Expenditure in the Brazil defence market increased at a CAGR of 8.29% during the review period and valued US$35.85 billion in 2013. The focus of the Brazilian government will be on the modernization of its armed forces, participation in peacekeeping operations, and military procurements. The modernization of the armed forces, development of indigenous defense capabilities, and large defense procurement projects are the major drivers of the Brazilian defense industry.
Brazil has a strict offset obligation for defense deals, equivalent to 100% of the contract value. This has proved a challenge for those foreign OEMs whose government has a policy of limited technology transfer, including the US-based company Boeing. Moreover, Brazil's offset policy requires that defense contracts use domestic companies for the manufacture and assembly of defense systems. A number of foreign OEMs have agreed to such offset requirements due to the availability of inexpensive labor and raw materials in the country. However, a significant portion of these companies are reluctant to share proprietary information with Brazil, and often fail to supply defense systems to the country as a consequence. These rigorous requirements by Brazil often delay the approval of defense deals.]
A significant challenge faced by defense suppliers to Brazil is the time taken by the Ministry of Defense to ratify defense deals. As defense procurements occur through competitive bidding, competing companies must undergo technical compliance checks, after which the ministry enters a lengthy negotiation process with bidders, designed to secure the maximum technology transfer at the lowest price. As such, the ratification process is further delayed by long negotiation periods and competing offers given by the various defense firms. Examples include the delay in selecting a supplier for the fourth-generation fighter jets and the delayed purchase of armored personnel carriers from the Italian branch of Invesco Ltd.Despite having the eleventh-largest defense expenditure globally, Brazil only allocates around 6-7% of its total defense expenditure to arms procurement.
The country currently allocates 41% of its defense budget towards providing pensions for retired military personnel, and a significant amount is spent on the administration of its defense forces. Although domestic advancements by Brazilian defense firms are fueling the component procurement market, the deal value for these components is often small. This results in the Brazilian defense industry appearing as a relatively less attractive investment opportunity for foreign OEMs.
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