Tensions in Asia help keep defence sales buoyant

Even before he retired last month, the former head of Raytheon’s international business talked frankly about what drives the sales of the US defence company’s Patriot defensive system, which shoots down enemy missiles.

“When North Korea threatens, it helps our sales,” Thomas Culligan said, noting that when Pyongyang test-fired missiles last year, Congress received expressions of interest from countries intending to buy or upgrade Patriot missile systems.

North Korea is one of several threats stoking Asia’s arms race, to the advantage of western defence contractors such as Raytheon, non-western suppliers such as Russia, and emerging competitors from Singapore to South Korea.

Regional rivalries, the need to keep shipping lanes open, disputes over resource-rich territories, and China’s growing military heft have contributed to Asia’s defence spending spree – as has the growing wealth of its countries.

For western defence companies hit by declining budgets at home, Asia has become a prime target. China, however, remains out of bounds as a customer because of US and EU sanctions that have restricted arms sales to Beijing since its bloody Tiananmen Square crackdown on demonstrators in 1989.

In 2013, Asia spent $322bn on military budgets, up from $262bn in 2010, with China growing more dominant. Military spending in China grew 43.2 per cent from 2008 to 2013, according to data this month from the International Institute for Strategic Studies.

Asia’s outlays “are fuelling heightened military procurement in a region replete with conflicting territorial claims as well as longstanding potential flashpoints,” the IISS warns in its annual review of the world’s military balance.

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The dispute between the six nations that claim the oil-rich Spratly Islands in the South China Sea has been a catalyst, especially for ships and submarines, analysts say.

In 2011 – after Chinese patrol boats attacked Vietnamese oil exploration ships and China’s navy staged live fire drills near the Spratlys – Benigno Aquino, president of the Philippines, told his Chinese counterpart: “When we have these incidents, does it not promote an arms race within the region? And when there is an arms race, does not the potential for conflict increase?”

Acknowledging that his country was no match for China, he warned that international incidents around the islands might force Manila to upgrade its arms. However, its military spending grew just 4 per cent from 2011 to 2012.

By contrast Vietnam, another party to the Spratlys dispute, has ratcheted up its spending, doubling it since 2005 to $3.4bn in 2012, according to the Stockholm International Peace Research Institute. In the past two months, it has received two of six Kilo-class diesel-electric submarines ordered from Russia.

Russia has benefited from its close trade ties with Vietnam, and still sells one in every four military aircraft in the region.

Meanwhile, China and Ukraine are making inroads in areas such as vehicles, where two-thirds of southeast Asian defence budgets went to non-western suppliers between 2008 and 2012.

Europe and the US still dominate the region in general defence sales. But they are especially dominant as suppliers of sophisticated equipment, with three-quarters of Asia’s market for high-tech equipment such as radar, sonar, communications systems and complex weapons, according to IHS Jane’s, the analysts.

Executives and analysts expect their dominance to continue as they try to compensate for declining domestic sales.

But there are rivals on the horizon, and some are working hard to be able to offer more sophisticated and valuable equipment.

When South Korea sold its KAI T-50 fast jets to the Philippines, and Singapore Technology supplied military communications systems to Thailand, the countries revealed themselves as two of the biggest threats to western dominance in Asia.

Asian countries are also forcing suppliers to offer economic benefits – or offsets – along with their military hardware.

“The days of grabbing ad hoc benefits by relying on low-value counter-trade – such as chickens for aircraft and palm oil for submarines – are largely over,” says Guy Anderson, an analyst at IHS Jane’s.

“Buyers in southeast Asia are asking for – and increasingly getting – partnership status in the joint development of military equipment.”

Asian governments are using this access to technological knowhow to help domestic businesses grow.

If Asia’s governments get this approach right in the long term, their companies also stand to benefit from threats such as North Korea’s missiles and regional territorial disputes.