Last week, US defense companies descended upon Abu Dhabi to attend the International Defense Exhibition (IDEX). They were drawn by the prospect of expanding their international sales at a time when the US defense budget is under strain.
With the threat of sequestration still looming, increasing international sales is a top priority for US defense companies. And while the international defense market is more competitive than ever, US companies that develop a comprehensive strategy, matched by an investment in the resources to grow their international sales, are seeing results. Success in the international market will require US defense firms to master the intersection of overseas demand and US foreign policy.
Over the past decade, US defense exports through the Foreign Military Sales (FMS) system have steadily grown. FMS sales have risen at a compound annual growth rate (CAGR) of 7.7 percent from fiscal 2006 through 2014. While the growth includes large sales such as the record-setting arms package to Saudi Arabia in 2012, the increase is a long-term trend not dependent on any one sale.
Looking ahead, US defense companies are poised to continue their growth in international sales. The Obama administration is emphasizing building partner capacity in regions wracked by conflict or terrorist threats. At the same time, the US government has undertaken steps to improve the ability of the US defense industry to compete in the international market place.
Throughout my tenure at the Department of State, I constantly heard from allies frustrated that FMS was not responsive or agile enough to meet their immediate requirements.
Early in the Obama administration, the focus was on improving direct commercial sales, specifically through the president's Export Control Reform effort, which despite early skepticism is nearing completion and bearing fruit by building higher fences around fewer items. The Defense Security Cooperation Agency has embarked on an ambitious effort to improve the FMS system through its "Vision 2020" initiative, and has already made changes to how FMS can be used by NATO countries that want to purchase defense systems as a group.
The recent release of the administration's unmanned aerial systems export policy has helped clarify the rules of the road for exporting these high-demand platforms as well.
US government efforts aside, growing instability around the world has made US partners and allies increasingly value the capabilities and interoperability that US platforms provide. This has become even more apparent in recent weeks as the UAE, Jordanian and Egyptian militaries have stepped up to conduct airstrikes against ISIS targets.
The rise of ISIS throughout the Middle East over the past year, and the ability of groups like Boko Haram to thrive in areas with less able militaries, have focused many militaries in the Middle East and North Africa on the need to invest in the counterterrorism capabilities they need to confront these networks. And while Middle East customers were the primary focus at IDEX, global events are creating demand elsewhere.
Russia's proxy war against Ukraine and larger efforts to expand its influence in Eastern Europe have resulted in a long overdue focus by the Pentagon on how to use security assistance to reassure countries in the region that the US will provide for their security. Poland and Ukraine are particularly eager for US support.
As tensions reach a post-Cold War high with one near-peer nation, Asia faces security challenges of its own as the nuclear-armed DPRK is less predictable than ever as Kim Jong Un consolidates power and uses cyber capabilities to antagonize nations. In addition, long-simmering disputes in the South China Sea have increased demand for maritime assets as regional militaries balance shows of force with preventing miscalculation.
Some US defense firms have learned to crack the code to increased FMS sales. They have learned that long-term success requires C-suite decisions to realign their business development teams toward growing in-country presence, and dedicating other resources to building long-term relationships with not only foreign militaries but with US Defense and State Department officials.
In addition, they are developing joint ventures that do more than meet a single requirement, but are more strategic and help build their brand. They are developing approaches to meeting offset obligations that can minimize risk and generate further opportunities.
Finally, as firms less experienced in FMS learn about the process, they are adjusting their projected timelines for sales and clearly communicating them to leadership, shareholders and foreign government customers.
With continued effort and smart strategy, foreign military sales will continue to increase in the years to come.
Andrew Shapiro is a founder and managing director of Beacon Global Strategies. He served as US assistant secretary of state for political-military affairs from 2009-2013.