Eastern promise: Southeast Asian opportunities and challenges

Transcription

1 Eastern promise: Southeast Asian opportunities and challenges [Content preview Subscribe to IHS Jane s Defence Weekly for full article] Southeast Asia is becoming increasingly attractive for foreign defence companies looking for new opportunities, but continuing challenges mean gaining market share is far from guaranteed. Jon Grevatt reports With mounting regional tension, expanding defence budgets, and significant gaps in military capabilities, Southeast Asia is proving an appealing defence market for exporters looking to meet revenue targets against a backdrop of economic constraints at home. The Royal Thai Army ordered six UH-72A Lakota light-utility helicopters from Airbus Helicopters in (Airbus) In recent years numerous global defence companies have expanded their presence in the region, setting up and developing headquarters in Singapore, Malaysia, and Thailand as they look to position themselves in a region expected to be one of the world's fastest-growing defence markets over the coming decade. However, the opportunities in the market have also supported the evolvement of fierce competition. Defence contractors from all the major export nations, China, Europe, Israel, Russia, South Korea, and the United States, are in direct competition for contracts. Page 1 of 8

2 Strategic drivers The most important factor driving military modernisation in Southeast Asia is escalating offshore border tensions. While territorial disputes in the region are far from new, they are increasingly a concern for Southeast Asian countries as a direct result of China's growing assertiveness over its claims to much of the region's offshore territory. These assertions - framed by Beijing's infamous 'nine-dash-line' claim that overlaps with the economic zones claimed by several regional countries - are unlikely to abate due to a controversial international tribunal ruling in July that said China's ownership claim had no legal basis. China's assertiveness has been evidenced through its growing military manoeuvres and activities within the nine-dash-line area as well as an escalating programme of land reclamation and island building, some of it featuring the construction of military bases. For instance, in April 2015 IHS Jane's reported that China had begun building its first airstrip in a region of the Spratly Islands, claimants to which also include Brunei, Malaysia, the Philippines, Taiwan, and Vietnam. While China's growing economic and military might are supporting its increasing aggression, Southeast Asian countries' claims - and their requirements to modernise military capabilities - are being driven equally by a need to protect sovereignty and secure assets such as natural resources and exploitable minerals, particularly hydrocarbons. Underscoring the requirement to secure these assets, the US Energy Information Administration (US EIA) said in 2015 that Southeast Asian countries are "exerting an increasingly important influence on world energy trends". The agency added that, while oil production will remain flat in the region for the next few years before a steady decline, Southeast Asian natural gas production will grow significantly over the next few decades. The US EIA also highlights the potential for growth, stating that countries such as Vietnam and Indonesia own expansive underexplored offshore territory. Implications for procurement The expansive requirements in Southeast Asia to secure and protect offshore territory bring with it a clear emphasis on developing power-projection capabilities. This means that nearly all the countries in the region are looking to acquire all manner of air and sea platforms that not only enhance combat capability but also improve air- and sea-lift, interdiction, air defence, logistics, search and rescue, and C4ISR. Page 2 of 8

3 Malaysia is looking to upgrade its fleet of armoured vehicles, including its fleet of Alvis Vehicles Scorpion light AFVs. (BAE Systems) Many of these capabilities, for example C4ISR and air-lift, double-up to meet land-based requirements, although continuing purchases in the region of main battle tanks, artillery, and most kinds of military combat and transport vehicles also suggest that land-based concerns remain relatively high, reflecting, in part, ingrained regional rivalry and suspicion. However, while Southeast Asian procurement requirements are relatively similar in nature, the realistic acquisition targets that each country pursues vary due to economic wherewithal and strategic relationships. For the most part military equipment that is 'good enough' - i.e., not the most advanced in its class - will suffice. Singapore generally looks to procure more sophisticated materiel from the West, while the Philippines has a tendency to acquire ageing second-hand equipment. Indonesia, Myanmar, and Vietnam, meanwhile, have traditionally been dependent on Russian equipment often supported by commodity-based repayment mechanisms and loans from Moscow banks. Defence spending Although the economies of Southeast Asia remain relatively strong, GDP growth remains behind what it was a decade ago when double-digit expansion in certain countries was not uncommon. Despite this, growth is still apparent at a rate way above much of the West. According to IHS Global Insight, the eight leading regional countries ( excluding East Timor and Laos) experienced 4.12% annual GDP growth between 2013 and 2016 and are forecast to register 4.58% growth between 2016 and Page 3 of 8

