Individual Case Assignment: The F-18 Hornet Offset
The export agreement between McDonnell Douglas (MDC) and the Finnish government outlines an example of offsets as they are applied to the military aircraft business. The case illustrates that although the selling price of the F-18 Hornets amounted to $3 billion, the offsets reached a total of $3.345 billion by the end of the 10-year term. This signifies the added investment in offsets in excess to the sale price. Are offsets really worth the high costs in resources and time? To answer this question, four perspectives were analyzed: the domestic government, the buyer government and industries, the seller company’s future growth, and competitiveness of the seller.
Under each perspective, benefits and drawbacks were compared. In the end, the result showed that throughout all four spectrums, countertrading did serve a valuable purpose for the seller firm. It meant exporters were able to gain consumers internationally, while also allowing them to differentiate their value offering in comparison to competition.
However, there are certain risks that need to be kept in mind, mainly the possibility of losing specialized technology and competitive advantages deriving from the seller firm’s specific production capabilities.
To avoid these risks, exporters seeking to enter into countertrade agreements are advised to communicate effectively and clearly with their customers, setting realistic offset commitments, being proactive to take advantage of offsets serving as a marketing platform, and by better planning their technology sharing initiatives to maximize return for both parties.
Following these guidelines will ensure that exporters are well-prepared for participation in offset agreements, while maximizing the benefits gained from undertaking this long-term commitment. Table of Contents
The case is situated over a 10-year period from 1992 and 2002 between two trade parties – McDonnell Douglas (MDC) and the Finnish government. MDC had faced significant obstacles in previous trade dealings, and was urgently seeking a contract to sustain the business. The Finnish government required an updated fleet of fighter planes, and saw a perfect match between their requirements and the specifications of the F-18 Hornet. A bid amongst potential sellers resulted in MDC winning the contract. Over a period of 10 years, MDC made significant offset investments – both, direct and indirect – contributing to offsets worth USD $3.345 billion in sum. These investments consisted of counter-purchasing goods, opening up a full-time office in Finland, marketing assistance, export development, technology transfer, team purchases, and investment financing. The final result was greater trade between the US and Finland, while enhancing relationships between MDC and its new suppliers, Finnish companies. Key Issues
The case illustrates the wide-spread practise of countertrade agreements between nations around the world. Particularly emphasized in the military and aircraft industries, offsets are often mandatory requirements when making a deal. In the case of MDC and Finland, the required offset agreement amounted to 100% of the sale price - USD$3 billion – however MDC had paid an additional 11.5% ($345 million) by the end of the offset term. These high costs are in addition to the added risk and uncertainty of doing business globally. Companies such as MDC who are seeking markets to serve abroad may need to ask themselves: are countertrade agreements worth the investment? To answer this question, companies need to address a number of potential issues:
What is the stance of the domestic government?
What is the impact for buyer governments and their respective industries? 3)
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