Navigating the new frontiers: The challenges of defence trade in India and the United Arab Emirates

Transcription

1 Navigating the new frontiers: The challenges of defence trade in India and the United Arab Emirates Obstacles to success, offset, international relationships, procurement strategies, and defence industrial intelligence Guy Anderson Lead Analyst, Jane s Defence Industry 28 October 2010

2 Navigating the Emerging Markets - background The emergence of Brazil, India, UAE and Saudi Arabia (BIUS) The balance of global defence spending continues to shift a consequence of financial woes / austerity measures in the West and pockets of economic vigour driving budgets in the Middle East, Asia and South America United States the share of world defence spending will fall from 53% in 2007 to 46% in 2014 European Union: principal markets* - the share of world defence spending will fall from 19% to 17% (2007 and 2014) Significant growth will come from the relatively closed Chinese and Russian Markets Chinese spending to climb 114.9% 2007 to 20014; Russian spending 43% The principal emerging markets based on forecast spending growth from a credible base; relative political and economic stability; broadly understood procurement requirements; and the potential for broad access by foreign defence contractors emerge as Brazil, India, United Arab Emirates and Saudi Arabia (the BIUS countries) Industrial exposure European primes have reduced exposure to domestic markets over last five years (export to non-european/us markets accounted for 17.7% of sales in 2005 and 22.4% by 2008). US primes looked to their home market for 76% of sales in 2005 and 76% in 2008 *1: France, Germany, Italy, Greece, Poland, Spain, Sweden, and the UK Forecasts from Jane s Defence Budgets

3 Navigating the Emerging Markets - background The emergence of Brazil, India, UAE and Saudi Arabia (BIUS) Major markets Forecast change to defence expenditure (2010 to 2014) US$bn Source: Jane s Defence Budgets

4 United Arab Emirates Market summary Defence spending strong increases expected over coming five years, underpinned by regional threats; continued world oil demand; and the national strategy of accelerating economic development through defence investment Procurement - Historically dominated by the US and France, but pool of suppliers on course to broaden. Step-change agreements with South Korea and Russia point to greater access to defence market Regional alliances steadily deepening defence ties between UAE and near neighbours points to the formation of a significant regional defence industrial cluster over the coming decade! The UAE defence market lacks transparency, while the offset and industrial participation reforms of 2010 give reason for concern

5 United Arab Emirates in figures Forecast spending by segment 2010 to 2015 (% total and US$bn) UAE - GDP Real GDP growth (%)and real GDP (2005 USD) - Source Global Insight Weapons, 4.68, 21% Aircraft Ships C3, 1.76, 8% Aircraft, 9.91, 45% Gnd Vehicles Unmanned Systems Sensors C Sensors, 2.43, 11% Unmanned Systems, 0.24, 1% Gnd Vehicles, 1.30, 6% Ships, 1.90, 8% Jane s DS Forecast Weapons IHS Global Insight Real GDP (2005 USD) Real GDP Growth Procurement spending by service US$bn (FY11+ Jane s Defence Budgets forecasts) FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 Army Navy Air Force Defence Wide TOTAL

6 United Arab Emirates procurement overview Dominance of air and emphasis on training / logistics / C4ISR Unmanned Systems, 0.24, 1% UAE Procurement spending by function 2010 to 2015 (forecasts US$bn and % total procurement over five years)*1 Weapons, 4.68, 21% C3, 1.76, 8% Sensors, 2.43, 11% Ships, 1.90, 8% Gnd Vehicles, 1.30, 6% Aircraft, 9.91, 45% Aircraft Ships Gnd Vehicles Unmanned Systems Sensors C3 Weapons Procurement Dominance of aircraft over procurement funding reflects accords announced 2008/2009: six C-17 Globemaster (US$1.17bn) 16 CH-47D Chinook (US$2bn) Intention to procurement 12 C-140J-30 Super Hercules Three A330 multirole tankers Emphasis on training and logistics plus C4ISR also apparent Training / logistics - high on procurement agenda to enhance ability of armed forces to sustain operations with recently purchased equipment C4ISR To ensure inter-operability with the rest of the sixmember GCC military structure *1 Jane s DS Forecast / Jane s Defence Budgets

