2-8 April 2013
FOREIGN DEFENCE companieshave been doing well in Brazil.With rising security needs anda small deence industrialbase, the nation has beenorced to go beyond its bordersto buy military hardware.So: Brazil’s new submarinescome rom France, its latestocean patrol vessels come romthe UK and its new fghter will beacquired rom France, Swedenor the USA; the last in a compe-tition between the Raale,Gripen E and Lockheed MartingF/A-18E/F Super Hornet.But a new law passed in2012 seeks to change Brazil’sreliance on oreign companiesor major weapons systems.Public law 12.598 establishesa new category or a “strategicdeence company”, o which atleast 60% o the shares areowned by Brazilians.It is not the frst time a gov-ernment has leveraged its de-ence budget to incentivise orprotect a domestic industry. TheUS deence industry is shieldedrom some oreign competitorsby the Buy American Act andthe Berry Amendment.Brazil’s new law does notprohibit oreign companies romcompeting on military hardwareor services bids, but it doesmake it harder or them to win.Instead, the law exempts stra-tegic deence companies romBrazil’s tax on industrial goods,and rees them rom obliga-tions to contribute to unemploy-ment insurance and socialsecurity programmes.The move appears partly aimed at countering the oreigndeence companies that havebeen buying ownership stakesin Brazilian deence companies.“There is no prohibition orsomeone who is a multina-tional company, but they arenot to be eligible or the ben-efts o being a strategic de-ence company,” says LuizCarlos Aguiar, chie executiveo Embraer Deence Systems.The programme has already caused a minor restructuringwithin the deence industrialbase. Two years ago, Embraerormed the Harpia Systems jointventure with Elbit Systems sub-sidiary AEL Sistemas, with equalownership by both companies.As a result o the law, ormerEmbraer rival Avibras agreed tobuy 10% o Elbit’s stake in the joint venture, increasing thenumber o shares owned by theBrazilian frms to 60%.
NEW LAW AIMED AT SOURCING WITHIN BORDERS
midst of a near two-decade reduction in de-fence spending.National priorities have shifted in the pastdecade, however, as Brazil has embraced alarger role on the regional and world stagesand discovered a new wealth of oil and natu-ral gas deposits within its maritime borders inthe South Atlantic.Defence spending remains at a modest1.6% of gross domestic product, but the coun-try’s rising economic output means spendinghas risen proportionately. Overall spendingpeaked in 2012 at $36 billion, of which about$5.16 billion was set aside for investmentssplit between the three armed services.“That’s above what we had last year,” saysLuiz Carlos Aguiar, chief executive of EmbraerDefense Systems. “There are some importantprogrammes they have been reducing becausethey are ﬁnalising, and they are being replaced by others. That’s why I believe we have spaceto grow in Brazil. Out of this $5 billion, Em- braer, as a group, have 27%.”If that level of spending is sustained Brazilwill be buying much more than new ﬁghtersand KC-390s during the next decade. Themilitary is seeking to modernise its invento-ries of combat and support equipment, whileintroducing a wide-ranging surveillance net-work over the country’s porous southeastern border and territorial waters.Indeed, Brazil’s ambitions grew so large it ap-peared to brieﬂy force Embraer on the defensive,as the promise of lucrative systems-integrationcontracts energised new competitors from thecountry’s construction companies. Salvador- based Odebrecht formed an alliance with Euro-pean prime contractor and EADS subsidiaryCassidian to compete for the border surveillancecontract. Another Brazilian construction ﬁrm,Synergy Group, teamed up with Israel Aero-space Industries to pursue the same work.In the end, the army awarded the $400 mil-lion contract to Embraer in November 2012 tolaunch phase one of the system for the sur-veillance of the frontiers (SISFRON) contract.The award appeared to deﬂate the hopes of Embraer’s erstwhile competitors. Follow-onawards for SISFRON are still available and theBrazilian navy plans to launch a similar pro-gramme next year, but the Odebrecht/Cassidi-an joint venture has reportedly been dissolvedin the aftermath of losing the army contract.
Instead, Embraer appears to have secured itsnew role as the Brazilian military’s most im-portant prime contractor, with billions of dol-lars in new programmes waiting on the books.With the KC-390 headed for series produc-tion, Embraer Defense Systems is set to contin-ue its seven-year growth trend, including thedefence unit that existed before the standalonecompany was formed. Defence sales accountedfor only $227 million of Embraer’s revenues in2006, but more than $1.05 billion in 2012.The defence unit’s share of the company’soverall revenues has nearly tripled to 17%, evenas Embraer has introduced the Phenom 100 and300 business jets to its product line-up.The key for Embraer now will be executingon the SISFRON programme. It has only re-ceived the phase-one award, but the overall pro-gramme is valued at $4 billion during the nextdecade. The system is going to create a networkof border surveillance stations, with ground- based radars, UAV sensors and command andcontrol systems networked together to identifyand catch smugglers crossing the open border.“Until March we are going to ﬁnalise all of thesubcontractors on the SISFRON contract,” saysAguiar. “We have a deadline by the end of March, and we are in the process right now. We
The law exemptsstrategic defencecompanies fromBrazil’s tax onindustrial goods
The fleet of the Brazilian air force includes Lockheed P-3 special-mission aircraft and Northrop F-5 fighters
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