Asia shops for aircraft, arms under China's shadow

Exhibitors from China National Aero-Technology Import & Export Corporation (CATIC) the explain functionalities of the JF-17 Thunder combat aircraft to military delegates at the Singapore Airshow in Singapore February 14, 2012.

SINGAPORE (Reuters) - Asian nations shopped for aircraft and military hardware at the region's biggest aerospace and weapons bazaar on Tuesday as a new report said China's defense spending would exceed the combined spending of all major countries in the region within three years.

Aircraft and weapons manufacturers, military officers, arms dealers and airline executives rubbed shoulders as the 2012 Singapore Airshow kicked off in a vast hangar near the city-state's Changi airport.

Deals worth about $10 billion were announced at the last show in 2010 and the number could well be higher this year as Asian nations ramp up defense spending.

Among the early deals announced on Tuesday was an order given to Raytheon Corp by Boeing Co for advanced radar systems on eight of its P-81 anti-submarine and anti-surface surveillance aircraft being sold to the Indian navy.

India signed a $2.1 billion deal with Boeing for eight P-81 planes in 2009, according to media reports. The first of the aircraft is scheduled to be delivered to India this year.

On the civilian side, Boeing signed its largest ever order for commercial aircraft, a $22.4 billion deal with Indonesia's Lion Air. The deal was originally announced in November.

Boeing said Lion Air, Indonesia's largest carrier by passenger volume, has ordered 230 airplanes, including 201 737 MAXs and 29 next-generation 737-900 ERs. Lion Air will also acquire purchase rights for an additional 150 airplanes, Boeing said.

CHINA CONCERNS DRIVE SPENDING

IHS Jane's said in a report that while all major Asian nations are forecast to increase spending on defense, China's military budget will soar to $238.20 billion by 2015 from $119.80 billion last year, growing about 18.75 percent per annum.

That number will exceed spending by all other nations in the region combined, but compares with a base U.S. defense budget of $525.40 billion for 2013.

In Asia, Japan and India follow China in defense spending, but both may be constrained in coming years while China is likely to steam ahead, underpinned by strong economic growth, analysts said.

"Japan's government debt and the investment needed after Fukushima will impact defense spend. We will increasingly see budget channeled towards key programs and equipment," said Rajiv Biswas, chief economist in the Asia-Pacific for IHS Global Insight.

"India's government debt and fiscal deficit is very high as a share of GDP, and the rupee depreciated significantly in 2011, all of which will limit India's defense ambitions."

Nevertheless, Japan's defense budget is forecast to rise to $66.60 billion by 2015 from $60.30 billion last year. India's military expenditure is likely to be $44.90 billion in 2015 from $35.40 billion in 2011.

"China's rise is not the only motivator," said Paul Burton at IHS Jane's. "There are a number of lingering security issues, driven by competition for untapped natural resources, that are prompting many states to increase their defense to GDP ratio."

China itself prefers to indigenously build almost all its military requirements, but it is hawking its planes and weapons at the show as well. Considerable interest at the show's CATIC pavilion was shown in China's Harrier 1 unmanned surveillance aircraft and the JF-17 fighter jet built in collaboration with Pakistan.

CATIC, or China National Aero-Technology Import and Export Corp, is the country's biggest company for the trade of aviation and defense products.

EU CARBON CONTROVERSY

Europe's carbon emissions scheme and by defects plaguing the Airbus A-380 and the Boeing 787 Dreamliner are other issues likely to dominate the show.

The EU's Emissions Trading Scheme, introduced on January 1, has drawn howls of protest from airlines around the world, with China banning its carriers from taking part.

Europe's plan to charge airlines for carbon emissions could trigger a full-blown trade war with implications for plane deals and Europe's crippling sovereign debt crisis.

Meanwhile, the discovery of hairline cracks on part of the frame inside A380 wings several weeks ago has embarrassed its maker, Airbus Industries, a unit of EADS. European safety authorities last week extended inspections for similar cracks to the entire fleet.

Airbus and operators say there is no risk to safety, but German magazine Der Spiegel said the problem could cost Airbus 100 million euros ($132 million).

Boeing has said it has found a problem with the 787's fuselage, but has said the "incorrect shimming" is easily fixed and will not affect production schedules. Shims are used to close tiny gaps in joints.

(Additional reporting by Tim Hepher and Harry Suhartono in SINGAPORE and Sakthi Prasad in BANGALORE; Editing by Matt Driskill)