International defense markets: seizing opportunities, avoiding common pitfalls.

• Author: Menon, Mrinal
• Position: VIEWPOINT

The past decade has been a period of unprecedented growth in U.S. arms sales overseas. Foreign military sales could reach a record $50 billion by the end of fiscal year 2011.

Annual foreign military sales grew from $8 billion to $38 billion over the last 10 years, and in the past several months alone, the United States has announced a $5.8 billion sale of C-17 aircraft to India, a $6 billion agreement to provide a range of defense equipment to Iraq and a massive $60 billion arms deal with Saudi Arabia. This uptick in international business comes as a welcome respite from dreary forecasts for the U.S. defense industry's domestic market, and it elevates foreign sales from an often ancillary activity to a major growth opportunity.

U.S. companies looking to expand their footprint abroad are encountering a rapidly changing international landscape. The well-developed markets for U.S. defense products in Western Europe and other NATO countries are lagging as a result of acute budgetary pressures. Instead, the Middle East, and emerging markets in Asia and South America will account for the bulk of major arms purchases over the next decade.

While many top-tier defense firms are well versed in the complexities of international sales, for others the imperative of growing their business will force them to confront a host of unfamiliar challenges. Even for the largest defense primes, the shift in emphasis from large platform sales to more diverse systems and subsystems will stress their existing operating models and practices.

Compared to highly regimented and relatively transparent processes in the United States and, to some extent, NATO allies, the defense acquisition practices in many growing markets are a continuing source of frustration for Western firms. Regulations and decision-making processes are often both opaque and underdeveloped, making it difficult to ascertain the playing rules, let alone the requirements for success. Decisions take years longer than expected.

Long a part of international sales, offsets remain a key component of many transactions. While direct offsets tied to building indigenous defense industrial capabilities are still part of the mix, the offset framework has expanded to encompass a broad range of indirect (and barely related) trade and investment initiatives. Depending on the size of the acquisition, offset obligations can be extensive and difficult to discharge. The most successful firms take a proactive approach to...