Saudis a Fading Target for Brazil Arms Industry : Military: The U.S. move to sell the kingdom more sophisticated weapons reduces the chances for Third World suppliers. Some are in deep financial trouble.

Brazil’s arms industry, once the biggest in the Third World but now in deep financial trouble, desperately needs new business. So as Saudi Arabia stocks up on military equipment, Brazil is hoping for a share of the sales.

But with the United States dominating the Saudi arms market, Brazilian prospects there seem uncertain at best.

Engesa, a Brazilian company that builds armored vehicles, has been trying to close a $2.2-billion deal to provide Saudi Arabia with 318 Osorio battle tanks. To please the Saudis, Engesa even calls the tank the Al Fahd, as in King Fahd.

Engesa’s main competition is General Dynamics of the United States. And a $7.5-billion list of planned U.S. arms sales to Saudi Arabia, announced Thursday by the White House, includes 150 General Dynamics Corp. tanks, the M1-2A Abrams.

Production recently began on a Saudi order of 315 Abrams tanks approved last year, and a new list of planned sales to be announced in January is expected to include more of the tanks.

In the past, Israel has objected to proposals to sell such sophisticated armaments as Abrams tanks to Arab countries, but the Persian Gulf crisis has convinced the U.S. government of the need for more. That reduces the chances for other countries to sell less sophisticated equipment to the Saudis, said Shelley Stahl, a researcher at the Washington-based Carnegie Endowment for International Peace.

“I would guess that a lot of Third World suppliers are going to be sort of frustrated now that the United States is willing to sell (the Saudis) more stuff because of the crisis,” Stahl said in a telephone interview.

Some Brazilian newspapers already have reported that Saudi Arabia has decided not to buy any Engesa tanks. But Miguel Whitaker Pinto, an Engesa executive, said the company still has hopes.

“We don’t have any news, good or bad,” he said. “We don’t have any information from the government of Saudi Arabia.”

Engesa sold thousands of troop carriers and other armored vehicles to Iraq during the Iraq-Iran War. Those sales stopped in 1987, Pinto said, because Iraq stopped paying.

Iraq reportedly owes Engesa $80 million, one reason the company is in financial trouble; another is the reported expenditure of $100 million to develop the Osorio tank. Pinto said he could not confirm either figure.

He did confirm reports that Engesa owes its creditors about $200 million and, under a legal agreement with them, must pay 40% by March to avoid bankruptcy.

Another major Brazilian arms builder is in similar trouble. Avibras, which makes rockets and missiles, also owes about $200 million and must pay 40%--$80 million--in January.

Avibras recently sold Saudi Arabia a shipment of short-range, ground-to-ground rockets. The rockets, made for truck-mounted Astros-2 multiple-rocket-launchers previously sold to the Saudis by Avibras, were worth up to $70 million, industry sources said.

The company is said to be hoping for more sales to Saudi Arabia worth several times that amount. But the latest U.S. package for the Saudis also includes rockets and launchers, an indication that Avibras faces competition.

Industry sources say Avibras’ billing dropped from $350 million in 1987 to $10 million last year. As a result, the company has laid off all but 400 of its 6,000 employees.

The Brazilian military is buying few weapons, making things even harder for the arms industry. Fernando Batista Costa, vice president of the Brazilian Assn. of Defense Industries, said government austerity measures have cut military budgets nearly 50% since March.

He said most of that comes out of equipment purchases because “you can’t cut out food for the troops.” As a result, some weapons-supply contracts have been canceled and new orders have nearly dried up.

“We are all at the doors of bankruptcy,” said Costa, who operates a company that supplies naval electronics equipment. “The whole industry is in difficulty.”