishment -- having long ago grown disgusted with right-wing regimes that showed little regard for human rights -- had for years excluded South America from the $12 billion global market for U.S.-made high-tech weaponry. As a result, many Latin militaries began turning to Russia, France, Israel and China for everything from guns to grenades.

Yet with democracy now a fact of life in every Latin American nation save Cuba, Washington has been forced to do an about-face.

Last August, the Clinton administration -- acknowledging that the United States needed to enhance its credibility among Latin armies and discourage "destabilizing acquisitions" -- reversed the long-standing U.S. prohibition against arms sales to Latin America, promising to review each proposal on its own merit and reject cases only in exceptional circumstances.

The new policy has since been criticized by several think tanks such as the Washington Office on Latin America, which warns that lifting the arms ban "threatens to divert resources from social and economic investments" throughout the region while spurring an arms race between adversaries such as Ecuador and Peru.

Yet the end of the ban thrills U.S. weapons manufacturers, since it could clear the way for several big deals, including Chile's proposed purchase of fighter jets. Among the models being considered are Lockeed-Martin's F-16, Boeing's F/A-18, France's Mirage and the JAS-39, made by a Swedish-British consortium.

"Our sole interest was in changing the overall policy on Latin America from one which uniquely patronized Latin America in an unsatisfactory way, to one where you look at arms sales on a case-by-case basis," says Joel Johnson, vice-president of international affairs at the Aerospace Industries Association, a trade group representing 54 U.S. defense contractors.

"The defense industry is fully aware that Latin America is a modest-size market, which has growth potential over the next decade and has modernization requirements," he told us, "but nobody thinks it's going to replace lost contracts because of the downsizing of the U.S. defense budget."

Nevertheless, Johnson estimates Latin America as an $800 million to $1 billion market, of which the United States has a 26% share. "Given we have 50% of the world market," he explains, "if were to treat the Latins with the same respect we treat the rest of the world, it wouldn't be unrealistic to assume the U.S. will get at least 50% or maybe more. That alone would argue an increase of $250 million [worth of business] a year."

Indeed, industry officials argue that Latin America spends proportionally less on defense than any other region in the world. According to the CIA World Factbook, South America's biggest military spenders -- as a percentage of GDP -- are Guyana (6%), Venezuela (4%) and Chile (3.4%). At the other end of the scale are Brazil (0.9%), Colombia (1.3%), Paraguay and Bolivia (1.6%), Argentina (1.7%) and Peru (2%). By comparison, the United States spends around 4% of its budget on defense, down from 6% just a few years ago.

In fact, domestic procurement has dropped by 60%, from $100 billion in 1985 to $42 billion now. So by definition, the export market has nearly doubled from 12% of total production to 23%.

Johnson says the best U.S. customers in Latin America are also the wealthiest in terms of per-capita income: Brazil, Argentina and Chile. Surprisingly, Mexico -- a neighboring country of 90 million people -- isn't on the list. "Mexico historically has spent very little on defense," he says. "Mostly they're focused on the army and paying soldiers."

Since the new U.S. policy on Latin America was implemented, several juicy deals have been announced. The Brazilian Army, for example, recently revealed it would buy four Sikorsky S-70A Black Hawk helicopters for an undisclosed price, though it could be a long time before the choppers fly over Brazil. Initially, they'll be used for military reconnaisance missions over the disputed Amazon border area between Ecuador and Peru.

To meet the difficult jungle conditions, says Sikorsky, each helicopter will carry a Global Positioning System, long-distance high-frequency radio, an internal rescue hoist and weather radar; such peacekeeping missions are currently being flown by U.S. Army UH-60 Black Hawks.

Besides Brazil -- a member of the four-nation observer force along the disputed border -- Sikorsky (a $1.6 billion unit of United Technologies Corp.) has sold Black Hawks to Argentina, Colombia, Mexico and 19 other countries.

"Latin American military modernization will occur for a couple of reasons," says Johnson. "First, it will be economically driven as much as threat driven, somewhat like Southeast Asia. As these economies grow, they'll have more money for defense, and will likely spend a good bit of this on modernization -- not because they want to attack their neighbors, but because they want to modernize."

Johnson said the best prospects for U.S. military sales to Latin America include F-16s (Lockheed-Martin) and F18s (Boeing); attack and utility-type choppers (Bell, Sikorsky and others), and radar surveillance systems (Raytheon). The biggest competitors, he says, are France, which manufactures Mirage-5 fighter jets; Israel, which has sold Pythons to both Chile and Brazil; Great Britain, which makes Hawk 100s, and former Soviet republics such as Belarus, which recently sold MiG-29 jets to Peru.

Says Boeing spokeswoman Maria Sheehan: "The lifting of the arms ban allows us to compete in international competitions wherever the US government allows us to do so. At this point, our near-term market is Chile and only Chile."

As for Litton's $315 million modernization contract with the Venezuelan Navy, the two 2,500-ton LUPO Class frigates were initially placed in service in Venezuela between 1980 and 1982, and are designed for anti-air, anti-surface and anti-submarine warfare. Work performed at Ingalls will include repairs to the ships' hulls; upgrades of gas turbine engines, shipboard command and control systems; replacement of propulsion diesel engines, electrical generating plants and machinery control systems, and the overhaul of all weapons systems.

"Participating in the modernization of the Venezuelan Navy is certainly compatible with our capability and experience and demonstrates our company's reputation internationally," said Jerry St. Pé, senior vice-president of Litton and president of Ingalls shipbuilding. "Ingalls has a long-standing reputation for quality, schedule and efficiency in the construction and modernization of major naval vessels," he said, having been a lead designer and builder of five of the U.S. Navy's newest, most advanced classes of major surface combatants.

Not all U.S. defense contracts in Latin America are weapons-related. In the biggest deal of its type, Raytheon Co. has formally begun work on its $1.4 billion Brazilian Amazon radar surveillance project (known by the Portuguese acronym SIVAM). Funding sources include the U.S. Export-Import Bank, Sweden's AB Svensk Exportkredit, Raytheon itslef and the SIVAM Vendor Trust. The U.S. Ex-Im Bank is putting up most of the cash, with loans totaling over $1 billion.

SIVAM -- the focus of numerous conflict-of-interest debates during the bidding process -- will for the first time give the Brazilian government the eyes and ears it needs to monitor Brazil's vast Amazon region. This data will be shared with federal agencies to help protect the environment, improve air safety, increase the accuracy of weather forecasting, fight epidemics, curtail illegal mining, combat the drug trade and enforce border controls.

"Here's an exmaple of using a surveillance system both for civilian and military purposes," says Johnson. "It's looking at anything flying over their airspace, whether they be drug traffickers, smugglers or somebody else's air force."

As part of this contract, Lockheed-Martin's Ocean, Radar & Sensor Systems unit will supply six tactical mobile radars to Raytheon, in a subcontracting deal worth around $50 million. The OR&SS radars, known as TPS-B34 for this particular project, are the latest in a family of sophisticated, long-range solid-state radars. Lockheed has 115 such radars in service in 15 countries.

"This long-awaited contract is our first program in South America," says Stanton Sloane, vice-president of the OR&SS unit, "and we expect it to lead to future opportunities throughout the region."

Luxner News Inc, PO Box 938521 - Margate, FL 33093 USA tel=301.365.1745 fax=301.365.1829 web site design washington dc