Selling Weapons to our Friends: A Look Inside a Little-Publicized Industry
One of the biggest and fastest growing industries in Alabama is the sale of major weapons systems to foreign countries. Big as it is, it’s just not a business that’s much understood or often trumpeted in headlines.
Photos by Dennis Keim
• Alabama’s role and profile in the world of international weapon sales is rising quickly, owing to BRAC and the relocation of two key divisions to Redstone Arsenal.
• Foreign military sales have risen dramatically in recent years, fueled by Middle Eastern countries flush with cash.
• Sales of U.S. weapons systems to foreign governments last year topped $100 billion.
• Last year, Raytheon hosted 4,500 visitors to its offices in Huntsville, and over half were representatives of foreign governments shopping for weapons systems.
• A recent Foreign Military Sales “how-to” conference in Huntsville drew 35 representatives from 28 companies.
Outside of the familiar consumer marketplace, there exists a huge world of commerce based in the business of selling U.S. weapons systems to our allies. Businesses and military commands based in Alabama figure prominently in that world, both manufacturing those weapon systems and inking the deals with the foreign governments that are purchasing the systems.
Sales of weapons systems by U.S. companies to foreign governments last year topped $100 billion, with the U.S. government managing $25.2 billion of that through the Foreign Military Sales (FMS) program.
From tanks and fighter jets to helicopters and even ships, U.S. weapon systems are in high demand. Sales of these systems represent a significant portion of total sales for U.S. defense companies, typically accounting for 15 to 30 percent of total sales.
Foreign military sales have seen a dramatic increase in the last few years, perhaps not so coincidentally since a spike in the price of oil has made some Middle Eastern countries flush with cash.
“The highest (year for U.S. Army FMS) was FY 2009, when we had $24.2 billion in foreign military sales. We had a couple of very high value cases that year. One of those was the Patriot (missile defense system) sale of more than $6 billion in value,” according to Brigadier General Christopher Tucker, the commander of the U.S. Army’s Security Assistance Command (USASAC). USASAC is responsible for managing the sale of U.S. Army materiel to roughly 140 U.S. allies.
Just about everything that the U.S. Department of Defense uses to arm and equip its military is available to our allies.
While the current war in Afghanistan takes center stage for the commands managing foreign weapon sales, there are a large number of additional international customers procuring U.S. materiel.
In 2009, Israel topped the FMS customer list, with sales at $4.0 billion, followed by Egypt, at $2.6 billion. The Kingdom of Saudi Arabia, at $2.5 billion, and the United Kingdom, at $1.8 billion, rounded out the top four FMS customers in terms of sales.
The trend to an overall increase in FMS continues for the U.S. Army. “From FY 2003 to FY 2006, a four-year period, the Army’s total foreign military sales were just over $18 billion,” Tucker says. “It has tripled for the four years of FY 2007 through FY 2010, we’ve had $63.5 billion in foreign military sales.”
In November of 2010, the Department of Defense notified Congress of plans to sell Saudi Arabia up to $60 billion in weapons. The proposed sale, which may be the largest to another country in U.S. history if all purchases are made, includes Boeing Co.’s F-15 fighter jets and attack helicopters. Raytheon Co. hopes to win a $4 billion contract to upgrade Saudi Arabia’s Patriot missile systems.
Brigadier General Tucker and his command moved to Huntsville’s Redstone Arsenal last year from Virginia’s Fort Belvoir as a part of the 2005 military Base Realignment and Closure (BRAC) law. The move has further enhanced the organization’s efforts in foreign military sales.
“Implementing BRAC 2005 has allowed us to build a strong team here at Redstone,” Tucker says. “We will probably end up with about 35 percent of our workforce that was at Belvoir, Virginia relocating to Huntsville, and that has been a significant help for us to support all of the FMS sales. The last three fiscal years, FY 2010, '09 and '08, saw $52 billion in FMS as we simultaneously moved the headquarters from Fort Belvoir to Redstone Arsenal,” Tucker says.
