Title: Defence Procurement in Emerging Markets: Challenges
1Defence Procurement in Emerging Markets
Challenges Opportunities
- Gautam Ganapathy, Research Associate
- Aerospace and Defence
- Feb 2, 2010
2Focus Points
3Global defence spending in 2008
Source Frost Sullivan
- The global defence expenditure for the calendar
year 2008 was around 1.46 Trillion dollars with
the United States accounting for 42 of it. - Emerging economies particularly China, India,
Russia and Saudi Arabia have increased their
defence spending substantially over the past 5
years. - Substantial economic growth combined with a
commitment from the emerging economies to
invest in modernizing their defence
infrastructure augurs well for the world defence
market over the next decade. - In 2008, Asia and Oceania accounted for 17 of
the total world defence expenditure. - China, Russia, India and Saudi Arabia figure in
the list of top 10 defence spenders of the world.
4Defence spending in major emerging economies
China
- In 2008, China became the second largest defence
spender in the world - Chinas military expenditure has doubled since
1988 - China was the worlds largest importer of major
conventional weapons in 20042008, as it has been
for many earlier periods. - Almost all of Chinas imports come from Russia.
Although the indigenous Arms industry is expected
to meet most of their military demands in the
future, the key technologies and components are
expected to imported.
India
- Indias defence budget is projected to be at
least 60 Billion come 2019. A third of it is
projected to be used for fresh procurement. - In 2008, India was the second largest arms
importer - Indias major arms exporters are Russia, Israel
and recently the USA. India is looking to
diversify its exporter base in the coming years.
Source Frost Sullivan
5Defence spending in major emerging economies
(Contd..)
Saudi Arabia
- With a defence and security budget soaring above
36 billion in 2008, Saudi Arabia currently
represents the biggest market for defence
equipment within the Middle East - Defence and Security budget heavily dependent on
global oil prices and Saudi Arabia keep up its
spending as regional issues come to the fore.
Their investment will be critical for the
protection of their oil resources in the future. - Saudi Arabia is currently completely dependent
on imports for its defence capabilities. - High defence spending is also due to their
opting for really advanced capabilities.
Russia
- Russia has one of the most advanced indigenous
defence industry with a heavy focus on RD as
well. - Russias defense needs are comfortably managed
by its indigenous defence industry. Although the
Russians have been a little reluctant to go in
for imports, there is a possibility of them
importing advanced technology from the West when
it comes to defence electronics for army and navy
applications. - Soldier and force modernization high on the
priority list to modernize its ageing Soviet era
military infrastructure.
Source Frost Sullivan
6Defence spending in major emerging economies
(Contd..)
South Korea
- South Korea is in the middle of a 13-year
defence plan Defence Reform 2020 bill. This was
the Governments long-term commitment to
increased budgets. South Korea has an extensive
indigenous defence industry, but is lacking in
advanced capabilities. - South Korea is expected to up its military
budget culminating in acquisition of advanced
technologies through imports. - The projected procurement budget is around 15
Billion till 2020. - South Korea is comparatively an easy country to
penetrate as a number of foreign defence primes
already have their footprint there.
Brazil
- Brazil in the middle of a major program to
modernize its force capabilities. - Brazilian Government has placed a strong
emphasis - on revitalizing the countrys domestic military
sector. For instance, Brazil has made it clear
that purchases of military equipment from abroad
will be dependent on significant transfers of
technology to boost its domestic industry. - Brazil had a strong defence industry which was a
major exporter during the 80s. But it has shrunk
in size and Brazil is expected to rely on imports
for advanced military capabilities.
7 What is driving the spending?
- Modernization Programmes devised to upgrade
obsolete defence infrastructure - High Economic Growth rate in emerging economies
- Battle for regional supremacy
- Military spending is driven primarily by
perceived threats. They may be due to a variety
of reasons like threat from terrorists, internal
security threats due to a potential insurgency,
and regional aggressors. - The war in Iraq and Afghanistan has had
considerable influence on the growth of the
global defence market. - Advent of newer and advanced technology and
constantly evolving concepts of war. - Non-extant or inadequate indigenous defence
industry in emerging economies making them
reliant on imports for advanced platforms and
technologies.
Source Frost Sullivan
8 Key Policy Issues and Challenges facing the
industry in Emerging Economies
- China
- Perceived lack of transparency in disclosure of
defence related expenditures - Trade Embargo imposed by the United States and
the EU on the aftermath of the Tiananmen Square
crackdown in 1989. - There are concerns from major Defence primes over
China's protection of intellectual property and
the openness and accountability of its
procurement processes. - United States continued assistance in defence
procurement to Chinas rival Taiwan in spite of
the fact that neither of these two nations
acknowledge Taiwans sovereignty.
- India
- The limit imposed by the Indian Government on FDI
puts off large defence companies who continue to
demand at least an equal stake in Joint Ventures
with Indian defence companies. - The competitive bidding structure for Indian
Defence contracts is still perceived as flawed
by a number of foreign as well as local defence
firms. - With its OFFSET programme in place, India seeks
to build on its indigenous defence market by
supporting smaller companies through
re-investment from large foreign companies. This
policy shift has been critical in convincing
Foreign defence companies to form Joint Ventures
or partnerships with private Indian defence
companies.
