China steals $114 million U.S. defense deal with Peru

Beijing learns tricks in contracts market

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LIMA, Peru — Trade between China and Peru, a key U.S. ally in the regional drug war, is at a new high. Now the Chinese defense industry is getting in on the action.

Military officials from Beijing increasingly are making high-level visits, pushing initiatives to protect Chinese nationals and companies here and, in some instances, undermining U.S. arms deals in order to sell their own weapons to this resource-rich Andean nation.

Last month, for example, the Peruvian Defense Ministry canceled a $114 million contract with a consortium that included U.S. defense manufacturer Northrop Grumman after a Chinese company convinced officials that the deal did not meet technical specifications.

Peruvian officials awarded the contract in February to the Triad consortium consisting of Israel’s Rafael Advanced Defense Systems, the Polish Bumar Group and the Northrop Group to provide an air defense system.

Russia’s Rosoboronexport and a consortium of Chinese defense manufacturers also bid for the contract.

Triad won, but the state-owned China Precision Machinery Import Export Corp. (CPMIEC) applied enough pressure to derail the multimillion-dollar deal, according to Defensa.com, a trade magazine that cited unnamed Peruvian officials.

“This contract cancellation shows that the Chinese contractors are becoming more sophisticated players in the Latin America arms market,” said R. Evan Ellis, an assistant professor at National Defense University in Washington. “They are applying tactics such as legal protests against winning bids, long used by sophisticated Western defense contractors in procurement battles over major weapon systems.”

Asked about CPMIEC’s role in derailing the Triad contract, Rafael spokesman Rudoy Ravit said it would be “inappropriate to respond or comment at this time.”

A Northrop Grumman spokeswoman referred questions to the Peruvian Defense Ministry. A person answering the phones in the ministry’s press office said that, because of an ongoing change in defense ministers, no press representative was available to take questions.

Anti-U.S. army leaders

Defense industry analysts in Peru say Russia is the largest overall vendor, but CPMIEC is one of several Chinese companies well known to defense officials.

In 2009, CPMIEC sold the Peruvian army a number of portable air defense systems, according to contracts obtained in 2010 by the Peruvian newspaper La Republica.

Two other state-owned Chinese companies - China North Industries Corp., known as Norinco, and Poly Technologies - helped China sell $34 million worth of arms and equipment to Peru, making it the country’s largest supplier that year.

The contracts show that the Peruvian army negotiated the purchase of a batch of MBT 2000 Chinese-made tanks valued at $1.4 billion and meant to replace T55 Soviet-built tanks acquired during Peru’s military dictatorship.

But the sale, according to a monitor of Chinese defense issues in Latin America, never materialized because a Ukrainian contractor either could not produce needed parts for the tanks or fell under pressure from Russia not to do so.

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