IT might be big business in the developed and industrialised countries but the defence industry is flexing its muscle with greater intent when it comes to displaying, developing and selling their wares to countries in Asia.
That was aptly displayed at the recent Defence Services Asia (DSA) expo, where 850 companies from 45 countries participated in the four-day event, showing the variety of arsenal from handguns to jetfighters.
The reason for such a display boils down to what drives the industry spending. And it’s no surprise much of that is taking place in Asia.
A report by IHS Jane’s, a defence industry publication, has forecast China’s military spending will outstrip the combined total of Nato’s top eight members Britain, France, Germany, Italy, Turkey, Canada, Spain and Poland excluding the United States by 2015.
Furthermore, growth in spending is taking off not just in China but also in South-East Asia, which has spurred its spending.
A report by the Stockholm International Peace Research Institute shows that the region increased its defence spending by 13.5% last year, to US$24.5bil. The figure is estimated to skyrocket to US$40bil by 2016, with the report noting that Malaysia’s defence spending has also risen.
As observers have noted, Asia will outspend Europe this year. The London-based International Institute for Strategic Studies (IISS) says in the think tank’s “The Military Balance 2012” annual report that China’s spending has fuelled other growing Asian states into pouring more funds into their military and defence.
According to the IISS, Asia, excluding Australia and New Zealand, spent US$262bil on defence in 2011 with China alone accounting for US$89bil compared with Nato’s European members, which spent about US$270bil.
Five contracts and 15 memorandums of understanding worth a total of more than RM4bil were signed between the Defence Ministry and several local and foreign companies in conjunction with the DSA.
Five contracts worth RM357.2mil were inked between the ministry with four local companies and a Russian firm.
With military superpowers like the United States and Russia flexing their military might, smaller Scandinavian countries were seen displaying their sophisticated equipment and gadgetry at Asia’s largest arms exhibition.
Life-size replicas of an AugustaWestland helicopter and a Eurofighter Typhoon attracted crowds in droves, along with military equipment and weaponry that were available for tryouts (sans the artillery).
The exhibition has also set the stage for Malaysian companies to showcase their growing expertise within the sphere of the defence industry.
At the DSA, visitors were treated to demonstrations by commandos and static displays occupying a floor space of 40,000sq m.
Tucked in a corner of the show, British-based defence, aerospace and security company BAE Systems is slowly but definitely shifting its focus to the Asean region and the wider Asia-Paficic.
Vice-president for Malaysia and Indonesia Mark Burgess tells StarBizWeek that the company had recently shifted its entire operations from Singapore to Malaysia in a bid to establish its regional hub in Kuala Lumpur.
“We see far greater opportunity in the Malaysian market both in terms of sales and partnerships. For the last 20 years, Malaysia has been a far more successful market than Singapore. Strategically, coupled with a number of reasons, it makes much more sense to move our office here,” he says.
For the record, BAE Systems is vying to supply its combat aircraft, Eurofighter Typhoon, to the Government, which is currently considering to retire the ageing fleet of Russian made MIG-29N under the Multi Role Combat Aircraft (MRCA) programme.
It is looking to supply a fleet of 18 to 36 of fully-equipped Typhoons to the RMAF, of which it had submitted a formal proposal that comprise a 100-page list of technologies that the company was willing to transfer as well as names of local and overseas companies that were willing to participate in the process.
With the re-establishment of Malaysia-Britain bilateral relations in almost 20 years following a visit by British Prime Minister David Cameron, the Typhoon deal is seemingly a catalyst to strengthen critical trade relationship between both countries.
“We are not new to this market, as BAE Systems had helped with the start up of SME Aerospace Sdn Bhd by contracting it to manufacture Hawk aircraft pylons with the technical assistance of BAE Systems back in 1992,” Burgess says.
He says BAE Systems is also central to the creation of Composites Technology Research Malaysia Sdn Bhd, which benefited from the transfer of technology from BAE and has since transformed itself to a full-fledged composite component manufacturer for the aviation industry.
“BAE System and its consortium of manufacturers had bought about £800mil worth of goods and services from Malaysia. Based on current plans, another £1.5bil of expenditure is expected to be channelled into Malaysia over the next five years,” he says.
Burgess says BAE Systems and part of its consortium are already a very important trade and investment partners with Malaysia, and the MRCA programme will build the relationship further via offset policies that are imposed by the Ministry of Defence.
Offset agreements are often an integral part of international defence contracts, where a supplier often agrees to buy products from a local country in order to win the country as a customer, while in return reinvest the money into the country via the purchase of components, services and technology transfer.
Another party benefiting from technology transfers and joint ventures (JV) is DRB-Hicom Defence Technology Sdn Bhd (Deftech). It has a successful JV with several big names including Turkish firm FNSS, which manufactures several types of armoured personnel carriers (APC).
When met on the sidelines of DSA 2012, DRB-HICOM head for automotive and defence Abdul Harith Abdullah says the conglomerate is looking for more industrial collaborations and this is just only the beginning of a bigger picture to drive the nation’s defence industry.
“The 8×8 wheeled APC is the starting point for us to make our presence felt in the international arena. The defence budget for Malaysia is not extremely big in any way and to survive in the industry, we could not limit ourselves to just land-based businesses,” he points out.
With the collaboration with FNSS, doors are opened to Deftech to acquire valuable technological know-how and intellectual property to enable it to design and manufacture APVs on their own in the future.
Deftech is also keen to stretch its wings to go into the aviation and naval industries. Last year, Deftech was awarded a RM7.55bil contract from the Government to supply 257 units of APCs in 12 variants.
The Malaysian army might require as many as 500 such vehicles to replace the soon-to-be obsolete Condor and Sibmas-type APCs that were in use since the early 1980s.
In 2002, Deftech collaborated with FNSS to supply 211 of ACV300 to the country.
“Our aim is to be at the forefront of the national defence industry and not just rely on trade. If we can champion the local industry, local original equipment manufacturers would benefit from the spillover effects, and we are hoping for a really big success to expand internationally,” he says.
At the DSA 2012, DefTech signed a cooperation agreement with India’s Tata Motors to develop and promote Tata’s high-mobility vehicles.
Last year, DRB-Hicom signed an industrial cooperation teaming agreement with Sweden’s SAAB AB as part of a collaboration to supply airborne early-warning and control system to the RMAF.
Meanwhile, Destini Bhd is also vying for a piece of the pie in the defence industry, with an ultimate aim to grow its business outside Malaysia.
Destini, a maintenance, repair and overhaul service provider for safety survival and rescue equipments, is also involved in the trading of military supplies. It was awarded a RM7.9mil contract to supply the army with anti-tank 40mm rocket-propelled grenades.
Destini group managing director Datuk Rozabil Abdul Rahman says the defence industry is not an easy business to venture into.
“The spending in the local defence industry is shrinking, and that is the reason why we desire to expand overseas. For the other second liners, you should think big and expand and not just rely on local contracts,” he says.
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