7 United Arab Emirates procurement issues Diversified procurement / limited transparency and consistency Public tenders: In common with many nations, defence procurement is put beyond public tender laws Rare specialisation : Foreign suppliers are typically required to appoint a local commercial gent or partner. The exception is in the poorly defined area of rare specialisation typically government to government deals Funded development: UAE has looked to fund the development of systems by foreign partners at an early stage as opposed to concluding later off-the-shelf-deals. EG: F-16 accord included US$2.5bn advance payment for development of an updated avionics suite and US$500m towards development of the NG Agile Beam radar Development of Black Shaheen cruise missile This approach is likely to gather momentum continued indications that UAE will not settle for buyer/seller relationship Public/closed competition: Openly announced tenders and relatively closed competition have been noted, many major procurements were announced without known competitions. EG: US$1.2bn Advanced Jet Trainer requirement was open to open competition C-17 Globemaster III and A300 tanker not subject to known public competitions Broad supplier base: The F-16 procurement was followed by the purchase of Mirage aircraft from France, thus underlining the UAE s willingness to avoid reliance on one supplier. There are indications that the supplier base will broaden further. US influence: Washington has previously been able to influence UAE procurement (eg, 1997 attempted procurement by UAE of Russian Almas S-300V air defence system).

8 United Arab Emirates offset obligations Offset regime was overhauled in 2010 there are reasons for concern Main reforms: + Hybrid programmes: Obligations discharged on the basis of output prior to Hybrid programmes with up to 30% of obligation on basis of input now permitted - Annual milestones: Previously set at 3,5,7 years, now must be met every 12 months. This is problematic given output emphasis on difficulty achieving profit in early years of an offset venture - Retrospective: Reforms appear retrospective, forcing contractors to convert existing outstanding obligations under new terms and conditions - Real penalties: Annual milestone measures have the potential to drive real penalties beyond published liquidated 8.5% damages to a real level of up to 17% - Joint Ventures: 49% holdings in JVs are strong encouraged. Flexibility is limited although this policy is likely to be revised UAE Offset policy at a glance Overview: Over-riding aim of offset policy is to meet the goals of the Economic Vision 2030: an effort to transform the country s economic base, and to reduce reliance on oil exports. There is also the demographic challenge of creating meaningful employment for a young population, and to reduce reliance on foreign workers. The offset regime was revised in July Authority: UAE Offset Programme Bureau Threshold: USD10 million (in any five year period) Quota: 60 per cent of contract value (minimum) Fulfilment period: Seven years Direct / Indirect: Preference for indirect offset Foreign Direct Investment: Capped at 49 per cent. Offset regime appears to penalise holdings of less than 49 per cent, however. Milestones: progress towards obligation objective now assessed every 12 months; percentage achievements of 5%, 10%, 10%, 15%, 15%, 20%, 25% expected for each year of the obligation. Prior to 2010, progress was assessed at three, five and seven year milestones.

9 United Arab Emirates defence industrial rationale Two pronged strategy Regional threats: Concerns stemming from perceived Iranian threat and a strategy of contesting Saudi Arabia s dominance six nation GCC have driven military modernisation UAE military modernisation drive began in earnings in the mid-1990s Defence expenditure has grown from US$2bn in 2001 to US$6.4bn in 2008 *1 UAE does not share a land-border with Iran procurement has therefore focused on air force / naval equipment and missile defence systems First modern step-change in terms of industrial capabilities was the establishment of Abu Dhabi Shipbuilding in 1995 reflected need for indigenous naval capabilities Economic reform: Development of industrial base is a component of the wider Abu Dhabi Economic Vision 2030 strategy: ADEV2030 focuses on creation of meaning full local employment on and reduced energy export reliance Energy Oil exports accounted for 40% of GDP in 2008 Demographic challenges: 20.9% of UAE nationals were under 15 years of age in % of working age residents were foreign nationals in 2008 Saudi Arabia faces similar challenges, and has taken a similar strategy of jump-starting economic change through defence expenditure *1 Jane s Defence Budgets

