From Supply Chain Management Encyclopedia
A politically focused but fair definition states: Offset is the practice whereby government buyers seek compensation for the loss of technical and financial investment in domestic industries caused by their acquisition of foreign-manufactured equipment.Offset transactions are a wide class of countertrading that increasingly represents the most prevalent arrangements where capital goods are supplied and paid for by the customer and as a ‘quid pro quo’ the supplier identifies other goods or services which can either be purchased for the supplier’s own requirements or marketed to third parties for the purpose of developing new export sales </ref>. On the other hand, the customer may seek inward investment from the capital goods supplier. The countertrade transaction is intended to generate a new income stream for the customer to mitigate the overall economic costs of purchasing the initial capital goods.
Offset transactions are a wider class of countertrading that increasingly represents the most prevalent arrangements where capital goods are supplied and paid for by the customer and as a quid pro quo the supplier identifies other goods or services which can either be purchased for the supplier’s own requirements or marketed to third parties for the purpose of developing new export sales . On the other hand, the customer may seek inward investment from the capital goods supplier. The countertrade transaction is intended to generate a new income stream for the customer to mitigate the overall economic costs of purchasing the initial capital goods. According to explications of the HMV Group Frontier Solutions TM that is forming Leading Software Solutions for the US Defense Market, offset considerations are a critical aspect of any sales transaction to a foreign country. For the last time, purchasing governments have increased the emphasis placed on reciprocal trade agreements to compensate partly their military expenses. Governments utilize offset arrangements to benefit their state economy beyond the purchased military goods. With proper consideration, offset requirements are an opportunity to gain an advantage against the competition. Currently, at least fifty countries require offsets arrangements in military or aerospace purchases, while another fifty countries have enacted provisions to utilize offsets. Offset arrangements are very common in the Middle East and Eurasia.
Offset Classification 
- Direct Offsets: Contractual arrangements that involve defense articles and services referenced in the sales agreement for military exports. Direct offset is a form of compensation to a purchaser involving goods or services that are directly related to the item being purchased . For example, as a condition of a military exporting country’s sale, the contractor (exporter) may agree to permit the purchaser (importer) to produce in its country certain components or subsystems of the item being sold. Normally, direct offsets must be performed within a specified period. Sometimes, they include into the list of direct offsets a co-production (See below), licensing, subcontracting, and joint venturing. Naturally, if the main features of offsets are revealed herein.
- Indirect Offsets: Contractual arrangements that involve goods and services unrelated to the exports referenced in the sales agreement.Indirect offset is a form of compensation to a purchaser (importer) involving goods or services that are unrelated to the item being purchased . For example, as a condition of a sale the contractor (exporter) may agree to purchase certain of the customer's domestically manufactured products, agricultural commodities, raw materials, or services. Indirect offsets may be accomplished over an expected, open-ended period of time.
- Co-production: Overseas production based upon a government-to-government agreement that permits a foreign government(s) or producer(s) to acquire the technical information to manufacture all or part of a country-exporter's origin defense article. Co-production includes government-to-government licensed production, but it excludes licensed production based upon arrangements with exporting manufacturers in the exporting country.
Table 1. Subjects and Features of Offset Arrangements
|Subjects of Direct Offsets||Comments to Direct Offsets||Subjects of Indirect Offsets||Comments to Indirect Offsets|
|Local assembly and procurement of locally made components||
||Assistance in export marketing.||
||Technical and professional training||
||Civil construction projects||
|Research & Development||
|Maintenance and servicing||
||Commodities and semi-manufactured goods||
Generalized offset transaction scheme
EXAMPLE: As it is well-known for the case in military aircraft deals, there were offsets involved. Some are industrial, including a service center for the aircraft in Malaysia, but one offset was especially interesting an is given herein to show an offsets variety. According to Victor Komardin, Deputy Director General of Rosoboronexport:“…the offset clause of the Contract with Malaysia envisages the on-site setup of the Service center for the Russian-made aircraft as well as the assistance in promoting the Malaysian national space program. In autumn 2007 the first Malaysian cosmonaut is due to visit the International Space Station as a member of the 16th space crew.” And it was so. The ISS got a Malaysian visitor, orders progressed, and all 18 SU-30MKMs were delivered.
- ↑ Definitions - http://www.stemcor.com/definitions.aspx
- ↑ Offset/Countertrade - http://www.stemcor.com/offsetcountertrade.aspx
- ↑ Offset Ventures, HMV Group, LLC OFFSET Information - p.3. - http://www.docstoc.com/docs/33971994/What-is-an-offset-agreement
- ↑ ibid, p.1.
- ↑ Offsets of Foreign Military Sales - http://www.acq.osd.mil/dpap/cpic/ic/offsets_of_foreign_military_sales.html.
- ↑ ibid
- ↑ Holmes, J. Preparing The Offset Proposal - Barter News - http://www.barternews.com/offset_proposal.htm
- ↑ The SU-30MKM Deal: Old Offsets & New Opportunities - http://www.defenseindustrydaily.com/malaysia-receives-first-2-su30mkms-03336/