Security anxieties are boosting Asia's defence industry
Eufracia Taylor says as regulations and military requirements change, regional countries are not just buying more arms, but also selling more
Asia's drive for military modernisation presents lucrative opportunities for both foreign and local defence companies. Maritime territorial disputes are fuelling demand for naval and air capabilities in Asia, while rapid economic growth has facilitated the expansion of defence budgets.
The International Institute for Strategic Studies estimates that defence spending in Asia has risen by more than 27 per cent since 2010, to US$344.2 billion last year, while around a third of global re al defence spending rises came from the region. Major representatives of the global defence industry are not the only ones being drawn in; local players, confined largely to their home markets in the past, are eager to take part. This trend is perhaps most evident in Japan. Following the relaxation of defence export laws in April last year, Tokyo hosted its first military trade fair in May.
Nevertheless, even established foreign defence giants are being challenged by changing regulations and military requirements across the region, which have reinforced the importance of adapting strategies and product offerings to meet Asia's diverse requirements.
Reduced defence spending in the US and Europe has supported the shift in focus for Western defence suppliers towards Asia. The US has traditionally enjoyed lucrative defence ties with allies Japan and South Korea, but it is beginning to face growing competition from its European counterparts, especially France, Germany and the UK. Western and South Korean defence companies are also beginning to hone in on emerging Asian markets, looking to take advantage of the growing financial strength of Southeast Asia.
The modernisation of the Indonesian Air Force has spurred the interest of the US, South Korea, Sweden and Spain - all of which are competing with Russia, which has traditionally enjoyed a strong customer base in Asia. However, local content provisions in Indonesia's defence industry laws - designed to boost local industry - have prompted some European companies to offer 100 per cent technology transfers and South Korean firms to pursue local partnerships. This has been somewhat to the detriment of US competitors, which are subject to more stringent regulations regarding technology sharing.
Beyond Indonesia, the bid to boost domestic defence industries is evident across the region. Nevertheless, France's success in securing a US$7.5 billion fighter jet deal with India in April, moving from local manufacturing in India to a direct sale from France, highlights how countries may sacrifice local content to quickly meet gaps in military capabilities.
The agreement exemplifies an uncomfortable truth for Asian governments: security imperatives may require deference to foreign parties with the desired technology, at least in the short term. Nevertheless, in the longer term, the build-up of domestic industrial capacity in the world's largest defence importers could ultimately threaten the position of foreign defence giants.
Japan, for one, is making its presence felt. Its ongoing negotiations with India regarding the sale of amphibious planes are positive indications of Japan's export potential. Japan is also in prime position to win the bid for Australia's US$39 billion submarine tender.
Southeast Asian states, particularly the Philippines and Malaysia, are also seeking greater strategic engagement with Japan, as a balance to China's growing influence. Japan's ability to market itself effectively will be a key determinant of its success in the coming years, particularly as its high-end products will compete directly with those from Europe and the US.
For all these other changes in the region, China remains the lynchpin of regional defence spending. The Chinese market is generally closed to US suppliers due to the long-standing arms embargo, but Europe's more lenient approach is proving profitable, particularly in regard to engines and dual-use technology.
Although a primary defence exporter to states such as Pakistan and Myanmar, China has traditionally struggled to enter new markets in the region, in part due to concerns with the quality of technologies and the political implications that such arms deals would have on relations with the US. However, as China begins to invest more heavily in its domestic defence architecture and encourages more active competition, its offerings and prominence as a supplier could improve over the long term.
Market dynamics in Asia go hand in glove with the strategic rivalries characterising the region. Western defence companies are therefore set to reap the benefits of regional insecurity and the associated increases in defence budgets - for now. The growing capabilities of regional counterparts look set to change the face of the competitive landscape in the years to come.
Eufracia Taylor is senior Asia analyst at risk analysis company Verisk Maplecroft