10 United Arab Emirates defence industrial rationale Overview, issues and challenges Small-scale capabilities: Bulk of UAE defence ventures have been trading fewer than 10 years; typically employ fewer than 1,000 people; and are almost wholly reliant on domestic market Changed direction 2005: Low technology, labour-intensive defence industrial operations were scaled back. Efforts in UAV technologies, electronic warfare, night vision systems and military communications came to the fore. Changed direction coincided with oil boom (revenues jumped 39% from 2004 to 2005) UAE advanced defence industrial ventures post 2005 UAE venture Profile Launched C4 Advanced Solutions Military communications 2006 Al Yah Satellite Communications Abu Dhabi Autonomous Systems Space-based comms and bedrock of local moves towards network centric capabilities Unmanned aerial, ground and naval systems Defence industrial capabilities current priority areas [based on current offset strategy] Composites Maintenance and repair facilities Precision manufacturing Large calibre tank guns Military land systems (MBT) Advance electronics France *1 Jane s Defence Budgets

11 United Arab Emirates defence industrial rationale Overview, issues and challenges % 90.00% 80.00% 70.00% 60.00% 50.00% 40.00% UAE Suppliers Country of final assembly - (forecasts) Source Jane s DS Forecast 15.53% 28.26% 10.48% 15.20% 10.38% 10.70% 9.18% 14.75% 8.11% 20.95% UAE Suppliers Country of final assembly (forecasts) Source Jane s DS Forecast Canada South Africa UK 1% Switzerland 1% 3% 1% Germany 3% Russia 2% Italy 10% All Others 2% US 48% 30.00% 20.00% 10.00% 26.05% 48.75% 57.18% 49.33% 55.04% UAE 10% France 0.00% FY10 FY11 FY12 FY13 FY14 US France UAE Italy Russia Germany Canada Switzerland South Africa UK France 19%

12 United Arab Emirates defence industrial rationale Significance of joint venture / partnership activity UAE international joint venture / MoU agreements signed 2009/2010 Nature of acc. UAE Partner International partner Int partner nation Scope of partnership JV Abu Dhabi MAR ThyssenKrupp Marine Systems Germany Military surface ships - part of wider accords between TKMS and ADM JV Mubadala (Abu Dhabi Aircraft Technologies) Sikorsky US military aviation MRO JV Arabia Holdings and Ras Al Khaimah Transport Mahindra India land systems export facilitation MoU Abu Dhabi Shipbuilding STX Offshore and Shipbuilding Korea naval systems export facilitation JV Abu Dhabi Aviation AgustaWestland Italy helicopter MRO JV Air Freight Aviation OPK Oboronprom Russia helicopter MRO JV Mubadala Boeing US composite manufacturing, training, maintenance JV Bayunda Aviation Technology Safran France propulsion support services JV Bayunda Aviation Technology Safran France military aviation technologies, smart weapons JV Abu Dhabi Ship Building BVT Surface Fleet (now BAE Systems Surface Ships) UK naval support services - gulf region JV Services Privatisation Group Safran Securite France security systems sales in gulf region France / high-tech systems - defence and security -details not JV C4 Advanced Solutions EADS Defence and Security Germany disclosed JV C4 Advanced Solutions Thales France tactical radio maintenance MoU C4 Advanced Solutions Raytheon US training services MoU Emirates Advanced Investments ITT US night-vision, electronic warfare, sensing and comms technologies MoU Tawazun Holding Northrop Grumman ES US Not specified - believed to be linked to export facilitation

13 United Arab Emirates international relations International partnerships significance to defence trade Top ten exporters to the UAE major arms producing nations (all trade) China PRC India US Germany Japan UK France Italy Korea RoK Singapore Russia fy00 fy01 fy02 fy03 fy04 fy05 fy06 fy07 fy08 fy09 Suppliers of defence materiel - % share of all imports by year Source: IMF 100.0% 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Source: SIPRI Other Indonesia Romania Italy South Africa Germany Netherlands UK Russia USA France

