Chinese militarisation of the South China Sea remains the dominant security story in the Asia-Pacific region, providing a lightning rod for growing competition with the US and leading to almost universal condemnation.
The decision by the US to send destroyer USS Lassen through what China claims as its territorial waters in the Spratly Islands in late October 2015 firmly put the issue on the international agenda.
China’s response was a series of snap drills that included J-11 combat aircraft landing on Woody Island in the Paracels.
Meanwhile, work is advancing on all seven reefs that China has transformed into islands. All now have piers and harbours and at least three will have 3,000m-long airstrips.
On the indigenous capability side, China continues to make progress. At a massive parade in Beijing on 3 September 2015, it unveiled a raft of ballistic missiles, including the much-touted DF-21D anti-ship ballistic missile, while it was also revealed that the China Aerospace Science and Technology Corporation (CASC) 3,000-4,000 km-range DF-26 intermediate-range ballistic missile has an anti-ship capability. Both are key elements of the ongoing attempt by China to force the US Navy to operate further away from its coast – and Taiwan – if Beijing ever decided to take the island by force.
Japanese defence is dominated by the tortured passage of Prime Minister Shinzo Abe’s security bills through the Diet. The bills, which change the government’s interpretation of the constitution and allow it to come to the aid of an ally under attack, are seen by Abe and his supporters as just a step towards the ‘normalisation’ of Japan’s defence and foreign policy that is justified by the worsening situation in northeast Asia.
For Abe’s critics, the new laws are an unconstitutional attack on the post-war consensus that threatens everything Japan has achieved and stands for internationally. This gap in perception is unlikely to close in 2016.
In practice, the new laws are just one element of a new Japanese defence policy architecture that includes new US-Japan Defence Guidelines under which Tokyo is expected to play a greater global security role in support of US operations.
South Korea enjoyed another solid year as an emerging defence exporter with further successes for the T-50 Golden Eagle trainer in Thailand. In the past few years, South Korea’s defence industry has secured a range of major contracts in the region on the back of increasingly competitive industrial capabilities and strong government support.As well as the T-50, these include an order from Thailand for a new class of frigate constructed by Daewoo Shipbuilding and Marine Engineering (DSME); six new DSME missile corvettes for Malaysia; and the sale to Indonesia of the Chiron man-portable surface-to-air missile system made by LIG Nex1, DSME Chang Bogo-class Type 209 submarines, and Doosan Black Fox military vehicles.
The long-delayed 2016 Australian Defence White Paper represents the most comprehensive and coherent exposition of Australian defence policy since the late 1940s. If there is a key strategic theme to the White Paper, it is a commitment to “a stable Indo-Pacific region and a rules-based global order”.
While this is the third of three ‘strategic defence interests’ listed in the White Paper – a list that includes “a secure, resilient Australia, with secure northern approaches and proximate sea lines of communication” and “a secure nearer region, encompassing maritime South East Asia and South Pacific (comprising Papua New Guinea, Timor-Leste and Pacific Island Countries)” – it is in some ways the most significant.
The White Paper reflects increasing concern about what it describes as “points of friction in the region in which differences between the US and China could generate rising tensions”.
The Chinese vehicle industry is the largest supplier to the region with a forecast of USD38.6 billion, 32.6% of the APAC market share. Revenue is led by infantry fighting vehicles (IFVs), main battle tanks (MBTs) and logistic vehicles at 28%, 22% and 18% respectively, for a total of USD26.2 billion. 97.2% of Chinese revenues (USD37.5 billion) are from the domestic market, while the rest are from small deliveries to Pakistan, Venezuela, Bangladesh, Argentina and Middle Eastern states.
Hyundai Rotem represents USD8.52 billion, 7.19% of the APAC market share, with revenue chiefly dominated by MBTs at 62.9% and APCs with 28%, for a combined total of USD7.74 billion. Chief programmes by Hyundai include the K2 MBT, K1/K1A1 MBT upgrade, KW1/KW2 APC and KM-1 LTV.
