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U.K.'s BAE pins sales hopes on grumpy gulf

Nov. 6, 2012 at 12:23 PM   |   Comments

RIYADH, Saudi Arabia, Nov. 6 (UPI) -- BAE Systems, Britain's biggest defense company, has a lot riding on British Prime Minister David Cameron's tour of longtime allies in the Persian Gulf to drum up arms sales in the face of growing criticism of London's regional policies.

The core objective of Cameron's three-day swing through the United Arab Emirates and Saudi Arabia is to sell 100 Eurofighter Typhoon combat jets built by BAE. That could earn Britain at least $9.6 billion.

BAE needs that shot in the arm after a proposed merger with the French-German-Spanish European Aeronautic Defense and Space Co., which builds Airbus, to create a European challenger to the Boeing Co. of the United States fell through in October.

Britain and BAE strongly backed the $45 billion merger plan, which would have transformed the global defense industry. But it foundered on political objections from Germany.

Berlin, which has a 22.5 percent stake in EADS through Daimler, feared the union of Europe's biggest defense and aerospace contractors would mean a loss of jobs and investment.

BAE has a major operation in the United States and it's one of the Pentagon's leading suppliers but it's facing sharp reductions in its order book because of U.S. and British cuts in defense spending.

It also faces tough competition from the United States and France in the gulf, particularly new-generation fighter aircraft.

Meantime, Germany's trying to muscle into the gulf market for the first time with a potential sale of up to 600 Leopard 2A7+ battle tanks potentially worth $12.6 billion after easing longtime restriction on arms sales to conflict zones.

Cameron and BAE face major difficulties is securing major arms contracts in the gulf, and not just because of anger in Saudi Arabia and the emirates over the British Parliament's criticism of Cameron's government making massive arms sales to absolute monarchies whose poor record on human rights and democratic reform is being questioned.

The United States is in the process of delivering to gulf states in the next few years Boeing F-15 jets and attack helicopters, anti-missile defense system and other advanced weaponry worth in excess of $67 billion.

The United Arab Emirates recently won U.S. congressional approval to buy two of Lockheed Martin's Theater High Altitude Area Defense systems, the first sold abroad, for $3.5 billion, to boost its defenses against Iran.

The heart of the matter is that the Middle East remains a major arms market, with U.S., European and Russian defense companies increasingly reliant on export sales to maintain production lines.

The United States accounts for two-thirds of global arms sales, the Congressional Research Service reported in August.

U.S. arms exports tripled in 2011 to $66.3 billion, largely because of $33.4 billion in sales to Saudi Arabia.

BAE is increasingly dependent on the oil-rich kingdom because defense cuts have left Europe's combat aircraft industry facing "an uncertain future," the International Institute for Strategic Studies in London concluded in September.

Only three European fighters are in production, the Typhoon manufactured by Britain, Germany, Italy and Spain, Rafale built by France's Dassault Aviation and the Gripen from Sweden's Saab.

But, the IISS observed, the Typhoon and Rafale lines are likely to halt by the end of the decade.

Lockheed Martin's stealthy F-35 Joint Strike Fighter "is likely to be the West's dominant combat aircraft for decades to come," it added.

It may not have been just coincidence that as Cameron was negotiating in Riyadh to convince the Saudis to buy another 72 Typhoons, to add to the 72 they bought for $8.6 billion in 2009, the Pentagon announced Qatar and the Emirates had formally requested to buy arms systems worth $7.6 billion.

These are extra THAAD launchers and missiles worth $1.96 billion for the Emirates, and a request by Qatar for nine THAAD launchers, 48 interceptor missiles and radar units worth $6.5 billion.

But worse may be to come for BAE, whose fortunes have largely been built on aircraft sales to Saudi Arabia since the 1970s.

The International Monetary Fund warned Oct. 31 that although the gulf monarchies are well cushioned by petrodollars, they face "heightened vulnerabilities" because of ever-swelling government spending.

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