Jane’s Defence Weekly Interview:
Jonathan Hoyle, Vice President of Europe, Lockheed Martin International
Defence export sales no longer adhere to the traditional offset structure where a certain amount of work at a certain cost has to be transferred to the customer, according to Jonathan Hoyle, Vice President of Europe for Lockheed Martin International. Instead, he said, export sales provide an opportunity to partner in-country, with engineering and support expertise being shared between the various parties involved.
Hoyle warned that the linear approach that has been traditionally used is no longer viable because more countries want some sovereign control over their acquisitions.
He explained that even if a country is buying off-the-shelf it makes commercial sense to look for opportunities that will benefit both parties, such as maintenance and support in the operator country.
“There is, if you like, a commercial dimension to this as to how much use we will make of the partnership, and then there is a government requirement as well that we are responding to,” Hoyle told Jane’s, adding, “So there is a business sense to this, and then there is ‘How do we meet what the customer wants by way of the government going forward?’”
Hoyle claimed that old-fashioned offsets became somewhat of an “accountant’s exercise” due to contracts mandating that a certain value be offset to the customer nation, which simply had to be accounted for and signed off.
“We’ve moved on from that now,” he emphasised, “and it is more of a business mindset of recognising that we have to partner with these companies to do offsets and actually looking at how we can get better use of them for both our benefit and for the customer/government benefit”.
Hoyle noted that US companies were for some time known for simply selling technology manufactured in the United States to export customers as an off-the-shelf offering, but that mindset had now changed with the prospect that more can be gained by partnering.
He pointed to the F-35 Joint Strike Fighter programme as a turning point in this regard for Lockheed Martin because it is a multinational effort that seeks to share development of the technology.
“We were a company that built stuff in the US and sold it over there, but I don’t see that anymore,” he explained.
“We have an international supply chain that reaches tentacles out globally and we cannot deliver on programmes without those international partners. We are now dependent on them fulfilling their side of the bargain and it is no longer an American piece of kit that gets exported. People look at it from a global perspective as to where it is best to do this work.”
Hoyle noted that work on the F-35 programme is available to the nations involved and what a partner nation can gain back is relative to its investment, not necessarily the number of aircraft it is due to purchase. However, no country is promised this work, Hoyle stressed; instead, whichever country offers the best value will win the award.
Using the example of Denmark, Hoyle described how “it has existing contracts worth in the region of USD1.3 billion for the F-35. If you extrapolate that from production,” he continued, “the value could be around USD10 billion, [but] they don’t have a contract that promises them that; they have to recompete every few years and demonstrate that they deliver value. There are no free giveaways.”
Although Hoyle suggested there are benefits to be gained from longer-length contracts because industry can invest more and in turn drive down unit cost, which enables Lockheed Martin to sell more aircraft at a better price in the long run, he stressed that there is a balance to be achieved.
“We’re not competing the work every year. We’re contracting out into the distance, but they do not have in the old-fashioned offset way a promise that they will get work into 2030/2035. They’ve got to remain cutting edge and competitive in delivering value,” he highlighted.
Pointing to Romania as an example of a prospective market in which more work can be contracted to benefit both countries, specifically regarding the first sale into Europe of the High Mobility Artillery Rocket System (HIMARS) that was announced in February, Hoyle said, “They are going to have to be able to support the HIMARS capability going forward and are not going to want to send it back to Grand Prairie, Texas, for maintenance, so we’ve got to find in-country partners who are capable or could be capable of doing that work for the next 25/30 years.”
Looking to the future, Hoyle noted that the company hopes to sign memoranda of understanding (MOUs) in the coming months that will lead to support for the HIMARS system and possibly broader work.
“The question then becomes for us, once we’ve found those companies – given that it is a big investment for us to choose that partner – do we want them to do just the bare minimum in an old-fashioned offset way, or do we want to use them more constructively in a broader role?” he asked.
According to Hoyle, Norway is another country that benefits from work outside its involvement in the F-35 programme. Lockheed Martin has signed an MOU with Kongsberg, for example, covering areas that include Lockheed Martin’s helicopter business.
“Jumping to Kongsberg in Norway, which is a big part of the F-35 programme and its supply chain, they have capabilities of their own in terms of missile development and are actually competitors of ours in that market place,” Hoyle pointed out.
“However,” he countered, “because of their engineering and technical capabilities, we’ve decided to broaden the partnership with them away from the F-35.”
This is a reproduction of an article that appeared in the May 2, 2018 edition of Jane’s Defence Weekly and is the copyright of IHS Markit.