Military suppliers turning their attention to new markets
Aug. 17, 2012, Paraiba Valley, Bra. - The unmanned aircraft soaring above Brazil’s Paraiba valley looks like a toy plane. In fact, it is the newest means of monitoring drug and arms traffickers, and the latest result of a military buildup that is attracting companies from Boeing Co. (BA) to Odebrecht to Thales SA.
The suppliers, facing possible reductions in defense spending in the U.S., U.K. and countries worldwide, are jockeying to take a bigger share of Brazil’s defense contracts. The industry has expanded 236 percent in the past four years to 12 billion reais ($5.9 billion) in annual spending, according to the Defense Ministry.
Brazil is replacing aging military equipment to develop its own technology and create jobs, industry executives say. The nation of more than 210 million people has avoided armed conflicts with its 10 neighbors for 142 years and hasn’t been involved in a war since 1945.
“It’s a very promising market, everybody knows Brazil’s importance is growing in the global arena,” said Ramiro Brasil, administrative manager at Sao Jose dos Campos, Brazil-basedFlight Technologies, which delivered three prototype drone aircraft to the army last year and is testing its smaller, hand- launched model. “Finally there are public policies that sustain the defense industry.”
Brazilian President Dilma Rousseff in March signed legislation that grants a series of tax breaks over five years for companies providing strategic defense goods and services. The move is part of a broader strategy, announced in 2008, to shift Brazil’s capabilities away from conventional warfare to surveillance and protection of infrastructure and natural resources, particularly in the Amazon and offshore regions.
The number of foreign and domestic defense companies in Brazil jumped to 150 last year from 39 in 2007, with sales of $3.5 billion, according to the Brazilian Defense and Security Industries Association, or ABIMDE. The government has signed contracts for equipment worth more than $12 billion and the Defense Ministry estimates the armed forces will need annual investments of 20 billion reais over the next two decades.
Brazil’s main construction companies, including Odebrecht and Queiroz Galvao SA, are joining in the competition for contracts. Belo Horizonte, Brazil-based Andrade Gutierrez SA created a defense joint venture in January with aerospace and industrial electronics company Thales SA (HO) of France.
Embraer SA (EMBR3), the world’s fourth-largest airplane maker, projects defense revenue to grow 17 percent this year to 1 billion reais and to account for a quarter of its income by 2020, up from 14.7 percent now, according to an e-mail from the Sao Jose dos Campos-based company. Its shares rose 2.41 percent at 1:37 p.m. local time, compared with a 1.1 percent rise for the Bovespa index.
“We view the company’s increasing revenues in the defense segment as a potential positive in the next few years,” Standard and Poor’s said in a June report.
Shares in Forjas Taurus SA (FJTA4), the Porto Alegre, Brazil-based company that makes firearms, rose 7.28 percent today. It is up 100 percent for the year, compared with the Bovespa’s gain of 3.7 percent.
Underlying the need to beef up a military with 328,000 troops, the second-largest force in the Americas, is a conviction among policy makers that the country’s defensive capacity should be in line with its growing economic clout.
“In the past we had limited budgets because of our large foreign and social debts,” army General Aderico Mattioli, head of product development at the Defense Ministry, said in an interview. “With the new economic reality we can think of the country’s defense again.”
Share of GDP
While Brazil last year overtook the U.K. to become the world’s sixth-largest economy, its defense spending as a share of gross domestic product ranked it 88th among 172 countries, according to the latest U.S. Central Intelligence Agency World Factbook. Last year Brazil spent 61.8 billion reais, or 1.5 percent of GDP, according to the Defense Ministry. The U.S. spent 5.1 percent of GDP on defense last year, according to data compiled by Bloomberg.
Some entrepreneurs are wary that slower economic growth may lead policymakers to cut thedefense budget. Economists surveyed by the central bank forecast 1.8 percent growth this year, down from 7.5 percent in 2010 and 2.7 percent last year.
“There’s some uncertainty whether spending will continue at its current rate,” said Luiz Carlos Teixeira, chief executive officer of Sao Jose dos Campos-based IACIT, which is developing maritime and meteorological radars able to detect tsunamis and low flying aircraft. Shifts in spending are particularly disruptive to small- and medium-sized companies that often depend on a few defense contracts, Teixeira said.
The government is pushing ahead with planned projects and last week took offers for its border defense system, which may include the type of unmanned aircraft tested by Flight Technologies over the Paraiba Valley.
