US Export Restrictions Hand Korean E-X AWACS Competition to Boeing

E-737 Cutaway
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Developments since the 2008 contract, incl. 1st plane ready in Korea. (Aug 1/11)

Other countries have criticized the USA’s ITAR policy for being as much about unfair trade competition as it is about genuine security. August 2006 events in Korea would certainly appear to strengthen their case… and now a Nov 8/06 KOIS report puts the final nail in by announcing a $1.6 billion contract “win” for 4 Boeing E-737 early-warning aircraft. Yet Boeing was always the ROK’s second choice, and its “win” came about by default.

A pair of December 2005 articles covered the $1.8 billion competition for South Korea’s E-X airborne early warning & control (AEW&C) aircraft, designed to detect incursions into ROK airspace and act as a sort of air traffic control for the air war. Right now, Korea doesn’t have any AWACS assets, relying solely on its allies; by 2012, it wants at least 4 aircraft. In response, there were 2 main competitors…

• The (Rail) Road to a Deal
• Contracts & Key Events [updated]
• Op Ed/ Analysis (August 2006)
• Additional Readings

The (Rail) Road to a Deal

G550 CAEW
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Boeing’s E-737 “Wedgetail” AEW&C was matched up against an American-Israeli consortium of General Dynamics Gulfstream, L-3, & IAI Elta, offering a G550 CAEW platform based on the Gulfstream 550 long range business jet. It sold for about $400-500 million less overall, and was reportedly favored, but the need for US permission under ITAR to incorporate certain technologies was holding up the sale.

The items on the interference list hardly constitute unusual technologies, and are exported all the time:

• Data Links (Link 11 and Link 16/MIDS capabilities) for automatic data exchange with other aircraft, ground stations, air defense units, etc.;
• IFF (Identification Friend or Foe);
• The Satellite communications module;
• The UHF/VHF Have Quick Radio;
• GPS P(Y) code technology.

Over the hump… by default
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Eight months after the December 2005 articles, Boeing’s E-737 was selected. By default.

After an announced competition delay in December 2005, an August 2006 news report noted that:

“Elta, a subsidiary of Israel Aircraft Industries, was dropped off as it failed to guarantee obtaining required export licenses from the U.S. government regarding key items to be installed on its product for the sealing of the contract, a DAPA spokesman said.”

Price negotiations followed, with a formal announcement taking place in November 2006. The ROKAF’s E-737s are based on the 737-700, and carry a flight crew of 2 and a mission crew of 6-10.

Northrop Grumman Electronic Systems provides the Multi-role Electronically Scanned Array (MESA) radar. It is able to track around 1,000 airborne and maritime targets simultaneously, and can help the mission crew direct fighter aircraft while continuously scanning the operational area.

Korean Aerospace Industries (KAI) will perform aircraft modification and mission equipment modification and checkout. Modification of the 1st aircraft will occur at a Boeing facility, but KAI will modify the remaining aircraft in Saechon, Korea.

Contracts & Key Events

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Peace Eye arrives
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Dec 13/11: South Korea’s 2nd E-737, and the 1st modified by KAI, is delivered ahead of schedule to ROKAF Base Gimhae. Boeing Peace Eye program manager had high praise for KAI’s quality and technical expertise. KAI will modify 2 more planes in Sacheon, for delivery to the ROKAF in 2012. Boeing.

In its release, BAE Systems also claims that this development of telecom computer architecture for military use is among the first military applications of this technology.

Nov 8/06: Boeing announces the $1.59 billion contract for four 737 airborne early warning and control (AEW&C) systems. The contract also includes ground support segments for flight and mission crew training, mission support, and aircraft and system modification support. Delivery of the 1st 737 AEW&C aircraft under the Foreign Military Sale “Peace Eye” program is scheduled for 2011. The remaining 3 aircraft are scheduled for delivery in 2012.

Nov 8/06: That announcement took until November, but it has come. The ROK’s Defense Acquisition Program Administration (DAPA) announces that DAPA’s supreme committee chaired by Defense Minister Yoon Kwang-ung had formalized the decision, and signed a $1.6 billion contract with Boeing for its E-737 aircraft under the “Peace Eye” Foreign Military Sale program.

Op Ed/ Analysis (August 2006)

Security restrictions on military technology transfers, and even political restrictions, are not uncommon for Western countries. The breadth of US global interests, and the importance of interoperability with allies, place the USA in a unique position. The demands of that position require careful balancing and the appearance of scrupulous fairness, however, or the result will be a series of “wins” that actually erode both the USA’s allied interoperability and its global clout over the long term.

Two other items in our Aug 4/06 coverage offer excellent illustrations of these imperatives in action.

We’ll begin with the F-35 Lightning II Joint Strike Fighter, one of the largest military programs in the world with estimates as high as $279 billion. A recent deal between the USA and Britain forestalled an impasse that could have led to the unraveling of much of the international consortium, increased costs per aircraft, and left a serious cloud over the export potential that’s essential to the F-35’s long term business case. Note that one of the key issues was the ability to create third-party add-ons. Integration of foreign equipment without requiring US say-so was another. The fact that those were 2 of the 3 major issues is telling in and of itself.

