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LONDON (Reuters) - After years of dictating the terms under which they supplied top of the range fighter planes and weaponry to a volatile third world, western defense contractors are increasingly losing the upper hand to their Middle East and Asian customers.
The global market in fighters has been a crowded place for some time, but with world defense spending falling and cuts in European and U.S. budgets gaining pace, the battle for an estimated $90 billion in orders by 2020 has become more frantic.
Industry players at the Paris Airshow this week said that has put all the cards in the hands of growing economies like the United Arab Emirates, India or Brazil who still have money to spend, allowing them to demand far more in return.
The value of reciprocal industrial contracts that firms like Lockheed Martin (LMT.N) or BAE Systems (BAES.L) are offering as part of such deals is expected to have risen tenfold in the decade to 2016 as a result, according to one industry study.
"There's a dramatic shift in aggregate demand from one part of the world to the other," Alessandro Pansa, chief executive of Italian contractor Finmeccanica SIFI.MMI told Reuters. "The shift is taking place from countries where defense companies exist, to countries where companies do not exist.
"We definitely are becoming more price takers than price makers."
Defense offsets, which funnel industry investment into the buyer country, have been around since World War Two but have proliferated as export deals increased in importance.
China, Russia, Vietnam and Saudi Arabia all raised defense spending in 2012, while U.S. and European outlays fell by 5 and 2 percent respectively and global spending slipped - to $1.73 trillion - for the first time in 14 years.
In the battle for a piece of that shrinking pie, consultancy Avascent estimates governments through 2016 will rack up $500 billion in commitments to invest and orders to suppliers in the buyer country, up from $50 billion a decade earlier.
At stake for Lockheed Martin's (LMT.N) F-35 fighter jet, the Eurofighter Typhoon backed by Finmeccanica, BAE and EADS EAD.PA, Dassault Aviation's (AVMD.PA) Rafale aircraft, the Gripen by Sweden's Saab AB (SAABb.ST) and Boeing's (BA.N) F-15 fighter are orders in Asia, the Middle East and South America.
"Many of these countries know that they're in a position of strength because everybody is scrambling for growth, so they will try and wring as much as possible out from these big deals beyond the actual aircraft themselves," said Roger Johnston, an analyst at Edison Investment Research.
"It's much wider than just the aircraft itself in terms of capability. It's what else can you offer?," he said.
India is currently exclusively speaking to Dassault on a $12 billion order of 126 war planes, while also in prospect is an order for at least 60 new aircraft to replace the UAE's Mirage fleet and a 60 jet order from South Korea.
India, which only formulated an official defense offset policy in 2005, wants 50 percent of work worth up to $6 billion from the jet contract to be given to Indian companies compared to the legislative minimum of 30 percent.
In Brazil, Boeing has invested heavily and in April announced it would establish a new research centre in the Sao Paulo state at a time when it is trying to sell its F/A-18 Super Hornet to the government.
Lockheed vice president Steve O'Bryan this week announced a new deal with Japan's Mitsubishi Heavy Industries for final assembly of its F-35 Joint Strike Fighter, designed from the outset as a collaborative global program and now including over 250 suppliers worldwide.
Contractors say such deals are essential to building relationships with governments and local players, and to getting a foothold in such markets in the long term.
But some analysts warn that companies are taking large risks for the future and that export markets will not be enough to make up for cutbacks in their home markets.
"The risks are certainly there if you're taking on huge obligations worth billions and you don't know how to do it," one senior industry source said, adding that some defense contractors were already finding it difficult to fulfill such deals.
Additional reporting by Andrea Shalal-Esa; editing by Patrick Graham