China’s 13.5 billion-baht (US$392 million) deal to build a submarine for Thailand was hailed in 2017 as one of the centrepieces of Beijing’s defence export plans. But the deal has appeared increasingly in limbo in recent months because of the manufacturer’s inability to obtain German-made diesel engines as stipulated in the contract. The reason? Germany is limiting the export of defence technology to China, citing a European Union embargo first imposed in 1989 in the aftermath of the Tiananmen Square crackdown. Certain exports from European nations have been allowed in the past, but it appears the rules are being more strictly enforced this time around. A German official in the country’s Thai embassy said in February that Beijing had failed to coordinate with Berlin before signing the 2017 contract. The first of three diesel-electric S26T submarines with German-made MTU engines that Thailand ordered from China was set to arrive in 2024. Given the snag related to the supply of engines, that delivery date is likely to be delayed. Opposition politicians in Thailand have called for the submarine deal to be scrapped, claiming that it would be in the nation’s best interests given the EU embargo. Thailand’s Chinese submarine order hits snag after German export embargo Prime Minister Prayuth Chan-ocha’s government, meanwhile, has struggled to defend the deal, which continues to be the subject of strident public criticism, with many questioning if such exorbitant defence expenditure was needed following the economic pain caused by the pandemic. Observers say the deal is unlikely to be scrapped, but the saga has brought fresh scrutiny of Beijing and Bangkok’s diplomatic and security ties. Here’s are the key things you need to know about the troubled deal: Why does Thailand need submarines? The Thai navy said in 2020 – three years after the first deal with Chinese state-owned conglomerate China Shipbuilding & Offshore International had been signed – that the submarines would help protect Thailand’s estimated 24 trillion baht (US$697 billion) in maritime interests and increase strategic leverage at a time of heightened tensions in the South China Sea . It offered this clarification then amid a growing public backlash after a parliamentary subcommittee had approved the purchase of another two submarines. The navy said the submarines would operate in the Andaman Sea to the west and Gulf of Thailand to the east. It said their purchase was necessary as other Southeast Asian nations – including Vietnam , Indonesia , Malaysia and Singapore – had submarines of their own. Why buy Chinese submarines? Because China offered a good deal, according to the Thai navy. The submarines were on sale at a discount – three for the price of two – with an extended quality guarantee; communications and combat systems such as torpedoes and guided missiles pre-installed; and training programmes for Thai personnel thrown in as part of the package. The 36 billion baht price tag (US$1.05 billion) was set to be paid in instalments until 2027, but Thailand’s navy last year withdrew a request to parliament for the budget to pay for the second two submarines – costing 22.5 billion baht in total – citing the pandemic and the country’s battered economy. Thailand also considered offers made by Germany , South Korea , Russia , Sweden and France for two submarines, but found China’s offer to sell three for the price of two “irresistible”, according to Termsak Chalermpalanupap, visiting fellow at the ISEAS-Yusof Ishak Institute in Singapore. What does it mean for China? The submarine deal came at a time when Thailand was leaning closer to China following the 2014 coup that brought former army chief Prayuth to power. He told reporters in April that Bangkok-Beijing ties would not be affected if the contract was cancelled, saying that both sides had been working closely to reach a solution. “Both Thailand and China will be keen for the submarine deal to go ahead,” said Ian Storey, a senior fellow at the ISEAS-Yusof Ishak Institute. “Thailand is one of the few countries in Southeast Asia that doesn’t operate submarines and has wanted to acquire subsurface military capabilities for decades in order to keep up with its neighbours. Even Myanmar operates two submarines today.” China will want the deal to proceed because arms sales have become an increasingly important component of its defence diplomacy in Asia Ian Storey, ISEAS-Yusof Ishak Institute In December, Beijing transferred the second-hand Chinese-manufactured submarine UMS Minye Kyaw Htin to Myanmar, a year after the latter received a Kilo-class submarine from India. “China will want the deal [with Thailand] to proceed because arms sales have become an increasingly important component of its defence diplomacy in Asia,” Storey said. “If it falls through, it will be bad publicity for China’s arms industry.” Paul Chambers, a Southeast Asia security specialist at Thailand’s Naresuan University, described the submarines as “military surplus” and said the deal “represents an aspect of maintaining close neighbourly military relations and military diplomacy”. What happens next? Thailand’s navy said in February that it intended to resolve the engine issue through discussions with the Chinese state-owned shipbuilder. No date has been given for when those discussions will conclude, however. Observers have suggested China could transfer second-hand submarines to Thailand by way of compensation – a scenario that has been discussed in the local media without any confirmation from the Thai navy. Meanwhile, opposition politicians have questioned whether China or Thailand were even aware of Germany’s embargo policy at the time the 2017 deal was signed. The Thai navy earlier stated that China Shipbuilding & Offshore International must comply with the contract which specified the use of the German-made MTU engines. Thailand delays hit China’s Southeast Asian high-speed railway ambitions “If China offers Thailand two refurbished submarines Bangkok is likely to reject it because it wants new submarines not second-hand ones,” Storey said, pointing to the fact that such an offer had already been rejected “some years ago”. “One option would be for China to offer the Thais the more advanced engines it uses in its Type 039A/041 Yuan-class subs,” he said. “China has not previously exported these engines, but it may have to bite the bullet or risk losing the sale altogether. If the Thais do decide to cancel the order they should be entitled to compensation, subject to the provisions in the contract.” Chambers, however, said the submarine deal would likely be kept – especially “if the Chinese reduce the price heavily or throw in some other military hardware” as compensation. “The deal is very unpopular in Thailand so if Prayuth scraps it, it might help his popularity,” he said. “But Prayuth is an ex-military official. He and the military want the submarines. My guess is that they will wait until after the election to purchase them again: either cheaper or alongside other Chinese military hardware.”