Source Frost Sullivan
9 Key Policy Issues and Challenges facing the
industry in Emerging Economies (Contd..)
- Others
- The Russian Government has put in place a defence
procurement policy that is essentially
nationalistic in flavor. But recently, a few
foreign defence companies see opportunities
coming their way in the following sectors Ships
and Advanced defence electronics. - One of the challenges that suppliers would need
to face up to in Brazil is the issue of
technology transfer. Brazil is continuing efforts
to increase its autonomous capability in arms
production.
- Middle East
- Perceived lack of transparency in disclosure of
defence related expenditures - The procurement in the middle east is not
straightforward. There is no single window
clearance for ratifying defence deals. - US and UK companies have a solid rapport with the
high spenders in the middle east especially the
UAE and Saudi Arabia which might make things
harder and complicated for a European Company to
make its mark in this market.
Source Frost Sullivan
10Where are the opportunities?
Sectors with highest total growth potential
1
Unmanned Systems
2
2
Force Protection
1
1
High(gt10)
2
3
Military Airlift
4
Combat Aircraft
3
6
Land Combat Systems
5
CAGR for Vertical Markets
Medium(5-10)
Soldier Modernisation
6
5
4
Strategic Tactical Comms
7
9
7
8
8
Training and Simulation
Low(0-5)
Command and Control
9
Counter-IED
1
Small (lt2 billion)
Large (gt5 Billion)
Medium(2-5 Billion)
Counter Rockets and Mortar
2
Source Frost Sullivan
Annual Market Size of Vertical Markets
CAGR is calculated from 2008 - 2012
11Sectors for growth in Defence Markets
Extensive force modernization is ongoing in
China, India, South Korea, Malaysia, Pakistan,
Singapore, Taiwan and Vietnam. All have recently
introduced or are scheduled to introduce weapons
that give new capabilities for long-distance
operations, and many of these weapons are
imported.
There is growing consensus that emerging
economies will invest more in air and missile
defence infrastructure as there has been a heavy
proliferation in procurement of long and short
range missiles (All air, land and sea based).
There are a few sectors where rampant growth is
expected over the next decade in emerging
markets. They include defence electronics,
soldier modernization, unmanned systems and
increasing use of electronics equipment could
offer significant revenue potential in the form
of support contracts and through life capability
management in the later part of the decade.
As the emerging economies invest in advanced
platforms, they would be required to invest in
training their forces in using these equipments
as well. The global training and simulation
market is expected to be worth several billions
over the next decade.
Source Frost Sullivan
12Potential issues affecting the global defence
market
2008 - 2020
The Unexpected
High Impact
Major regional war in Middle East
Rapid growth in Chinas military capabilities
Reduction in defence spending in major European
markets
Adoption of Total Cost of Ownership and TLCM
Principles
Projected Impact on the Defence Industry
Stabilisation and re-prioritization of US Defence
Budget
Defence procurement by countries hit by embargos.
Russia and China providing them with an
alternative
Strong growth in Asia-Pacific Defence Markets
Introduction of new competitive forces from weak
public finances
Rapid technology cycles driving system
obsolescence
Increasing Importance of After-market Services
Introduction of new competitors / Partners from
Asia-Pacific Markets
Financial difficulties for Tier-3 sub-component
manufacturers on critical supply line affecting
delivery
Low Impact
Certainty
Low
High
Source Frost Sullivan
13Looking Ahead
- In terms of Spending Growth, the future
certainly looks rosy in emerging economies like
India, China, Saudi Arabia, UAE and South Korea.
Spending Growth in developed economies is
expected to be very low as most of the
procurement cycles in these countries has already
peaked. - In the future, maintenance and operations costs
will outstrip spending on procurement and RDTE.
- Traditional importers will increasingly looking
to develop and support local industry through
offset - Asia-Pacific is a major importer of defence
technology, but local competition are set to
become significant competitors on export markets - Oil prices volatility will have a significant
impact on defence imports, especially in the
Middle East - Companies in the later part of next decade would
want change their focus from just products to
through life solutions.
14Existing and Upcoming Research Services
Published research Indian Land Combat Systems
Market Assessment Middle East Land ISR Radar (Air
Defence/Air Surveillance) Market
Assessment Network Centric Warfare A European
Market Executive Analysis Upcoming Topics in
2010 Indian Defence Offsets - Market
Opportunities Optronics Market Assessment
(Includes Laser Range Finders) Middle East
Defence Programs - Revenue Opportunities and
Stakeholder Mapping
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17For Additional Information
Monika Kwiecinska Corporate Communications Aeros
pace Defence 48 223 904 127 monika.kwiecinska_at_
frost.com
Andrew Thorndyke Strategic Account
Manager Aerospace Defence 44 (0) 1865
398645 andrew.thorndyke_at_frost.com
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