Fortunately, high-level diplomacy conducted in a spirit of fairness appears to have headed a major dispute off at the pass.

Next, note our coverage of the (canceled) Venezuela deal for 12 EADS-CASA transport aircraft from Spain. Regardless of whether or not one agrees with the restriction or its rationale, there can be no question that the lost sales will be keenly felt on a political level due to lost jobs in Spain, even though EADS’ corporate parent may see it as an acceptable trade for access to the US market. A major and separate deal from Brazil for its Super Tucano aircraft was also blocked – this time, with no offsetting consolation either economically or politically.

The result must inevitably be resentment, in both locations. The fact that the USA has a consistently expressed security concern with the country in question will be a mitigating factor, because at least the decision is not seen as utterly capricious. To some extent, the USA must simply pay this price as part of the policy cost of working to make Venezuela’s arms build-up more difficult – though our Feb 14/06 “Love on the Rocks” article did note that the US had options that would have both furthered its own global objectives and cushioned the blow in Brazil.

It may eventually wish that it had pursued those options. While EADS is now tied to the US market by golden handcuffs, Embraer and many European companies who lack such ties may well be thinking hard about minimizing future US technology inputs in their products. This may be an acceptable cost if the USA considers its Venezuelan policy goal important enough, but it will chip away at the edges of future US influence in such sales by providing it with fewer opportunities to invoke ITAR export restrictions. As a mitigating factor, crossing the USA on issues it considers highly important is always understood to have costs. Unless one plans in advance to sell to rogue regimes, therefore, the Venezuelan example is unlikely to fuel a big “buy any except American” dynamic because of the effort, expense, and possible cost to buyer appeal of going with substitutes.

Which brings us to the Korean E-X competition. Whether or not ITAR was in fact deliberately used to hinder a competitor that included non-US firms, that is certainly the appearance. This, we submit, is the most damaging possible message – especially because it confirms a widespread but quiet suspicion within the international defense industry.

If the issue is simply that one should hesitate before crossing the USA on major foreign policy issues (Venezuela), or that pressure is required to make the USA do the right thing (F-35), that is one thing. If the issue is that using American technologies will cut one’s export potential across the board because it will be used against you in competitions, that’s a very different kettle of fish. That perception would be material enough to affect the calculus for major items like engines when developing new platforms, as well as many electronics. If it does, the result is fewer ITAR levers for the USA, less compatibility with foreign designs, and a long-term loss of work in its defense sector to offset the more visible short-term wins.

Note also the technologies that became sticking points in the E-X sale: GPS. Link 11 and Link 16/MIDS. IFF. Minor technologies all, which became broad and important allied standards under US/NATO leadership.

As the EU prepares its own rapid deployment forces as a clear parallel force to NATO, and pursues global projects like the Galileo GPS satellite constellation, it is already likely to push for more European interoperability standards, as opposed to US/NATO specifications. They will be built for interoperability, of course, or at least trumpeted as such – but they will also be built to allow solo operation. It will be much easier to get countries and firms to go along with such projects if they see it as a hedge against unfair American export competition. In addition, the creation of a market for such technologies is likely to create a production base of minor players who can step in as substitutes for various components – without worrying about the potential effect on their nonexistent US exports.

Countries, and companies, understand security concerns. They also understand the requirements of geopolitics. So long as their opinion of one’s geopolitics is that it lives within the realm of reason, its effect on production decisions will be minimal. The appearance of undue advantage or exploitation of those security concerns as a front, however, will not be understood or accepted. If that view becomes prevalent, the result will be a long-term set of changes in the market that make any short term wins a pyrrhic victory indeed.

In our opinion, the USA needs to take a hard look at its ITAR processes, and the way they are being handled. Other countries and firms around the world are certainly doing so.

Additional Readings

• Boeing – 737 Airborne Early Warning And Control. Currently based on the 737-700.

• DID – USA Moves to Improve Arms Export Regulation Process

• DID (July 31/07) – US Industry Associations Pushing to Reform Export Controls. But for whose benefit?

• Aviation Week’s Ares (June 5/07) – US Technology? No Thanks! “The only way to resolve technology access and U.S. government export restrictions imposed by ITAR is by “not including any U.S.-sourced technology into our products,” [Dassault CEO Charles Edelstenne] the President of the Aerospace and Defense Industries Association of Europe (ASD) said yesterday…. In the context of space programs, steps are already being made towards completely excluding U.S. input in order to stay clear of the ITAR restrictions, adds Francois Gayet, the permanent Secretary-General of the ASD….”

• DID (Feb 14/06) – Love on the Rocks: CASA’s $600M Venezuelan Plane Sale In Heavy Turbulence. A good example of export controls at work – but even when the security concerns are legitimate, they can generate unwanted backlash unless they’re handled carefully. This case illustrates both sides of that coin.