14 United Arab Emirates international relations Overview France and US have dominated the supply of materiel to the UAE over the last decade. France cemented position through strong military ties and wider accords in areas such as nuclear energy. UAE/US relations have warmed since September 11. Military trade has been substantial Broad outlook UAE/US relations likely to remain strong over coming five years a consequence of US regional influence and scale of trade / partnerships over last decade. Issues of trust stemming from the Dubai Ports World affair of 2006 and the stalled Free Trade Agreement - may erode the position of the US.! France: Position likely to be eroded by emerging competitors from East and from Europe. The US$20 billion nuclear energy deal signed between South Korea and UAE at close of 2009 was a blow to France, and points to a new level of trust between Seoul and Emirates which is likely to be a precursor to greater co-operative partnership! Emerging competitors There is a high probability of greater penetration by Russia into the UAE market, underscored by greater activity notable in 2009 and wider energy accords. Moscow is likely to pursue a strategy of penetration through defence accords in which the sale of materiel for financial gain is of secondary importance. South Korea is now on a comparable footing with France in terms of relations with the UAE. UAE features in Korea s plans to emerge as a major league global exporter of materiel.

15 India Market summary Strong spending outlook - Defence spending is forecast to remain strong over the coming five years, underpinned by healthy economic growth and strategic/regional threats which show no signs of diminishing Russian dominance - The bulk of procurement funds will continue to be spent with Russian entities particularly following the signing of the 10 year military technology agreement of 2009 Rise of Washington - Russia s share of Indian procurement funds will decline, however, as relations continue to deepen between New Delhi and Washington The Indian market poses major challenges FDI and bias - Restrictive foreign direct investment rules and a continued bias towards state-owned Indian companies at the expensive of the emerging private sector are likely to hinder indigenous development Bureaucratic inefficiencies will remain a major barrier to smooth trade and procurement Slow progress - Continued reforms likely to be sluggish

16 India in figures Procurement spending by function 2010 to 2015 (forecasts US$bn and % total Weapons, procurement over five years)* , 11% Procurement spending annual amount spend v returned funds Unmanned Systems, 0.91, 1% C3, 13.94, 11% Sensors, 10.75, 9% Gnd Vehicles, 18.22, 15% Aircraft, 37.35, 31% Ships, 26.53, 22% FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 Procurement budget spent Sum returned *1 Major projects undertaken by India s DRDO Delays and cost overruns as of May 2010 Source: Indian government *1 figures for FY09 were to end of Feb09, while fiscal year ended March. Indian MoD stressed that there were many additional expenditures in the system at this stage, and the full under-spend may therefore have been less than indicated. Source Indian govt *2 Jane s Defence Budgets

17 Jane s Defence Budgets India in figures India - Unemployment (%) India - GDP IHS Global Insight Real GDP (2005 USD) Real GDP Growth (%) IHS Global Insight Procurement spending by service US$bn (FY11+ forecasts) Army Navy Air Force Defence-Wide TOTAL

18 India - procurement Overview Defence procurement processes have been hampered by bureaucratic processes which appear to slow decision maker (a consequence in part of previous corruption issues). The procurement machine continues to discriminate against private Indian defence ventures in favour of the state-sector. Defence Procurement Procedures (DPP) four categories post 2009: Buy outright purchase from foreign / Indian vendor Buy and make with transfer of technology purchase from foreign vendor followed by licensed production (INR3bn+ deals) Make Outright indigenous production programming using indigenously developed technologies Buy and make India an indigenous production programme using technologies development by foreign companies Comments Most procurement takes place under Buy and Buy and Make with state-owned firms (Defence Public Sector Undertakings) receiving offset. No records of Make category for major equipment Buy and Make India introduced specifically to encourage private defence companies to participate yet indications that major contracts will continue to be diverted to state sector

19 India offset Frustrations of foreign and domestic industries Missed targets The offset regime, introduced 2005, was intended to have generated work valued at US$10bn by December As of December 2009, offset work worth US$2 billion had been secured DOFA: Defence Offset Facilitation Agency (DOFA) appears too small to cope with the volume of work facing India (based on procurement plans), and lacks regulatory powers Banking Short life of banked offsets (2.5 years) and lack of inclusion of multipliers is a source of frustration Oversight - Lack of Indian regulations over type of offset being accumulated means that foreign companies may continue to enter offset agreements that are undesirable to India s defence industry Inconsistent application The application of offset rules towards private and state-owned ventures has been inconsistent, thus denying the private sector many of the possible benefits of offset International criticism International trade groups co-signed a letter to India s MoD in 2010 calling for reform of offset procedures.* Review Offset policy was scheduled for review by close of 2010 * Aerospace Industries Association in the United States; the Washington, DC-based U.S.-India Business Council; the UK's ADS (AeroSpace Defense Security); the German Aerospace Industries Association (BDLI); France's Groupement des Industries Françaises Aéronautiques et Spatiales; and the Aerospace Industries Association of Canada.

