Export License Requirements: Direct Commercial Sales vs. Foreign Military Sales

The United States provides more military hardware and services to the global stage than any other nation, and it isn’t even close. Sometimes, we have this idea that Russian or Chinese equipment tops the charts for use worldwide, but this isn’t the case.

The U.S. supplies over forty percent of global arms exports, roughly four times as much as the nearest competitors (France at 10.9% and Russia at 10.5%). Global arms exports are a huge business, but not everyone gets to buy from us. We’re going to talk about two similar but not identical procurement options for foreign buyers: Foreign Military Sales versus Direct Commercial Sales. 

What Is FMS?

Foreign military purchases are a federal government initiative that provides defense products, services, and training in international markets. The foreign military sales programs are funded by fees to foreign purchasers and are run without any tax liability on taxpayers. The Federal Military Support Agency (FSCA) is responsible for running FMS programs in the DoD. Under FMS, the US government purchases defense articles from its partners through DoD acquisitions. A candidate nation may buy military equipment with a private fund or via federal funds.

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What Are Direct Commercial Sales?

Direct Commercial Sales, or DCS, refers to sales and transactions the U.S. government has authorized through the Arms Export Control Act. U.S. companies approved to sell defense articles to foreign governments are granted an export license to sell their materials, services, or other articles and items. 

In the context of the U.S. State Department, which operates the Defense Security Cooperation Agency (the point agency for FMS and DCS), they do not really have a dog in the fight so they do not care whichever one the country in question pursues. It makes no difference as long as the nation is approved through its process. 

Direct Commerical Sales, in a nutshell, is where an approved nation bargains directly with the manufacturer or service provider instead of going through the FMS process, which is a government program.    

State Department Responsibility

It has the authority to recheck applications from FMS applicants. The FMS has nothing to do with assisting countries. Our objective in making this coalition stronger worldwide means we can find allies with familiar tactical characteristics. Several F-16s are used around the world for aircraft that can be integrated with our own.

Are There Other Ways To Obtain U.S. Defense Articles and Services?

Yes, there are. The defense products are offered in the United States during direct business sales. A new DCS regulation provides that US companies receive commercial export licenses from the Department of Commerce and can negotiate for and sell directly to these partners. Like FMS, DCS is subject to all relevant U.S. export regulations.

Who Can Participate in the FMS Program?

The president designates the countries and institutions that could join FMS. The state agency uniquely appointed specific programs. Around 188 countries are currently part of FMS.

Does FMS Compete with DCS?

Foreign military sales and direct commercial sales are absolutely not in competition with each other. The DOD generally does not decide whether countries purchase military products and services from foreign military companies or directly through FMS. If the purchaser wants to receive the FMS data through a contractor, he or she must prove that commercial acquisition efforts ceased. 

Foreign military sales can withdraw service offers from any buyer who obtains FMS data or has the option of asking for an estimate of the commercial price from the FMS.

Unless an item is requested for sale or transfer has been designated as a ‘foreign military sales only,’ the Department of Defense usually stays neutral as to how it is acquired. Since both methods are legal, assuming the State Department approves the foreign government for the foreign military sales program or direct commercial sales. 

Do FMS Sales Require Congressional Notification?

Foreign purchasers need to be aware of different tiers when foreign military governments want to use the FMS process. 

A federal law that requires notification for military sales that meet or exceed the following thresholds is in effect. For the rest of the world, the amount is $14 M or greater; defense articles and services worth more than $50 million; or design and construction services worth more than $200 M.

What Nations Can Participate in Direct Commercial Sales?

All the countries that have the opportunity to participate in DCS are currently thoroughly vetted and ready for action. This program's flexibility does not diminish our government's requirement of approval.

Are There Any Restrictions?

Currently it is restricted by financial constraints. The United States government only tries to fund allies who use programs that work seamlessly together with mission objectives. In terms of business it seems very plausible, but it's true. Our purpose is to become compatible partners for our Mission. Design alterations that are not relevant to American uses are no longer a priority, so they cannot be funded financially. Beyond the finances, they should serve as trusted allies in the U.S. government.

Key Steps in the Direct Commercial Process

When a foreign purchaser prepares to do business with an American company through the Direct Commercial Sales process, there are a few key steps to keep in mind. 

1. Identification of your needs: The purchasing country needs to develop a thorough roster of military items, services, and articles that it will need for the mission in question. They’ll want to assess the operational requirements and any gaps they currently have in mission capabilities and then figure out if there is specific equipment, tech, or services they need to fill the gaps. 

2. Conduct thorough market research: a foreign purchaser needs to conduct market research to identify suppliers who can meet the needs. Industry tradeshows remain a top way to network for these types of things. 

3. Much like the U.S. government’s process, the foreign representative must issue a Request for Prosal (RFP), outlining specifically what they need. This not only includes the military gear, services, or defense articles, but also design specs, quantity, delivery schedule, and terms & conditions. 

4. The proposal is submitted: U.S. defense contractors will submit a proposal to the RFP, just as they would to the U.S. government. Proposals need to include pricing, technical specs for the items requested, a delivery timeline, and any associated support or services that are part of the package.

5. Selection time: The foreign governments have reviewed all proposals and will now enter a selection. This is all assuming they have already been approved for FMS and DCS, of course. 

6. Once a selection has been made, the foreign purchaser and the selected contractor enter into negotiations. 

7. Award of contract: At the conclusion of negotiations, a contract is ultimately awarded. The contract will include all of the agreed-upon terms, such as what equipment was ordered and prices. 

8. Execution, delivery, acceptance, and payment: This stage could take years to realize fully. For instance, when a country orders a shipment of aircraft, it will take several years to deliver all of the airplanes. Throughout the process of receiving equipment, the receiving nation will inspect the finished products to ensure they have been delivered to spec. 

9. Post-sales support, compliance, etc. The project was still not completed upon delivery. Generally, the supplier or contractor will provide a level of service to make sure that the product works as advertised or the service meets the levels described in the contract. Since this is an overseas purchase through DCS, compliance must also be monitored and documented. This is for the supplier and the foreign purchaser to cover their hind ends. Failure to ensure compliance can lead to stiff penalties for the supplier and cancellation of FMS or DCS eligibility for the foreign nation. 

Parting Thoughts

The Direct Commercial Sales process is integral to our national security strategy. It allows the U.S. government to arm our allies who have similar values and interests with the best weaponry and support in the world. Also, war equipment is compatible with our military’s, simplifying wartime logistics.  

Greenwood Aerospace is your trusted partner in FMS, with over four decades of experience working with FMS programs from start to finish. Don’t get in over your head; give us a call first to see how we can help!

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