Challenges in the Middle East for US defence companies

Buyers in the Middle East offer US defence companies a reliable option for deals, but some relationships within the region with Washington are complicating the issue.

Sheikh Mohammed bin Zayed, the Crown Prince of Abu Dhabi and Deputy Supreme Commander of the Armed Forces, speaks with Lockheed Martin chief executive Marillyn Hewson at the Dubai Airshow. Ryan CarterShow more

US defence companies are increasingly looking to Middle East buyers to help offset sagging military spending at home.

But their quest to secure purchases is happening against a backdrop of more distant relations between Washington and some of its allies in the region.

Last year about 7 per cent of Lockheed Martin’s US$47.2 billion sales originated from the Middle East.

"We certainly expect that to grow in the region as we think we have products and capabilities that our customers in the region need," said Marillyn Hewson, chief executive of Lockheed Martin, the largest US defence company, in an interview at the Dubai Airshow. "Certainly around missile defence products we provide, F-16s, C-130Js, work we're doing in satellite communication, cyber security – a whole range of IT services we provide."

Ms Hewson said the contribution of international revenues to the company’s overall global business was expected to grow from about US$8 billion, or 17 per cent now, to more than 20 per cent in the next few years.

In its domestic market, Lockheed Martin was hit by the US government shutdown last month that forced 2,500 of its employees to take paid leave. It was also hurt by the budget sequestration – a series of automatic cuts to federal spending – that came into force in March.

“The biggest issue we face is sequestration,” said Ms Hewson.

“We have a voice on Capitol Hill to make sure it’s clear we see this as having a very significant impact.”

In contrast, the big spending governments of the GCC offer much more fertile ground for defence contractors. Among the planned contracts recorded by the US Defence Security Corporation Agency are a $4bn munitions deal with the UAE, and a similar $6.8bn contract with Saudi Arabia.

“The Middle East region has been and will continue to be the most important region outside the US,” said Matt Riddle, president of Raytheon International, the US defence contractor. It has 27 per cent of its business revenues from international sources.

But arms firms are having to navigate a more politically charged environment in some parts of the Middle East.

Saudi Arabia’s intelligence chief Prince Bandar bin Sultan last month reportedly told European diplomats that the kingdom was hoping to make a “major shift” away from the US, according to Reuters, citing a source familiar with Saudi policy. Saudi Arabia has been unhappy with the response of the US to the Syria conflict and the second revolution in Egypt.

Theodore Karasik, director of research and consultancy at Institute for Near East & Gulf Military Analysis, said US companies would still be able to push forward with regional deals.

“From the GCC point of view business trumps politics on a case by case basis. In addition, requirements are based on American technology and packaging that are constantly and consistently required by GCC states whether civilian or military,” he said.

In another sign of US diplomatic strain in the region, Saudi Arabia has also raised concerns about negotiations with Iran over its nuclear programme.

Asked about the discussions he had with customers in the region about the Iran issue, Jim McNerney, chairman, president and chief executive of Boeing, the US plane maker, said: "The shifting sands of Middle East diplomacy go back and forth but the fundamental security needs and alliances tend to withstand the washback and forth of these things."