Who Lost Korea? Boeing Did
Sep 24th 2013 7:08PM
Updated Sep 24th 2013 7:10PM
Score this one Yogi Berra -- 1 : Rich Smith -- 0.
Last week, the Financial Times confirmed that both the BAE Systems / EADS /Finmeccanica Eurofighter Typhoon and Lockheed Martin's F-35 stealth fighter had officially priced themselves out of competition for a 60-plane, $7.7 billion Korean fighter jet contract. Given that Boeing had already (1) won both of the first two rounds of bidding in this "FX" defense contract; that (2) its F-15SE near-stealth fighter jet was the cheapest of the three planes being offered, and that (3) none of its competitors could possibly win, I told you that Boeing had the contract in the bag.
I was wrong.
Boeing missed it by that much with its F-15SE fighter jet. Source: Boeing Korea.
And Yogi was right
Yes, Yogi was right: It really is "tough to make predictions, especially about the future."
Turns out, South Korea's Defense Acquisition Program Administration (DAPA) wasn't just interested in getting a good price on its fighter jets. Korea had its heart set on the "Porsche" model -- Lockheed's fifth-generation F-35 Lightning II. So when Boeing offered to sell Korea a souped-up Chevy with pinstripes and a wicked spoiler instead (the so-called F-15 Silent Eagle), Korea demurred.
What do the Koreans really want? In a word: stealth. As DefenseNews.com explained it earlier today, given "the current security situation, North Korea's nuclear program and... the rapid development of aviation technology," South Korea thinks any offer of a plane that's less than fully fifth-gen, and not completely stealthy, is a non-starter.
That's bad news for Boeing (and for Eurofighter, too) because the cold hard truth of the matter is that neither of their jets is truly stealthy -- not to the extent of Lockheed's fifth-gen F-35. Thus, it appears the odds of winning this competition have reversed. Lacking a fifth-gen fighter to offer Korea, it's now Boeing (and Eurofighter) that cannot possibly win this contract. It's now Lockheed's contract to lose -- if only Lockheed and Korea can agree on a price.
At last report, $7.7 billion won't seem to cut it. But there is still wiggle room. Lockheed just won a deal to sell the Netherlands 37 Lighting IIs for about $173 million apiece. This suggests that the Koreans can buy about 45 Lightning IIs for their stated budget of $7.7 billion.
Or they could increase their budget by a third to buy the full five dozen F-35s.
Or -- in the happiest scenario -- Lockheed's continued contract wins could enable it to ramp up F-35 production to a point where it starts enjoying economies of scale and can lower the per-plane price.
What happens next
Luckily, Lockheed now has 12 months to try to make that last option work. Having rejected all offers on Tuesday, DAPA says it plans to start FX-III over from scratch, reassess its budget, reassess its requirements, and choose a new winner in a process that "will take about a year."
And Boeing? Boeing tells me it's "deeply disappointed by the Republic of Korea's... decision." And now it's Boeing's turn to reassess its "options."
The article Who Lost Korea? Boeing Did originally appeared on Fool.com.Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool owns shares of Lockheed Martin. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insightsmakes us better investors. The Motley Fool has a disclosure policy.
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