India Needs Jets: Sweden's Saab, US Overstretch

[NOTE: This still is the IPE Zone, not Jane's Defence Weekly. Still, you may want to pull the bomber jacket out of the closet and groove to Steve Stevens for old time's sake.] Here's an interesting IPE angle on the machinations of defence procurement that I came upon totally at random alike much of the most interesting blog fodder. It's funny how time flies when Top Gun is 25 years of age this year. Back then the Cold War was still very much in full swing with Maverick and Goose encountering the (fictional) MIG-28. As late as 1986, India was still more sympathetic to the Soviet Union than the United States in the belief in central planning and a mistrust of unfettered markets. This was before Manmohan Singh started loosening the reins of the infamous "Licence Raj" that kept India on the infamous Hindu rate of growth.

So it will be of no surprise to anyone that aside from the custom of writing five-year plans, the Indians also purchased a lot of their military hardware from the Russians. They Still do--but even that may change. Manmohan Singh, now prime minister, famously signed a nuclear technology sharing agreement with the Yankees in 2006, causing his then-Communist allies great consternation. In the commercial realm with India becoming perhaps the offshoring destination of choice for Western firms, the globalization game was well and truly on.

Now resurgent India is flush with cash as its aging fleet of MIG-21s reaches the end of the red brick road. To be sure, the nation has a fair need for military hardware. India's main security concern remains nuclear-armed Pakistan--the suspicion is mutual--while its border dispute with China remains a point of contention. In geopolitical terms, it is troubled by both US-Pakistan and China-Pakistan military cooperation. Internationally, there is now a massive race to see who can get India's signature for a multibillion dollar deal that is arguably the most eagerly anticipated one in the international arms bazaar. Aside from the Soviets and the Americans, the French and the Swedes are also vying for this lucrative contract.

For comprehensive information on India's Medium Multi-Role Combat Aircraft(MMRCA) competition, let us turn to Defense Industry Daily for the first time ever:

“It’s the biggest fighter aircraft deal since the early 1990s,” said Boeing’s Mark Kronenberg, who runs the company’s Asia/Pacific business. India’s planned multi-billion dollar, 126+ plane jet fighter buy became a contest between Dassault, Saab, MiG, American competitors and EADS’ Eurofighter...

The original intent of India’s fighter purchase was to replace hundreds of non-upgraded MiG-21s that India will be forced to retire, with a complementary force of 126 aircraft that would fit between India’s high end Su-30MKIs and its low-end Tejas LCA lightweight fighter. While plans to develop a “fifth generation fighter” in conjunction with Russia have received a lot of press, they are uncertain at best, address a different requirement, and offer no solution to the immediate problem of shrinking squadron numbers as existing aircraft are forced into retirement.

Let us now segue into Saab's story. Unlike ill-fated Saab Automobile AB which was bought by GM in 1990, Saab Aerospace--maker of sleek fighters and other defence gear--has remained in Swedish hands. The Swedes are a go-it-alone sort, preferring not to join the Eurozone while keeping the krona, for instance. So it has been in defence: its jets are not Eurofighters but homegrown designs. Through persistence and individuality, Saab is now in the frame with the world's top defence concerns in a race to replace India's MIG-21s even if its name recognition handicaps it somewhat:

The biggest contract that everyone is fighting for at the moment is an anticipated $11bn (£6.7bn) Indian order for 126 fighter jets, set to become one of the biggest export orders in the history of the defence industry. Saab was recently told it had not been shortlisted for the Indian contract, due to be awarded in March 2012, but remains hopeful nevertheless...

Saab is convinced its lightweight single-engine multirole fighter aircraft is both as capable as and much cheaper to buy and operate than larger, twin-engined jets such as the Eurofighter Typhoon, Dassault's Rafale and Boeing's Super Hornet - not to mention Lockheed Martin's F-35 Joint Strike Fighter, which has suffered from cost overruns running into billions of dollars. By contrast, [Saab's] Mr Sindahl observes: "We made the Gripen demonstrator at 40% of the original budget because we introduced new ways of working.

At any rate, there are other customers for the Swedes even if India doesn't sign on:

Saab's gain is a commercial product that is marketable across the world, according to Lennart Sindahl, head of Saab Aeronautics, the largest of the group's five divisions. The Saab JAS 39 Gripen has so far been bought not only by Sweden, but also by the Czech Republic, Hungary, South Africa and Thailand, and the UK is using it as its advanced fast jet platform for test pilots worldwide...

