The new year is here, and any day now, the U.S. is going to start pulling its troops out of Afghanistan. We hope.
After spending some $678.5 billion trying to drive al-Qaeda out of the country, the U.S. is currently embarked on a multibillion-dollar mission to remove its own troops and equipment from Afghanistan. But the locals view this as a mixed blessing. On the one hand, Afghanistan has never been a nation hospitable to foreign occupiers. On the other hand, the government does still have certain "issues" with the Taliban. With U.S. troops departing, it's finding itself short of arms with which to carry on the fight.
And so it was that last month, Afghan President Hamid Karzai journeyed to India in search of a new ally -- and a new provider of weapons for his beleaguered military.
In search of a sugar daddy
The U.S. isn't leaving Afghanistan high and dry. Just last year, the U.S. Air Force brokered a $1 billion deal to supply Afghanistan with Super Tucano fighter planes from Embraer (NYSE:ERJ). It's gifted the local air force with two Lockheed Martin (NYSE:LMT) C-130 transport aircraft -- the most popular military transport in the world. (And in a bit of a PR fiasco, the U.S. also arranged for dozens of Russian Mi-17 Hip helicopters to be shipped to Afghanistan.)
On the ground, the Afghan Army will keep 500 of Textron's (NYSE:TXT) "Commando Select" MRAPs that the U.S. is leaving behind. We're also building 25 rapid aerostat initial deployment (RAID) towers for Afghanistan, equipped with full-motion video electro-optical/infrared sensors from FLIR Systems (NASDAQ:FLIR) to help monitor insurgent movements, plus four aerostat sites to base them at.
Yet all this is still not enough. So last month Karzai went to India, seeking commitments to supply his country with attack helicopters and main battle tanks... which is great news for U.S. defense contractors.
A blessing in disguise
Now, you might not see a connection between Afghanistan seeking arms from India, and American defense companies benefiting. But the connection is there nonetheless.
You see, as arms markets go, Afghanistan is certainly a willing buyer. But with an economy that generated GDP of less than $20 billion in 2012 (about the cost of one U.S. Gerald R. Ford class aircraft carrier) -- and generated $1 billion of that from opium exports -- Afghanistan is hardly the ideal customer for U.S. defense contractors. It's simply too poor to buy much on its own.
India's economy, in contrast, is booming. It's home to a thriving hi-tech industry, headlined by Infosys, and a powerful industrial economy with Tata Motors at its figurehead. And flush with cash, India's also in the midst of a defense sending boom. Already, it has some $40 billion in large arms acquisitions projects pending approval -- everything from Boeing (NYSE:BA) Chinook helicopters, Poseidons, and C-17s, to Lockheed C-130s and BAE howitzers are on the block.
A bull market for arms dealers
As India upgrades its military with military hardware bought from the U.S., it will be left with dozens and dozens of obsolete weapons systems that it can hand down to its new friends in Kabul. Friends who, incidentally, share a common antagonist in the form of the country that sits between India and Afghanistan: Pakistan.
Already, India has indicated some willingness to help out Afghanistan. Last month, Karzai apparently obtained assurances that India will supply two Cheetah utility helicopters built by Hindustan Aeronautics. He also won a commitment from India to provide training for up to 1,000 Afghan soldiers. If Afghanistan succeeds in winning further arms shipments from India, this could accelerate that country's efforts to upgrade its own military -- and its purchasing of upgraded arms from U.S. defense contractors, as it ships the old bits and pieces to Afghanistan.
Far from ruing the loss of Afghanistan as a potential customer to India, U.S. defense contractors, and the shareholders who invest in them, should be encouraging Afghanistan to "buy, buy, buy!" from India.