This means that it could be millions more that the Danes were willing to pay, for a vehicle that still hasn’t seen a battlefield to date.
Let’s go back in time for a second. In 2014, the Danish Ministry of Defense (MoD) and the Danish Defense Acquisition and Logistics Organization (DALO) decided to replace their outdated fleet of M113 armored troop carriers and launched a European tender. In December, the MoD received final offers from four European manufacturers. The competition included BAE Systems Hagglunds, with its CV90 Armadillo, Flensburger Fahrzeugbau Gesellschaft (FFG) with the PMMC G5, General Dynamics Land Systems (GDLS) with the ASCOD (tracked) and the Piranha V (wheeled) and the Vehicule Blindé Combat D’Infanterie (VBCI) from Nexter Systems.
Unofficially, the run tests showed that the wheeled vehicles were performed better in the long run versus the tracked vehicles, which brought the options down to two main competitors: VBCI and Piranha V.
On April the 30th 2015, the MoD and the DALO announced that the Piranha V was the chosen vehicle. That decision has since risen great concerns within the Danish political world, which is now spreading to the media and the Danes themselves. Many felt deceived by the MoD because the final price that Denmark will pay is significantly different from what was originally billed to the nation. The reason may sound ludicrous: Danish officials didn’t hedge the exchange rate.
A few years ago, the American giant General Dynamics bought Swiss builder Mowag to grow its European sales. When the offer was sent on December 5th 2014, it was made by General Dynamics European Land Systems – Mowag, not in Dollars, Euros or Danish Krones but in Swiss Francs. This currency has since seen an appreciation of over 16% regarding the Danish Krone, and it’s still increasing. This is not good news for the Danes, who can end up paying 20% more for the final price… or get 20% less vehicles at the end of the deal.
Of course, defense experts, Danish politicians, and the general population aren’t thrilled by that idea. It could now turn into a major financial and political crisis in Denmark and with the upcoming elections, the Danish Government seems forced to address the Danes’ concerns.
The Danish Liberal Party’s spokesperson on defense has already described it as a “scandal of unseen dimensions” (1). The Minister of defense Nicolai Wammen (Social Democrats Party) tried to urge the opposition to calm down, stating “The offer was made in Swiss Franc. Hedging requires that a contract has been made. As it is not yet decided how many new armored personnel carriers we are to procure, a contract is obviously not yet made. It will also probably be a multiannual payment process. It can thus not be assessed how the exchange rate of the Swiss franc will influence the total procurement price. The offer price for the vehicles is commercially confidential wherefore this cannot be stated” (2).
Former Minister of Foreign Affairs and Spokesman on defense for the Socialist People’s Party Holger K. Nielsen made it clear that the Piranha V was chosen for its low price and that if it ended up being more expensive than planned, the MoD should go back on its decision. “This was clearly the cheapest and best offer, but if we find any wrong prerequisites regarding the exchange rate we will go back” he said.
But the lack of hedging and amateurism of the Danish Government is now turning into a nightmare, as questions are being raised about the Piranha V itself and the unfair practices of GDLS. The Piranha V had raised many concerns in the past, essentially because it is not a combat proven vehicle. This means that if we know how it reacts during training practices, there are still many questions that remain about its long term ability on the battlefield, including long term costs of maintenance and repairs, as well as overall efficiency.
Moreover, it is unclear how this costly mistake could have been made. If Denmark truly wasn’t aware of the exchange rate changes, it is hard to believe that GDLS didn’t plan it this way in order to win the tender. “It does not sound like sound business practice” (1) said Spokeswoman on defense Marie Krarup from the Danish People’s Party. “I find it odd to avoid hedging in large government agreements such as this one. It sounds like a true blunder” she added.
The Danish Government also wanted to make a point to not only purchase the technology, but partner with its provider in order to do relocate parts of the manufacturing to Denmark and benefit the Danish economy as well. However, GDLS is well known for not being willing to localize its assembly chains. In 2008, General Dynamics received a major armored vehicle order from the UK (for the FRES-SV) but a dispute soon rose as General Dynamics planned most of its production in Spain and not in the UK as originally planned. In 2014 the relations between the two parties were already troubled. “The first 100 vehicles are being assembled in Spain. We have an option to assemble the rest in the UK and we have asked General Dynamics to scrub the number and look at that,” (3) had declared British Procurement Minister Philip Dunne. General Dynamics at first declined to comment on the Government’s request, which made the Brits even angrier. A similar situation happened during their deal with Israel with the Namer Vehicle program. In both cases, GDLS was reluctant to assemble the vehicles in the buyer countries, arguing that it would be more expensive to do so: "The Namer is emigrating to the US" was the "Globes" headline at this time (4).
In Denmark’s case, if the MoD sticks with its original decision, GDLS won’t be willing to move the assembly line to Denmark, or at least not for the agreed price of the Piranha purchase. And even if Denmark was to cut the number of vehicles in its order because of the lack of hedging on the Swiss franc exchange rate (which can still rise until Denmark’s final payment), GDLS would probably have to raise its price per vehicle in order to keep its margin.
Denmark’s leaders are in a really delicate situation and must address it in a timely manner before the election and before it transforms into a great financial and political crisis in the country.
(1) Indkøb af panser til Hæren skal måske gå om, Nationalt, Christian Brondum, June 1st 2015, translated from Danish.
(2) Ministry of Defence Official
(3) British MoD Reconsiders Assembling Scout in UK, Defense News, Andrew Chuter, September 13th 2014.
(4) Israel halves Namer order with General Dynamics, Globes, January 14th 2014