Saab is convinced it can extend its list of customer countries considerably over the next decade or so, as some 5,000 of the 13,000 fighter jets currently in operation are scheduled for retirement, and as emerging nations prepare to gear up their air forces. "For the Gripen, there are new markets and market possibilities coming along all the time," Mr Sindahl tells BBC News in an interview.

Those crafty Swedes have used the oldest trick in the book, industrial policy, of keeping its defence industries competitive:

The Gripen project has emerged from Sweden's desire not to rely on foreign companies for its defence capabilities. The programme has been further strengthened by the country's supportive industrial policy.

Sweden has realised that targeted investment in hi-tech sectors, such as the military aircraft industry, can be hugely beneficial for the nation as a whole, according to Gunnar Eliasson of Sweden's Royal Institute of Technology and the Ratio Institute, a free-market think tank. "Long-term competitive sustainability of an industry requires the local presence of one or more technology-leading firms for the rest of industry to learn from," he says in a book on advanced public procurement as industrial policy. Investment in the Gripen project "has generated an additional social return to society on the order of magnitude of at least 2.6 times the original development investment", according to Mr Eliasson.

Now let us turn to the Yanks. Lockheed's F-35 Joint Strike Fighter (JSF) programme has famously been beset by delays and cost overruns. Like America itself, US defence contractors are seldom on time or on budget. That figures. While it is certainly one of the more advanced and highly rated designs in the race to replace the ageing MIGs, it is beset by--you probably guessed it--industrial policy, this time on both sides. On one hand, while the Indian economy has certainly liberalized compared to the pre-Manmohan Singh days, it seems they are still keen on not just being paying customers by availing of technology transfer and accompanying "offsets" that benefit local industry:

The vendor who finally wins will be required to undertake 50% offset obligations in India. That’s a boost from the usual 30%, which is required for Indian defense purchases over $70 million. The additional 20% was added because India is looking for a large boost to its aerospace and defense electronics industries, and understands that the size of their purchase gives them additional leverage. The Indian MoD’s RFP release adds that “Foreign vendors would be provided great flexibility in effecting tie up with Indian partners for this purpose.”

On the other hand, you also have American defence firms alike Lockheed being obliged to keep proprietary knowledge in-house that are not keen on sharing this knowledge--even at a price:

India has been invited to F-35 events. With potential US [domestic] order numbers dropping, India might even be accepted into the program if they pushed for it. The F-35’s killer weakness was timing that coudn’t deliver the fighters in India’s timeframe, and India’s pursuit of its FGFA program with Russia offers it a semi-indigenous alternative. Even if India changed its mind, the F-35’s advanced systems, established industrial partnership structure and program procurement policies could also make it nearly impossible to meet India’s technology transfer and industrial offset rules.

Just as international trade policy largely fashioned on American preferences as exemplified by the WTO discourages subsidies, so does US foreign military sales (FMS) procurement policy discourage "offsets":

The general policy of the Department of Defense with regard to offsets is that they are market distorting and inefficient. In accordance with an April 16th, 1990, Presidential Policy statement, the decision whether to engage in offsets, and the responsibility for negotiating and implementing offset agreements, resides with the companies involved. The Presidential Policy mandates that "no agency of the U.S. Government shall encourage, enter directly into, or commit U.S. firms to any offset arrangement in connection with the sale of defense goods or services for foreign governments."

Let's be honest here: Americans have BS artists from here to eternity, and the defence industry certainly isn't free from them. Even when the US military cannot afford jets due to overstretch--broke America probably has more pressing priorities--it still turns up its nose to countries that can actually pay for these killing machines.

Security matters often receive less IPE attention, but we have an interesting triple comparative political economy here depicting countries on different trajectories. India is definitely shining with many keen on sharing design know-how with it. Sweden is maintaining its reputation for engineering through well-applied industrial policy. And the US is, industrially speaking, a beggar being a chooser that is flushing itself down the toilet of history through overstretch. That's about par for the course as far as the global pecking order is concerned.

Modern American defence policy isn't up there with the best of the best, to put it mildly. It's funny what a difference a quarter of a century makes.