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JF-17 Export Efforts: Negotiating Expectations
In the sidelines of Defence Services Asia (DSA) 2018, a marquee defence exhibition that took place in Kuala Lumpur in Malaysia in April 16-19, Pakistan Aeronautical Complex (PAC) officials told IHS Jane’s that it had “primary level talks” with Malaysian officials about selling JF-17 Thunder multi-role fighters to meet the Royal Malaysian Air Force’s (RMAF) requirement for a single-engine fighter.[1] Of course, the caveat sitting in this news is that the RMAF has yet to formally include the JF-17 as part of its actual evaluation process, much less beginning contractual negotiations (confirmed to Jane’s by PAF itself).[2]
In effect, the RMAF is likely a prospective customer rather than a substantive lead approaching PAC, but a look at the RMAF’s fighter bid does raise several questions about Pakistan’s capacity to properly pursue certain fighter programs – i.e. those requiring commercial offsets, transfer-of-technology (ToT) and/or a partnership involving commercial activity (related to the JF-17 and/or PAC). The issue is not PAC’s (and by extension, the Aviation Industry Corporation of China: AVIC’s) ability to practically undertake such steps, but its ability to negotiate customer expectations while maintaining its own interests.
According to PAC (via Jane’s), the provision of ToT to enable for local maintenance, repair and overhaul (MRO) and parts manufacturing is a component of the RMAF fighter bid.[3] Besides entertaining those, one should also expect Lockheed Martin, Saab and Korea Aerospace Industries (KAI) to have credible loan/line-of-credit mechanisms available to Kuala Lumpur as well. However, as Malaysia has multiple modernization priorities – each involving big-ticket items (e.g. twin-engine fighters, maritime patrol aircraft, etc) – there could be a need to control fiscal spending on defence.
It is on this basis that PAC likely senses an opportunity to sell the JF-17, but its traction will be contingent on how well it packages the idea of low acquisition and life-cycle costs with an attractive support package with industry inputs. AVIC, by virtue of being an equity partner in the JF-17 program, is also a factor – i.e. it can potentially offer credit to Malaysia should it procure the JF-17 (and/or other Chinese equipment).
For PAC, the question is whether it can move beyond the loss of potential long-term support work (e.g. undertaking MRO of RMAF planes in Pakistan) and convert an industry package into a revenue source.
Why Export?
Despite attaching the importance of exporting the Thunder in its narratives, commercial endeavours (in regards to the JF-17) have not been a priority of the PAF. This was plainly evident in the PAF sitting on the development of a twin-seat variant (i.e. JF-17B) until 2016; the PAF did not require it for its own needs. In effect, the core of past and current JF-17 activities center on fulfilling the requirements of the PAF. In fact, one can even (albeit cynically) ascribe the JF-17B to this notion since it possesses some significant changes that are relevant to the Block-III, i.e. the three-axis fly-by-wire (FBW) digital flight control system. In other words, the PAF can begin evaluating new subsystems for the Block-III.
Ultimately, PAC functions as an arm of the PAF (to undertake maintenance and facilitate procurement) – i.e. not a commercial enterprise analogous to AVIC. However, this is not unique to the PAF, the Army and Navy’s properties – i.e. Heavy Industries Taxila and Karachi Shipyard & Engineering Works, respectively – are primarily geared to support local requirements, with commercial activities being supplementary.
But none of that changes the reality that raising PAC et. al has been a costly course, and with Pakistan’s long-term economic status uncertain, the question of whether this overhead can be converted into means for acquiring hard/foreign-currency (especially for the stressed public exchequer) is relevant – if not for long-term economic prosperity, then to help support future armed forces procurements for certain.
JF-17 to Malaysia?
