Future of the Kazakh Defense Industry Market Attractiveness, Competitive Landscape and Forecasts to 2018
TABLE OF CONTENTS 1. Introduction... 9 1.1. What is this Report About?... 9 1.2. Definitions... 9 1.3. Summary Methodology...11 1.4. SDI Terrorism Index...12 1.5. About Strategic Defence Intelligence...12 2. Executive Summary... 13 3. Market Attractiveness and Emerging Opportunities... 15 3.1. Defense Market Size Historical and Forecast...16 3.1.1. Kazakh annual defense expenditure to reach US$ billion by 2018... 16 3.1.2. Counter-terrorism and the need to modernize outdated defense equipment to drive Kazakhstan s defense expenditure... 18 3.1.3. The country s defense expenditure as a percentage of GDP expected to remain at an average % over the forecast period... 19 3.2. Analysis of Defense Budget Allocation...21 3.2.1. Share of capital expenditure to increase steadily over the forecast period... 21 3.2.2. Capital expenditure budget expected to increase during the forecast period... 23 3.2.3. Kazakh revenue expenditure expected to record a CAGR of % during the forecast period... 25 3.2.4. Per capita defense expenditure expected to increase during the forecast period... 27 3.3. Homeland Security Market Size and Forecast...29 3.3.1. Homeland security budget projected to increase at a CAGR of % during the forecast period... 29 3.3.2. Human trafficking, drug smuggling, and cybercrime form the major components of homeland security expenditure... 31 3.3.3. Kazakhstan is at a low risk from external and internal threats... 33 3.4. Benchmarking with Key Global Markets...34 3.4.1. Kazakh defense expenditure expected to increase at a CAGR of % over the forecast period... 34 3.4.2. Kazakhstan s military expenditure is low when compared to countries with the largest defense expenditure... 36 3.4.3. Kazakhstan allocates a low percentage of GDP to defense... 37 3.4.4. Kazakhstan has a moderate per-capita defense expenditure... 38 3.4.5. Kazakhstan faces low risk of terrorist attack... 39 3.5. Market Opportunities: Key Trends and Growth Stimulators...42 3.5.1. Helicopters... 42 3.5.2. Naval Vessels... 42 3.5.3. Air defense system... 43 2
4. Defense Procurement Market Dynamics... 44 4.1. Import Market Dynamics...45 4.1.1. The current need to modernize its armed forces will drive defense imports... 45 4.1.2. Russia stands as the leading supplier of arms to Kazakhstan during the review period; a trend that is expected to carry on during the forecast period... 46 4.1.3. Armored vehicles accounted for the majority of defense imports during 2008 2012... 47 4.2. Export Market Dynamics...48 4.2.1. Kazakhstan does not export arms due to its under-developed domestic arms industry... 48 5. Industry Dynamics... 49 5.1. Five Forces Analysis...49 5.1.1. Bargaining power of the supplier: medium to high... 50 5.1.2. Bargaining power of the buyer: low to medium... 50 5.1.3. Barrier to entry: medium... 50 5.1.4. Intensity of rivalry: medium... 50 5.1.5. Threat of substitution: low to medium... 50 6. Market Entry Strategy... 51 6.1. Market Regulation...51 6.1.1. Kazakhstan does not disclose any offset obligations imposed by the country... 51 6.1.2. Foreign direct investment (FDI) in defense sector not disclosed by the government... 51 6.2. Market Entry Route...51 6.2.1. Government-to-government agreements are the preferred market entry route for foreign OEMs... 51 6.2.2. Joint venture and license manufacturing agreements provide an attractive market entry route... 