Foreign defence groups drawn to Brazil

The entrance to Brazil's new submarine base near Rio de Janeiro passes through a tunnel under a jungle-covered hill, giving what will be one of the continent's most strategically important military sites a decidedly James Bond-like feel.

Once completed, the facility at Itaguai will become home to Brazil's first nuclear-powered submarine. Not only will this represent a powerful deterrent to protect the country's burgeoning offshore oil industry. But as the largest French foreign military contract and an important example of cross-border co-operation - a unit of Brazil's Embraer will build separately the nuclear propulsion unit for the sub - the project underlines Brazil's promise for international defence companies.

"In this multipolar world, Brazil wants to play its own tune, and France is here to help," said Jean-Yves Le Drian, the French minister of defence, during a recent visit to Brazil, the first by a member of President Francois Hollande's cabinet.

Growing Brazilian defence spending and that of other emerging markets eligible for western military exports are offsetting gloomier prospects in developed countries for defence companies as European nations and the US cut back on spending.

A peaceful power, Brazil is seeking greater influence over global and regional security, lobbying for a permanent seat on the UN Security Council while increasing surveillance of narcotics gangs along its borders. Foreign defence companies say that as a country with relatively transparent military procurement processes, and the means to pay, it is an attractive market.

"Strategically Brazil ticks all those boxes," says Llyr Jones, vice-president for Latin America and Canada at BAE Systems.

Brazil was ranked 10th in terms of military spending in 2011, up from 11th in 2010, with a budget of $35.4bn, or 1.5 per cent of gross domestic product, according to the Stockholm International Peace Research Institute. Its defence budget has increased 19 per cent since 2002, although much of it is spent on salaries and pensions.

The country's aerospace market is overshadowed by local manufacturer Embraer, the world's third-largest commercial aircraft maker, but most major producers are also represented.

France's Eurocopter provides the military's helicopters while Germany's Krauss-Maffei Wegmann supplies the army's main battle tanks, and at sea, vessels from BAE and local shipyard Arsenal da Marinha no Rio de Janeiro account for much of the navy.

Other projects under way include BAE's sale of three patrol boats to the Brazilian navy for £133m and the UK-based group's refit of the army's fleet of armoured personnel carriers.

But it is the new opportunities that have the industry excited. The most talked about is the proposed multibillion-dollar FX-2 jet fighter programme, in which the Rafale, made by France's Dassault, is battling the F/A-18 Super Hornet from Boeing of the US and the Gripen from Sweden's Saab for a contract to supply 36 fighter jets. The project is still awaiting the go-ahead from President Dilma Rousseff.

Then there is Embraer's KC-390 plan to build a new transport jet for the Brazilian military that will compete with Lockheed's C-130 Hercules. Embraer is co-operating with Boeing and neighbouring countries on the project.

Embraer also recently won the R$839m ($413m) first phase to build the army's $7bn-$8bn "Sisfron" system to monitor Brazil's 16,886-kilometre land border. The project is being keenly contested by local and multinational consortiums, as is another to monitor the coast, colourfully named the "management system for the blue Amazon", or Sisgaaz.

"The idea is that in three to four years from now we will have more such products in our portfolio to sell abroad," says Luiz Carlos Aguiar, head of Embraer's defence business, of the Sisfron system.

Analysts caution, however, that while promising, the Brazilian market can also be frustrating, as repeated postponements for budgetary reasons of the FX-2 jet fighter programme have shown.

"Brazil is a lucrative market but in Latin America it is one of the most competitive to enter with the likes of Embraer already well established," says Aman Pannu, aerospace, defence and security analyst at Frost & Sullivan. He says in Latin America, political requirements, such as transfer of technology and local content rules, also sometimes take priority.

Indeed, technology transfer is the buzzword at DCNS, the French contractor that is building the Rio submarine base in partnership with Brazilian construction group Odebrecht, with 180 Brazilians training in France as part of the first phase of the project.

The hull of the first of the Scorpe?ne class subs is being built in France but otherwise all of the subs will be made in Brazil. The first phase is for four conventional and one nuclear submarine but the navy wants to eventually have 15 conventional and five nuclear subs. The first phase will cost €6.7bn.

"It's a new trend, it's never happened before," says Eric Berthelot, president of DNCS do Brasil, of his company's technology transfer. But if the government has its way, it is only the start of things to come.

© The Financial Times Limited 2013. All rights reserved.
FT and Financial Times are trademarks of the Financial Times Ltd.
Not to be redistributed, copied or modified in any way.
Euro2day.gr is solely responsible for providing this translation and the Financial Times Limited does not accept any liability for the accuracy or quality of the translation