Thursday, October 8, 2009

Deal Near in India-U.S. Export-Control Flap?

Defense News


Aero India

Deal Near in India-U.S. Export-Control Flap?

By Defense News Staff

BANGALORE, India - U.S. and Indian officials may be close to resolving the impasse about oversight for American-made military equipment, according to the Pentagon's top export-control official.

"We're in the process of, I hope, reaching closure in the next days, if not weeks," said Vice Adm. Jeffrey Wieringa, head of the Defense Security Cooperation Agency (DSCA). "I've just met with the Indian staff on their latest proposal. We are reviewing that and hopefully we will be at closure."

Others at last week's Aero India air show here were less confident of a speedy accommodation, but the question now seems to be not whether but when.

The End Use Monitoring (EUM) strictures were widely pondered at Aero India 2009 at the hot and dusty air base near here. Officials from several hundred companies came to seek their chunk of the $100 billion India will spend on arms and defense gear over the next decade. Government and industry officials talked as well about the Indian requirements for technology transfer, offsets and - of special concern to European firms - 74 percent of foreign-backed joint ventures.

Under U.S. law, all nations buying sophisticated American military equipment must agree to various oversight provisions, including seeking Washington's permission before reselling it. Some 90 nations have accepted the conditions.

Indian and U.S. officials have been discussing the EUM issue for three years, but it has come to a head as U.S. contractors start to make inroads into the Indian market. Purchases of Boeing P-8I maritime surveillance aircraft and Lockheed Martin C-130J transports, among other deals, could depend on a compromise.


On Feb. 12, Indian officials handed a draft text proposing changes to EUM strictures to Wieringa's delegation, who sent it on to Washington.

Indian Defense Minister A.K. Antony told reporters that he hoped for a quick resolution and noted that while India has its reservations, "America has its laws."

Indian national security, defense and military officials have generally expressed comfort with the EUM strictures, said sources who participated in talks between top Indian officials and a delegation of U.S. executives.

But one Indian defense official warned that the clause relating to the physical inspection of U.S. weaponry to India will need to be dropped or modified. India's independent auditing agency, the Comptroller and Auditor General, recently questioned why India's $50 million purchase of the amphibious warship USS Trenton went through with EUM strictures, including restrictions on offensive deployment and permission to inspect and inventory transferred articles.

Another Defence Ministry official said the United Progressive Alliance government is unlikely to sign a deal endorsing any EUM arrangement with a general election pending.

But the central hang-up, these sources said, is with the Ministry of External Affairs, India's equivalent to the U.S. State Department, where officials believe the strictures infringe on local sovereignty.

One U.S. executive said resolving those objections might require negotiations between American and Indian diplomats.

Wieringa was more upbeat. "I haven't been involved with those folks" in the Ministry of External Affairs, "but every signal that I've gotten this week in Bangalore has been positive from India, that they feel it's critical that we reach closure," he said.

Vivek Lall, vice president and India head for Boeing Integrated Defense Systems, said fears over the EUM were much ado about nothing.

"In the last three years, we're seeing tremendous progress in the defense relationship as a whole. Things we're talking about today, we couldn't even envision talking about several years ago," he said. "I think the countries are learning to do business together on the defense side. It's coming through the natural progression of negotiations and high-level consultations for both governments."

Lall said cultural sensitivity is key to doing business in any country, but especially in India.


European executives appeared more preoccupied with New Delhi's reluctance to lift the bar on foreign investment.

EADS Defense & Security CEO Stefan Zoller said the Indian government should rethink its 26 percent cap on foreign ownership of local companies, lest the country miss out on investment and hinder domestic ambitions to bring capabilities to world-class levels.

"Twenty-six percent is not very attractive for an outside investor," Zoller told reporters Feb. 11. Large international companies such as EADS have to consider whether to invest in India or other economies, and such a limit of ownership is unlikely to give India the edge, he said.

Still, the current policy is an improvement over older rules that forbade foreign ownership. "The Defence Procurement Policy has opened the door to participation in India," Zoller said.

And he hinted that a joint-venture agreement could be announced soon: "Expect bold moves in the very near future."

EADS is keen to take part in the long-term development of India's industrial base, beyond winning short-term deals for combat aircraft, helicopters, radar and missile warning systems. EADS has signed 25 nonexclusive memorandums of understanding with local firms, and wants to create joint ventures.

Alan Garwood, BAE Systems' group business development director, said his company intended to continue to increase its presence in the Indian market despite the New Delhi government's refusal to budge on its foreign investment regulations.

BAE, which set up an armored-vehicle joint venture with India's Mahindra & Mahindra earlier this year, asked to hold 49 percent but settled for 26.

"We respect the Indian rules," Garwood said. "We are satisfied with 26 percent as a starter, but getting to 49 percent increases our appetite to invest."


At the Aero India show, Bell Helicopter and Boeing officials revealed they had pulled out of the competition to supply 22 attack helicopters, leaving the job open to European and Russian bidders.

Officials with both companies said they decided not to bid because the India deadline was too soon to allow their helicopters to clear the U.S. DSCA's Foreign Military Sales (FMS) review process.

Brian Nelson, spokesman for Boeing's Integrated Defense Systems in India, said there it was also uncertain whether a sale of the AH-64 Apache fell within FMS rules.

Bell Helicopter's vice president for South Asia, Max Wiles, said Indian offset requirements were also too much and "would not have met the overall business strategy."

Wiles said that Bell would have bid its AH-1Z Cobra for the attack helicopter mission and 407 for the Reconnaissance Surveillance Helicopter program.

Both firms' executives said their companies would like to bid if the Indian government reopened the tender process.

But Sikorsky is pushing ahead in "one of the fastest growing markets in the world for helicopters," said Scott Pierce, Sikorsky vice president for Worldwide Sales – Asia.

Pierce said his firm is leaving nothing to chance in its bid for the Indian Navy's $1 billion Multi-Role Helicopter (MRH) program to replace 16 Sea Kings.

Sikorsky feared EUM disagreement would not be resolved quickly enough to successfully compete for the tender with just one aircraft, so the firm is offering both the S-70B Seahawk as a commercial direct sale and the MH-60R as an FMS under the DSCA.

"We put in two bids," Pierce said. "Many companies are watching the P-8 deal to see how that is resolved."

Andrew Chuter, Wendell Minnick, Gayle S. Putrich, Vivek Raghuvanshi and Pierre Tran contributed to this report.