Reports of the RMAF seeking a new single-engine multi-role fighter (to complement its longer-ranged Su-30 and F/A-18D) emerged in November 2017.[4] The rationale to ‘break’ from the RMAF’s traditional line-up of twin-engine, medium-to-heavyweight multi-role fighters was to control cost (amid the downturn in the Malaysian economy).[5] Thus, the RMAF is reportedly seeking a lightweight multi-role fighter with “full air-to-air and a full air-to-ground capability” along with the capacity to serve as a lead-in fighter-trainer (LIFT) platform.[6] It must also be ready for full operational clearance (FOC) by 2021-2022.[7]
For PAC, the optimal offering should be the JF-17 Block-III as it fulfils more of the core criteria expected of modern fighters – i.e. a fully digital flight control system – along with substantive subsystems, i.e. active electronically-scanned array (AESA) radar and helmet-mounted display and sight (HMD/S) system. Along with marketing the JF-17’s lower acquisition and life-cycle costs, PAC could also be creative by positioning Malaysia’s existing experience with the Klimov RD-33 turbofan (via its MiG-29 fleet) as commonality with the JF-17’s RD-93. In fact, PAC could also consider adding an optional buffer (e.g. $350-500 million US) on top of the JF-17’s stated price for customization work for the RMAF.
The idea with the ‘optional buffer’ is to present the RMAF with the option (without it being integral to the JF-17 offering) of configuring the JF-17 with a non-Chinese electronics and weapons package. Essentially, the PAF could look to Malaysia to pay for the cost of making the Leonardo Vixen 1000E AESA radar viable for the JF-17 in terms of integration, testing and sourcing (or developing) air-to-air missiles (AAM) as well as anti-ship missiles (AShM). Of course, it would be an option, the RMAF can stick to the base offer instead. Though opportunistic, this is not a new practice, the likes of Lockheed Martin and others had utilized this method to proceed with new development of existing platforms (e.g. the F-16E/F Block-60 Desert Falcon).
However, the technical merits and immediate commercial offering are but several components of a wider package, in which Malaysia is also seeking concessions for its domestic industry.
Can Pakistan Concede on Offsets and ToT?
On the surface, one might view the provision of commercial offsets and ToT to Malaysia (and/or another customer) as taking away from PAC’s long-term business interests. Offsets requires a willingness to spend one’s hard-currency gains from the buyer in the buyer’s country through investments. ToT – especially for MRO and parts manufacturing – would remove PAC from the business of after-sale support for the RMAF’s fighters. Clearly, the ability to promote a big-ticket arms sale as not only bringing technology but retaining hard-currency in one’s shores is a strong message for the buyer (to convince its electorate). However, how does the seller manage such expectations, especially in terms of its own commercial interests?
In reality, offsets and ToT are not necessarily obstacles for the seller – in fact, they are important strategies in terms of both securing a short-term sale as well as generating long-term returns. Granted, both could come at the cost of the buyer’s market negating the growth of employment in the seller’s country. Placing a MRO site to support the JF-17 in Malaysia results in Malaysians undertaking the long-term maintenance work, not Pakistanis. However, in contrast to a private sector corporation, PAC is a state-owned enterprise or entity (SOE). Whereas Lockheed Martin et. al’s profits return to its shareholders, PAC’s would actually flow (in theory, at least) to the federal exchequer, which in turn is to spend on Pakistanis.
Thus, PAC does not necessarily require “work” from JF-17 sales, it simply requires the cash which the PAF can then spend on other programs which will involve employment – i.e. Project Azm and future PAF JF-17 orders. For PAC, the goal is not to secure workshare from JF-17 sales, but hard-currency. Thus, one must structure their exports to simply bring foreign capital back to Pakistan; this capital will flow through the SOE and return to the local economy as a stimulus through another program. This can be built into the pricing of each JF-17, thus accounting for the cost of support work and the necessary equipment to undertake it in Malaysia. In other words, the JF-17 with ToT would be priced higher than without ToT.