51 6.3. Key Challenges...52 6.3.1. Corruption and lack of transparency create roadblock for foreign companies... 52 6.3.2. Domination of companies from the Russia poses a challenge to other foreign firms... 52 7. Competitive Landscape and Strategic Insights... 53 7.1. Competitive Landscape Overview...53 7.1.1. Foreign suppliers manufacture defense systems overseas and deliver to Kazakhstan... 53 7.2. Key Companies...54 7.2.1. Eurocopter SAS: overview... 54 7.2.2. Eurocopter SAS: products and services... 54 7.2.3. Eurocopter SAS: Recent Contract Wins... 54 7.2.4. Russian Aircraft Corporation "MiG : Overview... 55 7.2.5. Russian Aircraft Corporation "MiG : products and services... 55 7.2.6. Russian Aircraft Corporation "MiG : Recent contract wins... 56 7.2.7. Uralvagonzavod overview... 57 7.2.8. Uralvagonzavod major products and services... 57 3
7.2.9. Uralvagonzavod Alliances... 57 7.2.10. Sagem: overview... 58 7.2.11. Sagem: products and services... 58 7.2.12. Sagem: Alliances... 58 7.2.13. Astrium: overview... 59 7.2.14. Astrium: products and services... 59 7.2.15. Astrium: Alliances... 59 7.2.16. Thales: Overview... 60 7.2.17. Thales: products and services... 60 7.2.18. Thales: Recent Contract Wins... 62 8. Business Environment and Country Risk... 63 8.1. Demographics & Social Statistics...63 8.1.1. Total Rural Population... 63 8.1.2. Total Urban Population... 64 8.1.3. Number of households... 65 8.2. Economic Performance...66 8.2.1. GDP Per Capita... 66 8.2.2. GDP, Current Prices... 67 8.2.3. Exports of goods and services (current USD Bn)... 68 8.2.4. Imports of goods and services (current USD Bn)... 69 8.2.5. Gross National disposable income (USD Bn)... 70 8.2.6. Manufacturing Output (USD Bn)... 71 8.2.7. Consumer Price Index... 72 8.2.8. Wholesale Price Index... 73 8.2.9. Local Currency Unit per US Dollars... 74 8.2.10. Local Currency Unit per Euro... 75 8.2.11. Market capitalization of listed companies (USD Bn)... 76 8.2.12. Market capitalization of listed companies (% of GDP)... 77 8.2.13. Total Government cash surplus/deficit (LCU Bn)... 78 8.2.14. Government cash surplus/deficit as % of GDP (LCU)... 79 8.2.15. Goods exports as a % of GDP... 80 8.2.16. Goods imports as a % of GDP... 81 8.2.17. Goods balance as a % of GDP... 82 8.2.18. Services imports as a % of GDP... 83 8.2.19. Service exports as a % of GDP... 84 8.2.20. Services balance as a % of GDP... 85 8.2.21. Foreign direct investment, net (BoP, current US$ Bn)... 86 8.2.22. Net foreign direct investment as % of GDP... 87 4
8.2.23. International reserves, including gold... 88 8.2.24. External Debt as % of GDP... 89 8.3. Energy and Utilities...90 8.3.1. Conventional Thermal Electricity Net Generation... 90 8.3.2. Hydroelectricity Net Generation... 91 8.3.3. Conventional Thermal Electricity Installed Capacity... 92 8.3.4. Electricity Exports... 93 8.3.5. Electricity Imports... 94 8.3.6. Proved Natural Gas Reserves... 95 8.3.7. Petroleum Consumption... 96 8.3.8. Crude Oil Proved Reserves... 97 8.4. Infrastructure...98 8.4.1. Roads, total network (km)... 98 8.4.2. Rail lines (total route-km)... 99 8.4.3. Air Transport, freight (million ton-km)... 100 8.5. Minerals... 101 8.5.1. Mining, Manufacturing, Utilities Output... 101 8.6. Technology... 102 8.6.1. Research and Development expenditure (Local Currency Thousands)... 102 8.7. Telecommunication... 103 8.7.1. Telephone Lines... 103 8.7.2. Telephone Lines Penetration Rate... 104 9. Appendix... 105 9.1. About SDI... 105 9.2. Disclaimer... 105 5