4 Average defence spending increases across these eight countries between 2013 and 2020 are higher than GDP growth during this period at 4.79%, while forecast regional defence spending increases between 2016 and 2020 are higher still at 4.91%. In monetary terms, total defence spending in the region is forecast by IHS Jane's Defence Budgets to rise from USD36.4 billion in 2016 to USD44 billion in 2020: an overall increase of 21%. During this timeframe the biggest overall spender will continue to be Singapore, although Indonesia's defence budget will grow the fastest, climbing an overall 40%. Moreover, IHS Jane's Defence Budgets expects Indonesia's defence budget to overtake Singapore's by the end of the decade, with a forecast expenditure of USD10.9 billion in Underscoring regional countries' commitment to modernising their respective militaries, spending on defence investment - i.e., research and development (R&D) and procurement - is forecast to expand at a faster rate than the combined defence budgets. Key suppliers In terms of Southeast Asia's most prominent suppliers there are no major surprises. Data provided by IHS Jane's Balance of Trade showing contracted deliveries to six regional countries (Indonesia, Malaysia, Philippines, Singapore, Thailand, and Vietnam) between 2009 and 2018 reveal that Russia and the United States lead, followed by France, South Korea, and Germany. However, other countries that have secured export success in the region include Australia, Brazil, China, Italy, Israel, Sweden, Ukraine, and the United Kingdom. Top 15 military suppliers to Southeast Asia (contracted deliveries). (IHS) The IHS data also reveals the extent of competition in the region. Indonesia and Malaysia, for instance, can each count on more than 30 military suppliers between 2009 and 2018, while Vietnam and Thailand have 20 or so, and Singapore - the least diversified - has only about 12. The statistics also reveal regional countries' respective favourite suppliers. Russia's success in the market has depended on sales to Indonesia, Malaysia, and Vietnam, while the United States is favoured in Philippines, Singapore, and Thailand. It is France that has the widest export presence Page 4 of 8

5 across the region, while suppliers from Sweden and South Korea can point to Thailand and Indonesia respectively as their strongest regional export markets. Indonesia has procured several batches of Russian Sukhoi Su-27 and Su-30 fighter aircraft over the past 15 years and is understood to be considering the purchase of additional Sukhoi platforms. (Royal Australian Air Force) But it is also the case that the market is shifting and Russia's dominance is waning. IHS Jane's believes that this trend will continue for the foreseeable future and can be attributable to several factors. Firstly, some regional countries not previously aligned with the United States are gradually turning as a result of the United States rebalancing effort that seeks to strengthen US influence in the region. US moves to lift the arms embargo on Vietnam in 2016 and normalise military relations with Indonesia in 2010 have been supported by additional efforts to strengthen ties with countries including Malaysia, Philippines, and Singapore. These closer ties are supported by US pledges to share know-how, enter joint production programmes, expand opportunities for trade through aid, support greater interoperability with the United States, and - probably most importantly - offer allied status with a major regional maritime power and access to some of the world's most sophisticated military technologies. Routes to market Over the past decade regional countries' increasing emphasis on indigenous industrial development has made partnerships with local companies the primary route to market. Given the developing capability of local industry, these partnerships have not usually focused on facilitating joint R&D and localised production of sophisticated platforms, but still offer a variety of potential activities that will not only enable a foreign contractor to meet industry engagement obligations, but will also support its efforts to expand presence in the market. Page 5 of 8

6 The Royal Malaysian Navy is said to have begun initial evaluations of the AW159, seen here in Royal Navy livery, for its anti-submarine warfare helicopter requirement. (Crown Copyright) Only Malaysia operates an official defence offset policy, with the remaining countries prefer to place emphasis on flexible industrial participation programmes that can be directed at national objectives on a case-by-case basis. In this respect key activities in the region have tended to focus on transferring technologies and know-how to facilitate production of more basic platforms, including offshore patrol vessels, armoured vehicles, artillery, and transport aircraft; localised component production; maintenance, repair, and overhaul capabilities; and logistics support. Indonesian state-owned shipbuilder PT PAL is expected to complete the licenced construction of a South Korean Type 209 Chang Bogo-class diesel-electric submarine by the end of the decade. (Howaldtswerke-Deutsche Werft) Page 6 of 8

7 In recent years there has been some evidence of greater levels of ambition - highlighted by Indonesia's plans to license-build one of three submarines ordered from South Korea's Daewoo Shipbuilding and Marine Engineering - but the only regional country whose industry is able to consistently engage in more advanced programmes is Singapore. For instance, in its programme to procure two Type 218SG-class diesel-electric submarines from Germany's ThyssenKrupp Marine Systems, Singapore Technologies Electronics was selected by the government to jointly develop the associated combat management system in collaboration with Atlas Elektronik. Saab has offered its Gripen multirole combat aircraft to meet a requirement in Malaysia. (Czech MoD) Market challenges Balanced against some of the positives in the Southeast Asian defence market are a host of challenges that can deter market entrants. These challenges are usually related to local industrial engagement, corruption, delays and excessive bureaucracy, opaque procurement processes, and questionable decision-making processes. Page 7 of 8

8 A British F-35B Joint Strike Fighter performs a vertical landing manoeuvre at Marine Corps Air Station Beaufort in South Carolina. Singapore has reportedly expressed interest in this model. (IHS/Kelvin Wong) While Singapore stands alone in Southeast Asia in terms of its ability to procure the most sophisticated equipment, it is also the only country to subject military procurement to a rigorous checking system designed to ensure competition, transparency, and value for money. Elsewhere, military procurement remains a less robust activity where the most cost-effective and bestperforming piece of equipment does not necessarily win contracts. Equally important can be levels of proposed industrial engagement as well as personal relationships with decision-makers in the defence ministry and military. For the full version and more content: IHS Jane's Defence Industry and Markets Intelligence Centre This analysis is taken from IHS Jane s Defence Industry & Markets Intelligence Centre, which provides world-leading analysis of commercial, industrial and technological defence developments, budget and programme forecasts, and insight into new and emerging defence markets around the world. IHS defence industry and markets news and analysis is also available within IHS Jane s Defence Weekly. To learn more and to subscribe to IHS Jane s Defence Weekly online, offline or print visit For advertising solutions contact the IHS Jane s Advertising team Page 8 of 8