Where Industry and Security Intersect
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Offset transactions form the basis upon which the impacts of offsets on the U.S. defense industrial base are estimated. For the purpose of analysis, offset transactions were grouped by type (i.e., direct, indirect, and unspecified), and then sub-grouped into the nine categories described in Chapter 2 (Purchases, Subcontracts, Technology Transfers, Training, Overseas Investment, Co-production, Licensed Production, and Miscellaneous).
During the time period 1993 to 2000, 40 U.S. defense companies reported 4,425 offset transactions with a total value of $18 billion. The reported offset transactions were completed with 1,602 recipients in 35 different countries. The offset transactions were conducted in fulfillment of 226 U.S. weapon system exports, some dating from the 1980s. U.S. firms received a total of $21.5 billion in credit toward open offset obligations during the reporting period, yielding a composite multiplier of 1.197 (i.e., credit value divided by offset value). Roughly one in eight offset transactions (556 in all) earned extra credit (i.e., had a multiplier greater than 1). The average yearly offset transaction value was $2.25 billion.
Approximately half of the value of reported offset transactions (50.7 percent) was in furtherance of offset agreements entered into before 1993 (before BIS began collecting offsets data). These older offset agreements (approximately 250), included requirements for practically all offset transactions for Finland, the second largest recipient country; 60 percent of offset transactions for South Korea; more than 80 percent of offset transactions for Italy; and smaller amounts for many other countries.
The values of offset transactions by type are reflected in Table 5-1 .
| Data Element | All Transactions | Pre-1993 | 1993 & After |
|---|---|---|---|
| Offset Transaction Comparisons | Transactions
Addressing Offset Agreements Entered into |
||
Total Value |
$17,993,496,125 |
$9,118,144,951 |
$8,875,351,174 |
Direct Offsets |
$7,107,805,750 |
$3,375,693,397 |
$3,732,112,353 |
Indirect Offsets |
$10,253,659,363 |
$5,522,641,373 |
$4,731,017,991 |
Unspecified Offsets |
$632,031,013 |
$219,810,182 |
$412,220,831 |
| % Element |
Percent Distributions |
||
% Direct Offsets |
39.50% |
37.02% |
42.05% |
% Indirect Offsets |
56.99% |
60.57% |
53.31% |
% Unspecified Offsets |
3.51% |
2.41% |
4.64% |
Source: BIS Offsets Database
The data show that seven countries were the recipients of approximately two-thirds (66.8 percent) of the actual value of all offset transactions. These seven countries had a composite multiplier of 1.103, and each country had at least $800 million in offset transactions during the reporting period. The multipliers for the top seven countries ranged from 1.007 for the United Kingdom to 1.412 for South Korea . The UK and Finland were the two largest recipients of offset transactions, each with totals of more than $3.2 billion during the reporting period. Together, the two countries accounted for 36 percent of total offset transactions during the reporting period. Because of smaller than average multipliers, however, the UK and Finland represented only 31.2 percent of the total credit value of all transactions.
After the UK and Finland , individual country offset transaction totals diminish rapidly. For example, Israel was a distant third in total value with only 8.5 percent of the offset transactions, followed by Switzerland with 6.4 percent, and the Netherlands with 5.4 percent. All other countries each accounted for shares of less than five percent of the total value of offset transactions. Sixteen of these countries had shares of less than one percent. The top seven countries receiving offset transactions with their multipliers are shown in Table 5-2.
| Country | Actual Value | Credit Value | Multipliers |
|---|---|---|---|
1. United Kingdom |
$3,256,484,855 |
$3,278,539,063 |
1.007 |
2. Finland |
$3,216,337,843 |
$3,446,007,399 |
1.071 |
3. Israel |
$1,533,386,656 |
$1,590,743,094 |
1.037 |
4. Switzerland |
$1,148,627,066 |
$1,157,282,447 |
1.008 |
5. Netherlands |
$1,089,903,849 |
$1,394,722,802 |
1.280 |
6. South Korea |
$973,467,169 |
$1,374,337,556 |
1.412 |
7. Spain |
$801,702,880 |
$1,020,824,250 |
1.273 |
Total |
$12,019,910,318 |
$13,262,456,611 |
1.103 |
Percent of All |
66.80% |
61.57% |
|
All Countries (35) |
$17,993,496,125 |
$21,540,271,239 |
1.197 |
As expected, the regional distribution of offset transactions closely mirrors the pattern of offset agreements. Chart 5-1 presents this pattern graphically. As with offset agreements, European countries dominated the regional distribution of offset transactions. Europe accounted for more than 71 percent of the value of offset transactions during the reporting period. However, with a smaller than average multiplier (1.156), European countries accounted for only 68.6 percent of the total credit value applied toward open offset agreements.