Regarding offsets, which would require PAC to spend the proceeds of a JF-17 sale to Malaysia in-country (i.e. not take the hard-currency back to Pakistan), long-term gains would have to be had through investing in the Malaysian economy. In other words, the JF-17 would serve as the currency Pakistan will spend on foreign direct investment (FDI) in Malaysia. Politically, this could be a sensitive subject in Pakistan, which largely relies on China for FDI and would prefer to keep its hard-currency returns. However, waiting for a long-term revenue source through investment (the profit of which returns to the state) is a strong case.
For PAC, the objective is to identify the right areas for investment, especially for long-term gain through profits (generated by business in Malaysia) flowing to Pakistan. Imagine if a JF-17 sale to Malaysia amounts to $1.5 billion US, $1 billion is invested in Malaysia with the aim of returning $100 m US annually. Putting inflation aside, the return-on-investment would break-even in 10 years and be profitable thereafter. That is the effect of an offset, which is essentially a form of FDI. This is not novel; Russia is undertaking exactly this by investing $400 million US in Indonesia’s MRO industry through the latter’s Su-35 purchase.[8]
The challenge – besides identifying the right investments – is managing one’s own interests with those of the buyer. One should assume that the buyer is cognizant of its interests and that it will not be exploited. Thus, the contractual negotiations process would have to balance respective interests, conflicting agendas and pressure from competitors to properly succeed.
Conclusion: Can Pakistan Succeed?
To successfully compete for a bid, negotiate a lucrative upfront package while coupling it with a profitable long-term offset program requires competence. The PAF is a warfighting arm, it cannot take the role of a trade department combined with a commercial business arm and negotiating wing. Firstly, this is not the PAF’s job. Secondly, making it a part of the PAF’s job will distract the PAF – either by capping the market-side by delaying programs suitable for export (e.g. JF-17B) or by offering wrong incentives to those in the PAF (orienting them towards becoming business stalwarts instead of military professionals).
Before it can negotiate with other states, Pakistan itself must negotiate its internal order of responsibilities and national priorities, especially in terms of the defence industry. The current approach is inefficient and presents Pakistan to numerous risks. First, there is no firewall between PAC’s commercial and operational elements, thus rendering PAF officers (i.e. soldiers) as business professionals. This either caps commercial potential by having people unequipped (in terms of education, experience and skills) take-lead in market activities and/or – worse – generates wrong incentives for those involved. Second, lucrative opportunities on the commercial market cannot be pursued due to product development being completely contingent on domestic requirements. This was shown during the years the PAF spent not pursuing the JF-17B (which its market had asked for) because the PAF itself did not plan to use a twin-seater to train JF-17 pilots.
Quwa Premium’s articles have offered insight on Pakistan’s domestic industry, see below:
https://quwa.org/2017/12/19/pakistans-defence-industry-high-risk-and-high-reward-partnerships/
[1] Jon Grevatt. “DSA 2018: Pakistan in ‘primary level’ talks with Malaysia on JF-17”. IHS Jane’s Defence Industry. 15 April 2018. URL: http://www.janes.com/article/79282/dsa-2018-pakistan-in-primary-level-talks-with-malaysia-on-jf-17 (Last Accessed: 16 April 2018).
[2] Ibid.
[3] Ibid.
[4] Gareth Jennings. “Malaysia seeks Light Combat Aircraft as part of wider modernisation plans”. IHS Jane’s Defence Weekly. 07 November 2017. URL: http://www.janes.com/article/75502/malaysia-seeks-light-combat-aircraft-as-part-of-wider-modernisation-plans (Last Accessed: 16 April 2018).
[5] Ibid.
[6] Ibid.
[7] Ibid.
[8] Bradley Wood. “Indonesia’s Su-35 countertrade deal: Worth its weight in jet fighters?” The Jakarta Post. 27 September 2017. URL: http://www.thejakartapost.com/academia/2017/09/27/indonesias-su-35-countertrade-deal-worth-its-weight-in-jet-fighters.html (Accessed: 04 December 2017).
