Question

Bofors AB is a Swedish company that specializes in the manufacturing and sales of weapon systems such as antiaircraft/antitank guns, artillery, and ammunition. The Indian government concluded an agreement with Bofors AB for the purchase of 410 FH77B howitzers ($1.3 billion) in 1986. The FH77B howitzer is a powerful, highly mobile artillery system. It has a gun with a range of 30 km and a capability to fi re three rounds in thirteen seconds. It can be integrated with a 6x6 all-terrain vehicle. The agreement provided for the purchase of goods from India amounting to not less than 50 percent of the value of the contract. Given its lack of experience in countertrade, Bofors AB signed a contract with other Swedish and U.S. trading companies to fulfi ll its countertrade agreement with India. Among these companies, Sukab took the leading role due to its vast experience in international trade and expertise in countertrade. Sukab is owned by more than eighty Swedish companies and was set up after the Second World War to promote Swedish exports. Pursuant to the agreement, Sukab promoted the sale of Indian goods in Sweden through various channels, including seminars held by Swedish trade councils and chambers of commerce. It also set up offices in India to provide export training (e.g., on the best ways and means of exporting Indian goods to Sweden). The Indian government had to approve of all the products being exported. Bofors AB was provided with a list of approved products. Certain products were specifically excluded from the list of exports. The major factor that motivated India to enter into the countertrade arrangement was its lack of hard currency to pay for the purchase of the howitzers. The countertrade arrangement provided an opportunity to India to generate enough hard currency to fulfi ll a portion of its commitments. Furthermore, the arrangement allowed India to expand its distribution channels and gain new markets. The countertrade arrangement also allowed Bofors AB to win the contract over other competing fi rms.

Questions

1. Do you think this was an ideal trading arrangement for Bofors AB?

2. Would this form of trade arrangement be more beneficial to India than to Bofors? Explain.

Please explain both questions in details for a good understanding

Answer 1

For Bofors AB, the countertrade arrangement was a way to secure a defense contract despite lacking experience, by partnering with firms experienced in countertrade. For India, the arrangement was more beneficial as it enabled them to acquire artillery systems without complete reliance on hard currency, while also expanding their export market and improving trade expertise.

Step-by-step explanation:

Analysis of Bofors AB's Trading Arrangement

The trading arrangement with India was not an ideal situation for Bofors AB given its lack of experience in countertrade. However, it provided them the opportunity to secure an important contract for the sale of FH77B howitzers by offering a beneficial term to India that helped overcome the country's hard currency shortage. To navigate the challenges of countertrade, Bofors outsourced its responsibilities by collaborating with companies like Sukab, leveraging their expertise in international trade and countertrade arrangements. This strategy enabled Bofors to fulfill the contract prerequisites and access the Indian defense market.

Benefits of the Trade Arrangement for India

For India, the countertrade arrangement was particularly beneficial. Lacking sufficient hard currency reserves to pay outright for the defense equipment, India found an opportunity to pay partially through the exchange of goods. This not only allowed them to acquire the needed artillery systems but also helped in expanding their export markets, developing better trade relations with Sweden, and gaining valuable export training. These ancillary benefits helped India beyond just the immediate transaction, potentially leading to a longer-term increase in their international trade capabilities and market reach.