Almost every purchasing country in the world has its own official or unofficial policy for evaluating offsets projects and monitoring their implementation. This creates a need for both suppliers and purchasing countries to establish some common ground in defining offsets and determining their dynamics, characteristics and value.
An offset requirement is usually expressed by the procuring country in terms of a percentage of the supply contract value. Generally, this will be applied on procurements over a pre-determined threshold and varies according to the amount and type of procurement. So for example, when a 100% offset obligation is usually applied on the foreign content value or on the product cost, this obliges the supplier to provide an equivalent value to the order in offsets.
This, in turn, according to the multipliers that will be applied to each individual offsets program, will result in a specific amount that the supplier will have to place in purchasing orders or invest in order to fulfil his offsets obligations.
It is important to note that while offsets in a competitive procurement process make up only one part of an offer, the other two being the technical and financial components, it is often perceived as a key differentiator. Each procuring country gives a higher or lower weight to an offset offer, according to its specific legislation and requirements. Offsets can be 'banked' against future bids and many procuring countries will fine or penalise the contractor should the offset commitment not be fulfilled.
An offsets program’s value (usually referred to as 'credit value') is in most cases derived from the offsets program base or nominal value multiplied by a credit factor or multiplier. Generally, a higher multiplier is given to transactions that correlate on a macroeconomic scale with the overall economic policy of the procuring country and, on a microeconomic scale, with the particular requirements and value-added strengths of the local company that is the recipient/implementer of the offset program.
Put simply, offset programs that maximize employment and technology transfer and result in export value to the procuring country will attract a high multiplier.
Offset credits arrangements are in place worldwide
Most defence contractors have offset credit commitments in place. Companies such as Lockheed Martin, Boeing and BAE Systems are likely to have offset arrangements in:
Hungary, CR, Bulgaria, Slovenia, Romania
Thailand, Malaysia
South Africa
Australia
Kuwait, UAE
Argentina, Brazil, Chile
Spain, Portugal, Belgium
Colombia, Mexico, Venezuela
Migrating manufacturing to a low cost economy delivers reduced unit cost
Capital is provided by defence contractors seeking to gain offset credits, and by venture capital financiers
What is required from you?
Your commitment to:
- off-take volumes at a sufficient level to secure viability for a period of at least three years
- input of specific product knowledge and transfer of skills during the migration process
- extend any critical supplier agreements to the new facility.
Key steps for preparing and implementing a turnkey factory in a low cost economy
To view the following manufacturing migration key-step diagrams in full detail and print out, please click here [PDF file, 274Kb]
The first step is to prepare a business plan to confirm feasibility and secure informal agreements
The planning phase: the objective is to secure the deal and the funding and then prepare for implementation
The implementation phase will deliver the turnkey factory and transfer products to the new facility
Contact us
To discuss how PA’s award-winning experience can help your organization to set up 'free' factories please contact:
Linda Pearse
PA Consulting Group
123 Buckingham Palace Road
London
SW1W 9SR
United Kingdom
Tel: +44 1763 267137
E-mail: linda.pearse@paconsulting.com
