Avascent conducted research into the current state of offset obligations to arm companies with a foundational understanding necessary to begin thinking strategically and creatively about how to meet current and future obligations.
Bearing in mind the opaque character of this marketplace, Avascent estimates show that over the last seven years (2005 – 2011), approximately $214 billion in total offset obligations were generated around the world. While exact figures on the scale of discharged obligations are not publicly available, anecdotal evidence suggests a significant portion remain outstanding. Driven by pockets of strong spending in the Middle East, Asia and Latin America, and by the proliferation of increasingly complex and demanding offset policies, firms are expected to accumulate an additional $225 billion in offset obligations on new sales through 2016.
The analysis of global offset markets is divided into four regions: Middle East and North Africa (MENA), Asia, Europe & Canada, and Latin America, each of which is evaluated individually to generate growth rate forecasts for total new obligations and which highlight important country and region-specific trends.
Data on offset obligations are derived from Avascent 050, a proprietary database and decision support tool on international defense sales. Using past and projected future sales as the baseline, Avascent derived offset obligations:
- Defined sales for countries with active offset policies from 2005-2016
- Segmented sales by contractor, country, size and sales type
- Applied country specific offset criteria
- Adjustments to Avascent’s projections were made for sales not subject to offset (e.g., trade between members of the European Union) and for programs where a sale is anticipated in the future, but no contract has been awarded.
New obligations derived from Middle Eastern countries are estimated at over $12 billion in 2011 and will exhibit an 8% compound annual growth rate (CAGR) through 2016. This growth is primarily driven by the UAE and Saudi Arabia, both of which have developed more sophisticated offset policies that largely emphasize social and economic sector interests and the attainment of advanced technologies. For example, UAE’s revamped offset guidelines emphasize profits from newly formed offset ventures, job creation for Emirati nationals and the transfer of exportable technologies and capabilities. Other Middle Eastern countries with robust offset policies include Kuwait and Israel. From 2005 to 2016, an estimated $156 billion worth of cumulative new offset obligations will be accumulated by contractors, a formidable sum to absorb by an economically diverse and fairly sparsely populated region.
Offset obligations derived from Asian countries are estimated at approximately $10 billion in 2011 and will exhibit a 5% CAGR on new obligations generated each year through 2016. Asian offsets are dominated by the two vastly different offset regimes of India and South Korea, which collectively comprise approximately 60% of the region’s offset obligations. India’s offset policy has proven a challenge for aerospace and defense firms as it does not award multipliers nor qualify technology transfer for offset credits, but does require local partnership for foreign providers. Conversely, South Korea offers a more traditional policy, with the stated goal of building local production and excess export capacity. Other prominent Asian countries with growing offset demands are Singapore, Malaysia, and Taiwan. Through 2016, an estimated $122 billion worth of offset obligations will exist.
Europe and Canada
European and Canadian offset regimes will generate an estimated $10 billion in new obligations for 2011 but will exhibit only a 3% CAGR through 2016, the lowest rate of the four regions. The lower growth rate in Europe is due to efforts to control military spending and a counter offset trend, embodied in a 2008 Code of Conduct on Offsets signed by 26 European nations. Despite such developments, many European countries such as Italy, Sweden, and the Netherlands have robust offset policies that demand indirect defense offsets as a tool for providing opportunities to their large defense industries.
Other European countries with demanding offset requirements are Finland, Greece, Poland, Spain, and Portugal. Canada also has a sector-driven offset policy, which requires defense primes to place sub-contracts and investments in Canada’s high-tech sectors. From 2005 to 2016, an estimated $118 billion worth of cumulative new offset obligations will be created.
Latin American countries generated offset obligations totaling $2.8 billion in 2011 and will exhibit a 10% CAGR through 2016, the highest rate among the four regions. This growth will be driven by military upgrades and modernization efforts in Brazil, Colombia, and Chile, which have implemented more stringent, formal offset policies over the past decade stressing local production, technology transfers, and broader social benefits.
The Brazilian offset guidelines, for example, emphasize training, technology transfer, and joint development of systems to foster innovation, recently showcased in the Brazilian Air Force’s KC-390 program. From 2005 to 2016, an estimated $41 billion worth of cumulative new offset obligations will be created.