India Looks West for Its Defense

"The Bush Administration, like the Reagan regime before it, is often derisively labeled "cowboy" in international circles. Yesterday, though, the Administration didn't just tolerate the label, but seemed to embrace it. Yesterday, it brought the Cowboys and the Indians together to play wargames."

So began the first installment of this column, penned nearly two years ago on the occasion of India's groundbreaking agreement to purchase six C-130J cargo planes manufactured by Lockheed Martin (NYSE: LMT  ) . At the time, I described this $1 billion contract as potentially opening the door to follow-on arms sales by Boeing (NYSE: BA  ) , which was bidding on a contract to provide the Indian Air Force with 126 combat aircrafts.

Both Boeing and Lockheed are still vying for the rights to that contract, but last week, Boeing did land a contract twice the size of Lockheed's door-opener -- a $2.1 billion deal to sell eight P-8Is, a variant of its P-8A Poseidon sub-hunting aircraft to the Indian Navy. Boeing is expected to provide the first new P-8I within four years, with the remaining seven planes touching down sometime between then and 2015.

Without even so much as a "thank you!"
Bittersweet news for Lockheed, I imagine. After all, Boeing's leading a team , with Northrop Grumman (NYSE: NOC  ) and Raytheon (NYSE: RTN  ) , to replace Lockheed's own sub-hunter, the venerable P-3 Orion, with its own Poseidon for the U.S. Navy. No sooner had Boeing usurped Lockheed's place, than Lockheed opened the door to India ... and Boeing swooped in and snatched up a big win in that market as well.

And what a market it is. According to AP, India has evolved into one of the world's largest arms buyers, with a fiscal 2008 defense budget pegged at $26 billion, up 10% from last year. While you might the effects of a global slowdown to crimp that growth rate, I personally expect Indian arms purchases to continue growing, and perhaps even accelerate.

With great power comes great ... vulnerability
Why? India's looking to modernize its military equipment, much of what they acquired from the former Soviet Union. They've made a few key acquisitions over the past few years and are still looking to make more. In addition, India currently owns one aging aircraft carrier. By 2015, it's supposed to have at least one more such carrier. Not to mention, India's currently working on its own Vikrant class carrier, which is being developed and built within the country.

Carriers are valuable assets, and are also famously vulnerable to submarine attacks. Shoring up India's maritime equipment will help protect its carriers as well as its coastline. (Note to General Dynamics (NYSE: GD  ) and Northrop Grumman: Y'all might want to work up some bids here, too. There's plenty of carrier-related loot to go around.)

The wealthier India gets, and the bigger its carrier fleets, the more it's going to need sub-hunters and other military assets to protect them -- which is great news for America's defense contractors.

More Foolishness on (legal) international armaments deals:

Fool contributor Rich Smith owns shares of Boeing. The Motley Fool has a disclosure policy.


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