As defense budgets flatten and decline in traditional US and European domestic markets, emerging international markets are becoming an increasingly important component of future growth. While international expansion presents a number of challenges for firms, one that stands out is navigating the complex, changing, and frequently opaque offset requirements for each country. Given the increasing importance of successful offset strategies but often the limited publicly available data surrounding offsets, Avascent leveraged its proprietary 050 data product and market models to build a comprehensive global offset database for the estimated $500B in global obligations expected through 2016. From this country by country analysis and through its international market experience, Avascent highlights key global offset market trends by region and provides a series of recommendations to build more effective global strategies.

1. Avascent is the leading manage-
ment and strategy consulting firm As defense budgets flatten and decline in traditional US and European domestic
advising clients who serve govern- markets, emerging international markets are becoming an increasingly important
ment and related commercial component of future growth forecasts for leading global aerospace & defense com-
markets. panies. While international expansion presents a number of challenges for firms,
Avascent’s work is focused on
one that stands out is navigating the complex, changing, and frequently opaque
driving strategic growth and value offset requirements for each country. These offset policies are increasingly sophisti-
capture for our clients. cated and their enforcement is becoming more rigorous. Companies with offset
strategies conceived after contract signature or lacking in analytical rigor are likely
We help senior executives define to see reduced profitability, increased exposure to risk and a potentially negative
and act decisively on their growth impact on the corporate brand abroad.
agenda through strategy formula-
tion, new market entry, mergers
Many leaders are beginning to grasp that changes in offset regimes will impact their
and acquisitions, price-to-win and
organizational development.
international growth, although few truly understand the magnitude of this chal-
lenge. While specific market data on offsets is difficult to measure comprehensive-
With a combination of core strat- ly, Avascent has used its proprietary 050 data tool to build a comprehensive bottom
egy experience, senior level advi- -up financial model to determine the size of global offset obligations.
sors, and a proprietary 050 data
product, Avascent brings deep Avascent’s analysis shows there is going to be approximately $500 billion in global
subject matter knowledge and a offset obligations from 2005 – 2016 (cumulative to date; future based on country by
pragmatic, results-oriented ap-
country analysis and individual company projected future sales). The magnitude of
proach to international markets.
offset obligations and growth in the coming years makes this an area of strategic
importance for any global Aerospace & Defense (A&D) firm looking to expand its
international presence in the coming years.

2. Data on offset obligations are derived from Avascent 050,
Foreign customers are moving away from penalty pay- a proprietary database and decision support tool on inter-
ment schemes that allow obligors to indefinitely postpone national defense sales. Using past and projected future
the fulfillment of their offset obligations. Many foreign sales as the baseline, Avascent derived offset obligations:
customers are also increasing the value of sales subject to  Defined sales for countries with active offset policies
offsets, with some requiring obligations equal to or ex- from 2005-2016
ceeding 50 percent of an awarded contract’s  Segmented sales by contractor, country,
total non-indigenous value. This trend is size and sales type
especially true for larger, more prominent  Applied country specific offset criteria
programs. As countries become stricter  Adjustments to Avascent’s projections were
about implementation timelines and more made for sales not subject to offset (e.g.,
demanding in the make-up of their desired trade between members of the European Un-
offset output, A&D firms are struggling to ion) and for programs where a sale is antici-
develop effective plans to manage their obli- pated in the future, but no contract has been
gations. The challenging offset environment awarded.
is compounded by poor data on global offset
obligations, which constrain the ability of obligors to as-
sess the magnitude of the challenge and develop efficient New obligations derived from Middle Eastern countries
and holistic discharging strategies. are estimated at over $12 billion in 2011 and will exhibit
an 8% CAGR through 2016. This growth is primarily driven
Avascent conducted research into the current state of by the UAE and Saudi Arabia, both of which have devel-
offset obligations to arm obligors with a foundational un- oped more sophisticated offset policies that largely em-
derstanding necessary to begin thinking strategically and phasize social and economic sector interests and the
creatively about how to discharge current and future obli- attainment of advanced technologies. For example, UAE’s
gations. Bearing in mind the opaque character of this revamped offset guidelines emphasize profits from newly
marketplace, Avascent estimates show that formed offset ventures, job creation for
over the last seven years (2005 – 2011) ap- Emirati nationals and the transfer of exporta-
proximately $214 billion in total offset obli- ble technologies and capabilities. Other Mid-
gations were generated around the world. dle Eastern countries with robust offset poli-
While exact figures on the scale of dis- cies include Kuwait, Turkey, and Israel. From
charged obligations are not publicly availa- 2005 to 2016, an estimated $156 billion worth
ble, anecdotal evidence suggests a signifi- of cumulative new offset obligations will be
cant portion remain outstanding. Driven by accumulated by contractors, a formidable
pockets of strong spending in the Middle sum to absorb by an economically diverse and
East, Asia and Latin America, and by the pro- fairly sparsely populated region
liferation of increasingly complex and de-
manding offset policies, firms are expected
to accumulate an additional $225 billion in Offset obligations derived from Asian coun-
offset obligations on new sales through tries are estimated at approximately $10 bil-
2016. lion in 2011 and will exhibit a 5% CAGR on
new obligations generated each year through
The analysis of global offset markets is divid- 2016. Asian offsets are dominated by the two
ed into four regions: Middle East and North vastly different offset regimes of India and
Africa (MENA), Asia, Europe & Canada, and Latin America, South Korea, which collectively comprise approximately
each of which is evaluated individually to generate growth 60% of the region’s offset obligations. India’s offset policy
rate forecasts for total new obligations and which high- has proven a challenge for aerospace & defense firms as it
light important country and region-specific trends. does not award multipliers nor qualify technology transfer
for offset credits, but does require local partnership for

