Tags: Boeing, Defense, India

Defense Suppliers Compete for a Piece of India’s Multibillion-Dollar Military Revamp

By , Associate Editor, Money Morning •

The Boeing Co. (NYSE: BA) is in talks with India for a $5.8 billion military aircraft deal as the country triples its defense budget, leading defense suppliers to compete for a piece of the multibillion-dollar action.

India is negotiating with Boeing over the purchase of 10 C-17 Globemaster III aircraft, which would be the largest defense order from India for Boeing, the second-largest U.S. defense contractor. India's Finance Minister Pranab Mukherjee said in February the government would spend $33 billion on defense in the fiscal year starting April 1.

The Asian country's "defense procurement budget is quite huge," Laxman Kumar Behera, a research fellow at the Institute for Defense Studies and Analyses in New Delhi, told Bloomberg. "The U.S. arms industry has become quite interested in the Indian defense market."

Boeing expects to bid for as much as $31 billion of military contracts in the next 10 years as India looks to replace aging Russian-made equipment.

"We've had a long-standing relationship with Russia. But that's changing now," Sitanshu Kar, a spokesman for India's Ministry of Defence, told The Washington Post last year.

U.S. President Barack Obama is slated to visit India early next month and will discuss securing more defense deals that - with the Boeing contract - could total $10 billion to $12 billion.

Boeing is targeting international contracts to counteract a slowdown in U.S. defense spending, and India's relationship with American defense suppliers has tightened over the past couple years.

"There's been increasing cooperation between India and the United States from both the defense side and security side," said Mark Kronenberg, vice president of business development at Boeing. "More importantly, from the Boeing perspective, it's not just about increased presence on the military side - we've always had a strong commercial presence here - we think with Indian suppliers and partnerships we can be here for a long time to come."

A closer business relationship with India could also open the door to Boeing benefiting from India's growing air travel demand. Earlier this month the chief executive officer of Boeing rival Airbus SAS said he expects India's aircraft need to climb over the next couple decades.

"Our market forecast is usually quite conservative but we should expect at least an additional 1,000 in the next 20 years here in India," Airbus CEO Tom Enders told a media briefing. "India next to China is one of the big growth hubs for the aviation industry."

Other U.S. companies hoping to cash in on India's multibillion-dollar defense spending are General Electric Co. (NYSE: GE), defense contractor Northrop Grumman Corp. (NYSE: NOC) and Lockheed Martin Corp. (NYSE: LMT), the world's biggest arms supplier. The companies have been wooing India since last year when the country signaled a shift from Russian suppliers.

But U.S. companies will face competition from global counterparts, like Moscow-based United Aircraft Corp., France's Dassault Aviation SA (EPA: AM) and European Aeronautic Defense and Space Company (EADS).

Suppliers who usually rely on U.K. defense spending are turning to India for business as the U.K. coalition government is expected to announce defense-spending cuts on Tuesday. The British media has reported that the Royal Air Force may lose some aircraft orders and U.K. defense suppliers could see their operating margins fall in coming years. France and Germany will also be reviewing their budgets to trim expenses, putting more strain on suppliers.

While India's growing economy has attracts more foreign investment each year, some companies are frustrated with the strict government regulation that limits foreign involvement in sectors such as technology and energy. President Obama is expected to address concerns over market access during next month's meeting with Indian officials, especially in regards to a recently passed Indian law that exposes nuclear technology firms to accident liability.

"We will not be able to support nuclear programs in countries where the nuclear liability regime is not consistent with international norms," Michael Tetuan, a spokesman for GE, told The Wall Street Journal.

These kinds of laws turn some businesses off from dealing with India, which some say has used its attraction of having incredibly high economic growth to control business and investment negotiations.

"India's pretty cocky right now," Charles Maddox, a professor of corporate law at the Jindal Global Law School outside New Delhi, told The Journal. "They're playing a brinksmanship game with the United States."

But experts say the progress made with U.S.- India relations marks a dramatic improvement from prior decades and is sure to continue.

"In any relationship where you have growing commercial activity, you're going to have challenges and disagreements," Francisco Sanchez, U.S. undersecretary of commerce for international trade, said in a recent interview. "But the advancement over the last 20 years has been significant. We need to keep plugging away."

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