U.S. and Brazilian negotiators announced Wednesday that for the first time in more than 30 years, the two nations are preparing to sign an "umbrella" agreement on military cooperation. As negotiations come down to the wire (signing is expected Monday), Brazil's also moving toward a decision on upgrading its air force with 36 new fighter jets. In that contest, Boeing's (NYSE: BA ) F-18 vies with offerings from France's Dassault and Sweden's Saab. It's the first step in a planned 100-plane revamp of the Brazilian air force, said to be worth more than $20 billion.
So ... should Boeing investors expect a $20 billion check in the mail next week?
Survey says: Nope!
While it would be nice to draw a straight line from Point A (defense cooperation) to Point B (big defense contract) here, the U.S. government has done much to erase that line lately. While the French are offering generous "technology transfers" as part of their bid, the U.S. is balking at the prospect.
Worse still (for our side), federal subsidies to American cotton growers have Brazil in an uproar. A WTO verdict that favored the Americans has Brazil threatening compulsory licensing of software and pharmaceutical products. Unless this conflict is defused, we could see companies like Microsoft (Nasdaq: MSFT ) and Pfizer (NYSE: PFE ) join with Merck (NYSE: MRK ) in the line of firms whose intellectual-property rights get wrapped up in a web of subsidized cotton.
In short, we haven't done much to make Brazil sympathetic to Boeing's case.
When Boeing's down, kick 'em
Meanwhile, France and Sweden ... have. According to the Brazilian military, all three planes on offer meet Brazil's performance requirements, but Saab's Gripen carries the smallest price tag, while Dassault's Rafale costs more, yet confers generous technology transfer benefits.
Initially attracted by Saab's low sticker cost, the Brazilian air force is coming around to President Luiz Inacio Lula da Silva's view that Dassault's the way to go. The prospect of in-country manufacture and tech transfer isn't the only enticement. "Lula" also signed a defense pact with France in late 2008. That deal might have later helped to secure a key aircraft order for Brazil's Embraer (NYSE: ERJ ) -- and Rio's right to host the 2016 Summer Olympics.
It's hard to put a price tag on favors like these, but I'd suggest that "$20 billion" sounds just about right. And it won't go to Boeing.
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