Why Offsets?

Author: Christian Hadjiminas, CEO , EPICOS
I have been in this business for nearly 15 years and I think it is perhaps time to try and answer the most basic question of our industry. Why Offsets? Are they worth it? Do they really contribute anything? Or do they simply feed a whole industry (including this site)?

In trying to answer this basic question let me start by pointing out some important factors in the equation. Every year we hear that offsets are going to die because of, for instance, US legislation or because some countries are tired of a specific offset model they have adopted and look to either abolish them or to change their direction. And what happens every year instead? Simply, more and more countries adopt offsets – and those that already use them try to expand them. In cases which yield disappointing results, rather than abolishing offsets, a new set of rules are enacted making them even more extensive and quite possibly demanding.

Simply put, offsets, despite their shortcomings are really something akin to a virus that nobody seems able to get rid of or more precisely, nobody really at the end of the day wants to risk letting them go. But again, why is that? One would have expected that the rapid increase in the globalization of all the economies and the resulting competition would have made offset an obsolete weapon in the fight to support one’s local defense/high tech industry.

Critics would immediately answer that this is the exact point. Administrations around the world do use them to keep (for political reasons) inefficient industries alive. Actually this may be partially true but explaining the stamina of offsets globally requires something more. If Offsets really are a big ‘white elephant’ (as they appear on the surface to be) they would have died; if for no other reason, than the fact that every new Government in every country could potentially use them to discredit their predecessor and, in a bid to drive their point home, abolish them. We all know, after all, that any large inefficient white elephant sitting out there would have been somewhere, somehow shot down.

Therefore, the truth lies elsewhere although yes, admittedly, on many occasions, they do tend to support inefficient industries. Indeed there have been also many cases of abuse. Offsets, itself a tool that can take any shape or form from investments to political assistance and therefore, with the fertile imagination that seem and is required to go into its creation an offset idea can be either benevolent or even to say the least, malicious and with a different target. And yet despite the many not so flattering names they receive offsets are still there, one of the main flags of each country that practices them, a critical microeconomic tool that nobody wants to lose.

Another factor became apparent to us while talking to an official who had just acquired a third generation fighter plane for his country – without really having any need for it. We asked him why they made the acquisition. His response: “because of the offsets that our industry will receive”. When we pressed the question further and asked provocatively “Well, can’t you spend all this money differently and generate more jobs, more efficiently some other way?” He assured us that “this is the only way we can be hooked to superior high tech industries and have our industry fertilized further”.

Indeed, this answer went some way in addressing the question but what really filled in the missing blanks was when we attended an offset conference. During this conference, a prime contractor who had just undertaken a major program spent some time trying to present to us, the audience, a) the local capabilities of the country where he now tries to fulfill a large offset liability and b) the extent to which (internally) his senior management tried to approach the liability through different means. And that is when it started to make perfect sense to me.

Offsets are a necessity to every actively developing country – not because of the jobs directly created but mostly because they ‘force’ big, technologically and managerially advanced multinationals to spend some of their valuable brain capital to address issues which politicians may struggle with; Governments need this exchange of ideas – even if they attend just because of a gently put ‘forced contractual commitment’. It is perhaps their only way to ‘force’ a large and more advanced multinational to access its resources and know how and address the country needs. They need those companies’ – superior in many cases – standing in the market to call and invite the rest of the world’s attention to the specific country.’

Just think, especially those who have been in the business even for the last few years, how much executive time has been spent by companies like Boeing, Raytheon, Thales on dealing with different countries and how they can find the right thing for the country in order for them to fulfill their liabilities. Think how many different parties’ brains have tapped in and how much of their technology centers capabilities. Think how many presentations they have made in order to promote that specific country’s name by putting behind their own company credible name. Endless hours, endless money which countries seem to be willing to pay through offsets in order to get this attention, in order to get their brain. If you wish, in order for that country’s industry to be connected (even to be just connected for a dialogue and exchange of ideas!) to the world pillars of technology and to the world’s centers of excellence.

In short, Governments around the world, especially those away from the day to day production of superior products/ideas in the US and Western Europe, feel there is a party going on out there and they even want to pay for the invitation that will gently again put ‘force’ on the hosts to share their time and resources with them.

Is this wrong? Most definitely not. Why not use a fraction of the money spent on huge say armaments acquisitions to get this attention, this sharing of brainpower?

Is it inefficient? The sense of inefficiency is really a relative one. Something is more or less efficient always in relation to an alternative. What is the alternative and thus, more efficient than offsets in forcing such a technological and managerial “party” to involve some countries as well? Could, for instance, a country allocate directly and outside offsets a fraction of its total expenditures and hire those companies as ‘consultants’ to address a company’s needs?

Perhaps a country could hire a third party to promote it but they do this anyway. The issue is that they can never hire those large companies, typical defense manufacturers, to do this, since they do not consider it part of their job. Yet, when it comes down to offsets, which are tied to a sale or no sale, they do allocate the resources. And it is precisely this trick that makes offsets worthwhile to a country. Even if a defense company were to be hired and accepted to play this role, in the absence of a testing ground to observe any new ideas they suggest to the country, would they be worthwhile or would they just be put unutilized in a Government’s archives? Most probably yes. That is why, one can conclude that Offsets are not just a ‘forced mechanism’ to generate ideas but a tool that one needs to somehow score (due to a contractual obligation) with those ideas and see in this way their validity.

After contemplating all of this, we had to consider that maybe after all the recipients of offsets are perhaps a little smarter than one would assume. They have managed somehow to draw attention to those deposits of knowledge and technological/managerial experience for many years where someone on the periphery would only speak of and see white elephants, which may in some cases exist.

And what about the companies themselves? Are they the losers in this fun game called offsets? Well, their basic expenses are covered; their executives get a real cultural infusion of knowledge each time they get to know a country more, a valuable tool in an era of fast globalization; they find occasionally or more often than occasionally some new international subcontractors; they sometimes test technologies that could have remained obsolete at their factories; they sometimes make use of foreign human resources that bring themselves the necessary fertilization back home; sometimes, sometimes,. Well, there are so many sometimes that if one where to add them up maybe one could find some benefit for those companies in most if not all offset programs.

All in all we come to the conclusion that offsets cannot be just measured and thus, evaluated in strict direct economic terms such as how many jobs have been created. They can almost impossibly assessed by this indirect and on the surface peripheral side effects of a dialogue that results in sharing of brain power, cultural exposure and promotion of a country always in search of how to score. So long as those unapparent, superficial benefits exist, although by all means immeasurable, offsets will continue to survive and grow. When somehow those side benefits are no longer needed due perhaps to a truly global economy then offsets may start shrinking or disappearing. At least then we will know why this happened and we are certain even those in our industry will accept it as the right thing at the end of a maturity cycle. In the meantime, let us enjoy the exchange of ideas “party”, both the hosts and the excited guests.