Offset agreements ordinarily specify the level of offset required, normally expressed as a percentage of the sales contract, and the types of activities that are eligible for offset credits. For example, coproduction activity may also include the transfer of technology needed to improve production processes. Procurements of goods and services not related to the weapon system sales—indirect offset activities—were also frequently used. Placing contracts overseas has resulted in additional contractors who are qualified to participate in weapon system development and production. However, the long-term supplier relationships that develop may result in reduced business opportunities for some U.S. firms. U.S. contractors have established longer term relationships covering foreign firm participation in future sales of the weapon system and beyond their commitment in the purchasing country. In most cases, the value of the technology transfer is negotiated between the U.S. contractor and the foreign government. To satisfy this desire, a U.S. contractor provided an Asian commercial company with technology and training in the area of commercial component manufacture. In addition to the U.S. contractors making purchases, they also employ other parties such as major subcontractors, suppliers, and foreign entities to help meet their offset obligations. In a few cases, U.S. contractors advocated a foreign firm’s product to DOD or suppliers. Offset Transactions Include Business Development Activities

U.S. contractors also undertook a wide variety of activities that could be labeled business development and are similar to those performed by an economic development ministry. Marketing Assistance

Marketing assistance is defined as a U.S. contractor helping foreign companies penetrate and develop U.S. and/or non-U.S. markets by analyzing the market for the exporter’s product or assisting the exporter in responding to a request for proposals. Financial assistance is defined as providing funds to a foreign company in the country where the offset obligation exists to facilitate an export. Scope and Methodology

To assess the activities undertaken by U.S. contractors to satisfy offset obligations, we analyzed over 100 transactions contained in 19 ongoing or recently completed offset programs by 6 major U.S. defense companies with 12 purchasing countries.
Why GAO Did This Study

Pursuant to a congressional request, GAO reviewed the types of activities undertaken by U.S. contractors to meet offset obligations associated with the sale of defense equipment to various foreign governments.

What GAO Found

GAO noted that: (1) companies undertake a broad array of activities to satisfy offset requirements; (2) under offset programs, U.S. contractors commonly award subcontracts for components and subsystems to firms in purchasing countries, and in a few cases, have made longer-term commitments covering foreign firm participation in the event of future sales of weapon systems; (3) this activity has been accompanied by technology transfers, for example, providing manufacturing technology needed to produce a component; (4) placing contracts overseas has resulted in the emergence of additional contractors that are qualified to participate in weapon system development and production; (5) the long-term supplier relationships that develop may result in reduced business opportunities for some U.S. firms; (6) nonetheless, the value of the export sale, in the transactions examined, greatly exceeded the amount of work placed overseas; (7) for procurements not directly related to weapon systems, U.S. prime contractors enlisted their major subcontractors, their suppliers, and other foreign entities to help meet offset obligations; (8) U.S. contractors also undertook a wide variety of activities that could be labelled business development; (9) contractors provided technical assistance to foreign firms across a wide range of technologies and industries and assisted foreign firms in marketing their products in export markets using the expertise of the contractors' own organizations or consultants; (10) in a few cases, U.S. contractors advocated a foreign firm's product to the Department of Defense or suppliers; (11) in isolated cases, offset transactions involved financial assistance to subsidize particular export sales; (12) these transactions were limited to foreign markets and therefore did not involve improper incentive payments under U.S. law; (13) U.S. contractors also facilitated or established joint ventures with firms in the offset country; and (14) while a country's economic development ministry might perform similar activities, the offset program allowed the country, or firms in the country, to leverage the expertise and know-how of major U.S. multinational firms.