Asian countries ranked a distant second in both categories. Asia accounted for 13.6 percent of the total value of the offset transactions. However Asia , with a larger than average multiplier (1.5), accounted for 17 percent of the total credited value of such transactions.
Middle Eastern and African countries accounted for 12.8 percent of the total offset transactions and 12.2 percent of the credit value. The multiplier for Middle Eastern and African countries was 1.141, slightly lower than Europe 's.
Source: BIS Offset Database
North and South American countries were a distant fourth with only about 2.6 percent transaction shares and 2.2 percent of the credit. The multiplier for North and South America was the lowest of the four regions at only 1.013. Chart 5-1 presents this data graphically.
The multipliers for each region directly affect the impact offset agreements have on the U.S. defense industrial base. For the world at large, the offset percentage was 61.3 percent (i.e., the value of offset agreements was 61.3 percent of the total value of the related defense contracts). The multiplier for the world at large was 1.197. Therefore, the adjusted offset percentage - discounting 61.3 percent by the multiplier - is 51.2 percent. The multiplier, therefore, reduces the prime of fulfilling offset agreements.
For the four main regions described above, the multiplier discount reduced Europe 's offset percentage from 92.3 percent to 79.8 percent. The offset percentage for Asia , with its high multiplier, dropped from 26.2 percent to 17.5 percent. The Middle East and Africa fell from 44 to 38.6 percent, while North and South America showed little change, dropping from 90.8 to 89.6 percent. Lesser-developed economies usually provide larger multipliers as an incentive to the prime contractor in an effort to obtain needed technology or production capacity. The calculations and results of this analysis are shown in Table 5-3 below.
| Region | Actual Value | Credit Value | Multiplier | % Offset Agreements | Multiplier Discount |
|---|---|---|---|---|---|
| Offset
Transactions |
Offset
Agreements |
||||
|
Europe |
$12,784 |
$14,781 |
1.156 |
92.3% |
79.8% |
|
Asia |
$2,441 |
$3,659 |
1.499 |
26.2% |
17.5% |
|
Mid-East/Africa |
$2,310 |
$2,636 |
1.141 |
44.0% |
38.6% |
|
N./S. America |
$459 |
$465 |
1.013 |
90.8% |
89.6% |
|
Total |
$17,993 |
$21,540 |
1.197 |
61.3% |
51.2% |
Source: BIS Offsets Database
For the eight-year reporting period, direct offsets accounted for 39.5
percent ($7.1 billion) of the total value of offset transactions. Indirect
offsets accounted for 57 percent ($10.3 billion) of the value of offset
transactions. The remaining 3.5 percent ($632 million) consisted of transactions
that were not specified as direct or indirect. Direct offsets varied greatly
from year to year, based mostly on which countries dominated the offset
activity. The same variation held for indirect offsets.
Finland was the major recipient of indirect offsets through most of the
reporting period, receiving nearly 27 percent of the total value of indirect
offset transactions. (Most of these transactions were related to a major
offset agreement signed before 1993.) Indeed, only 14 percent of Finland’s
offset transactions were classified as direct offsets. Removing the data
on Finland yielded interesting results because Finland was so large an
influence and somewhat of an anomaly. Excluding Finland, the share of direct
offset transactions accounted for by agreements entered into before 1993
increased to nearly 50 percent of the residual total. This would indicate
that direct offsets were a bigger factor before the shrinkage in defense
spending began in the past decade.
By the same token, the UK led all countries in direct offset received during
the reporting period, and these were almost exclusively related to aerospace
contracts. A quick comparison between the UK and Finland leads one to conclude
that Finland lacks the indigenous aerospace infrastructure to take full
advantage of direct offsets, while the UK is well positioned to do so.
Finland could use direct offsets to help build an aerospace infrastructure;
however, it appears that Finland has other priorities.
Calculated on an annual basis, the value of direct offsets ranged from
$1.46 billion (in 1998) to $578 million (in 2000). Direct offset transactions
averaged $888 million yearly for the eight-year reporting period. The value
of indirect offset transactions ranged from $895 million (1998) to $1.65
billion (1995), averaging $1.28 billion per year during the reporting period.
