Procuring defence jobs...the offset way

TWI Bulletin, November - December 2004

Defence contracting made easy, but just what is offset and industrial participation?

Richard Freeman joined TWI from industry in 1996. He is Aerospace Business Manager and is the UK advisor to the American Welding Society AWS D17.1 committee on 'Fusion welding for aerospace applications'.

'Offsets, or work-sharing arrangements, are frequently requested by Governments when buying foreign defence equipment. Under an offset the vendor agrees to place work to a set value with firms in the buying country'...probably one of the best descriptions on this topic is taken from a publication called The economics of offset: Defence procurement and countertrade by Stephen Martin. As TWI's Richard Freeman explains the purpose of this is to compensate a country for the loss of work to its defence industry, as a result of buying offshore.

There are many other terms for offset, recently described by Brinley Salzmann of the UK Defence Manufacturers Association (DMA) including:

• Buyback
• Industrial benefits
• Industrial involvement
• Co-production
• Compensation trading
• Barter
• Investment
• Parallel trade
• Economic compensation
• Direct offset
• Indirect offset
• Reciprocal trade
• Counter purchase
• Technology transfer
• Licensed production
• Industry participation
• Switch trading
• Counter deliveries

The growth in this area is enormous, with only ten countries having formal offset agreements in 1979, and this has grown to over 120 in the 21st Century. In many countries the offset packages are mainly direct, which means they relate to the manufacture of parts for the defence equipment purchased (military aircraft and transporters, helicopters, submarines, frigates, and missile systems).

In other countries the balance can differ widely, with Poland for example splitting their offset 50% direct and 50% indirect. The indirect portion relates to non-defence industries of prime importance to their government(shipbuilding and agriculture to name but two). In the vast majority of countries, the offset equates to 100% of the contract value, and there is also a penalty clause for non-performance, which can equate to as much as 10% of the overall contract value.

In the United Kingdom this type of arrangement is known as Industrial Participation (IP). The UK Ministry of Defence (MoD) has a policy of 'open' procurement, and purchases significant values of matériel from non-UK suppliers, whilst UK firms can face greater obstacles in overseas defence markets.

To counter balance this the MoD introduced its IP policy, which has a threshold of £10 million. The policy encourages offshore companies to provide opportunities for UK industry to secure defence related business that otherwise have been placed overseas.

The work must be defence related, new, of equivalent technical quality, achieved within the duration of the MoD contract, and be completed at no additional cost to the MoD. The UK IP policy is non-contractual, because if fines were to be levied for non-performance the money would go directly to the Chancellor of the Exchequer and the defence industry would lose out.

The Defence Export Services Organisation (DESO) that monitors UK IP firmly believes that a softer approach brings more rewards, and this is indicated by the compliance of all offshore companies to their UK IP obligations to date.

Why TWI?

TWI's involvement in offset and IP programmes came about because of its world-wide network of clients. Approximately 52% of TWI's Industrial Membership base is drawn from outside the United Kingdom, and 53% of the orders received from the customers were non-UK. As TWI supports over 2000 Industrial Members in over 60 countries, in the aerospace and defence, shipbuilding, construction, electronics and sensors, medical, oil and gas, power generation and road transport industry sectors, it is well placed to offer support in this area.

When coupled with the economic valuation of projects that TWI regularly carries out with its customers, the picture becomes clearer. In a recent review of 66 customer projects, the average annual benefit totalled 17 times the original project cost, and a benefit of 71 times the original project cost was seen in one particular case.

Some specific examples of the economic valuation of TWI projects are shown below:

• A £20k welding consultancy project saved a US manufacturer £5 million in rework and scrapping off of parts for a space vehicle
• A £50k bridge repair and strain gauge monitoring project in the UK saved £2.5 million
• A £130k investment in two Group Sponsored Projects helped the Brazilian oil and gas company Petrobras to save £11 million in unnecessary scrap off of material
• A £40k project on assessment of an ethylene plant in North Africa saved the company £1 million per annum in reduced downtime and increased production

TWI helping aerospace and defence companies

TWI introduced Boeing to friction stir welding (FSW) in the early 1990s, and the process is now widely used in the manufacture of satellite launch vehicles with significant cost savings.

Upon receiving the TWI Lillicrap Medal in 2001, Doug Waldron, a technical expert at Boeing, commented that Boeing had produced over 75,000 feet of friction stir welds on the launch vehicles with no defects. As a result of the technical assistance afforded to Boeing, TWI was invited to assist them with their obligations in specific countries where indirect offset packages were required.

The following projects have been successfully completed for Boeing to date:

• Friction stir welding (FSW) training course and project work in Finland (2000-2002)
• Lead free solder training courses and project work in Taiwan (2000-2001)
• Composites training course in Taiwan (2000)
• Titanium fabrication training course in Singapore (1999)

TWI worked closely with Boeing and the relevant offset authorities, to ensure project deliverables and economic values were met in these projects. It continues to support them with a number of other obligations. Boeing has stated recently that 'Utilisation of TWI's established global technology network is beneficial for addressing modest IP obligations in markets new to Boeing'.

In 2002 TWI was invited to become a member of Lockheed Martin's team in their sales campaign to sell F-16 military aircraft to the Polish government. TWI was the only non-US company in the team and offered several projects into the overall $4.5 billion package that secured Lockheed's victory in the campaign. Unfortunately major political changes in the Polish political system meant that the offset committee was replaced, and the offset project package was radically altered. Despite this setback, TWI continues to work closely with Lockheed Martin supporting some current obligations.

Conclusions

TWI has a lot to offer to aerospace and defence companies that have existing or planned direct or indirect offset/IP obligations around the world. The relationship developed with the Boeing and Lockheed Martin IP staffs, and the projects completed to date, indicate that TWI can offer a wide variety of projects that meet the economic requirements of offset authorities. For more details please contact Richard Freeman.