“What I see is the synergy is starting to take effect with both the Army Materiel Command (AMC) and USASAC moving into beautiful new facilities that will truly highlight the significance of this relatively small command in dealing with our allies around the world,” says retired Major General Bruce Scott, director of ITT’s International Division and a former USASAC commander.
The Army Materiel Command manages all U.S. Army materiel procurement. It also is relocating to Redstone Arsenal as a result of BRAC 2005. AMC’s unofficial motto is “if a soldier eats it, flies it, shoots it, communicates with it or drives it, the Materiel Command provides it.”
With the relocation of AMC and USASAC to Redstone, combined with other commands and businesses already based in the state, Alabama’s role and profile in the world of international weapon sales is rising quickly.
“A majority of the defense contractors that have offices here in the Huntsville/Madison County area probably have one or more FMS cases that they’re working,” observes Tucker.
The number of international visitors working on FMS programs largely goes unnoticed. Last year, Raytheon hosted approximately 4,500 visitors to its offices in Huntsville, according to Rick McCabe, director of Patriot Strategic Growth Initiatives for Raytheon’s Integrated Defense Systems division. “In excess of roughly 2,300 of those people visiting just this building were here to do international business,” he says.
McCabe is a point man in Raytheon’s bid for $6 billion in new Saudi Patriot upgrades. The international market for Raytheon’s PAC3 missile system — the latest configuration of the company’s Patriot system, with Advanced Capability 3 — is significantly larger than the domestic market. “The principal area of our growth is international, but it includes strategic initiatives, including U.S. forces, as well,” McCabe says. “My job is to look ahead, and to help the rest of the Patriot team formulate options for growth, and how to best serve opportunities that may be presenting themselves to customer countries that are expressing interest.”
When procuring U.S. military equipment, foreign governments have several options. They can pursue a traditional FMS case, which begins with a government-to-government agreement consisting of the “Letter of Offer and Acceptance.” Alternately, they may prefer a “Direct Commercial Sale Contract,” which is an agreement between a foreign customer and a U.S. defense contractor.
Less sophisticated weapons and services to maintain these systems are often bought directly by foreign governments. That category of direct commercial sales has seen an enormous surge as well, as measured by export licenses issued during FY '09, covering an estimated $96 billion — up from $58 billion in 2005, according to the State Department, which must approve the licenses.
While companies may pursue weapons sales directly with foreign countries, there are some significant advantages to working through U.S. government channels and the FMS program. “If they go direct commercial, then they have to apply for a license through a Byzantine process, and it is very, very difficult,” Scott says.
Not all U.S. materiel is available to foreign governments, however. Certain technologies are considered to be too sensitive to share. “With a commercial case, you cannot notify Congress until you have a contract, and then you are not certain whether or not you’re going to be able to sell it,” Scott says. “A good example is when we (ITT) negotiated a commercial contract to sell night vision to a certain country and it exceeded the threshold for congressional notification. When it went for congressional approval, they denied it.”
The U.S. keeps careful tabs on its systems, even once they’re in our allies’ hands.
“There are a number of agreements in place that are part of the Arms Export Control Act, that the countries must adhere to, before we will sell them military technology,” Tucker says. “Follow-up can be as rigorous as serial number checks on some weapon systems or a count of certain numbers of weapon systems. It just depends upon what the release is and what the agency granting the release specifies in the end-use monitoring.”
Foreign military purchases have often led to upgrades of systems in the U.S. inventory. “If you have a technology that you would like to develop and that the U.S. government would like, but they simply don’t have the money, but a foreign nation really wants that capability as well, in many cases they are willing to pay the nonrecurring costs, the R&D cost, to develop it,” Scott says. “And yet, the company, because it is not U.S. government money, generally gets to keep the intellectual property.”
Scott points to one of ITT’s night vision systems. “Singapore really loved the clarity of our night vision goggles, and they asked us if there was any way that we could reduce the weight. The only way to really reduce the weight was to reduce the power requirements from a two-battery system to a one-battery device. So, Singapore paid the entire R&D for ITT to make a one-battery night vision system. That system is now the U.S. Army standard.”