Direct offset transactions were at their lowest levels in 1993 and 1994
relative to indirect offset transaction, accounting for just over 30 percent
of total offset transactions in those years. This was before the UK received
a substantial value of direct offset transactions in 1995, which increased
to almost $650 million by 1997, before tapering off. A large value of direct
offset transactions ($280 million) also was reported for Israel in 1995,
raising the overall percentage of direct offsets to 39.2 percent that year.
In 1998, the percentage distribution of direct offsets peaked at an unusually
high 61.9 percent. In addition, exceptionally high direct offset transactions
were reported in Italy, Israel, and the Netherlands in 1998, while the
UK subsided from the prior year with direct offsets of $350 million. These
year-to-year variations in the distribution of direct and indirect offset
transactions are presented in Chart 5-2 below.
|
Source: BIS Offsets Database
Three categories of offset transactions dominated offset activity
during the reporting period: Purchases, Subcontracts, and Technology Transfers.
These three categories accounted for 75.4 percent of the value of all offset
transactions during the eight-year reporting period. Purchases (35.2 percent)
and Subcontracts (28 percent) alone accounted for almost two-thirds of the
value of total offset transactions. Technology Transfers made up an additional
12.2 percent. Most of the remaining 25 percent of offset transactions were
categorized as Miscellaneous (8.8 percent) and Credit Transfer (6.3 percent).
The remaining 9.5 percent of the value of offset transactions were distributed
among the other four categories: Training, Overseas Investment, Co-production,
and Licensed Production. Chart 5-3 below shows the distribution of offset transactions
by category.
All 35 countries involved in offset activity were recipients of offset transactions categorized as Purchases, which were classified as either indirect or unspecified offsets. These purchases were comprised mostly of manufactured goods and services, including metal castings and forgings, aircraft parts, night vision components, machined parts, electronic components, software, and educational and consulting services. The countries with the most purchases were the United Kingdom (accounting for 19 percent of the value of all purchases), Finland (14 percent), and Switzerland (11 percent). About 47 percent of all offset transactions categorized as Purchases were aerospace-related, many of which were used directly by U.S. exporters to supply items for other unrelated defense systems or elsewhere in their logistics network.
Offset transactions categorized as Subcontracts. Incidentally, Finland accounted for only 2.3 percent of the value of all offset transactions categorized as Subcontracts, despite being a close second in the overall offset transactions with $3.2 billion in transactions during the reporting period. Data showing the percentage of total offset transactions accounted for by Purchases, Subcontracts, and Technology Transfers are shown in chart 5-4 below. The dominance of these three categories ranged from 66.3 percent of all offset transactions (by value) in 1993 to 87.2 percent in 1998.
Some 23 countries accounted for all technology transfers. Finland accounted for nearly 30 percent, while South Korea (15 percent) and Spain (13 percent) rounded out the top three. Others with significant shares included Taiwan (8 percent), Australia (7.4 percent), and Switzerland (5.7 percent).
Analyzing the distribution of offset transactions by category and by type provides further insight into the effects of offsets on the U.S. defense industrial base. For example, Subcontracts, Co-production, and Licensed Production accounted for 77.5 percent of the value of all direct offset transactions, and each of these categories resulted in foreign production of goods or services. As a result of such offsets, U.S. suppliers can be dislodged from participation in the manufacture and/or assembly of U.S. defense systems and – even more importantly – from future maintenance requirements, which can often be more lucrative than the initial sale. Offset transactions in these three categories totaled $5.5 billion during the eight-year reporting period, with Subcontracts by far the largest portion ($5 billion).
Indirect offsets that involved foreign production of goods and services included Purchases and a small amount of Licensed Production. Together, the value of these two categories totaled nearly $6 billion during the period and accounted for 58.4 percent of the value of all offsets classified as indirect. In total, during the reporting period, $11.5 billion in overseas production – or an average of more than $1.4 billion per year – was the result of either direct or indirect offset transactions.
