06 11 15 - Foreign Sales by U.S. Arms Makers Doubled in a Year

http://www.nytimes.com/2006/11/11/business/11military.html?pagewanted=2&_r=1 NewYork Times
By LESLIE WAYNE- November 11, 2006

Sales of military weapons by United States contractors to foreign governments doubled in the last year, as countries like Pakistan, Australia and Greece stepped up purchases of armaments and the United States government loosened policies to allow more American weapons to be sold on the world market.

Weapons Sales Rise A total of $21 billion in arms sales agreements were signed from September 2005 to September 2006, compared with $10.6 billion in the previous year, according to new data compiled by the Pentagon. Foreign military sales agreements have typically ranged from $10 billion to $13 billion a year since 2001.

A number of factors are behind the surge in sales. Since Sept. 11, 2001, the Bush administration has used arms sales as a way to reward allies and cement international relationships. Middle Eastern countries, flush with oil revenues, have become big buyers.

Countries like India, Pakistan and Indonesia that were once barred from buying American weapons have had those bans lifted, and some have placed big orders.

For military contractors, the sales have provided a welcome source of new revenue at a time when the Pentagon has indicated that the era of record military budgets is ending.

Because many of the weapons sold overseas are mature products, the profit margins to American arms makers are high, since the initial development costs have long been recuperated.
And in the case of some planes, like the F-16 Fighting Falcon fighter jet and the C-17 Globemaster cargo plane, foreign military sales are a way to keep open production lines that might close for lack of Pentagon orders.
“There have been a remarkable number of orders placed,” said Howard Rubel, an analyst at Jeffries & Company. “It’s another arrow in the quiver of military contractors.”

One of the biggest orders was placed by Pakistan, which had been barred from buying most American weapons because of its nuclear program. That ban was lifted last year and the country placed a $5 billion order for advanced F-16 jets made by the Lockheed Martin Corporation.

A similar ban on India was also lifted, opening up a potentially lucrative market to American contractors. India is currently looking to buy up to 126 new fighter jets, and American contractors have been flying to India to show off their wares.

Oil profits are also behind some of the orders. Saudi Arabia said in July that it planned to spend $5.8 billion on American weapons to modernize its National Guard and will also put in more than $3 billion in orders for Black Hawk helicopters, Abrams and Bradley armored land vehicles, new radio systems and other weapons.

In the gulf region, Bahrain, Jordan and the United Arab Emirates have filed plans to buy Black Hawk helicopters — for a total of $1 billion. Oman plans to buy a $48 million anti-tank missile system. The Emirates plans to buy rocket artillery equipment and military trucks for $752 million and Bahrain will purchase Javelin missiles for $42 million.

Bahrain alone has accounted for $1 billion in foreign military sales in the five years since 9/11.

“The rise in oil prices has allowed countries like Saudi Arabia and the United Arab Emirates to increase their arms purchases dramatically,” said William Hartung, director of the arms trade project at the World Policy Institute, which is part of the New School in New York.

For contractors, Mr. Hartung added, these sales “are a welcome windfall, not just icing on the cake.”

These new big gulf region orders, like the Saudi deal, were not included in the $21 billion tally for 2006. They will be carried over into the 2007 tally and are a sign that next year will be as robust as this one.

“We’ve got a good start on 2007,” said Lt. Gen. Jeffrey B. Kohler, director of the Defense Security Cooperation Agency, which manages foreign military sales.

Besides Pakistan and India, since 9/11, bans on arms sales have been lifted on Tajikistan, Serbia and Montenegro, Armenia and Azerbaijan as these countries have been identified by the State Department as critical allies in the war on terror. They have turned into buyers, although on a much smaller scale than the big Pakistani or Saudi orders.

Armenia, Azerbaijan and Tajikistan had no American arms purchases before 9/11. But as a group, they have bought $32 million in weapons under the foreign military sales program, according to statistics from the Center for Defense Information.

Foreign military sales are negotiated directly between the United States and other governments and are overseen by the State Department, the Pentagon and Congress.

Other strategically situated countries have also stepped up their purchases. Nepal, for instance, bought $1.1 million of American weapons in the full decade before 9/11, and $22 million in the five years since.
Weapons Sales Rise Similarly, Yemen, Djibouti and Uzbekistan bought $16.4 million combined in the decade before 9/11, and $73 million of American weapons since.

“Foreign military sales are a good hedge against potential further cuts in Pentagon procurement,” said Mark T. Esper, executive vice president for defense and international affairs at the Aerospace Industries Association, a trade group.

In a conference call with analysts, Christopher E. Kubasik, chief financial officer of Lockheed, estimated that foreign sales account for 15 percent — or $5.5 billion — of Lockheed’s sales, which were $37 billion in 2005.
“They’re valued customers, and we plan to continue to grow in that area,” he said.

Foreign sales have importance to military contractors beyond the dollar value of the contract. Once a country buys a weapon system, it will need to continue to buy spare parts or upgrades.

“In the next couple of years,” said Cai von Rumohr, an analyst with Cowen & Company, “foreign sales as a percentage of company revenues will be tracking up.”

Foreign sales can also keep endangered weapons programs alive.



For instance, when Boeing made some announcements that it might begin to close production of its C-17 cargo line, Canada and Australia quickly stepped in to place orders: Canada’s deal is valued at $1.3 billion and Australia’s at $2 billion. Orders for the F-16 from Turkey, Greece and Pakistan are pumping $11 billion into that program at a time when the Air Force is phasing out of it.

For that reason, the Aerospace Industries Association has been pressing Congress to relax rules so more foreign deals can be done outside of government scrutiny — an effort that has, so far, been rebuffed in Congress.
Last month, the industry association, along with representatives from the Boeing Company and the Northrop Grumman Corporation, met at the Heritage Foundation, a conservative Washington research group, to outline their plans to pursue this effort.

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