Heavy Industries Taxila’s forecast revenue of USD6.1 billion represents 5.14% of APAC market share, with earnings from APCs at 50.1% and production and upgrade of MBTs at 25.5% for a total of USD4.6 billion.
Major productions include Talha APC, Al-Khalid MBT and upgrade of Type 59 MBTs.
End user countries
China leads the region, with a -6.1% compound annual growth rate (CAGR) and a forecast value of USD65.94 billion. Top programmes are the Type 97A (ZBD97) with USD8.37 billion forecast, the Type 99A2 MBT (USD3.8 billion) and VN1 forecast at about USD3.5 billion.
Type 97A and ZLC-2000 anti-tank vehicles are valued at USD2.2 and USD1.7 billion respectively. The PLZ07 self propelled gun (USD1.2 billion) and ZBL-09 reconnaissance vehicle (USD571 million) round out this market. Although largely unaddressable, there is USD4.5 billion forecasted in opportunities with the PLA’s procurement and modernisation efforts being directed towards wide-scale restructuring.
India is next in the region with USD18.5 billion forecast and a 5.6% CAGR. Major procurement programmes include the Techwin K9 SPH, T-90S Bhisma (USD3.6 billion), an upgrade for the ZSU- 23-4 Schilka (USD344 million) and continued efforts on the Arjun Mk 2 (USD787 million).
Opportunities are numerous and include the future infantry combat vehicle (FICV) with USD2.5 billion forecast, the future main battle tank (FMBT) valued at USD495 million, the mounted gun system (USD955 million), a wheeled APC (8×8) with USD828 million forecast, a tracked SPH (USD640 million) and a light armoured multipurpose vehicle (LAMV) valued at USD172 million. These make up a total of USD6.5 billion in opportunities.
The Modi government is trying to fast track procurements and lure foreign OEMs to invest in India’s defence sector by simplifying licensing procedures and making other concessions.
South Korea’s 7.6% CAGR and USD16.2 billion forecast are very healthy and provide opportunities for external suppliers. Programmes include the K-2 MBT (USD3.6 billion), K-21 IFV (USD1.5 billion), K1A1 MBT upgrade (USD655 million), KW2 8x8 APC (USD602 million), K9 SPH (USD595 million), Chun-Mu K-MLRS (USD563 million), KW1 6x6 APC (USD488 million), K200 IFV upgrade (USD463 million), KM1 light tactical vehicle (USD451 million), EVO-105 mounted SPH (USD323 million) and KM-SAM (USD263 million). Opportunities include an IFV (USD1.2 billion), a short-range air defence vehicle (USD287 million) and a MBT (USD225 million).
The Army is in the midst of acquiring an array of new tracked and wheeled vehicles and defence spending under the new Mid-Term Defence Plan (2016-20) is to increase by an average of 7.2% per annum.
Seoul strongly favours defence industry partnerships as a means of gaining access to technological and industrial capabilities.
Pakistan’s forecast shows a USD12 billion market value over the forecast period and a 3.8% CAGR. The Talha APC tops the programmes with a USD1.1 billion forecast, followed by the Al Khalid II at USD1 billion. The Maaz APC (USD842 million) rounds out the top programmes.
Other programmes include the HQ-7B short-range SAM vehicle (USD222 million), Al Zarar MBT upgrade (USD50 million) and LY-80 medium-range SAM vehicle (USD17 million). Opportunities exist for a self-propelled mortar (USD1.5 billion), an APC (USD1.1 billion) and a SPH for USD844 million.
Pakistan continues to struggle with its economy, expecting to grow just over 3.5% in the next five years. However, defence spending has increased from 2.3% of GDP to 2.54% and local industry is struggling, remaining largely dependent on licensed production by public owned organisations with no significant R&D.
Japan has a 1.4% CAGR and USD7.3 billion market forecast.
Large programmes underway include the manoeuvre combat vehicle (USD523 million), Type 10 MBT (USD470 million), CBRN detection and reconnaissance (USD352 million), Type 99 SPH (USD283.5 million), AAV7 (USD235 million), Type 12 coastal defence system (USD140.52 million) and a midrange multipurpose anti-tank missile vehicle (USD184 million).
