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Briefing: Licensed Production
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Licensed production is where a company's product is
manufactured under contract by a company in another
country. At its simplest, parts purchased from the vendor
are assembled in the buyer country; at its most advanced,
a weapon's design, along with the expertise of engineers, is
purchased and the equipment built in its entirety in the
buyer country.
Licensed production agreements are also often
referred to as licensed manufacturing agreements, co-production
agreements or technology transfer agreements,
although there are technical differences between the
terms 1 . We will be considering all of the above, and also
the activities of company subsidiaries and any sale of
production equipment. It is as well to be aware that the
term "licensing" is used both for licensed production and
the licensing required by governments for arms exports to
take place.
In the highly competitive global arms market,
licensed production has become a common feature of
deals. It is no longer an issue just of interest to "industrial
studies" academics; it is a fundamental aspect of the arms
trade - a basic tool used to win arms contracts. It is more
than just a trend in itself, it is an integral part of the new
"globalized" arms industry - the simple concept of an arms
company is disappearing "into a labyrinth of licensed
production, joint ventures, conglomerates, strategic
partnerships, and Co-operative Armament Programmes".2
This overall trend is unlikely to change so it is very
probable that licensed production will continue to be an
increasing factor in arms sales.
Buyer countries no longer expect merely to purchase
equipment, they expect additional compensations, or
sweeteners. There are a wide range of possible sweeteners
(see "Offsets" box on back page), but licensed production
by their own companies is a key one. Anticipated benefits
for local industry and employment are leapt upon by the
buying government to "sell" to their populations what
might otherwise seem to be extravagant or wasteful
weapons purchases.
Most of the largest arms importers are extremely
active in seeking licensed production agreements,
and Turkey, South Korea and India are
particularly keen. The box opposite shows
recent deals for India alone, indicating that it
is having no trouble obtaining licensed production
agreements for high-tech equipment. This is despite its
conflict with Pakistan and a US arms embargo following
its 1998 nuclear test.
A register of licensed production underway during
1996-2000, indicated that the UK had agreements with
11 countries including Algeria, Greece, India,
Philippines, Poland, Saudi Arabia, Thailand and Turkey.3
The register covers only major conventional weapons.
Information on agreements relating to small arms and
ammunition is harder to come by. However, one analysis
of relevant licensed production agreements from 1960-
1999, established that 14 countries, including the UK,
had made such agreements with 46 other countries.1
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India has recently formalised closer military industry links
with Russia, Israel and France. All of these envisage sizeable
licensed production.
a $3.3 billion contract for the licensed manufacture of 140
multirole fighter aircraft.4
the purchase of 310 Russian main battle tanks for an
estimated $600-$700 million. 124 will be delivered
complete and the rest assembled in India. The tank is
expected to be eventually produced under licence.5
plans for a $1 billion air defence system which "includes
licensed production of 2,000 155mm self propelled
guns".6
an accord between India and Israel was signed in July 2001.
It allows for the transfer of Israeli technology to India and
has a potential value to Israeli industry of $2 billion.7 It
aims to establish "licensed production lines in India for
the Indian Army, as well as for potential third-country
exports".8
India and France have formed a "partnership of defense
industries" and agreed transfers potentially worth $2
billion. These will comprise technology transfer, licensed
production and arms purchases. "In the long run, France
is looking to India as a hub for military hardware exports
to Asia, especially Indonesia, Taiwan and Malaysia".9
In 2000, the UK issued export licences to India for
production equipment &/or production technology for:
combat aircraft, military aero-engines, frigate, naval radar
and electronic warfare equipment.10 (These are not
necessarily for licensed production.)
BAE Systems is bidding for a deal which would see its
Hawk jets produced under licence in India. Until recently
it was favourite for the contract, and it is still vigorously
pursuing the deal - fresh pressure was applied by John
Prescott during a recent visit to India.11 |
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Most countries' export control regimes, including
those of the UK, fail to adequately cover licensed
production, leaving a gaping hole in their ability to control
arms transfers.
Licensed production can negate controls on exports to
the buyer country. Whereas government controls on
exports can be adjusted to take account of a conflict
situation or a worsening human rights record, this is not
possible with licensed production. Once equipment and
technology have been handed over, it is out of the hands of
the selling country. Depending upon the arrangement,
spare parts or technical help might continue to be useful,
allowing the selling country some say over production, but
this is by no means certain and the production capacity of
the buyer would have been enhanced regardless.
Oxfam has suggested that "It is not uncommon for
the licensed production agreement to start by establishing
an assembly facility which over time is provided with the
technology to produce full versions and finally to
undertake development of variants".12 The "GKN" example
in the box opposite indicates how the production capability
of the Filipino plant was steadily increased, moving it away
from reliance on UK exports and hence controls.