Foreign sales have likewise helped to upgrade the U.S. Patriot missile defense system, according to McCabe. “When the United Arab Emirates contracted with us for the Patriot, the Patriot had not been in production for about 10 years. So we had to reactivate a line and we had to address some obsolescence issues.” UAE-funded upgrades included an updated processor and modernized crew stations.
“Operators of the Patriots system today in the U.S. Army are still looking at a green cathode ray tube screen,” McCabe says. “So, we have now produced what the current customers are going to get, which are modern man stations that have touch screens. Not only are they easier to produce, they are a human interface that the current generation is accustomed to using. Because the United Arab Emirates was willing to pay the upfront, nonrecurring engineering bill, totaling hundreds of millions of dollars, to do all of this and to defeat all of the obsolescence issues, other customers reap the benefits of that. We have the opportunity now, since that work is done, to simply sweep through the balance of the customer fleet, and we can outfit the rest of the customers with more modernized capabilities.”
Another very large foreign sale with significant Alabama impact includes the development of an armed reconnaissance helicopter for the Iraq and Afghanistan military. “We are working a number of aviation deals for the Iraqi Ministry of Defense,” says Brigadier General Tucker. “There is a sale that was notified to Congress almost two years ago for 27 Bell 407 helicopters. The aircraft will begin deliveries at the end of calendar year 2011. There are three training aircraft that are part of the overall 30 aircraft package. The training aircraft were delivered this last weekend (early December 2010) and the remaining 27 will be delivered in the late 2011 timeframe.” The estimated cost of the program is $366 million.
Science Engineering Services Inc. (SESI) will do a significant amount of the work modifying the Bell 407s at its plant in the former Dunlop Tire manufacturing facilities in Huntsville. SESI has converted nearly 700,000 square feet of the old tire plant into pristine manufacturing space for making modifications to aviation systems.
The future seems wide open for foreign military sales and those who support them, even as U.S. defense budgets face greater scrutiny. As the defense budget continues to get squeezed, “97 percent of the USASAC’s operating budget comes from a surcharge that is added to the FMS case that funds almost all the positions at USASAC,” Scott says. “Since this non-DOD money isn’t subject to congressional appropriations, they are not going to be squeezed at all.”
FMS is an untapped market for many U.S. defense companies. “The U.S. market is huge, but it’s only 50 percent of the world market, so there is a whole 50 percent that they are not looking at all,” notes Scott. “The reasons historically for not looking (at FMS) were that it was just too hard to do business. You didn’t know how to get into the market, or who you had to see. But with FMS, you just have to link to the right program, find out what they want to buy, and if it goes through FMS, it is a government contract back to you. It is whitespace, it’s easy to get into using FMS, but difficult if attempting the direct commercial route.”
In-state interest in foreign sales is definitely growing. A recent FMS “how-to” conference in Huntsville drew 35 representatives from 28 companies.
Last summer’s announcement by Raytheon that it will open a $300 million facility at Redstone Arsenal, employing 300 workers to produce the SM3 and SM6 missiles, bodes well for the area’s continued growth in FMS.
As good as the Patriot/PAC3 System is, it has limitations on its effective range and the targets that it can engage. Some targets require earlier engagement, and the Standard Missile will be better equipped to intercept those missiles.
According to McCabe, “You will likely start to see international sales of Standard Missiles in the next five years.” The addition of the (Standard Missile) production facility at Redstone creates another dimension to the state’s international reputation in the evolving missile defense enterprise.
“As this (area) becomes the hub for missile defense, because the Missile Defense Agency will also be here, you can see that how the Huntsville area and northern Alabama is viewed internationally will change. You will become a lot more visible.”
Mike Ward is a freelance contributor to Business Alabama. He is the vice president for governmental affairs with the Huntsville/Madison County Chamber of Commerce.