USD2.8 billion in opportunities exist, including a light self-propelled howitzer (LSPH) valued at USD1.46 billion, a close combat vehicle (USD1billion), an APC forecast at USD136 million and a self-propelled SAM system (USD110 million).
Procurement for the Japanese Ground Self-Defence Forces (JGSDF) is likely to remain low, primarily because of significant downsizing of heavy armour and artillery assets. Despite this, the JGSDF continues to replace its vintage inventory with new sophisticated systems to maintain a technical edge over its rivals.
Major functional segments
Tanks lead regional market segments, with 3.2% CAGR and USD27.5 billion. IFVs have a 4% CAGR and USD25 billion share of the region, while logistic support vehicles reflect a negative -5.1% CAGR and USD21.8 billion forecast.
Lastly, the self-propelled artillery segment shows a 12.5% CAGR and USD14.2 billion forecast.
MAJOR DEFENCE MARKETS
Indonesian defence investment has been on a strong upward trajectory for a number of years, with greater sums directed towards equipment expenditure as Jakarta has sought to recapitalise diverse, ageing inventories.
Strong economic growth has allowed Indonesia to ease the chronic defence underfunding of past years and enabled the Indonesian Armed Forces (TNI) to become better prepared to respond to the country’s strategic concerns.
These include internal threats such as natural disasters and insurgency and external drivers related to offshore territorial disputes and growing concern about China’s expansionism in the South China Sea.
In responding to strategic threats, Indonesia is committed to modernising the TNI through a concept termed as “Minimum Essential Force” (MEF): a strategy introduced in 2005 that aims to establish the nature of military capabilities that Indonesia should, at a minimum, be able to deploy in response to threats.
Early stages of the MEF plan are focused on internal threats but subsequent phases are geared towards Indonesia achieving military balance with any perceived threat within Asia. It is also possible that the MEF could be accelerated under President Joko Widodo, given escalating tension in the South China Sea, where Indonesia is claimant to expansive territory and assets.
Under the MEF, major acquisitions that are planned include multirole combat aircraft, large tactical transport aircraft, additional submarines and surface combatants. Defence procurement spending is forecast by IHS Jane’s Defence Budgets to climb around 50% between 2016 and 2020, rising from USD1.66 billion to USD2.36 billion. In the past the capital expenditure has been supplemented by foreign bank loans.
Military industrialisation is also a key component of the MEF and is increasingly becoming a factor in determining defence contracts. To this end, Indonesia has invested heavily in its state-dominated defence industry base and introduced legislation in 2012 – the Defence Industry Law – to mandate local industrial participation in military procurement programmes.
President Widodo has reiterated a pledge to more than double the country’s defence budget to support the modernisation of the TNI. Should Indonesia achieve economic expansion of 6% a year, the president supports defence budget growth so that 1.5% of GDP in spent on defence by 2020.
According to Widodo, this would provide a military expenditure of approximately IDR250 billion (USD18.6 billion), which is more than double the defence budget for 2016, which reached IDR99.5 trillion: a 2% increase over 2015. According to IHS Jane’s analysis, the target remains overambitious, but strong increases in defence spending are forecast.
Based on continuing GDP growth and gradual increases in the proportion of GDP that Indonesia allocates to defence, the country should reach 0.9% of GDP by 2020 (IDR132 trillion).
Land sector indigenous industry
Indonesia’s land systems sector, which is dominated by state-owned PT Pindad, is relatively self-sufficient, having developed and produced over the past decade or so the 4×4 Komodo and 6×6 Anoa APCs (as well as a range of variants), firearms, ammunition, explosives, mortars and howitzers. PT Pindad has also produced other firearms under licence from Belgium’s FN Herstal and Singapore Technologies Engineering and has developed a new version of the Anoa, called Badak, which is fitted with a 90mm canon developed by CMI Defence.
