Trading Up From A Mi G In Hungary

Budapest is kicking the tires on Western-made fighters

It's a nice plane order, as defense deals go: 30 fighters worth $1.2 billion, with options for 40 more. Lockheed Martin Corp. wants to land the deal; so does Saab, which makes the Gripen fighter for the Swedish air force.

The twist is this: The government mulling the order is Hungary. Once an archenemy of the West and now an eager candidate for NATO membership, Hungary is the first country in former communist Europe to consider buying fighters from outside the old Soviet bloc.

The battle for the order has big implications for the defense business. Poland and the Czech Republic are watching carefully to see how good a contract the Hungarians land--and how vigorously Russia protests the presence of Western-built fighters near its borders. If the deals unfold as Western contractors hope, they may be onto a bonanza: According to defense analysts, future orders in Central Europe could amount to more than 200 fighters, worth $8 billion, in the next five years. Hungary will be a key foothold. "If you can establish yourself in a part of a market, it makes the next competition easier," says Lockheed Martin President and CEO Norman R. Augustine.

But first, Lockheed Martin has to win in Hungary. A decision to buy is likely by yearend, according to Jeno Poda, chairman of the parliamentary committee supervising the purchase. Lockheed Martin and Saab, plus McDonnell Douglas, France's Dassault, and MAPO, the Russian maker of MiGs, are all invited to bid. Yet analysts believe only Saab's JAS 39 Gripen and Lockheed Martin's F-16 are serious contenders. "They are both excellent jets," says Paul Beaver, a consultant for defense publisher Jane's Information Group Ltd.

TRADING PARTNERS. Saab, part of the Wallenberg conglomerate, is especially keen to land the order, since so far only Sweden's military has bought Gripens. In return for a Hungarian order, other members of the Wallenberg group would invest in Hungarian companies to help them boost exports. "We are looking particularly at industrial technology, such as telecommunications hardware and electromechanical products," says Torbjorn Nordstrom, regional director of industrial cooperation for the Wallenberg Group. According to sources close to the negotiations, the resulting increase in Hungarian exports would more than offset the cost of the jets. More than 100 Hungarian companies have been identified as potential exporters to Sweden, Britain, or Germany.

OLD DEBTS. Lockheed, for its part, plans to offer the aircraft at rock-bottom prices through a leasing scheme. One plus for Lockheed: A purchase of American weaponry might give the U.S. an incentive to hasten Hungary's entry into NATO--something neutral Sweden cannot do. Neither Lockheed nor the Pentagon, which helps U.S. contractors land foreign sales, would comment on any proposals to help Hungarian exports.

One question is how strenuously the Russians, leery of NATO's planned expansion, will protest. Alexander Kulik, an arms analyst at a Moscow think-tank, the USA/Canada Institute, says Russia has to accept the inevitability of its former satellites purchasing Western products. "We can only supply spare parts for their old arsenal," he says. "But as for major systems, there will be a swift turn to Western suppliers."

This is an economic blow for the Russians. "One reason for their objection to NATO's expansion is the loss of weapons markets," says Dariusz Rosati, Poland's Minister of Foreign Affairs. Rosati says Poland will replace its 400 fighters with Western jets, probably U.S. ones, for about $4 billion over eight years.

There is one scenario that could see the Russians winning the Hungarian order. To pay off old debts owed Hungary for such goods as buses and electronics, Russia already has delivered some MiGs to Budapest. If Hungary's economic situation declines further, then the government may agree to take more MiG 29s to cover another portion of Russian debt. That would make it unnecessary to choose between Sweden and the U.S.

But diplomats in Budapest figure the Hungarian government wants to spruce up its air force to help the nation look like a worthy contender for NATO membership. If the Hungarians stick to that goal, Western suppliers could soon be powerful players in the former Soviet Union's backyard.

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