The U.S. Defense Contractor: A Different Kind of MNC

The American multinational corporation played a much different role in Iran in the 1970s than it had in Taiwan in the 1960s. In the case of Taiwan, the prosperous MNC was widening horizons, searching for both cheap labor and new markets. In the case of Iran, the American defense contractor was concerned with salvaging the US defense industry which, in the late 1960s, had fallen upon hard times.

Based on declining orders from the Pentagon, a US foreign trade deficit, and increasingly energetic competition from foreign defense firms, there was a pressing need to augment exports. Accordingly, Nixon and Kissinger both

tended to regard arms selling as an extension of diplomacy, in the nineteenth century tradition, and neither had serious inhibitions about their means. The humiliation of Vietnam, and America’s weakened economy, had engendered more skeptical and short-term diplomatic attitudes, treating arms as counters in the world’s game with which to bargain for settlement or placate client-states.

Nevertheless, as a consequence of increasing weapons sales, by 1972 the arms industry was beginning to enter a period of recovery.  The following year the Pentagon more than doubled foreign sales — from $3.9 billion in 1973 to $8.3 billion in 1974. The liberal sales policy had particular bearing in Iran where, by 1976, forty US companies had personnel stationed to work on military contracts. The largest operations were those of Bell Helicopter International (Army Aviation) and the Grumman Aircraft Corporation (F-14).

By the mid-1970s, Bell had 1,700 employees working on a forty-five acre Isfahan base. The large support staff was necessary because Bell helicopters required eight to ten hours of maintenance for every hour of flight. Iran was unable to provide the skilled labor required. Grumman was to have a similar number of employees and dependents based in the city.

The Grumman Corporation (Another Kind of Multinational)

In his May 1972 meeting with President Nixon, the shah presented evidence that high-flying (80,000 feet) Russian Foxbats — MIG25s — had been operating Over Iranian soil. The monarch expressed concern over this occurrence as well as over his perception of growing Soviet influence in the Indian Ocean-Horn of Africa region. Convinced of the need for deterrence, the US offered the purchase of either the F-14 or F-15 advanced fighter aircraft.

The shah selected the F-14 primarily because it carried the Phoenix weapons system which was the only system capable of reaching the high-flying Soviet planes. The F-14, manufactured by the Grumman Corporation based in Bethpage, New York, was the first entirely new American fighter to be designed for a decade. It first flew in December 1970. The most expensive fighter ever built, the plane’s manufacture had almost bankrupted Grumman. In 1971, the project lost $18 million and the following year $79 million. While the navy had at first paid more and then loaned Grumman money, the company had decided to conduct a search for foreign buyers.

Desperate to make a sale, Grumman hired an Iranian-American lobbyist (Houshang Lavi) with close ties to the regime, promising to pay him $28 million if Iran’s purchase of the Tomcat was formalized. By August 1973, the shah had decided to order the plane. In August 1974, however, the sale was jeopardized when Congress unexpectedly voted to cut off the navy loan which was subsidizing the plane’s production, forcing Grumman to come up with $200 million in six weeks or go under.

Fortunately, for the Long Island based firm, the shah intervened. Iran’s government-owned bank, Bank Melli Iran, agreed to loan $75 million to help ensure the delivery of the planes, an action which encouraged American banks and consortia to put together the credits necessary to bail the defense contractor out. In essence, the shah was sharing the cost of the planes with the US Navy.

In January 1976, ahead of schedule, the first Tomcat was delivered to Iran, accompanied by 800 workers and their dependents. Soon the company was sending not only planes but engineers, administrators, and instructors to support the aircraft.

As a consequence of the Shah’s patronage, both Iran and Grumman were locked into an alliance which was subsequently to become extremely contentious.

Tensions emerged when the Iranian deputy minister for war, General Toufanian, discovered that Grumman had paid $28 million to agents, an amount that had then been fed back into the contract for Iranian government reimbursement.

The general announced at a press conference:

This shows that the foreign companies want to loot us. We will not allow this and we will pull the extra money out of their throats.

While perhaps the most public, this would not be the only strain in the relationship. Both the US and Iran had underestimated the management problems inherent in the new programs. Moreover, US service personnel had not informed the Iranians of the complexities involved in achieving fighter readiness.

Unlike the American multinational in Taiwan or the Soviets at Isfahan’s steel mill, Grumman could not employ large numbers of local managers and technical experts. As a report to members of Congress stated:

The government of Iran is attempting to create an extremely modern military establishment in a country that lacks the technical educational and industrial base to provide the necessary trained personnel and management capabilities to operate such an establishment effectively. Iran also lacks experience in logistics and support operations and does not have the maintenance capabilities, the infrastructure (port facilities, roads, rail nets, etc.) and the construction capacity to implement its new programs independent of  outside support.

Thus, the back-end process — issues of procurement, finance, logistics, maintenance and training — had important implications.

Eventually urban pressures arising from the impact of the aircraft’s acquisition on Isfahan’s social, economic, and built environments would be linked to revolutionary circumstances.