Brazil’s discovery of 5 billion to 8 billion barrels of offshore oil reserves in 2007 has triggered a new awareness of security needs in a country that has 4,625 miles of coastline and limited naval capabilities, including one aircraft carrier, built in 1960.
“Nobody wants to go to war, but when you discover huge oil reserves 200 miles off your coast, somebody has to protect them,” ABIMDE’s executive vice-president, retired Admiral Carlos Pierantoni, said in a June telephone interview. Pierantoni expressed concern over a possible scenario in which pirates took control of an offshore oil platform and announced, “ ‘Either you give me $200 million or I’ll blow it up.’ ”
The defense push has led foreign companies to set up shop or expand production capacity in Brazil. Helibras, controlled by Toulouse, France-based European Aeronautic, Defence & Space Co., this year will begin production of 46 of 50 EC725 helicopters worth 1.8 billion euros ($2.2 billion) for Brazil’s armed forces at a new plant in Minas Gerais state, the company said in an e- mail. The first four were made in Europe. A civilian version of the helicopter is designed to ferry supplies and personnel to offshore oil rigs.
Boeing’s F/A-18E/F Super Hornet, French Dassault Aviation SA (AM)’s Rafale and SwedishSaab AB (SAABB)’s Gripen are competing for a deal to deliver 36 jet fighters that the U.S. State Department says is worth as much as $4 billion. The decision has been repeatedly delayed, and Rousseff’s office in an e-mail said it has no estimate of when it may occur.
In a departure from previous defense contracts, foreign investors, including the winning jet fighter contractor, will be expected to partner with local companies, transfer technology and maximize local production. “We have no aversion to foreign capital, what we want is a commitment to develop national production capacity,” said Mattioli.
Boeing agreed in June to share know-how and market studies with Embraer for the KC-390, a military cargo aircraft to be built in Brazil. The companies will offer the plane as a global competitor to Bethesda, Maryland-based Lockheed Martin Corp. (LMT)’s Hercules C-130.
Chicago-based Boeing in March chose AEL Sistemas, a subsidiary of Israel’s Elbit Systems Ltd. (ESLT) located in Brazil’s Rio Grande do Sul state, to develop and produce advanced cockpit avionics, and is looking for local partners in other defense sectors. Brazil is “an opportunity” as a defense market, production and research center, Donna Hrinak, president of Boeing Brazil, said by phone from Rio de Janeiro.
Italy’s Iveco SpA this year will build the first of 2,044 armored personnel carriers worth a total of 2 billion euros at a plant in Sete Lagoas in Minas Gerais state.
France’s DCNS SA and Brazil’s Construtora Norberto Odebrecht SA are building five submarines, one of them nuclear- powered, in Rio de Janeiro state, costing the government 9.6 billion reais between 2012 and 2015, the Defense Ministry said.
Based in the Sao Jose dos Campos industrial hub near Sao Paulo, Avibras Industria Aeroespacial SA has created niche markets for itself abroad. Foreign sales make up 80 percent of Avibras’s $210 million in annual revenue, and the Middle East is the biggest client for its flagship export item of missiles and rockets. U.S.-led troops used Avibras’s Astros II multiple rocket launcher to attack Iraqi forces in Operation Desert Storm during the Gulf War.
Brazil is following the same model other defense exporters have. “The government helps a little to develop products and then you start exporting, generate profits, jobs and foreign exchange,” said Sami Youssef Hassuani, president of Avibras.
Products containing sensitive U.S. components could face export limitations under U.S. law. In 2006 the U.S. government blocked Embraer’s sale of Super Tucano turboprops to Venezuela.
Embraer and its partner Sierra Nevada Corp. are competing against Hawker Beechcraft Corp. for a U.S. Air Force contract worth as much as $1 billion to deliver light-attack aircraft to the Afghan military after the first contract it won was canceled in February because Hawker filed a suit over the decision. On July 10, Embraer signed a contract for a second batch of 8 Super Tucano planes to Indonesia’s air force.
While a growing defense industry in Latin America would have been unwelcome in Washington only a few decades ago, Brazil now is seen as a regional and global source of stability, U.S. Defense Secretary Leon Panetta said in April.
“There was a time when the United States discouraged developing military capability in countries in Latin and Central America,” Panetta told reporters after meeting Defense Minister Celso Amorim in Brasilia. “The fact is today, we think the development of those kinds of capabilities is important and if we can use those capabilities to develop the kind of innovative partnerships that I’m talking about, that will advance the security in this region.”