U.S.- ITALY DEFENSE TRADE

UNCLAS SECTION 01 OF 02 ROME 000688

SIPDIS

SIPDIS

E.O. 12958: N/A
TAGS: MARR MASS PGOV EFIN ETRD IT
SUBJECT: U.S.- ITALY DEFENSE TRADE

REF: 2006 ROME 343

Sensitive But Unclassified. Not for Internet distribution.


1. (SBU) Summary. Defense trade is a crucial and mutually
beneficial component of the U.S.-Italy bilateral
relationship, in which both U.S. and Italian firms benefit
through collaboration on defense projects and technology
transfer. The Italian military is involved in seventeen
major weapon system programs and purchases approximately 380
million dollars annually from U.S. defense firms. The
Italian military prefers U.S.-made equipment because of its
quality, reliability, supportability, and because it ensures
Italian interoperability with other NATO forces. Budgetary
pressure on the Italian military has resulted in an increased
focus by the GOI on industrial participation and a reduction
in funds for military investment, procurement, and research
and development. End summary.


2. (SBU) Italian military spending is hampered by an anemic
economy and the domestic political priorities of the
center-left governing coalition. (Note. Although the GOI
projects two percent GDP growth in 2007, GDP grew at an
average of 0.67 percent between 2000 and 2005. End note.)
In 2006, the budget for the "defense function" totaled 12.107
billion euros, or 0.82 percent of GDP, and included 1.511
billion euros for procurement, research, and development. In
2007, some recovery is projected, with defense spending at
14.449 billion euros, or 0.96 percent of GDP. The 2007
budget includes 3.272 billion euros for procurement,
research, and development, intended to compensate for cuts to
the procurement budget in 2006. At 2.391 billion euros, the
average of the 2006 and 2007 funding for procurement,
research, and development falls below the 2.588 billion euros
allotted in 2005.


3. (SBU) The Ministry of Defense purchases a wide variety
of U.S.-origin defense goods. The MOD is currently leasing
or purchasing a number of aircraft, including the F-16,
AV-8B, C-130, C-17, 767 Tanker, CH-47 and Joint Strike
Fighter aircraft; stinger and TOW missiles; and Predator
UAVs. The MOD is also interested in purchasing Tomahawk
(T-LAM) missiles. Italy is a seventeen percent partner in
the Medium Extended Air Defense System (MEADS) and has
committed 595 million dollars to the program. The GOI plans
to use the Patriot Advanced Capabilities II system to bridge
the gap between the 2008 retirement of its Nike anti-missile
defense system and introduction of the MEADS system in
2012-2013. The Italian Navy recently awarded the propulsion
contract for the FREMM Euro Frigate to General Electric. In
addition to equipment purchases and leases, the GOI spends
about 120 million dollars annually to send Italian military
personnel to the United States for training.


4. (SBU) In the short-term, 2008-2009, Italy intends to
purchase Signals Intelligence (SIGINT) and CH-47F aircraft.
The SIGINT program will consist of two to three aircraft and
two ground stations, valued at approximately 300 million
dollars. The CH-47F aircraft program consists of 16-24
replacement aircraft for Italy's aging CH-47 helicopter
fleet. In the mid-term, 2009-2011, the GOI may purchase two
additional aircraft, the Airborne Early Warning and Command
(AEWC) aircraft and Multi-Mission Maritime Aircraft (MMA).
The AEWC and MMA programs are a high priority for the GOI.
Cuts in the Ministry of Defense's 2006 procurement budget
delayed purchase of these aircraft.


5. (SBU) Italy is also a Level Two partner in the Joint
Strike Fighter (JSF) program, and has invested 1.02 billion
dollars in the early stages of JSF. In February, the GOI
signed a memorandum of agreement to invest an additional one
billion dollars in JSF. Italy plans to purchase 131 JSFs,
valued at seven billion dollars. Follow-on logistics and
support contracts will raise this value significantly.


6. (SBU) In addition to sales to the Italian military,
American firms are engaged in sales to Italian security and
police forces. Motorola is currently bidding to provide the
Italian public safety agencies (Police, Carabinieri, Guardia
di Finanza, and Forestry Corps) with a TETRA (Terrestrial
Trunked Radio) communications network. In 2003, Motorola and
Finmeccanica, the Italian defense industry conglomerate,
entered into an agreement to provide a TETRA system to the
Italian public safety agencies. Finmeccanica let the
agreement lapse in 2005, and has begun exploring the
possibility of filling the TETRA contract in cooperation with
another European firm. Motorola estimates its share of the

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TETRA contract to be worth up to 12 million euros, and has
asked for USG assistance to counter Finmeccanica's moves to
cut Motorola out of the TETRA contract. Embassy and Motorola
officials have begun advocacy with high-level GOI and
Finmeccanica officials.


7. (SBU) Italian defense exports in 2006 totaled 2.2
billion euros, a 61 percent increase from 2005 exports. The
top three export markets for Italian defense firms were the
United States (exports valued at 350 million euros),the UAE
(338 million euros and Poland (227 million euros).
Finmeccanica, the Italian defense manufacturing conglomerate,
has been especially active in establishing a presence in the
United States, including the construction of manufacturing
facilities, and is pursuing a number of possible sales to the
U.S. military. Agusta Westland, a Finmeccanica subsidiary,
partnered with Lockheed Martin to win the competition for the
Presidential Helicopter replacement program (VH-71). The
VH-71 program consists of 23 helicopters, valued at
approximately 7.7 billion dollars over the life of the
program. A considerable percentage of the VH-71's components
are manufactured in Italy. Alenia, also a Finmeccanica
subsidiary, has partnered with L3 and Boeing to bid on the
contract for the U.S. Joint Cargo Aircraft (JCA) program.
The winner of this competition will be announced in May 2007
and will supply 145 cargo aircraft worth approximately six
billion dollars to the U.S. Army and Air Force.


6. (SBU) Comment. The Italian military overwhelmingly
prefers U.S.-made weapon platforms, due to their quality,
reliability, supportability, and interoperability with NATO
and U.S. forces. However, as the Motorola case illustrates,
pressure to "buy European" has increased since the election
of the center-left government last year. Additionally, U.S.
defense industry companies have come under pressure to
increase Italian "industrial participation" in defense
contracts, and have been led to understand that without more
Italian industrial participation, Italian parliamentary
approval is less likely. Despite increases in the 2007
budget for defense procurement, the pressure for improved
industrial participation comes at a time when the Italian
defense budget is under parliamentary scrutiny and amidst
increased political pressure to maintain high levels of
spending on pension and other social programs (reftel). End
comment.
SPOGLI