Additionally, there is the problem of knowing when
the contracted volumes have been produced. It is entirely
possible for production to continue after the agreed
volumes have been manufactured, whether it is for the
domestic or export market.
A blatant loophole exists just in terms of setting up
initial production. If a UK company signs a licensed
production agreement but arranges for the production
equipment to be shipped from another country, the UK
government would have no say.
Licensed production agreements can also
circumvent export controls by facilitating exports from
the buyer country to third countries. This can be an
unintended consequence of licensing production, but
can also be a motivation in itself (see "India" box on
front page, especially with respect to France).
As the law stands, the UK government cannot stop
a UK company arranging for its small arms, armoured
vehicles or fighter aircraft to be manufactured overseas
and then sold to a third country. Circumvention of
export controls has occurred in relation to the UK,
though it is not presently possible to establish the extent
to which it has been deliberately arranged. Whether
deliberate or unintentional, weapons are delivered to
places disallowed under the originating country"s export
controls. Ann Clwyd MP used the example of the
assembly of GKN vehicles in the Philippines to illustrate
the UK government"s position:
"I asked the President of the Board of Trade
"what control she has over the transfer of (a)
armoured vehicles and (b) armoured personnel
carriers to (i) Indonesia and (ii) other countries
from the GKN Defence licensed production
facility in the Philippines."
The answer was:
"The control of exports from the Philippines
is a matter for the Philippine Government..."
That answer illustrates the fact that the
inadequacy of UK licensed production
agreements leads to the establishment of new
centres of production of military/security
equipment over which the UK Government have
little or no control. We must introduce statutory
powers to control licensed production overseas."13
Many countries that are producing under licence
from European arms manufacturers appear to have few
meaningful restrictions on who they will export to.
South Africa is a prime example. A study in 2000
compared government export criteria with the countries
actually exported to. It found that 57 of the 83
countries to which South Africa sold arms between
1996 & 1999 did not comply with the necessary
criteria.17 But at least South Africa had criteria.
Many countries do not. A Pakistani General reported that
they had "no ban on selling arms to specific countries.
"I don"t think we have a problem on that score. Maybe
Israel we wouldn"t like to sell weapons to"".18
The US has one of the strongest export control
regimes in the world, with legislation making the
"diversion of technologies to unauthorized uses and
prohibited third parties" illegal. Unfortunately,
"inadequate enforcement" means that there are frequent
abuses.19 Some of these are shown in the box to the left.
While it is unfortunate that the US enforcement is
not stronger, there is at least the possibility of legal action.
It would be naive to imagine that a lack of controls, as is
the situation in the UK, would do anything but facilitate
a much greater level of "diversion".
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- Japan Aviation Electronics Industry was fined $10 million in
1992 for illegally selling US licensed weapons components to
Iran.14
- South Korea planned to export landmines that, according to o
Pentagon officials, illegally used US technology. The plans
were terminated in May 2001 after threats to block purchases
of advanced US weaponry.15
- South Korea violated the terms of its licence for M-16A1 assault
rifles by over-producing and exporting them without US
approval. They were not penalised as South Korea claimed it
had exported a "Koreanised" version of the weapon.1
- "Israel has repeatedly transferred US-licensed missile and radar
technology to China in the 1980s and 1990s".14
- Israel "has been charged with illegally incorporating U.S.
designs and technology into weapons exported to South
Africa, Chile and Ethiopia".16
- Brazil transferred US technology to Iraq, where it was used
to improve the targeting capability of Scud missiles".14
- A member of the US "Presidential Commission on Offsets in
International Trade" reported that "In small arms, there are
numberous examples of violations of licensing
agreements".14
- "A 1989 study of 18 co-production agreements..., found five e
cases of unauthorized transfers." 14
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Heckler & Koch (H&K) is a small arms multinational
company. It became a subsidiary of Royal Ordnance, of the UK,
in 1991, which is in turn owned by BAE Systems. H&K has
licensed small arms production in 14 countries, including
Burma, Iran, Mexico, Pakistan and Saudi Arabia and Turkey.1
Oxfam lists 60 countries using H&K"s G3 rifle and 53 countries
using the MP5 sub-machine gun.12
Even before 1991, the UK was a H&K licensed producer,
manufacturing weapons in London and Nottingham. Prior to
the UN embargo on Yugoslavia it was illegal for Germany, but
not the UK, to export weapons there. When H&K sub-machine
guns were identified as being used in Bosnia and Serbia, H&K
stated that the weapons in question were made in London.1
MKEK of Turkey also produces H&K weapons under
licence, and has been doing so since the 1970s. Not only is this
production questionable due to the human rights abuses
carried out by the Turkish military and police, but it sells its
licensed products around the globe. In September 1999, at the
height of the referendum massacres in East Timor, MKEK was
reported to have shipped 500 H&K sub-machine guns to
Indonesia. This was only a few months after the UK
government had refused export licences for the export of
similar weapons to Indonesia.1
In 1994, Otokar, a Turkish company, began production
of the Scorpion light reconnaissance vehicle. The Scorpion is
comprised 70 per cent of Land Rover parts which are
assembled in Turkey and to which machine guns and night
vision surveillance cameras are added. The Land Rover parts
are exported from the UK but are listed as civilian transfers
and so do not require an export licence. "Ottokar in the past
have exported such armoured personnel vehicles to Pakistan
and also to Algeria".20
GKN Defence Ltd set up a licensed production
agreement with a company in the Philippines to produce
Simba Armoured Personnel Carriers. A total of 150 vehicles
were ordered, the vast majority to be assembled at the plant
of the Filipino company. The company started with the
assembly of kits, progressed to importing some parts and
manufacturing others, and finished up producing the whole
vehicle. (Also see Ann Clwyd quote on opposite page.)
