By Jose Miguel Pizarro
Chile can be considered one of the best overall market prospects in the region for U.S. and European defense companies for the simple reason that its financial situation has been remarkably stable for an extended period of time (more than 40 years). This financial position has been further improved recently by massive increases in the funds allocated to the military via what's known as the copper law. Those intakes from copper exports are how the Chilean military funds its major multibillion dollar procurement programs. (The law requires that these additional funds are to be used on new weapon systems and tactical equipment purchases.)
The transparency of the Chilean military's procurements is becoming increasingly comparable to that of other European governmental procurement programs. This, in turn, makes the Chilean military market that much more competitive, and provides a level playing field for all contenders. In fact, Chile has been pushing military spending transparency for the region as a whole as a means of reducing tensions. Although there is a strong purchasing preference for U.S.-made tactical equipment, very few small- and medium-size North American defense firms are aware of the existence of the Chilean military markets. Not surprisingly, even fewer U.S. defense companies are currently promoting their brands or competing to be awarded contracts in this country. As a result, small Israeli and European defense manufacturers dominate the Chilean markets with a wide variety of extremely expensive tactical products that are often discredited due to poor after-sales support.
While criticism has been widespread (mostly from anti-American organizations) that a "relaxation" in U.S. arms sales policy has set off a regional arms race, such complaints all too often reflect shallow knowledge of Latin American arms inventories and their age. What Chile is undergoing today is a simple re-equipment cycle in which aged, unreliable and obsolete weapon systems and tactical equipment are being replaced. This cycle is being done at a measured pace that carefully blends affordable new equipment and used equipment that will continue to provide years of service. Chile is simply looking to modernize an aged inventory to extend the viability of its force structure. Putting the emphasis on new tactical equipment simply reflects the perception that new always provides better value over the long run. Considering that new jet fighters, tanks and frigates for example, can be kept in service for 30+ years, the same goes for smaller tactical equipment such light 4x4 armored vehicles and UAV’s. The revitalization of the force structure will quickly achieve significant cost savings as inefficient and maintenance-intensive systems continue to be taken out of the Chilean inventories on a monthly basis.
Unfortunately, the purchases led to expressions of alarm in neighboring Argentina, Peru, Bolivia and even in the distant Venezuela. Some of the neighboring countries do not enjoy the economic boom of export-driven Chile and suffer from 50%-plus poverty rates and constant political instability that characterize the region. Moreover, tensions still persist as a result of the bitter legacy of the 19th century War of the Pacific (a military conflict between Chile against both Bolivia and Peru), which made Bolivia a landlocked country by stripping it of its coastline. Today, Peru and Chile vehemently disagree over their territorial and maritime border, while many Peruvians and Bolivians still hold a grudge over the immense amount of Bolivian and Peruvian territory lost to Chile during that war. Despite that Peru and Bolivia already have smaller, far less-equipped forces than Chile, current intelligence reports suggest that — in the event of a military confrontation — Venezuela could provide technical assistance, Russian-made weapon systems and logistical support to both countries to face the modern fleet of Chilean F-16s and the heavy armored and mechanized infantry brigades of the army.
A foreign perspective, or why Chile?
Chile has several competitive advantages that make this country an attractive location for foreign companies looking to export, develop new business and to expand the sale of its military products and services in Latin America. One of the country’s most valuable characteristics is its stable and transparent policy framework for foreign investment. The country has an active Free Trade Agreement with the U.S. and with almost every single European nation. Foreign investors in Chile can own up to 100% of a Chilean-based company and there is no time limit on property rights. These facts make Chile a much more attractive "market entry platform" than Brazil.
Also, due to a strong German influence in military training and operational doctrine lasting more than 120 years — that focused on advanced officer training and constant doctrinal modernization — Chile possesses the most modern and capable armed forces in Latin America. Chile also has one of the largest defense industries in the region, pursuing an aggressive modernization strategy over the past decade. Chile’s defense budget for 2015 is US$7.4 billion, with a projected increase of 5.3% of GDP per year for the next three years. Defense expenditure is expected to reach US$10.5 billion by 2017.
Market Opportunity and Entry Strategy: Analyses and Forecasts 2015-2017.
The Chilean armed forces are well funded. As a result they are buying and they are buying quickly. The main projected areas of growth are expected to be in modern infantry tactical weapons and individual equipment, hundreds of 4x4 tactical vehicles, aviation support systems, attack helicopters, troop transport aircraft, aerial surveillance and sensors, optics, and a wide variety of mechanized infantry weapon systems (to include logistical support and expeditionary equipment) capable to carry out both offensive combat operations in desert and mountain areas and for secondary rescue operations in times of natural disasters.
For large-scale sales, joint ventures, collaborations and strategic partnerships are the name of the game in Chile right now. In recent years, there have been a growing number of joint ventures between international companies and their Chilean counterparts. The Chilean government is encouraging these joint ventures and technology-sharing agreements, which enable domestic firms to enhance their capabilities while increasing diplomatic relations between the countries. Examples of these collaborations include the U.S.-Chile agreement on sharing military technical data to maintain the advanced F-16 fighters and AMRAAM (beyond visual range) air-to-air missiles, and the declaration of intent signed by Brazil and Chile to jointly develop the KC-390 military transport aircraft.
More recent programs include co-production of 45,000 assault rifles, Gatling guns, weaponization and upgrades of thousands of 4x4 tactical vehicles, combat simulation systems, new infantry gear for 44,000 soldiers, 60+ coastal patrol boats, decade-long maintenance contracts to provide logistical support to a mechanized force of more than 3,000 Infantry Fighting Vehicles and 400+ Leopard 2 Main Battle Tanks, etc. In conclusion, Chile seems to be an interesting defense market where it might be worth the effort to take a second look.