Thursday, 10 June 2010

European fighters become 25% cheaper


A Luftwaffe Eurofighter climbs steeply, even as its price falls relative to its American rivals. European fighters in the MMRCA contest have become 25% cheaper than they were in 2008

By Ajai Shukla
Berlin, Germany
Business Standard, 10th June 10

Plummeting European currencies, battered by the Eurozone financial crisis, are providing European aerospace corporations an opportunity to undercut their American rivals, Boeing and Lockheed Martin, in the contest to sell India 126 medium multi-role combat aircraft (MMRCA) for a price that has been estimated at US $11 billion, or about Rs 44,000 crores.

The six contenders for the MMRCA contract --- US companies, Boeing and Lockheed Martin; Russian company, MiG; and European companies, Dassault, Eurofighter and Gripen --- will submit fresh price bids this month to India’s Ministry of Defence (MoD) since their earlier bids, submitted in March 08, were valid for just two years.

At that time the Euro was worth more than 1.55 dollars; today, it has dropped below 1.2 to the dollar, almost 25% cheaper in relative terms. The Swedish Krona has fallen as precipitously: worth 0.165 dollars in March 2008, the Krona is at 0.126 dollars now.

That means that a bid, calculated in Euros as the equivalent of US $11 billion in 2008, would be just US $8-8.5 billion today, cheaper by as much as US $3 billion, or Rs 13,200 crores.

Taking note of this Enzio Casolini, the CEO of Eurofighter GmbH --- the four-nation consortium that manufactures the Eurofighter --- told Business Standard, “This (the drop in the Euro) is important, especially in relation to the American competitors. In comparison with the dollar, we went down from more or less 1.5 (dollars to the Euro) to 1.2. So this is good…”

Says Bernhard Gerwert, Board Chairman of Eurofighter GmbH, “When we launched Eurofighter’s campaign in India in 2007, I thought we had only a 10% chance of winning the contract. Today, I believe we have a better than 50% chance of winning.”

But it remains unclear whether the Euro’s fall has made European fighters cheap enough to win. Aerospace analysts believe that the American fighters in the fray --- Boeing’s F/A-18 Super Hornet and Lockheed Martin’s F-16IN Super Viper --- remain significantly cheaper than their European rivals. Having churned out thousands of F-16 and F-18 variants over the years, their development costs and production facilities have long been amortised.

The F/A-18 Super Hornet, going by published US government figures, costs the US Navy between US $40-45 million per aircraft. The F-16, being a lighter, single-engine fighter, costs significantly less than that. In contrast, the Eurofighter and the Rafale, more modern fighters that are still under development, are believed to cost upwards of US $80 million apiece.

It is not just the cost of the aircraft that makes up the total value of the Indian contract. Also included in the bid price will be the cost of technology transfer; stocks of running spares; training packages; maintenance costs; and technical documentation.

Complicating matters even further is the issue of “life-cycle costing”. While the lowest bidder, whose aircraft passes the flight trials, will indeed win the contract, the Indian MoD has publicly declared that the lowest bid will be calculated on more than just the up-front figures on the commercial bids. Instead, the IAF would calculate the cost of each fighter over its entire service life of three decades.

Consequently, European manufacturers, with high ticket prices on their fighters, have argued that low maintenance and high availability of their aircraft mean that they work out far cheaper over their lifetime than, say, Russian fighters that have high operating costs, low reliability, and require expensive maintenance and frequent changes of parts and engines.

Now, however, IAF sources have indicated to Business Standard that calculating costs over three decades is proving more difficult than they had bargained for; and that the up-front value of the bid might end up as a determining factor. For the vendors, this possibility poses a dilemma in their bidding strategy. Bidding high would mean pricing themselves out of the competition, since life cycle costing would no longer be a valid argument. Bidding too low, on the other hand, could result in winning a contract that becomes a financial liability rather than a triumph.

All six competing fighters have completed their testing and evaluation by the IAF. The IAF is aiming at submitting its recommendations to the MoD by September. According to procurement rules,the MoD will then open the commercial bids of the fighters that have been found suitable by the IAF and award the contract to the lowest bidder.

18 comments:

NJS said...

Ajay , any idea when india planned to announce about the winner .

Ra said...

Now at least it can be said that on the price front also, the Euro Fighter is in the live competition.

Anonymous said...

It's better to invest the amount in the best fighter than the cheapest fighter. If we are going for the cheapest, better cancel the deal and go for mass production of Tejas MK1.

Shailendra said...

Oh thats a bad news for Indian Gober In Mint (Government). This means 25% less commission.

Anonymous said...

paper gains. What happens if the euro increases after India signs the contract?

Ra said...

What happens if the euro increases after India signs the contract?

>> Perhaps it may depend upon whether the contract is with the firm prices or with the price variation clause.

the terminator said...

Ajay, the price or the evaluation report of the IAF are not the criteria that would be used to choose the MMRCA fighter. I think apart from the love affair with the US because of the nuclear deal which by itself has not brought any great change in the US policy of technology denial the deciding factor would be the amount of kickback that the baboooos brokering the deal would get.

