Oopsie! How Boeing Lost $20 Billion in Brazil

One step forward, two steps back. For the second time in just three months, Boeing  (NYSE: BA  )  has lost its chance to ink a multibillion-dollar fighter-jet sale.

Boeing's F/A-18. How could Brazil not love this plane? Source: Wikimedia Commons.

In September, if you recall, Boeing had a chance to sell the Republic of Korea $7.7 billion worth of F-15SE Silent Eagle fighter jets. Boeing lost that contest to Lockheed Martin (NYSE: LMT  ) and its F-35 stealth fighter. As the Koreans explained, Boeing's jet was cheaper, but what they really wanted was the more advanced F-35. And now it seems that Boeing just can't win ...

This week, down in Brazil, Boeing just saw its F/A-18 fighter rejected despite being technologically superior to the winner ... because it cost too much. (Sheesh!)

Price is the object
If you haven't been following this story closely, let me bring you up to date. A few years back, Brazil decided to update its air force of obsolete French Mirage 2000  jets. Brazil wanted more modern fighters, and whittled is shopping list down to just three planes, built by three different defense contractors:

  • France's Dassault, which offered the Rafale fighter jet.
  • Sweden's Saab, tendering its newest JAS-39 Gripen.
  • And Boeing, offering the F/A-18.

Brazil intended to start off the modernization process with an initial buy of three dozen attack jets, at an estimated cost of $7 billion. Further purchases would then continue over the next 15 years, totaling perhaps 100 fighter planes -- and $20 billion -- when all was said and done. This, therefore, was a prize worth fighting for.

Dirty tricks
And fight they did, with French Dassault playing especially dirty, trading favors with then-Brazilian President Luiz Inacio Lula da Silva to improve its chances of winning the contract. You can read all about the details of the insider dealing here. But basically, France agreed to buy military equipment from Brazilian defense contractor Embraer (NYSE: ERJ  ) , and even back an Olympic Games bid for Rio de Janeiro, if Brazil would choose Dassault's planes over those of Saab and Boeing.

This tangled web of favor-trading turned France's pricey Rafale, reportedly as much as $6.2 billion, plus $4 billion for maintenance contracts over 30 years, into the front-runner to win the contract. This was despite reports that Saab was offering to sell Brazil the Gripen for just $6 billion, maintenance included. Boeing's position, lacking Dassault's political connections and charging $7.7 billion for its plane (also including maintenance), looked tenuous in the extreme.

Then Boeing suffered an even bigger setback when news of the NSA spying scandal broke in August, and Brazil took umbrage at reports that the U.S. had been spying on its electronic communications. As one local official put it, Brazil was unwilling to even "talk about the fighters with Boeing" anymore, after that kerfuffle.

This week, the drama drew to a close, when Brazil confirmed it will pay $4.5 billion, plus the cost of long-term maintenance contracts, to buy 36 Gripens from Saab.

Whether it was Boeing's too-high price tag, or the NSA spying scandal that finally scotched Boeing's bid, we may never know for sure. Probably it was the price. At least, Brazilian daily Folha de Sao Paulo reported that price was the reason Brazil ultimately changed its mind and rejected France's Rafale.

What is clear, though, is that Boeing is rapidly running out of fighter jet contracts to lose -- and that's not good news for the company's $16 billion Military Aircraft business. With Lockheed Martin locking up the high end of the fifth-generation fighter jet market, second-tier planebuilders like Saab, Embraer, and now Textron (NYSE: TXT  ) sniping at the low end, Boeing's stuck in the middle, fighting for share in a shrinking market -- and more often than not, losing.

Saab's Gripen, flying away with the win. Source: Wikimedia Commons.

Invest ahead of the news
With Brazil's decision made, and so well-publicized, investors are well aware that this is bad news for Boeing and Dassault, and good news for Saab. But not all good news is quite so public. Our top technology analyst recently infiltrated one of Wall Street's most exclusive gatherings and left with three incredible investment opportunities, straight from the CEOs. These are profit-building strategies Main Street isn't meant to hear about -- so you must act now before someone shuts us up. Click if you want "industry insider" earnings -- now!

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  • Report this Comment On December 23, 2013, at 9:28 PM, 67alfa wrote:

    Sweden does not have a foreign corrupt practices act, the US does. That has a big bearing on Brazilian competitions such as this. Trust me on that one!

  • Report this Comment On December 24, 2013, at 9:22 PM, joseromano wrote:

    It was not only because it's more expensive . It's exactly the same reason Brazil adopter the FN FAL Rifle in the 60s , because there would be no technology transfer from Boeing to Embraer or the Air Force . That's the main reason .

  • Report this Comment On December 24, 2013, at 10:19 PM, Firnatine14 wrote:

    The Saab Gripen is not inferior technologically to the older F18 Super Hornet, the Gripen is a Gen 4.5 fighter with supercruise as an option like the F22 and F35 and has VSTOL capability, (very short take off and landing) only the Marine Corp version of the F35 is also VSTOL (full vertical capability in F35), in no way shape or fashion is the F18 superior technologically to the Gripen, the Gripen is less expensive for two reasons, first it has one engine like the F16 not two, second Saab unlike US defense contractors does not grossly overprice its products. The Gripen is not the only highly advanced weapons system they have the stealthiest sub in the world which US pays them to play war games with so we can figure out how to detect the worlds stealthiest sub, they also have the worlds first active stealth ship, a small tank with stealth technology (no heat signature etc) and the worlds most advanced mobile artillery piece the Archer. As for the Gripen any country that does not buy it is stupid, the first thing an enemy will attack is airfields, the Gripen does not need traditional runways.

  • Report this Comment On December 25, 2013, at 7:48 AM, WonderWii wrote:

    I Wonder Wii China and Russia did not participate in this bidding? Inferior products perhaps?

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