Lockheed Martin of the US has launched an international division as cuts in US military spending and the increasingly onerous demands of developing nations force the world’s biggest defence contractor to focus more of its resources and attention overseas.
Lockheed’s decision was all about capturing international growth, said Pat Dewar, the 28-year company veteran who will head the new division and report directly to its chief executive. The company wants to increase the share of its international revenue from $8bn, or about 17 per cent of total revenue today, to around 20 per cent of total revenue within the coming few years.
Lockheed sells everything from naval vessels to secure cyber systems and fighter jets to missile defence systems, and its biggest international operations are in the UK, Australia and Canada. However, Lockheed trails behind its smaller competitors, including Boeing, Raytheon and BAE Systems, which each derive at least a quarter of their total revenue from international sales.
Amid the fiscal austerity in the west, Lockheed is increasingly targeting oil-rich and faster developing nations, such as the UAE and Saudi Arabia for future sales growth. Many of these countries demand added commitments called offsets. Illegal under WTO rules in any industry other than defence, offsets are becoming an increasingly big part of defence contractors’ work outside the US and Europe.
The US Department of Commerce defines offsets as “Industrial compensation practices required as a condition of purchase in either government-to-government or commercial sales of defense articles and/or defense services”.
In practice offsets mean anything from a defence contractor committing to marketing a country’s wine or furniture, counting fish, opening a university or constructing a local factory it would not otherwise have built.
But increasingly, countries are becoming more sophisticated and are demanding direct offsets as they seek to move up the value chain by participating in the construction of the piece of defence equipment being purchased and receiving the often-proprietary technical knowhow involved.
Strict Itar regulations in the US hinder companies such as Lockheed Martin from giving away their most sophisticated technology secrets, but Mr Dewar says the company has plenty more to offer.
In an interview with the FT, he said: “In most cases they are really just interested in building their technological base. If they can’t build a heat-seeking missile because of Itar, that’s OK.”
In the UAE for example, Lockheed Martin is satisfying its offset requirement through its civil technologies, such as those in energy, he noted.
Despite the big financial commitments involved, not all defence companies make public the size of their offset commitments. Lockheed Martin is one of the few that does. Its offset commitment last year was $9.3bn, while international sales were $8bn and total sales $47bn.
Alluding to the importance of offsets in winning international work, Marillyn Hewson introduced her decision to create Lockheed Martin International, as it is to be called, saying: “We are at our best internationally when we are helping governments to protect their citizens and to provide essential services. We are also at our best when we are helping them to cultivate technical expertise, economic development for their countries, and job growth.”
LMI will have dual headquarters, one in London and the other at the company’s head office just outside Washington.
Additional reporting by Daniella Tsar in London