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Doing business the Boeing way

V. Jayanth

The company offers product-related facilities and joint ventures to offset part of the cost of a purchase.

PHOTO: BY SPECIAL ARRANGEMENT

Maintenance training at the Boeing factory in Seattle.

THE BOEING company, through both its arms — the Commercial Airplanes and Integrated Defence Systems — now specialises in an "offset programme" for its international customers. Under it, a contract for a major purchase from Boeing gets the customer country or public sector agency 20 to 30 per cent of the purchase price agreement in product-related facilities or joint ventures. This has been described as a "successful experience" and a "win-win situation" for both sides.

When Air India finally inks the purchase agreement with Boeing for 68 aircraft in an over $68 billion contract, it is expected to clinch a deal for setting up maintenance and training facilities in India. These could emerge as a "profit centre" for the national carrier by meeting the demand for such facilities in the region. "Offset" projects have become a way of business for not just Boeing but for any multinational manufacturing company that wants to spread its wings.

At Boeing, offset ventures are part of the contract and a company division specialises in nurturing them to become part of the international network that this programme has created. Such facilities exist in Israel, several parts of Europe, many countries in Asia, and in Australia. Boeing officials explain that about $26 billion worth of offset programmes have come up in 40 countries over the past 25 years. Thirty of them are still active and contribute to 15 products used in current projects around the world.

These include direct product-related ventures in co-production facilities, licensed production of systems or products contracted for a long term, component manufacture, training facilities, technology transfer, or even joint ventures for market development, health care, university programmes, and non-aero work placement such as information technology.

One of the latest examples is the co-production and joint venture arrangement in South Korea for the F-15 K project. With Korea becoming the "launch country" for the latest version of F-15s, Boeing's Integrated Defence System (IDS) has worked out a programme to not only produce a part of the fuselage, but also co-produce the fighter plane's engines.

According to Jim Albaugh, president and CEO, IDS, Boeing's defence-related ventures expect to wrap up 2005 with close to $32 billion, with operating margins touching an all time high of 10.5 per cent. The company has secured orders for about $80 billion over the past two years, but he quickly sounds a note of caution: "Defence spending has been at an all-time high in the past three or four years, but is moderating. Budget deficit levels in most countries may be politically and fiscally unsustainable." Consequently, the company is also focussing on enhanced investment in networks to make the customer country's investments competitive and productive. The aim is to build on existing products, to make the facilities more productive, and leverage them better.

Mr. Albaugh identifies "competitive discriminators" in market and customer needs driven projects, horizontal integration across the company, offer of common architectures across systems, and commercial-derivative aircraft access. He believes the IDS' future lies in transforming military aviation for the 21st century with the underlying theme: the soldier on the ground is not alone. There is an entire networked system that links submarines and fighter planes with the soldiers and marines through a satellite link. And this has begun to happen.

As Pete Hoffman, Director, Global R&D Strategy, IDS says: "Collaborating, partnering and strategic relationship are the way forward." A Phantom Works unit in IDS looks after "engagement" with the burgeoning Asia Pacific market. There are programmes in Japan, South Korea, Australia, and Singapore. Though talks with Malaysia have been going on for some years now, as no decision on purchase of F-18s has yet been made by that Government, the offset programme, which provides for a biotechnology centre, has also not taken off.

As far as India is concerned, a commercial deal for Boeing aircraft is now being hammered out. But the company is keen on pursuing a defence-related order, with a focus on either the F-18 variants or the more advanced Super hornets and the Multi-Mission Maritime Aircraft. Consequently, they are already thinking of working on several lines.

It can be a tie-up with HAL for co-production down the line, collaboration with the Defence Research and Development Organisation (DRDO) or even an arrangement with the private sector. But all that is incumbent on a purchase deal. There are going to be several missions from the U.S., and in particular Boeing, during the next few months, hoping to secure one order after the other.

It is now for the Government of India and the Defence establishment to assess the various options and take a final decision. Should the defence purchases and connections remain linked to Russia and possibly France or can India try the American line up? The Americans know that this will not just be a commercial or defence-related decision; there is bound to be a political angle to the decision-making process. Boeing and the U.S. State Department are likely to put their best foot forward to convince New Delhi about the "desirability" of the Boeing options.

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