Asia big sales target despite downturn

HANOI (Reuters) - Economies are slowing and budgets are under fire but in Asia and the Pacific one nearly bulletproof bet remains defense spending.

China has led the charge as countries across the vast region have poured money into their militaries to upgrade gear, add capabilities and expand their reach.

Asia ranks second after the Middle East in the developing world for arms imports.

Experts say so far the economic downturn has only made minor dents in the procurement plans of some Asian countries, but the region is likely to remain one of the most alluring markets for a global defense industry that is growing dependent on exports.

That's why at the Paris Air Show next week Asians are likely to be courted.

"There are a lot of people who, quite frankly, see the Asian market as one of the El Dorados," said military expert Richard Bitzinger, a senior fellow at Singapore's S.Rajaratman School of International Studies.

Military expenditure in the Asia-Pacific region, not including South Asia, rose more than 5 percent in 2008 compared with the year before to $248 billion, according to the Stockholm International Peace Research Institute (SIPRI).

According to the U.S. Congressional Research Service, Asia accounted for more than 40 percent of world arms transfers between 2000 and 2007.

The economic pinch has led some countries in Asia to tweak their defense spending plans. The Philippine military asked the government for permission to divert money earmarked for rifles, helicopters and radio equipment to fund fuel and bullets for its sustained offensive against Muslim rebels in the south instead.

Thailand has reportedly decided to delay its purchase of six Saab Jas-Gripen fighter jets from Sweden, which were supposed to be delivered in 2011, due to the economic crunch.

But overall the impact had been limited, said Sam Perlo-Freeman, a senior researcher at SIPRI.

"So far, I don't think we're seeing any big slowdown in the region amongst the major spenders in military expenditure. What happens further down the line will depend on how long and how deep the economic crisis is going to be," he said.

INCREASINGLY DYNAMIC

Strong economic growth has underpinned Asia's emergence as a major arms market.

"If you look at the expenditure as a percentage of GDP, it's actually been going down, not up. It's just that as countries become wealthier, they have more technologically sophisticated defense forces," New Zealand Defense Minister Wayne Mapp told Reuters at a defense summit in Singapore last month.

Ultimately, though, that is just one factor.

China's modernization drive is another big one.

SIPRI estimates China was the world's second biggest defense spender after the United States in 2008, as it plowed forward in a sweeping military modernization campaign that analysts say is unlikely to slow down.

Beijing has bought a fleet of quiet submarines, high-tech destroyers, supersonic fighter jets and recently admitted in public it is developing an aircraft carrier.

"Obviously, all countries in the region will be looking at what China's doing and what their growing military power and modernization means. To some countries that will be a stronger factor than others," said Perlo-Freeman.

Taiwan, for instance, had the largest percentage increase in military spending in 2008, at 22 percent, according to SIPRI. The island that Beijing sees as part of China, and has aimed hundreds of missiles at, is one of the United States' biggest arms buyers.

Vietnam is ordering six Kilo-class submarines and a fleet of new fighters, Russian media reported. Experts say it is likely a direct reaction to China's naval expansion and improving power projection capabilities.

Vietnam, China and others share long standing disputes over island chains in the South China Sea, which also commands strategic sea lanes between the Indian and Pacific Oceans.

RAND Corp analysts concluded in a 2008 study for the U.S. Air Force that American security partners in Asia -- namely Australia, Japan, the Philippines, Singapore, South Korea, and Thailand -- were generally not modernizing their militaries due to concerns about China's, a process called "internal balancing."

Instead, they were more focused on "external balancing" -- boosting security ties with the United States and each other.

But the study's lead author, Evan Medeiros, said there had already been some changes since the release of the study, which focused on regional reactions to China between 1997 and 2007.

"What we concluded is that as China's military acquires new capabilities, the mix between internal and external balancing among Asian militaries could shift. I see the new 2009 Australian Defense White Paper as evidence of that," he said.

In May, Canberra's Defense White Paper said China must be more open about its military expansion or risk alarming neighbors, warning that security jitters caused by a more capable China would extend far beyond Taiwan.

It also outlined procurement plans that include the purchase of 12 advanced new submarines that experts say could alarm China and accelerate arms procurement in the Western Pacific.

ARMS RACE?

Defense experts generally avoid calling what is happening in Asia an "arms race."

"What you do see in the region is a reaction between the military programs of certain countries," said Tim Huxley, executive director in Asia of the International Institute for Strategic Studies (IISS).

Sometimes the competition is obvious.

When China announced plans late last year to deploy ships to the Gulf of Aden to help protect ships from pirates, military analysts saw it as a kind of test of the Chinese navy's power projection capabilities.

Japan and South Korea sent their own ships quickly after.

"It smacked of having a competitive element," said Christian Le Miere, senior analyst at IHS Jane's.

Between 2004 and 2007, Asia-Pacific arms agreements accounted for 33 percent of all the deals done by the United States, 55 percent of those done by Russia and 50 percent of France's, according to a U.S. Congressional Research Service report.

"I expect the arms sellers will still be trying to push all they can in the region," Perlo-Freeman said.

(Additional reporting by Nopporn Wong-Anan in Singapore; Editing by Bill Tarrant and Jason Neely)