Indonesia’s indigenous defence industrial capabilities have been developed out of necessity. The development of the Anoa, for example, was accelerated in the early years of this century when the TNI were involved in conflict with the Free Aceh Movement. The Badak vehicle has also been developed out of a TNI requirement. In January 2016, PT Pindad received an order to supply the Indonesian Army with an initial 50 Badak units. The value of the contract is understood to be worth around IDR500 billion (USD36 million) and features the Indonesian company’s production of the CMI turret system.
Indonesia has recognised a specific strength with particularly its development of military vehicles and is looking to enhance this capability further through a partnership with Turkish company FNSS Savunma Sistemleri, announced in 2014 to co-develop a medium tank. PT Pindad has also signed agreements with Saab to extend the operational life of the TNI’s RBS 70 man-portable air-defence missile systems and with Rheinmetall Denel Munition to jointly develop and produce ammunition and provide support for the TNI’s Leopard tanks.
The defence market of South Korea is shaped primarily by a requirement to modernise the country’s armed forces in the face of continuing high tension with North Korea.
This strategic threat was demonstrated most clearly in November 2010 by the North Korean artillery attacks on South Korea’s Yeonpyeong island and the sinking of navy corvette Chon An in March of the same year.
Seoul’s main strategy in dealing with this threat is the acquisition and indigenous development of advanced military technologies and platforms channelled through its long-term defence reform plan. This is intended to provide South Korea with a qualitative edge, offsetting North Korea’s perceived quantitative advantage in terms of military personnel and conventional military equipment.
South Korea’s procurement strategy is also underpinned by a long-standing commitment to secure modern technologies and expertise through defence offset and industrial collaboration.
This has enabled the local defence industrial base to develop strongly over the past 10 years and, looking forward, is likely to facilitate the continued expansion of capability over the coming decade.
The growing competitiveness of this defence industrial base is evidenced by its expanded presence in military export markets and is strengthened by South Korea’s highly educated workforce, which is well suited to high-technology industries such as defence and aerospace.
While growing indigenous defence industrial capability has enabled Seoul to spend much of its capital expenditure in country, its traditionally close relationship with Washington means that the majority of imported materiel is sourced from the US, with most of the remainder contested by European nations, particularly Germany and France.
South Korea’s drive to continue to expand its military and industrial capabilities will be supported by a defence budget that is forecast by IHS Jane’s Defence Budgets to grow in line with the country’s economy at a rate of about USD1 billion a year during 2016-20, from around USD33.5 billion to USD38.7 billion (in constant 2016 values).
Defence procurement spending is forecast to grow at a similar rate, from USD7.8 billion in 2016 to USD9.5 billion in 2020.
Total procurement investment in this period is forecast at USD44.1 billion.
The Ministry of National Defense (MND) initially requested a KRW40.1 trillion budget for 2016, but expenditure was trimmed back by lawmakers concerned about the country’s economy. The approved budget, which represents a 3.6% increase over spending in 2015, comprises KRW27.16 trillion for operating and personnel expenses and KRW11.64 trillion for defence modernisation.
MND officials have said the budget will impact on programmes to procure satellites and unmanned aerial vehicles, which were intended to improve surveillance and monitoring of North Korean activities.
Land sector indigenous industry
The army is the country’s largest force and has the broadest array of requirements, most of which are met through indigenous products, suggesting that South Korea’s land systems capabilities are relatively advanced.
Over the years some of these requirements have been met through systems designed, developed and produced in foreign countries, such as Kirov Works T-80 MBTs, BAE Systems M113 and M577 APCs and Lockheed Martin MLRS.
However, increasingly South Korean industry is meeting these requirements, and the army is now estimated to source more than 70% of its procured materiel from local firms.
Companies including Hyundai Rotem, Doosan DST, Samsung Techwin and KIA Motors have supplied the army with K1/K1A1 MBTs, K21 infantry fighting vehicles, a range of military trucks and K9 Thunder self-propelled howitzers. Air defence weapons have been developed by companies including LIG Nex1, Hanwha and Doosan DST. RoKA weaponry requirements are also met by European and US designs, notably by MBDA and Raytheon.
Information from IHS Jane’s Markets Forecast, Defence Budgets and Navigating the Emerging Markets