20 India defence industrial overview Capabilities Indigenous capabilities are largely restricted to non-major platforms such as firearms, ammunition, light vehicles, and power plants. Large indigenous procurement programmes have achieved very limited results. Buy and Make India A reform introduced through DPP 2009 to allow private companies with requisite technical and financial capabilities to be issued RfPs. This is likely to include Tata, Mahindra & Mahindra and Larsen & Toubro France 1% Russia 13% Ukraine 1% US 8% Israel 6% Poland 1% UK 0% Italy 0% All Others 1% Public sector v. private ownerships The state sector (DSPUs) remained favoured under Indian procurement procedures (eg, tax exemptions on imports; exemptions to exchange-rate fluctuations; transfer of technology allowances in deals with foreign firms) India 69% Conflict? The question of allowing greater private sector involvement in defence procurement is politically charged. Public sector unions (such as All India Defence Employees Federation ) were instrumental in the rejection of reforms in Strike action against private sector involvement was held again in ,000 workers mobilised Country of final assembly - percentage of all procurement projects 2010 to 2015 (forecasts) Jane s DS Forecast

21 India defence industrial rationale India s defence industry strategy is driven by two factors: a requirement to provide equipment for India s armed forces from local suppliers and regional strategic threats. Regional issues: Sino-Pakistan relations - Concern in New Delhi at the extensive Pakistan-China relationship has grown while Islamabad is seen to receive increasing amounts of technologies and funds from Beijing to co-develop platforms and to assist in industry modernisation. Look East - India s response has been its gradual warming of ties with the US and Europe and a Look East policy that attempts to counter China s growing influence in Southeast and Northeast Asia by forming strategic ties in this region Economic / social and self-reliance: Social reform - India is committed to ensuring that a larger portion of procurement funds are spent within the country as part of a wider campaign to improve social welfare and create meaningful employment. Self reliance India s goal of defence industrial selfreliance (70%) is long standing. In part this has been motivated by past sanctions (US lifted three year old sanctions in Russia, Israel, Europe and the US - Relations with these states provide India with important strategic allies specifically against China as well as access to military technologies than can build industry capability and a level of diversification that facilitates competition and ensures a certain degree of supply.

22 India international partnerships Government to government defence accords signed by India 2005 to 2010

23 India foreign partnerships Defence sector proposals involving Indian / foreign investors that have been approved / delayed / rejected by Indian Foreign Investment Promotion Board since the beginning of 2009 Proposed partners Purpose / Area of interest Date latest decision / status Wipro (private) / unnamed foreign investors Icomm Tele (private) / unnamed foreign investors Lakshmi Machine Works (private) / unnamed foreign investors Zetatek Engineering Systems (private) and unnamed foreign company Larsen & Toubro (private) / EADS Deutschland Tata (private) / Israel Aerospace Industries Defence software/it Approved August 2010 Communications systems Approved August 2010 Defence/aerospace system components Deferred August 2010 Test systems and equipment Rejected 31 December 2009 Establish a joint venture to produce defence electronics (electronic warfare, radar, military avionics) Establish a joint venture named Nova Integrated Systems to develop unmanned aerial vehicles, radars, electronic-warfare and security systems Vyoneesh Technologies (private) and Design / manufacture defence electronics unnamed foreign company Proposal to create India Rizing Fund (trust founder Rajesh Narayan) Defence industry venture capital fund aimed to secure at least USD150 million through domestic and foreign investors to support the development of India's growing number of small and medium enterprises (SMEs). BAe Systems / Mahindra & Mahindra Establish a joint venture named Defense Land (private) Systems India - to develop and produce land vehicles and artillery for Indian and export markets Rejected 1 December 2009 following four deferrals over concerns related to equity structure. Plans to re-submit Rejected 16 November 2009 following series of deferrals Approved November 2009 following three known deferrals Withdrawn September 2009 following three deferred decisions Approved Jan 2009, having been rejected Oct 08 on basis of proposed equity structure