Technology Transfers, Training, Credit Assistance, and Overseas Investment offsets also can enhance the capabilities of foreign producers and make them more competitive in the global market. These categories of offset transactions can be either direct or indirect. Aside from the monetary value, the effects of such transactions can be long-term and overflow into other defense systems in the United States and other countries to the extent that they make foreign manufacturers more competitive. The value of direct offset transactions in these four categories was $1.35 billion during the reporting period, 65 percent of which were accounted for by Technology Transfer. The four categories accounted for approximately 19 percent of the value of all direct offset transactions. The value of indirect offset transactions in these four categories during the reporting period was $2.95 billion, most of which was accounted for by Technology Transfer (41.5 percent) and Credit Assistance (38.5 percent). In total, during the reporting period, $4.29 billion in offset transaction was accounted for by direct and indirect transactions in these four categories. The annual average was $537 million.
Charts 5-5 and 5-6 show the distribution of offset categories for direct and indirect offset transactions.
Source for these charts: BIS Offset Database
A total of 1,602 foreign entities received offset transactions during the reporting period. The average recipient was awarded the equivalent of 2.76 offset transactions with a total value of $11.2 million. However, the median value received was only $2.44 million, which is more representative of the situation for most recipients. The average offset transaction during the reporting period was valued at slightly more than $4 million ($1.13 million median).
More than half of offset recipients participated in only one offset transaction. These 871 offset recipients averaged about $3.89 million per transaction for a total value of $3.39 billion (or 18.8 percent) of all offset transactions during the reporting period. Five large transactions – all more than $50 million and one valued at more than $180 million –influenced the high average. These five transactions were not representative of the whole; if they are excluded, the per-transaction average drops to $3.33 million. The median for the one-transaction recipients was $1.09 million, which is less than half the median for all recipients. Direct offsets accounted for only 23.7 percent of the value of offsets received by single-transaction recipients, while aerospace transactions comprised about half their total.
On the other side of the spectrum, 165 recipients participated in at least six offset transactions. These companies accounted for almost half of the total value of offset transactions, 56.9 percent of the value of all direct offsets, and 55.2 percent of the value of all aerospace transactions. Collectively, these 165 recipients were awarded a total of 1,971 transactions valued at $8.8 billion during the reporting period. Of this $8.8 billion, more than 46 percent was comprised of direct offsets and 71 percent was aerospace-related. The average value of an offset transaction per recipient was $53.2 million, the median approximately $32 million. The total offset transaction values for individual recipients ranged from less than $1 million to nearly $500 million. One company was awarded 85 offset transactions for nearly $300 million, although this was distributed among several of the company’s divisions.
The value of offset transactions is concentrated heavily in a small number of the 1,602 recipients. The top 100 recipients accounted for 55.6 percent of the total value of offset transactions.16 Nearly 80 percent of the value of total offset transactions was awarded to the top 300 recipients and 94.5 percent went to the top 600. Chart 5-8 below shows the distribution of offset transactions among the recipients.
Identifying offset transactions by industry sector allows for an even more detailed analysis of the effect of offsets on the U.S. defense industrial base. Offset transactions generally are clustered around a small number of major industries associated with defense production, as shown by the data in Table 5-4. A complete listing of the detailed SIC data BIS was able to establish appears in Appendix D.
| SIC | Sector Description | Number of Transactions | Value in $ millions | Percent of Total |
|---|---|---|---|---|
| 37 | Transportation Equipment | 2,003 |
$9,015.5 |
50.1% |
| 36 | Electronic/Electrical Equipment | 604 |
$2,326.9 |
12.9% |
| 35 | Industrial Machinery | 535 |
$1,311.1 |
7.3% |
| 38 | Measuring and Analyzing Instrumentation | 220 |
$948.6 |
5.3% |
| 73 | Business Services | 236 |
$904.8 |
5.0% |
| 87 | Technical Services and Consultants | 210 |
$838.2 |
4.7% |
| Sub-Total | 3,808 |
$15,345.0 |
83.3% |
|
| Total | 4,425 |
$17,993.5 |
Offset transactions related to transportation equipment alone accounted for 50.1 percent of all offset transactions and were composed mostly of aerospace products. During the reporting period, over $9 billion in offset transactions related to transportation equipment accounted for 65 percent of the total value of direct offsets and more than 38 percent of the total value of indirect offsets. In addition, more than 75 percent of transactions not specified by type were in the transportation equipment sector.
