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Defence Procurement in Emerging Markets: Challenges

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Title: Defence Procurement in Emerging Markets: Challenges


1
Defence Procurement in Emerging Markets
Challenges Opportunities
  • Gautam Ganapathy, Research Associate
  • Aerospace and Defence
  • Feb 2, 2010

2
Focus Points
3
Global 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.

4
Defence 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
5
Defence 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
6
Defence 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
10
Where 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
11
Sectors 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
12
Potential 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
13
Looking 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.

14
Existing 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
15
Next Steps
  • Request a strategic approach document for a
    Growth Partnership Service or Growth Consulting
    Service to support you and your team to
    accelerate the growth of your company.
    (myfrost_at_frost.com) 44 (0)20 7343 8383
  • Join us at our annual Growth, Innovation and
    Leadership 2010 A Frost Sullivan Global
    Congress on Corporate Growth London, United
    Kingdom
  • (www.gil-global.com)
  • Register for the next Chairmans Series on
    Growth
  • The CEOs Growth Team Research and
    Development Driving Growth and Innovation
  • 17 February 2010 1000 AM GMT
    (www.frost.com/growthEU)
  • Register for Frost Sullivans Growth
    Opportunity Newsletter and keep abreast of
    innovative growth opportunities
    (www.frost.com/news)

16
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17
For 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
Balaji Srimoolanathan Program Manager Aerospace
Defence 44 (0) 2079157821 balaji.srimoolanatha
n_at_frost.com
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