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It's Raytheon Vs. Thomson


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IT'S RAYTHEON VS. THOMSON

It may set the standard for global defense conversion. In late July, Brazil is expected to award a $1.2 billion contract for a system designed to guide aircraft through Brazilian skies--and help preserve the Amazon rain forest. Relying on an elaborate network of satellites, airplanes, ground sensors, and computers, the system would monitor rain-forest deforestation, pollution, Indian migration, climate changes, and drug-trafficking in an area the size of the Western U.S.

At stake: key jobs at two of the world's premier defense giants--and the Clinton Administration's reputation for export promotion. In the running are Thomson CSF, which is 40%-owned by the French government, and Raytheon Co., the fifth-largest defense contractor in the U.S. Both have lined up government heavyweights to intercede on their behalf. With Thomson gear already entrenched in Brazil's air-traffic-control system, Raytheon is backing its bid with its technological expertise in missiles. The company says a win would mean 1,100 jobs in the U.S. during the next two decades.

FULL COURT PRESS. With so much at stake, it's no surprise the deal has become a highly visible slugfest. Senior officials from France and the U.S. have been lobbying hard. In late June, Commerce Secretary Ronald H. Brown, who has made export promotion a top priority, met with Brazilian President Itamar Franco to advance Raytheon's case. Raytheon Chairman Dennis J. Picard separately met with Brazilian officials. A day earlier, Brazilian officials met with French Foreign Trade Minister Gerard Longuet and Bank of France Governor Jean-Claude Trichet.

Anticipating a heavily subsidized bid from government-backed Thomson, the Export-Import Bank of the U.S. has prepared what a spokesman says is "by far the largest subsidy Ex-Im has ever made." It would also be the first time in five years that the agency has lent money to a state-backed Brazilian corporation, a spokesman says. Neither Ex-Im Bank nor Raytheon would disclose terms of the U.S. proposal. But Brown said of the U.S.'s financing package vs. France's: "We intend not only to match it but to surpass it."

Both companies could use the business--but none more than Raytheon. Thomson CSF is already the most profitable division of Thomson, one of France's largest conglomerates. After several years in the doldrums, export orders for its military equipment have begun rising. But it, too, faces shrinking French government spending on defense. ""Winning the Brazil contract would reinforce Thomson CSF's so far successful restructuring efforts to cope with sinking defense budgets," says a Thomson spokesman.

Raytheon's government defense contracts, on the other hand, have fallen by a total of almost $1 billion since 1990, and the company has been cutting jobs at a rate of more than 300 a month since then. In April, it lost a key contract: The government selected Loral Corp. to make the warhead for the next generation of Patriot missile. That decision cost Raytheon some $2 billion in potential revenue beyond 2000, when the Patriot is expected to be replaced, according to Prudential Securities Inc. defense analyst Gary Reich.

MOVING OUT. A win could give Raytheon's diversification strategy new legs. More than half of its revenues now come from such nondefense businesses as appliances, commercial aircraft, and engineering and construction services. It has also had some initial success in commercializing military technology: Raytheon is a major subcontractor on Motorola Inc.'s multibillion-dollar Iridium project to build a global satellite phone network. And it's developing electronic controls for high-speed trains for Amtrak.

Indeed, while the Brazil project would be Raytheon's biggest defense-conversion project, it would not rank among Raytheon's top 10 contracts. Nor would it have any immediate impact on its bottom line, says Prudential's Reich. That's because the contract is spread out over 20 years and requires that a large (though undisclosed) percentage of production to take place in Brazil.

This head-to-head battle may fizzle: One Brazilian official says the contract could end up being divided between the two companies. There's also the possibility that even showcase technology might not solve Brazil's problems with deforestation and mining. Says Environmental Defense Fund Senior Scientist Stephan Schwartzman: "The Brazilian government already knows a lot about illegal mining and deforestation, but they haven't acted. Will they change?"

Raytheon and Thomson can't answer that. But they would both like to give Brazil the chance to show they're serious about the environment.Geoffrey Smith, Boston with Amy Borrus, Washington By Bill Hinchberger in Sao Paulo


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