Weapons, Anyone?

Western arms makers covet new NATO members' business

It looks like a bonanza waiting to happen. As Central European nations ink the preliminary terms for joining NATO, global defense companies are salivating over their markets. They envision scores of lucrative contracts when Poland, Hungary, and the Czech Republic spend billions to upgrade everything from radar to aircraft. Many are jockeying for position to cash in on the potential military buying binge.

But the bonanza may not arrive anytime soon. Central European nations will be hard-pressed to pay for new weapons while trying to rev up their economies to fit in with their neighbors in the European Union. And cost estimates for NATO enlargement range from $27 billion up to $125 billion. Hungary, under pressure from international lenders to keep its budget under control, already has postponed a $1 billion deal to buy 30 of Saab's Gripen jet fighters.

RESTRAINTS. Current NATO members such as Germany and France can't afford to be generous, as they must keep their budgets in line to meet the criteria for European monetary union. The U.S., soon to adopt a balanced-budget deal, has similar spending constraints. And there are policy issues, too. Some observers are already asking whether speedy arms proliferation in Central Europe is desirable. "You must worry about the kind of arms you put there," says Andrew J. Pierre, professor of European studies at Johns Hopkins University. "Once they're there, they can be used for the next 30 years."

Some defense experts believe cash-strapped Central European countries are dangling deals before global defense companies solely to build support for their entry into NATO. After the July vote and ratification by NATO members, cynics say, little will be bought. Instead, the countries may settle for communications gear and other penny-ante stuff, to focus on economic development instead. "The governments have not sorted out their priorities," says Robert H. Trice, vice-president for international business development at U.S. defense giant Lockheed Martin Corp.

So Lockheed Martin, for one, is hedging its bets. On May 7, it decided not to buy a stake in Aero Vodochody, the Czech Republic's biggest weapons maker, even though the ailing company would have given it entree to the Czech defense market. Instead, a joint venture including archrival McDonnell Douglas, its merger partner Boeing, and Czech Airlines agreed to buy about 40% of Aero Vodochody, for $32 million. Lockheed and McDonnell Douglas Corp. are both in the running to supply the Czechs with up to 36 jet fighters. But Lockheed decided the investment wasn't worth the risk.

Instead, Lockheed is looking beyond military sales. It's bidding on a contract to link civilian and military air-control systems in five countries. And it can offer an array of civil programs, from handling space-based communications systems to environmental cleanups. "We're looking to become an advanced technology company in a whole variety of sectors," says Trice.

Other multinationals are doing the same, hoping that today's nonmilitary investments will lead to defense contracts down the road. For example, Sweden's Wallenberg group, which owns Saab, still hopes Hungary will eventually buy its Gripen. Wallenberg companies such as engineering giant ABB Asea Brown Boveri, phone-equipment maker L.M. Ericsson, and drugmaker Astra all have plants in Hungary. Similarly, France's Dassault Aviation is enlisting French banks and industrialists as partners and promises to help with European Union admission. And the Russians are promising to be cheapest by using debt forgiveness as payment for defense purchases.

GOODWILL. Ultimately, though, the dogfight for sales in the region may be between Lockheed and McDonnell Douglas. Dassault can't offer the kind of discounts the Americans provide, and Central Europe is more likely to cement its ties with the West than buy arms from Russia, no matter how cheap. That's why Lockheed Martin's caution on the Aero Vodochody deal could be risky. Despite Prague's denials of any link between the investment and future fighter-aircraft purchases, E. Grady Jordan, Lockheed Martin's vice-president for Eastern Europe, concedes McDonnell's investment will "probably give them some advantage over us."

McDonnell Douglas has long had a commercial-aircraft sales presence in the area. It has won goodwill through deals dating to 1973, when it sold DC-9s to Hungary in return for buses sold in North America. Such "offsets" also helped Hungary buy 22 of the company's MD-500 helicopters in 1987.

So Lockheed is trying to gain ground. After covering the region for years from Geneva, it has opened offices in Warsaw and Prague. In early May, it participated for the first time in the huge arms fair at Brno, the Czech Republic's second-largest city. Back in the U.S., Bruce Jackson, Lockheed's director for global development, co-founded the bipartisan U.S. Committee to Expand NATO, which will try to influence wavering senators to ratify NATO enlargement. Jackson says he is acting as a private citizen. But he is identified by his corporate title on the committee's list of directors.

Clearly, Lockheed wants to boost the odds that a defense boom will eventually take place. There's no doubt it knows how to fight for its interests in Washington. The question is whether it can win the shootout with McDonnell Douglas in the skies of Central Europe.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE