Licence build vs. outright purchase. Pros and cons. How does it work?

[pathology_doc]

Let us assume we have (for sake of argument) a Cold War-era attack aircraft (nonspecific), designed, built and fielded in large numbers by large industrialised nation A, which smaller industrialised nation B wishes to operate. Further assume that nation A has no objections to the aircraft manufacturer offering it or any of the technology that goes with it, nor will there be any backlash against A if B uses it against an arbitrary hostile neighbour, C.


Further assume that nation B has the option of outright purchase versus construction under licence. Flyaway price from outright purchase is, for the sake of simplicity, a round $10 million. To keep things simple, we will assume that nation B is sophisticated enough to handle all maintenance, overhauls and what-have-you - i.e. there is no service contract built into the deal, whichever option is taken - and that A and B are going to remain reliable allies into the foreseeable future (so that the ability to make future purchases of the aircraft is not in question).


You are the procurement officer/minister/bureaucrat for nation B. Which option are you going to take, and why? (And are there elements to this scenario that I haven't covered? :-\ ) Just how much would nation B pay for this licence, and is it a per-aircraft fee or a one-shot deal?

 

[Grey Havoc]

Based on the $10 million flyaway price, I presume that we are dealing with a late '50s/early '60s timeframe here?

 

[Bill Walker]

A very complicated question. The dollars part involves issues such as rights of sale to countries C though Z, new or second hand (think Canadair Sabres); taxes collected from citizens of country B vs. taxes to be paid as part of the purchase price from Country A; who pays for and who then owns capital expenses in Country B; etc.

And a much bigger non-dollar question. How much design, production and overhaul capacity does Country B gain at the completion of this program? Will this capacity ever be used again? What is that worth to the people of Country B?

 

[pathology_doc]

The extent of the licence build is complete, from raw materials through parts fabrication to complete aircraft, with the powerplant (and eventually avionics subsystems) given a similar treatment and the experience gained used as a springboard for indigenous design and construction, either on a clean-sheet-of-paper basis or as a divergent development track akin to the mutation of the Mirage III into the Kfir, etc.

(The first half-dozen or so would probably be bought outright, to give Nation B's pilots something to qualify on while production got started. Then a staged ramping up from final assembly for the first squadron or so through to de novo production.)

 

[aim9xray]

(And are there elements to this scenario that I haven't covered?

)

What donations would be required to Nation B's "Widows and Orphan's Fund"?

 

[Kiltonge]

Of note is how rarely the Soviet Union granted license production rights; only Czechoslovakia, Poland, China and India come to mind.

'Soft power' was much more effective if clients were dependent upon the Soviet Union for spares and maintenance; look how quickly equipment became unservicable in Indonesia, for example, which had been a regional superpower with missile-armed Tu-16s... so long as the spares kept flowing*

I believe that if a nation has the technical capability for license production then it is in their strategic interest to do so. Paying the royalties to the originator might seem expensive but it's a bargain in the event that relations sour, such as in the case of South Africa.

* Nowadays, interestingly, Indonesia license-builds a variety of helicopter types.

 

[Rickshaw]

One major consideration which I haven't seen addressed is that of foreign exchange. How does Country A's currency compare to that of Country B's? If it is substantially less, then Country B will find it is sending much more capital overseas than is desirable for it's own economy.

A major factor in license production is both keep capital in the licensee's country where spending it stimulates that nation's economy whereas outright purchase sees a massive exchange of capital to the licenser nation where their economy is stimulated. In cash-strapped UK of the 1950s it was often cheaper to enter either license production or outright indigenous design production than it was to purchase comparable equipment from overseas.

 

[pathology_doc]

Indonesia, for example, which had been a regional superpower with missile-armed Tu-16s... so long as the spares kept flowing*

A similar example might also be seen in third-world nations which buy advanced frigates bristling with weapons, which quickly go on to become dry-dock queens or glorified Presidential yachts.


The flipside of this is that if you DO want to be a regional superpower on the basis of bought weapons, it behoves you to ensure that you can produce those spares and perform the maintenance if the external supply suddenly dries up.

I believe that if a nation has the technical capability for license production then it is in their strategic interest to do so. Paying the royalties to the originator might seem expensive but it's a bargain in the event that relations sour, such as in the case of South Africa.

Precisely. Or in the event that you want something new out of the design that is easily achievable but which the originator isn't prepared to build for you because it doesn't match their needs (or because they have other types in service which do the same intended job just as well or better, so why bother?).

(ETA: I've been considering a revival of this project - http://www.secretprojects.co.uk/forum/index.php/topic,12764.0/all.html - but have been delving a lot more into the question of procurement and just how it affects the chances of the Services getting what they want and need.)

 

[Tony Williams]

Another issue is the possible wish of Country B to support its own industry by putting in its own equipment (as Israel does for licence-built US planes). That will put up the price, sometimes massively (as with the UK-built F-4 Phantom II and AH-64 Apache, both of which were given British engines at a huge additional cost).

There are so many variables applying here that it isn't possible to give a simple answer. What's worse, both financial and non-financial factors get involved and these can be very difficult to weigh up against each other.

 

[pathology_doc]

I can't speak to the Apache, but IIRC a big part of what made the F-4K and F-4M so damn pricey is that fitting the Spey in substantially changed the shape of the aft fuselage. Had there been a candidate engine which fitted the airframe within J-79 dimensions, there MIGHT not have been as much of a problem.


As to the rest, local system integration is as thorny an issue as Tony suggests - and it isn't limited to aircraft (*coughcough* Collins Class subs *coughcough*). The most sensible solution if you're determined to DIY appears to be local build of primary aircraft structure (including engines if willing & able to do so) with purchase of avionics elements off-the-shelf as factory fitted, and line replacement with local systems at major overhauls as and when their development is sound and their cross-compatibility is assured. At the very least, this should ensure that the aircraft are delivered on time with all systems smoothly integrated, and that delays in development of the local product don't derail or wreck the procurement process.


It also depends on the era in which the airframes and their systems were developed. Miniaturisation of electronics over time should ensure that new wine fits well into old wineskins, so to speak, at least from the weight and volumetric viewpoints; the question then becomes whether the number of airframe hours remaining make the conversions worth it - or whether the installation of one new subsystem demands the replacement or upgrading of so many others that you might as well start from scratch.


I appreciate that there are a hell of a lot of variables, and I never expected the answer to be absolutely clear-cut, but what's come up for discussion so far has certainly provided food for thought. Thanks.

 

[riggerrob]

License-build agreements get especially complicated for nations with limited foreign currency flow. Say trading bananas for blueprints.

There is also the matter of "buying votes" (see Canadair) by employing local machinists instead of foreign machinists to build the same part.

Thirdly, I question the cost of setting up a local production line to make a few dozen/hundred components compared with just buying from the existing production line.

Where is the break-even point?

How many hundred units before it becomes more profitable to license-build?

I also question the logic of "group-builds" with company A building all the ailerons and country B building all the rudders and country C building all the wheels.

When does the cost of shipping dominate?