LIST OF FIGURES Figure 1: Kazakh Defense Expenditure, 2009-2013... 16 Figure 2: Kazakh Defense Expenditure, 2014-2018... 17 Figure 3: Kazakh GDP Growth vs. Defense Expenditure Growth and Defense Expenditure as Percentage of GDP Growth, 2009-2013... 19 Figure 4: Kazakh GDP Growth vs. Defense Expenditure Growth and Defense Expenditure as Percentage of GDP Growth, 2014-2018... 20 Figure 5: Kazakh Defense Budget Split Between Capital and Revenue Expenditure (%), 2009-2013... 21 Figure 6: Kazakh Defense Budget Split Between Capital and Revenue Expenditure (%), 2014-2018... 22 Figure 7: Kazakh Capital Budget Expenditure (US$ billion), 2009 2013... 23 Figure 8: Kazakh Capital Budget Allocation (US$ billion), 2014 2018... 24 Figure 9: Kazakh Revenue Expenditure (US$ billion), 2009 2013... 25 Figure 10: Kazakh Revenue Budget Allocation (US$ billion), 2014 2018... 26 Figure 11: Kazakh Per Capita Defense Expenditure (US$), 2009-2013... 27 Figure 12: Kazakh Per Capita Defense Expenditure (US$), 2014-2018... 28 Figure 13: Kazakh Homeland Security Budget (US$ bn), 2009 2013... 29 Figure 14: Kazakh Homeland Security Budget (US$ bn), 2014 2018... 30 Figure 15: SDI Terrorism Heat Map, 2013... 33 Figure 16: Benchmarking with Key Markets 2009-2013 vs. 2014-2018... 35 Figure 17: Defense Expenditure of the World s Largest Military Spenders (US$ Billion), 2013 and 2018... 36 Figure 18: Defense Expenditure as a Percentage of GDP of Largest Military Spenders (%), 2013... 37 Figure 19: Per-capita Defense Expenditure of Largest Military Spenders in the World (US$), 2013... 38 Figure 20: SDI Terrorism Index, 2013... 39 Figure 21: Kazakh Defense Import Trend (US$ million), 2008 2012 (TIV values)... 45 Figure 22: Kazakh Defense Imports by Country (%),2008 2012... 46 Figure 23: Kazakh Defense Imports by Category (%), 2008 2012... 47 Figure 24: Industry Dynamics Porter s Five Forces Analysis... 49 Figure 25: Kazakh Rural Population (In Millions), 2009 2018... 63 Figure 26: Kazakh Urban Population (In Millions), 2009 2018... 64 Figure 27: Kazakh Number of Households (In Millions), 2008 2017... 65 Figure 28: Kazakh GDP Per Capita, 2008 2017... 66 Figure 29: Kazakh GDP, Current Prices (US$ Billion), 2008 2017... 67 Figure 30: Kazakh Exports of goods and services (current USD Bn), 2002 2011... 68 Figure 31: Kazakh Imports of goods and services (current USD Bn), 2002 2011... 69 Figure 32: Kazakh Gross National disposable income (USD Bn), 2002 2011... 70 Figure 33: Kazakh Manufacturing Output (USD Bn), 2003 2011... 71 Figure 34: Kazakh Consumer Price Index, 2008 2017... 72 Figure 35: Wholesale Price Index, 2002 2011... 73 Figure 36: Local Currency per USD, 2009 2018... 74 Figure 37: Local Currency per Euro, 2008 2017... 75 Figure 38: Kazakh Market capitalization of listed companies (USD Bn), 2003 2012... 76 Figure 39: Kazakh Market capitalization of listed companies (% of GDP), 2002 2011... 77 Figure 40: Kazakh Total Government cash surplus/deficit (LCU Bn), 2004 2011... 78 Figure 41: Kazakh Government cash surplus/deficit as % of GDP (LCU), 2002 2011... 79 Figure 42: Kazakh Goods exports as a % of GDP, 2002 2011... 