The electronic and electrical equipment sector was a distant second to the transportation equipment sector, accounting for only 13 percent of the total value of all offset transactions. This sector includes products such as radar, communications equipment, and electronic components, as well as completed avionics equipment and material inputs for avionics such as circuit boards. 17
Transactions in the industrial machinery sector accounted for more than seven percent of the value of all offset transactions during the reporting period. Industrial machinery includes capital equipment used in the production of both defense and non-defense items. This includes metal-working machine tools, conveyors, air and gas compressors, textile machinery, mining equipment, off-road vehicles, and welding equipment. Two additional sectors – Business Services (SIC 73) and Technical Services and Consultants (SIC 87) –also were significant. Business services (five percent of total offset transactions) were mostly related to computer software, databases, and other information technology. Technical services (4.7 percent of total offset transactions) included mostly engineering services and consulting, training, and related technical data packages.
Offset transactions were categorized into a total of 39 industrial sectors, including one labeled undetermined (SIC 99). The 33 sectors not described above accounted for less than 15 percent of the total value of all offset transactions. Only four of these sectors accounted for more than one percent of total offset transactions, while most of the rest were insignificant. The four were Non-Depository Credit Institutions (SIC 61) with 3.1 percent, Fabricated Metal Products (SIC 34) with 2.9 percent, Holding and Investment Offices (SIC 67) with 2.3 percent, and Educational Services (SIC 82) with 2 percent. The true meaning of credit institutions and investment offices was expanded to accommodate the credit assistance and overseas investment categories of offset transactions. These four sectors accounted for an additional 10.3 percent of the total value of offset transactions so that transactions in just 10 industrial sectors accounted for 95.6 percent of the value of all offset transactions.
Among the remaining 29 sectors, only Primary Metal Industries (SIC 33) and Chemicals and Allied Products (SIC 28) were of significance. The total value for Primary Metal Industries was $156 million and Chemicals and Allied Products was $119 million. Both sectors were comprised almost exclusively of indirect offsets. No other sector had more than $70 million in total offset transactions during the reporting period. The total value for the remaining 29 sectors was $804 million, and Primary Metal Industries (SIC 33) and Chemicals and Allied Products (SIC 28) represented over one-third of this total.
Manufacturing sectors ($14.5 billion) were by far the dominant offset choice, representing 80.6 percent of all offset transactions. Services ($3.3 billion) accounted for most of the remainder at 18.4 percent. One percent was comprised of a combination of agricultural products ($42 million), mining ($15 million), and construction activities ($48 million); another $77 million was undetermined.
Indirect offsets were more widely distributed among industry sectors than direct offsets. Indirect offset transactions occurred in all 39 sectors (and represented 100 percent of the offset transactions in 17 sectors and more than 90 percent in seven more). Most of these indirect offsets were not significant in dollar value. Direct offset transactions occurred in 22 sectors, but only accounted for more than 10 percent of the total value offsets in 14 sectors. Unspecified offsets appeared in just eight sectors, and represented over 10 percent in only two.
In terms of dollar value, the top 12 industrial sectors accounted for more than 97 percent of the total value of all offset transactions during the reporting period. Based on offset type distribution, these 12 sectors accounted for 97.7 percent of all direct offsets, 96.5 percent of indirect offsets, and virtually all of the unspecified offsets. The transportation equipment sector, with over half the total, was the leading sector for each type. Direct offsets were 51 percent of the sector’s total. Indirect offsets accounted for another 44 percent.
Two additional sectors that comprised significant quantities of direct offsets were the electrical equipment sector and the measuring and analyzing instrumentation sector. Along with the transportation equipment sector, these sectors accounted for 85.5 percent of all direct offsets. The same three sectors accounted for 55.8 percent of indirect offsets, which shows a noticeable correlation. Expanding this analysis to eight sectors, 97.1 percent of all direct offsets, 85 percent of all indirect offsets, and 95.5 percent of unspecified offsets were captured. This is clear evidence that offsets are predominantly defense/aerospace regardless of their type.
Chart 5-8 shows the relative shares of offsets by type for the 12 leading industrial sectors.
15 The 4,425 reported transactions included 31 with negative actual and credit values. The total actual and credit values for negative transactions was $64.9 million. An additional 36 transactions were reported with $0 actual values, but had positive credit values that totaled $211.3 million. This value was just under six percent of all additional credit of $3,546.8 million. These were submitted and treated as normal transactions.
16 Not all recipients in the top 100 received six or more offset transactions. For example, the second highest recipient (by value) was involved only in two transactions. The top 100 recipients actually topped the value of the 165 recipients with more than five transactions as noted above.
17 The completed avionics arguably could be part of sector SIC 38 – Measuring and Analyzing Instrumentation, but could not be specifically identified as one or the other based on the data provided.