24 India international partnerships Russia Russia has accounted for 70% of India s imported defence materiel over the past three decades. Annual defence trade was worth US$1 / US$1.5bn PA over the last decade. Major projects / joint development activities covered by the Indian / Russian intergovernment agreement on military technical co-operation, which was extended by another decade in December 2009 Major projects: Quantity 40-50, plus 140 to be built under license in SU-30MKI multi-role fighter aircraft India MiG 29KUB carrier borne aircraft 29 additional units Mi-17IV rotary wing aircraft 80 T-90S main battle tanks Joint Development projects: 347 (plus technology transfer for indigenous construction) Participants / details Military Technical Co-operation accord of 2009 potentially worth US$10bn over ten years Significant disharmony generated by the Admiral Gorshkov carrier accord. This is unlikely to have an adverse long term impact on relations, however Sukhoi T-50 PAK-FA fifth generation fighter aircraft. A USD10 billion programme Multirole Transport Aircraft (USD600 million) Brahmos supersonic surface-to-air missile India to acquire up to 300 FGFAs with funding, engineering and IP rights likely to be shared in a 50/50 proportion. Sukhoi (part of UAC) spent three years developing the aircraft prior to India joining in Indian effort to be led by HAL JV of HAL, Russia's UAC and Russian exporter Rosoboronexport To be undertaken by Brahmos Aerospace: the JV (between India's DRDO and NPO Mashinostroeyenia of Russia) established in 1998 to develop the Brahmos cruise missile

25 India international partnerships Value of US FMF accords with India per year (USD) United States significance of India/US civil nuclear accord and End-user monitoring agreement on defence trade 12 Thales- Raytheon-Systems AN/TPQ-37(V) 3 Firefinder artillerylocating radars $142.4 million A refurbished 16,900-ton Austinclass landing platform dock - the USS Trenton (renamed INS Jalashwa). $50 million. Six surplus Sikorsky UH-3H Sea King helicopters to operate from INS Jalashwa $39 million Six Lockheed Martin C- 130J Hercules military transport aircraft in March (talks over the possible acquisition of a further six C-130Js are continuing) $962 million Eight Boeing P-8I maritime reconnaissance aircraft. $2.1 billion Ten Boeing C-17 Globemaster III strategic transport aircraft. $5.8 billion Year / Event: FY03 FY06 FY08 FY08 FY09 FY09 FY10 India-US civil nuclear deal signed End-user monitoring agreement signed

26 India international partnerships Summary Russia France Israel US UK Germany Outlook for position in Indian market High probability of continued high level market penetration due to strong links already established and unrivalled technology access that Russia allows India. Technology agreement of 2009 shifts relationship to joint design / development / production. Probability of continued strong defence trade should Scorpene programme succeed. France s activities in Pakistan may also influence relations with India Deep strategic links forged over the last decade, particularly in fields of UAV development and modernisation of legacy Russian platforms. Relationship likely to remain strong reflects wider global teamings of US allies Trust between New Delhi and Washington is growing, pointing to greater US activity ahead. Technology export restrictions and continuing caution concerning US intentions balanced against attractiveness of US as a strategic ally and provider of modern materiel. Long-established ties will benefit UK ventures. UK government has indicated that it intents to push UK/Indian relations up policy agenda Germany Indian trade levels remain strong, although few reasons to expect Berlin to drive defence trade to level seen in the 1990s given competition. Suppliers of 2009 defence materiel to 2008 India 2007 By supplying country of 2006 origin - % total 2005 imports each year % 20.0% 40.0% 60.0% 80.0% 100.0% Other South Korea Poland Uzbekistan Israel Germany Netherlands France UK Russia Sipri

27 Navigating the new frontiers: The challenges of defence trade in India and the United Arab Emirates Thank you for your attention Guy Anderson Lead Analyst, Jane s Defence Industry - London Guy.anderson@janes.com 0044 (0) Jonathon Grevatt Asia Pacific Analyst, Jane s Defence Industry - Bangkok jongrevatt@gmail.com