RISK ANALYSIS: These are the pitfalls in Swedish outsider Saab's bid to win India's $ 12 billion jetfighter deal

open | 13 September, 2008

NEW DELHI. The deal in September between Sweden’s Saab AB and India’s Tata Consultancy Services (TCS) to “establish an aerospace development centre in India”, means that the Swedish arms company is stepping up its effort to win a 126 jet fighter contract worth US $ 12 billion with the Indian Government.

A contract with India would be Saab’s largest export contract ever, only overtaken by the company’s domestic contract with the Swedish Government.

The only contract that is remotely comparable was when South Africa awarded Saab its break-through first export contract back in 1999.

There are some similarities.

The $ 2.3 billion deal in South Africa for 28 Jas 39 Gripen, also had a substantial offset component. Indeed the offset in South Africa is one of the largest undertakings in the arms industry anywhere of the past ten years.

Saab and its then partner BAe Systems agreed to a $ 7.3 billion offset deal, of which by far the largest chunk was in the non-defense sector and only about 10 percent or $ 700 million was defense related.

The deal in South Africa has largely been, fulfilled though, in many ways against all odds.

Saab and BAE Systems had to work hard to score offset points. There were many change, redirections and outright failures albeit also some genuine achievements.

To what a degree the Saab/BAE offset in South Africa has long lasting effect that could be said to match the offset values is genuinely difficult to assess, as business plans, point scoring and the end result is not open for public scrutiny.

It remains, as with most offsets around the world, veiled in secrecy and each part is probably not even known by the politicians and the businessmen that signed the contracts.

Saab’s investments in the defense sector in South Africa is the most easily spotted offset benefit in South Africa.

The company has invested $ 70 million in various take over’s and JV’s including the gradual purchase of Grintek, a defense and technology company which was subsequently delisted from the Johannesburg Stock Exchange, and Saab’s $ 9 million investment in state company Denel’s aerostructure subsidiary in return for management responsibility and the right to take a majority stake further down the line.

Saab-Denel Aerostructures delivers structures to Gripen as well as Airbus.

A Saab deal with India would build on the Swedish arms manufacturer’s experience in South Africa – but would probably need to focus on areas were Saab doesn’t already operate JV’s in South Africa and elsewhere.

Saab’s chance to win in India is slim, but shouldn't be written off.

The company doesn’t have the same benefit from being Swedish, as it had when it was bidding in South Africa. The South African Government had only been in the driving seat for a few years when the arms tender was issued.

The ANC led Government was still fresh faced and had still strong, warm feelings towards Sweden, which was bankrolling a large chunk of the liberation movements activities during the struggle for liberation.

Saab also benefitted strongly from a marketing agreement with BAE Systems, which knew the players in the local arms industry and how to navigate its way around in Pretoria’s defense ministry corridors.

Exactly how murky the deal was in the end is another factor that remains unanswered, but it appears from what has come out so far that BAE was handling payments of commissions – a matter the British Serious Frauds Office has investigated on the BAE side, but not on the South African side.

As for defense offset Saab also in the end had to sort itself out. BAE’s ulterior motive was not to sell Gripen, but to sell Hawk and it even doubled up during an early stage of negotiations in South Africa and also tried to sell the Eurofighter.

No surprise therefore, that Saab’s and BAE’s relation soured and in the end fell apart.

The South African defense offset was not plain sailing. It was only secured after South Africa changed the rules, seven years down the line, and accepted Saab’s management takeover and investment in Denel Aerostructures as a genuine defense offset.

Initially investments in existing defense businesses was not accepted.

South Africa has become Saab’s “second home”, and it is not all rhetoric’s.

The company has made genuine investments and there are long lasting effects. The company has close to 2000 thousand employees in South Africa, which is more than any other Swedish company there.

An India deal is a different ball game. The size of offsets for the winner of the India jetfighter contract is a cause of concern.

The Indian government only accepts defense offsets and expects to get offset deals to the tune of more than $ 3 billion. This could be gained retrospectively, but with a very short two-year window to deliver on the obligations.

It is not clear how this is possible, or what it actually means – new directives or clarifications are likely to be issued by the Indian Defense Ministry.

Strategically Saab’s chance lies in Sweden being a small, but dynamic and reasonably humble, nation.

What weighs against Saab in terms of Sweden being a lightweight in the global strategic-political arena, could also be an advantage.

India is internally divided between reform minded government officials, keen to move further towards closer relations with the US, and the old style military-complex, with still warm relations with Moscow.

A deal with the Swedes would be surprising but not impossible to achieve if the Swede’s tie up the right kind of deals with the right kind of influential business people in India.

If the Tata Financial Services deal will deliver in that regard is too early to say. The Tata’s, as other large Indian groups would not put all their eggs in only one quite unsafe Swedish basket.

For now, the possibility of a deal between Sweden and India is causing a fair amount of excitement in Swedish Government- and industrial circles. On the Indian side the Government appears to show an interest in being courted by the Swedes.