
Offset: A genuine business enabler for exporters of technology
The word “offset” in defence commercial terms is frequently read with dread and trepidation, with the consequences viewed as an unwanted burden or complexity, and the associated processes often seen as difficult to navigate and rarely understood.
However, for willing exporters of technology or capability, with aspirations to do business in nations with ambitious domestic growth plans, should offset really be seen as an opportunity to be enthusiastically embraced?
If harnessed effectively, historical offset obligations can be a genuine business enabler and a unique means of overcoming commercial obstacles that may otherwise seem insurmountable. Is it the key to opening doors to new and exciting opportunities in new markets that were otherwise considered too difficult to reach?
What do we mean by offset?
Buying nations often have a defined “offset policy” and insist on clauses being included within contracts that create obligations for the seller to make financial commitments in the buyers’ country which are typically related to industrial development. The aim is to achieve economic benefit and local capability growth through investment in reciprocal trade or transfer of strategically important technologies matched to national growth plans. A company’s offset obligation can typically be between 30% and 100% of the value of the original contract and can be classified as “direct” or “indirect”.
Direct offset is linked to the original contract, where companies agree to transfer relevant technological knowhow or use local suppliers to build the products they are selling to the buying nation in that nation’s own country.
Indirect offset, though prompted by the original sale, has nothing to do with the hardware the buying nation is purchasing. It can include making or encouraging investments in local industries or helping to export a country’s domestically produced goods. Often, indirect offset can relate to strategic goals of the buying nation and the selling party is encouraged to focus on specific industries or technologies.
An offset policy may involve “multipliers” where sellers are credited for investing in initiatives that include key program goals such as creation of high value jobs, education and training, export potential and involvement of strategic technology. Longevity in the initiative is also important, with an aim for long term sustainable capability development. Achieving several “multiplier” targets can result in a seller being awarded “offset credits” equivalent to between 2 and 5 times the financial investment being made, therefore incentivising them to find the best initiatives and affording them the opportunity to increase their profits.
Offset also exists outside the defence industry in areas where governments spend large amounts of budget on foreign procurement, such as civil aerospace and infrastructure.
Where does offset policy create the greatest opportunity?
Many of the world’s top defence spenders have a defined offset policy, or at least an equivalent scheme aimed at supporting local industry, developing capability, and contributing to their domestic economy.
Countries with highest military spending, 2020
Spend Bn US$ | ||
1 | United States | 778.0 |
2 | China | 252.0 |
3 | India | 72.9 |
4 | Russian Federation | 61.7 |
5 | United Kingdom | 59.2 |
6 | Saudi Arabia | 57.5 |
7 | Germany | 52.8 |
8 | France | 52.7 |
9 | Japan | 49.1 |
1 | South Korea | 45.7 |
1 | Italy | 28.9 |
1 | Australia | 27.5 |
1 | Canada | 22.8 |
1 | Israel | 21.7 |
1 | Brazil | 19.7 |
Source: Statista 2021
These countries typically fall in to 3 groups:
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- Countries where it can be difficult or is not possible to trade for political reasons
- Those that have a well-developed home defence industry that serves its needs (such as US, UK, France, Germany, Turkey, etc)
- Those that currently spend most of their budgets outside of their own borders but have a strong wish to develop their technological base and grow indigenous capability
The 3rd group includes nations such as India, Saudi Arabia, UAE, and Australia and this is where there is genuine opportunity for defence companies to develop new business, align to a national strategy and become part of the nation’s technological and industrial base.
An example is Saudi Arabia, which is determined to transform its domestic defence spend from 20% to 50% of its annual budget over the next 10 years. Using the 2020 budget as a guide, that means growing from US$11.5B annual spend with local companies to US$28.5B by 2030, a hugely challenging target. As a comparison, in 1985 Turkey enshrined into law new legislation to help grow its domestic defence industry and it took over 20 years to achieve similar goals to those set by Saudi Arabia.
Saudi Arabia has an ambitious national transformation plan, Vision 2030. Fundamental to this plan is a desire to develop the country and reduce its dependency on oil and gas revenues. It is centred on three pillars: a vital society, a thriving economy, and an ambitious nation. The Kingdom aims to use its investment power to create a more diverse and sustainable economy, and to use its strategic location to connect the three continents of Africa, Asia and Europe together to create a modern “Silk Road”. For today’s defence and aerospace companies this offers an amazing opportunity to be involved in a challenging environment, but where the rewards can be great if managed correctly.
The UAE adopted a similarly challenging programme. This commenced earlier and is further towards achieving its goals. Transformation has already been achieved in the defence sector and we have seen the creation of Edge, which employs over 12,000 people in 25 different entities focused on creating a world leading indigenous defence sector. Managed by Tawazun, the country seeks to achieve 60% of direct and indirect offset through its defence acquisitions. Behind this is a strong desire to develop a prosperous country which is not dependant on imports, creates high value jobs, and produces a successful infrastructure.
India is also using offset to create a knowledge based, diversified economy, which enables long term growth, high value employment and gives it independence from others. To achieve this, it has adopted a requirement for a minimum of 30% offset on defence contracts. The country is also looking to achieve both strategic and social benefits.
Having similar objectives but managing them in a different way is Australia. Australia has no formal offset policy but does have a clear desire to create a sovereign defence technology capability. By 2028, Australia wishes to have its own thriving defence industry which it wants to grow through not only meeting its own requirements, but also through export. Several major international companies have established not only manufacturing bases, but also development facilities, including BAE Systems, Rheinmetall and Hanwha.
These nations have well defined growth plans and ambitions to create new and exciting capabilities. They have plans to transform their industrial bases and have clear needs for strategic technologies. They want to position themselves higher up the value chain and transform themselves into developers and not just manufacturers of technology. They need partners and willing investors to help them achieve this goal.
How can Cytec IPS make offset work for you?
Historical defence contracts have resulted in some of the world’s largest defence companies having significant offset obligations. These companies have a pressing need to find viable offset projects to invest in, and a time limit to adhere to or face financial penalties. Such investments can be in local infrastructure, training, capability development and other areas related to bringing a capability in to a nation to meet a need and satisfy a business case.
Cytec IPS is supporting major international companies with offset obligations, exporters with a wish to transfer technology or capability and nations with strategic capability development plans to help establish viable offset projects. We are developing strategies to provide our clients with viable indirect projects attuned to the export compliance criteria of the relevant territory, providing the ultimate end user greater flexibility and an enhanced business case for growth.
We can help by finding strategic technology partners, utilising our global network of defence and non-defence related customers and partners. Identifying the key components of an ideal offset project with the right strategic components for the buying nation and the most attractive mix of multipliers for the offset holder.
Cytec IPS can help the technology or capability provider present their proposition in the format and language necessary to satisfy key stakeholders. We can help produce detailed plans and demonstrate a viable business case.
If you have an exportable technology or capability and you are aware of a clear need and a want in a developing nation with an offset policy, please reach out to us. Cytec IPS may be able to assist you in finding an offset investment partner and help you navigate the process of getting an offset project assessed and approved.
It just may be that offset offers a route to market and source of finance for your initiative that enables you to finally break into a new territory and access business that is currently out of your reach.
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