* SE Asia defence spending seen rising to $40 bln by 2016
* Region is world no. 2 in military imports after India
* Countries tilting procurement to develop own expertise
By Yantoultra Ngui
KUALA LUMPUR, Aug 12 Spurred by tensions with
China, Southeast Asian nations are building up their own defence
industries, channelling fast-growing military budgets to develop
local expertise and lower their dependence on big U.S. and
European arms suppliers.
While countries such as Indonesia, Thailand and Malaysia
won't do away with big-ticket imports from giants like Airbus
Group NV or Lockheed Martin Corp, they are
increasingly encouraging domestic defence firms to manufacture
hardware locally. With regional defence spending seen rising to
$40 billion in 2016, 10 percent higher than last year, some
countries are already developing their own exports.
A domestic defence industry is a long-term economic as well
as security goal of varying degree for the 10 countries in the
Association of Southeast Asian Nations (ASEAN), spending more on
modernising ageing equipment partly to retain the region's
military balance. The goal has been given urgency by China's
moves in recent months to press disputed claims in oil- and
gas-rich waters of the South China Sea, security analysts say.
ASEAN members have stopped short of explicitly citing
Beijing as a reason for beefing up military capability. At a
meeting in Myanmar last weekend, ASEAN foreign ministers again
appealed for "self-restraint" in the face of heightened
tensions, with no mention of China in a formal communique.
"This drive to ensure sovereignty is now at the foremost of
all governments' minds in the region," said Jon Grevatt, Asia
Pacific defence industry analyst with IHS Jane's. "Obviously the
activity of China has raised the issue of protecting, securing
China, whose military spending topped $145 billion last year
according to U.S. estimates, claims about nine-tenths of the
South China Sea. It has alarmed Southeast Asian diplomats this
year with assertive moves like planting a giant, $1 billion oil
rig in waters claimed by Vietnam.
A build-up in China's coastguard fleet has also allowed
Beijing to beef up its maritime presence without deploying
warships. Some in the region have sought to counter that
like-for-like: In a package due to take effect this month,
Vietnam has set aside 11.5 trillion dong ($543 million) to be
used to buy 32 coastguard and surveillance ships.
Southeast Asia's defence spending grew 5 percent to $35.9
billion in 2013, data from the Stockholm International Peace
Research Institute (SIPRI) showed, and is expected to rise to
$40 billion by 2016. The region's defence spending has more than
doubled since 1992, according to SIPRI.
Defence procurement in Southeast Asia is still dominated by
government purchases of big-ticket items like jets or submarines
from Western defence suppliers such as Lockheed Martin of the
United States, France-based Airbus or Germany's ThyssenKrupp AG
. The region became the world's second-largest importer
of military equipment and technology after India.
Now, though, from Indonesia radar to Singapore submarines,
governments are tilting such purchases to help them develop
their own defence expertise. While breaking no records in size
or scope, recent deals show a growing trend towards embedding
local manufacturing in procurement contracts.
In one example, Malaysia's shipbuilding-to-weaponry group
Boustead Heavy Industries Corporation is working with
French state-controlled naval contractor DCNS on a 9 billion
ringgit ($2.8 billion) contract for six coastal combat ships for
Malaysia's navy - to be built locally.
"We expect to achieve well over 60 percent in terms of local
content and value, and see considerable transfer of technology
to ourselves as well as local vendors and suppliers who we work
with and cultivate," Ahmad Ramli Mohd Nor, executive deputy
chairman and managing director of Boustead Heavy, told Reuters.
"Importantly, we will already have IP (intellectual
property) rights for the first generation of offshore patrol
vessels, and this can provide a platform to tap the
international market," he added.
Known as "defence offset" deals, these partnerships can
enable countries to carve out domestic defence industries over
time. Turkey, for example, has successfully used defence offsets
to nurture its domestic industry, whose companies now produce
half the country's military equipment.
Indonesia, which has more than doubled its defence spending
in the last five years, this year awarded a $164 million air
defence system contract to France's Thales SA. A
condition of the deal is that Thales must transfer radar
manufacturing skills and knowledge to state-owned Indonesian
electronics firm PT LEN Industri.
Similarly, Singapore said late last year it would buy two
submarines from ThyssenKrupp Marine Systems in Germany - making
the deal conditional on the involvement of local industry in
developing combat systems.
Singapore has by far the most advanced defence industry in
the region, as well as being one of the world's biggest arms
The wealthy island state has sold defence equipment to
countries from Nigeria to Brazil since its first overseas arms
sales to Malaysia in 1971. Singapore Technologies Engineering
(ST Engineering), the state's main arms maker,
generated sales of $1.89 billion in 2012 alone, according to
In a breakthrough, a unit of ST Engineering also won a S$330
million ($256 million) contract in 2008 to supply armoured troop
carriers to Britain - its first such sale to a major Western
arms supplier - showing it could compete in the global defence
arena in some product categories.
"Singapore will agree deals with its foreign suppliers that
promote the best interests of both parties, and will not be
constrained by lots of regulations and unrealistic
expectations," said Ron Matthews, professor of defence economics
at Britain's Cranfield University.
Still, for now the rise of a Southeast Asia defence industry
won't deter big global players, analysts said. The region's
rising defence spending makes it attractive for weapons makers
at a time of tight military budgets in Europe and North America.
The regional firms' lack of advanced capability also means
they are not currently competing head-on with the big players
for big-ticket orders.
Instead, they can play a more complimentary role, focusing
on areas such as ammunition, small marine vessels and
maintenance. But that could change over time - as Turkey's
experience shows - if Southeast Asian firms start to compete for
orders on the global market.
"This is a near-term opportunity for global defence firms
and a longer-term challenge," said John Dowdy, senior partner at
McKinsey & Company.
($ = 3.19 Malaysian ringgit)
($ = 1.25 Singapore dollars)
($ = 21,180.0000 Vietnam dong)
(Editing by Stuart Grudgings and Kenneth Maxwell)