3. foreign providers. Conversely, South Korea offers a more through 2016, the highest rate among the four regions.
traditional policy, with the stated goal of building local This growth will be driven by military upgrades and mod-
production and excess export capacity. Other prominent ernization efforts in Brazil, Colombia, and Chile, which
Asian countries with growing offset demands are Singa- have implemented more stringent, formal offset policies
pore, Malaysia, and Taiwan. Through 2016, an estimated over the past decade stressing local production, technolo-
$122 billion worth of offset obligations will exist. gy transfers, and broader social benefits.
The Brazilian offset guidelines, for example, emphasize
European and Canadian offset regimes will generate an training, technology transfer, and joint development of
estimated $10 billion in new obligations for 2011 but will systems to foster innovation, recently showcased in the
exhibit only a 3% CAGR through 2016, the lowest rate of Brazilian Air Force’s KC-390 program. From 2005 to 2016,
the four regions. The lower growth rate in Europe is due an estimated $41 billion worth of cumulative new offset
to efforts to control military spending and a counter offset obligations will be created.
trend, embodied in a 2008 Code of Conduct on Offsets
signed by 26 European nations. Despite such develop-
ments, many European countries such as Italy, Sweden,
and the Netherlands have robust offset policies that de-
mand indirect defense offsets as a tool for providing op- The sheer size of offset obligations (estimated at nearly
portunities to their large defense industries. half a trillion by 2016) and rapid growth in the complexity
of offset policies are fundamentally reshaping the offset
Other European countries with demanding offset require- landscape. Current and future obligors face two main
ments are Finland, Greece, Poland, Spain, and Portugal. challenges in this new environment.
Canada also has a sector-driven offset policy, which re-
quires defense primes to place sub-contracts and invest-
ments in Canada’s high-tech sectors. From 2005 to 2016,
an estimated $118 billion worth of cumulative new offset
obligations will have been created.
First and foremost, offset regimes around the world are
becoming more sophisticated. Countries are seeking to
Latin American countries generated offset obligations to- pair offset policies with development objectives. These
taling $2.8 billion in 2011 and will exhibit a 10% CAGR goals also vary significantly by country: Brazil is highly fo-

4. cused on technology transfer, while neighboring Colombia  component for glob-
is focused on jobs and developing indigenous industries. al, regional and country-specific sales strategies;
The means by which obligors can discharge offsets is also take a proactive (vice reactive) approach.
changing. For example, the UAE recently migrated to a  and focus
policy requiring the majority of credits on developing internal capacity for effi-
to be generated from the net profits of ciently discharging offset obligations glob-
offset funded startups while India does ally; the offset strategy should guide are-
not allow for multipliers, which is a fun- as of internal capacity development.
damental assessment metric of virtually  early
all other offset regimes. Finally, coun- on offsets and the benefits of a successful
tries are changing the amount subject to and proactive strategy as part of the sales
offset and enforcing previously ignored capture effort. At the same time, broad-
rules. An obligor could, in the past, get en the set of stakeholders involved in off-
by paying the penalty on lapsed obliga- set discussions to include corporate strat-
tions—this is no longer true for many countries. egy, corporate development, and finance, particu-
larly in strategically important countries.

Integrating offsets into the
capture stage will have a major impact on the
Fundamental changes to offset regimes are exposing profitability of a contract after award and can
weaknesses in obligors’ internal capacity to discharge off- even increase the chance of winning a contract in
sets. Many A&D companies are in the habit of fully ad- certain countries.
dressing offsets only after the contract is signed and 
treating each obligation as a standalone event. Disjointed (financial metrics and planning) when
and ad hoc efforts are needlessly expensive and loaded developing offset concepts.
with undue risk. Moreover, even those firms with a robust  Con-
international sales history tend to lack internal capacity for sider a broader range of partners and create a ro-
discharging offset obligations in a holistic manner. Unfor- bust network of partners and advisors. Develop-
tunately, external support available to obligors has typical- ing a strategy for offset related partnering is a pru-
ly lacked independent, data driven approaches based on dent first step.
sound business fundamentals. More often than not, the Over the coming months, Avascent will be publishing a
rigorous business planning that characterizes a company’s series of thought leadership articles on the global aero-
corporate development or business development strategy space & defense marketplace. If you would like to discuss
is not employed when it comes to fulfilling the resulting in more detail, contact: Jon Barney at jbar-
offset obligations. As A&D companies look abroad to ney@avascent.com or (202) 280-6812.
counteract softness in domestic markets, a coherent offset
strategy will become a critical enabler of success.
Partner directing many of Avascent’s offset
and international market engagements.
Contact: jbarney@avascent.com
While countertrade and offset are familiar concepts to Senior Associate at Avascent
most A&D companies, the growing sophistication of offset
Contact: ajovovic@avascent.com
regimes around the world is outpacing the internal capaci-
Associate at Avascent
ty of most obligors. Avascent suggests current or aspiring
Contact: cmeissner@avascent.com
obligors take six critical steps to better prepare for the
efficient discharge of offset obligations: Senior Analyst
Analyst