"Abdul Minty of Anti-Apartheid gave evidence to the
UN Security Council in 1977 how sanctions were bypassed
when British-designed equipment was made under licence in
a third country and sold on to South Africa. "The most flagrant
example in this area involves Rolls-Royce engines," he
claimed".21
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How are we to interpret new legislation to control
arms exports which has an omission that allows it to be
systematically by-passed?
Maybe the UK government hasn't caught up with
changes in the international arms industry? Maybe it
has faith in the end-use controls of the countries it sells
to? Maybe it believes that licensed production won't
by-pass its export controls? Or maybe it knows licensed
production can circumvent its controls but doesn't mind!
It is difficult to avoid the latter conclusion.
In trying to understand the failure to adequately
address licensed production, it is useful to consider who
gains. In the proposed export control legislation, the only
serious loophole closed is brokering. While this is a
valuable tightening of controls, it is the one loophole that
will not affect the workings of the major arms companies.
Indeed, controls on brokering, where the deal is organised
from the UK but transfers are between other countries,
may well be favoured by the large arms companies as the
practice brings unwanted negative attention to arms
trading. In addition to licensed production, end-use
monitoring and the prior scrutiny of export licence
applications were missing from the legislation. (Unlike
licensed production, the other two aspects could be
addressed in secondary legislation. However, there is
presently no reason to believe that they will.) Each of
these could seriously affect major arms deals.
The question being asked by the UK government
appears to be not, "Could licensed production undermine
UK export controls?" but, "Will controlling licensed
production affect our exporting arms companies?"
The government needs to set the same standards for
goods produced under licence as it does for direct exports.
Contracts for licensed production need to specify the
quantity of military equipment to be produced and the
duration of the contract. There must be a clause in the contract
that provides that the finished product will not be exported to
third countries unless an export licence is obtained from the
UK government. The licensed production contract needs to be
approved by government before it is finalised and should be
turned down:
- if a direct weapons transfer would be refused
- where the buyer country cannot demonstrate sufficient
accountability in terms of end-use control
- to states that have a record of violating international arms
embargoes.22
It is not complicated to set up contracts that restrict
exports. Pharmaceutical companies and football manufacturers,
among many others, have them. But will arms companies
countenance anything that may hinder their ability to make
deals? And, if not, will the government have the integrity to
close the loopholes regardless?
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Offsets are essentially sweeteners used to secure deals with
buyer countries. Clauses are included in the arms contract
whereby the vendor country or company makes such promises
as:
- To invest in the buyer country's domestic companies (not
necessarily arms industry). This often suits the vendor company
as it can use this to acquire arms companies in the buyer
country and hence open new markets
- To buy an agreed quantity of the buyer country's produce. For
example, US company McDonnell Douglas agreed to accept
frozen chickens as part payment from Thailand for 8 F-18 fighter
aircraft.23
- To buy back used military equipment from the buyer country
- To accept the buyer country's produce in barter as part paymentt
(illegal for non-military industry under WTO rules). An example
of this is the payment in oil negotiated between the UK and
Saudi Arabia under the massive Al Yamamah deal.
- To source components for the deal from buyer country companies
- To set up production lines in the buyer country
- To provide the technical know-how and design for the buyer
country to produce the equipment themselves.
Offsets of 100% of the value of the deal appear to be becoming
commonplace, i.e. the selling country or company is required to
compensate the buyer country to the full level of the deal. In some
cases, such as the South African deal of 1999, much higher offsets
are agreed. In the South African case they were approaching 400%
of the cost of the armaments.
However, offsets have a poor record in terms of delivering on
agreements. The above Al Yamamah deal was supposed to create
75,000 jobs in Saudi Arabia. Only 1,600 jobs were actually created,
with just 300 of those being filled by Saudis.24 |
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Evading controls to the buyer country
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