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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.

Luis Giacoma, a former instructor at the Peruvian army's and navy's intelligence schools, said the army is more politically powerful and more anti-U.S. than the other military branches. He also said China's increasing investment and trade influence are likely leading to increased pressure on Peru's defense officials to look hard at Beijing's military offerings.

"The navy and air force tend to favor relations with the U.S.," he said. "But the army leadership is vehemently anti-U.S. and favors links with China and Russia."

President Ollanta Humala, a populist leader whose father is a communist activist, is a former army colonel. In November, his defense minister, Daniel Mora, signed a memorandum of understanding with Guo Boxiong, vice chairman of China's Central Military Commission.

"The current bilateral relations between China and Peru are at one of the best moments in history," Gen. Guo told reporters during the meeting in Lima. "We emphasize the development of relations between the two states and between both armed forces."

Increasing investments

Gen. Guo said the countries' militaries have deepened ties with "frequent high-level visits."

Mr. Mora, now a congressman, said he doesn't think Peruvian officials will start favoring Chinese arms makers because of the communist nation's growing economic influence.

"Chinese armaments have not had particular prestige internationally," he said. "But they are improving on them and are eager to put their products out to the world, just like any other country."

Since a free-trade agreement between the two countries took effect in 2010, China has replaced the U.S. as Peru's largest export market. It also has become Peru's largest investor in mining projects, some of which have provoked protests from indigenous groups complaining of social and environmental exploitation.

Mr. Giacoma said that 17 Chinese intelligence officials met last year with their Peruvian counterparts at the Peruvian army's headquarters.

"I've been told they discussed Chinese arms sales and plans on how to ensure the security of Chinese workers and investments," he said.

Mr. Ellis said in an email that the growing physical presence of Chinese companies in the region "will force [China] to confront challenges that others doing business there have long faced: management-labor relations, negotiations with local governments, opposition by environmentalists and local communities, and physical security, among others."

He noted that, in Colombia, Chinese officials are working with their security counterparts to secure the release of Chinese oil workers kidnapped last June. He also cited a case in Honduras where the government is using the armed forces to provide security for the Chinese company Sinohydro, which is building the Patuca III hydroelectric project.

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