If India is really keen on getting the best aircraft in terms of technology as well as decent TOT, they should go in for the Typhoon. At least India can be sure that whatever sanctions Uncle Sam comes up with, they won't affect the war preparedness of the nation. India need not fear of having useless white elephants in its inventory.

India should always try to be the dominant air power in the region to discourage some adventerous psychopants from trying another Kargil.

If the idea is to please Uncle Sam, India has already done more than its share by ordering the Herclues transport planes, the Boeing P8s and a host of others costing the taxpayers billions of dollars. So the so-called foreign policy dictates and trying to be in the good books of the US does not hold any crediblity.

India should just choose the fighter that would be a real asset to the IAF and a deterrent to its enemies.

Faffy said...

It cannot be so hard to calculate the cost over 30-year life! Future valuation of long-term assets is done everyday in the business world. In any case, it is the vendors' problem to do the life-cycle cost calculation and take a financial risk and not yours. Saying that the upfront cost alone will determine the winner because the lifecycle cost is proving difficult to work out simply smacks of wickedness.

Anonymous said...

There is NO reason for Euro currency to go up in the upcoming months and a few years. These are financially testing times as the euro backing states stretch themselves to save smaller european countries. That means european fighters could get cheaper to buy

joydeep ghosh said...

@ Ajai sir

I second @ anonymous 19:06

what will happen, when in future Euro goes up. Then EADS will say the price of manufacturing spare parts has gone up and so India needs to cough up more money.

By the way, even though EADS has brought the Eurofighter price down by 25% from Euro 80 million to Euro 60 million a piece, and is dangling a bait of shifting some Eurofighter production to Bangalore, they need to cut price even further by 15% to stay in competition.

In my opinion, Eurofighter's chances are really bleak. As in case of Euro price has come down then JAS 39 Gripen and Rafale will also have to quote lesser price.

Its also said that Eurofighter did not clear the trails in Leh. So as of now the JAS 39 Gripen is still the front runner having cleared the trails in Leh.

Though which aircraft wins the deal will be a political decision, we must keep in mind that we dont need a sword to cut a cake; means we need these 126 aircrafts to replace the Mig 21 fleet, which means a aircraft that helps in creating IAFs supremacy in the Indian subcontinent.

As for power projection beyond Indian subcontinent we have Su-30MKI. So heavier aircrafts like F-18 SH and Eurofighter are out of race as for me.

By the way

did you hear the GOI diluted the nuclear liabilities bill by striking out the Section 17 (b) under pressure from US cos. means if a Westinghouse reactor cause Bhopal gas like situation, they cant be held entirely responsible and asked to pay up.

http://beta.thehindu.com/news/national/article450968.ece

Anonymous said...

Quote -
"We will transfer some of our development projects, which we have in Europe for Eurofighter or other military aircraft to India, where we have set up a military research and development (R&D) centre in Bangalore," EADS chief executive (defence & security) Stefan Zoller told IANS here.

Eurofighter development in India is not a given. The devil is in the details. All this is BS until they start ironing out what "some" and "or" actually mean.

----

anon @ 13:01
Last year same time almost everyone claimed dollar was going to crash and burn.

Ra said...

I think the choice may ultimately boil down to GripenIN and Mig35 with the remnant points that GripenIN incorporates US dependent Technology and Mig35 has no direct experience and that both are developed models.

Int64 said...

sometimes i feel, it can be a US fighter, can be F-16 as it is cheape tha F-18, another argument will be-- Indian version is much more superior than paki version.

Apart from that, i really wish our babus and netas will consider county and IAF requirements beyond anything else

daanish bambery said...

The exploitation of this situation demands a sense of realpolitik amongst the negotiators, the price has come down but say let them keep the original bid but get them to throw in a full tech transfer, makes sense. The rupee can squeeze more out of the euro zone countries now then ever before. But in all fairness a European deal will always be better then an american deal, to use the equipment alone we have to literally sacrifice operational sovereignty.

Shaunak said...

"what will happen, when in future Euro goes up."

Gentlemen, for your reading pleasure and education - http://en.wikipedia.org/wiki/Hedge_(finance)#Hedging_currency_risk

Kind regards,
Shaunak

Anonymous said...

Curreny hedge works from the day India signs the contract and starts hedging.
What i mean to say is, Euro/USD is up 2.5% from its lows from last week.

Also, there is a premium you pay to hedge.

yogi said...

Ajay, I also been given to understand that Typhoon has the best flight safety record. In so far as life-cycle costs are concerned the calculation can not be left to vedors alone. Rather the factors have to be identified.

Shaunak said...

Anonymous @22:26,

Currency hedge can be implemented from the moment India decides to pursue an European fighter. There is no need to wait for the actual contract to be signed.

Yes, there is a premium involved. My intention in pointing out the possibility of a hedge is to allay concerns regarding an appreciation of the Euro a few years from now.

Let's not turn this page into a primer on currency hedging. Those interested can visit wikipedia.