The U.S. Government wants to create a defense industrial alliance with India. Manufacturing defense equipment in India, also for export markets. Lockheed-Martin (LMT) is the most likely candidate for first transferring production and maintenance to India and thus benefiting most.
U.S. Government Strategy
On January 17th, 2017 the
Emerging Powers and Future Threats: Implications for the U.S. and Global Defense Industry report was published by the Strategic Studies Institute of the U.S. Army War College. The current industrial base and 2 of the 4 recommendations are interesting:
Recommendation 2. Develop Strategic Alliances.
(...)
Alliances also should be constructed with emerging markets where the U.S. shares similar regional security interests. In Asia, these include Japan, South Korea, and India, the first two of which already have strong industrial bases and, combined, are home to 11 of the top 100 global defense companies. (...) It is essential for the U.S. Government, military, and industry to cooperate in seeking foreign markets for defense exports, since governments in other countries are aggressively courting contracts on behalf of their firms. Steep cuts in the UK defense budget, for example, have prompted the British Government to promise that it will help the industry sell its equipment and services abroad, mainly to developing countries such as India and Brazil. While it is difficult to imagine circumstances whereby the United States would want to forge defense industrial alliances with Russia or China, the other four countries would be reasonable options that would further U.S. political, foreign policy, and strategic considerations.
Recommendation 4. Use Weapons Exports to Achieve Political Objectives.
(...)
Likewise, developing closer collaboration with India’s Modi government by encouraging industrial cooperation between U.S. and Indian defense firms may serve to reduce Russian influence in that country, which has been particularly strong with respect to the arms trade.
These recommendations seem to have been adopted. The United States should pursue a strategy to develop India's Defense Industrial Base.
On October 19th, 2017 - during a visit to India - Secretary of State Tillerson said:
The proposals the United States has put forward, including for Guardian UAVs, aircraft carrier technologies, the Future Vertical Lift program, and F-18 and F-16 fighter aircraft, are all potential game changers for our commercial and defense cooperation…
Even as the United States and India grow our own economic and defense cooperation, we must have an eye to including other nations which share our goals. India and the United States should be in the business of equipping other countries to defend their sovereignty, build greater connectivity, and have a louder voice in a regional architecture that promotes their interests and develops their economies. This is a natural complement to India’s “Act East” policy.
The United States Government seems committed to creating a partnership with India. The “equipping other countries” is significant. Foreign Military Sales, paid by the U.S. Government may well be produced in India in the future.
Which companies will benefit?
Indian government’s strategic ‘Make in India’ policy is a good place to start. New defense orders create infrastructure to produce defense equipment.
Source: Confero, using data from the Stockholm International Peace Research Institute [SIPRI]
Lockheed Martin has repeatedly stated that it is eager to start activities in India. Lockheed-Martin’s CEO is clear about this since 2016. The Trump-election hasn’t changed this position. As published on December 14th, 2017:
Lockheed Martin is excited about the prospect of making F-16 fighter aircraft in India and making India a global manufacturing and supply base for the aircraft
But it is not only the F-16; apparently the C-130 Hercules and helicopters are involved. As published on November 29th, 2017:
Through a joint venture with the Tatas, Lockheed Martin has brought manufacturing of the important tail section of the C-130 Hercules aircraft to its facilities in Adibatla on the outskirts of Hyderabad.
“We have plans to fabricate more components of the cargo aircraft from Hyderabad and integrate them in the U.S. as well,” said Lorraine M Martin, Deputy Vice-President (Rotary and Mission Systems).
Similarly, through the second JV with the Tatas, which makes cabin products for the S-92 Sikorsky1 helicopter, the company is looking to increase the number of components made here in the near future.
Also, the company is in talks for selling its latest helicopters, which have strategic and utility services capabilities.
A large number of F-16 operators in Asia and the Middle East can be maintained, supplied or overhauled in India. These are for example Oman, United Arab Emirates, Bahrain, Iraq, Indonesia, Thailand, Singapore and maybe even Taiwan. The referrals to the “global (…) base” may indicate that all F-16 operators worldwide will be supported from India.
Right or wrong?
Industry cooperation and developing export markets is a strange recommendation for the military to make. Off-shoring (essential) parts of the defense industry is dangerous. When production needs to be scaled up because of war, this is much harder or impossible to do.
Production in India may become a liability with the increasing tension with Pakistan. Trump has stopped aid to Pakistan and Pakistan announced that it will return 1.5 million refugees to Afghanistan. This will heat up the already very hot conflict in Afghanistan, where the U.S. commitment is increasing without an end-date.
However, for the defense industry this will be very profitable. Wages in India are much lower than wages in the United States. Assembly, production and MRO [maintenance, repair, overhaul] in India will increase profits. Lockheed-Martin is most likely the first to go to India. They will benefit most. After them other companies will follow. Boeing, being the largest defense exporter - as the Lockheed-Martin: India Tailwinds shows – could be a possible second since they are the largest exporter to India.
Footnotes
1. The Sikorsky S-92 is a development to watch. This is a Chinese-US Joint Venture. Since China and India have long-lasting conflicts with regard to the borders, it is unlikely that they will agree to this.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.