80 Figure 43: Kazakh Goods imports as a % of GDP, 2002 2011... 81 Figure 44: Kazakh Goods balance as a % of GDP, 2001 2010... 82 Figure 45: Kazakh Services imports as a % of GDP, 2002 2011... 83 Figure 46: Kazakh Service exports as a % of GDP, 2001 2010... 84 Figure 47: Kazakh Services balance as a % of GDP, 2002 2011... 85 Figure 48: Kazakh Foreign direct investment, net (BoP, current US$ Bn), 2002 2011... 86 Figure 49: Kazakh Net foreign direct investment as % of GDP, 2002 2011... 87 Figure 50: Kazakh International reserves, including gold (US$ Billion), 2002 2011... 88 Figure 51: Kazakh External Debt as % of GDP (%), 2001 2010... 89 Figure 52: Kazakh Conventional Thermal Electricity Net Generation (Billion Kilowatt hours), 2002 2011... 90 Figure 53: Kazakh Hydroelectricity Net Generation (Billion Kilowatt hours), 2002 2011... 91 Figure 54: Kazakh Conventional Thermal Electricity Installed Capacity (Million Kilowatts), 2001 2010... 92 Figure 55: Kazakh Electricity Exports (Billion Kilowatt hours), 2001 2010... 93 Figure 56: Kazakh Electricity Imports (Billion Kilowatt hours), 2001 2010... 94 6
Figure 57: Kazakh Proved Natural Gas Reserves (Trillion Cubic Feet), 2004 2013... 95 Figure 58: Kazakh Petroleum Consumption (Thousand Barrels Per Day), 2003 2012... 96 Figure 59: Kazakh Crude Oil Proved Reserves (Billion Barrels), 2004 2013... 97 Figure 60: Kazakh Roads, total network (km), 2003 2010... 98 Figure 61: Kazakh Rail lines (total route-km), 2002 2011... 99 Figure 62: Kazakh Air Transport, freight (million ton-km), 2002 2011...100 Figure 63: Kazakh Mining, Manufacturing, Utilities Output (US$ Billion), 2002 2011...101 Figure 64: Kazakh Research and Development expenditure (Local Currency Thousands), 2001 2009...102 Figure 65: Kazakh Telephone Lines (In Million), 2002 2011...103 Figure 66: Kazakh Telephone Lines Penetration Rate (Per 100 People), 2002 2011...104 7
LIST OF TABLES Table 1: Kazakh Defense Expenditure, 2009-2013... 16 Table 2: Kazakh Defense Expenditure, 2014-2018... 17 Table 3: Kazakh GDP Growth vs. Defense Expenditure Growth and Defense Expenditure as Percentage of GDP Growth, 2009-2013... 19 Table 4: Kazakh GDP Growth vs. Defense Expenditure Growth and Defense Expenditure as Percentage of GDP Growth, 2014-2018... 20 Table 5: Kazakh Defense Budget Split Between Capital and Revenue Expenditure (%), 2009-2013... 21 Table 6: Kazakh Defense Budget Split Between Capital and Revenue Expenditure (%), 2014-2018... 22 Table 7: Kazakh Capital Budget Expenditure (US$ Billion), 2009 2013... 23 Table 8: Kazakh Capital Budget Allocation (US$ billion), 2014 2018... 24 Table 9: Kazakh Revenue Expenditure (US$ billion), 2009 2013... 25 Table 10: Kazakh Revenue Budget Allocation (US$ billion), 2014 2018... 26 Table 11: Kazakh Per Capita Defense Expenditure (US$), 2009-2013... 27 Table 12: Kazakh Per Capita Defense Expenditure (US$), 2014-2018... 28 Table 13: Kazakh Homeland Security Budget (US$ bn), 2009 2013... 29 Table 14: Kazakh Homeland Security Budget (US$ bn), 2014 2018... 30 Table 15: Benchmarking with Key Markets 2009 2013 vs. 2014 2018... 34 Table 16: SDI Terrorism Index... 40 Table 17: Eurocopter SAS Product Focus... 54 Table 18: Eurocopter SAS: Recent Contract Wins... 54 Table 19: Russian Aircraft Corporation "MiG Product Focus... 55 Table 20: Russian Aircraft Corporation "MiG Recent Contract Wins... 56 Table 21: Uralvagonzavod Major Products & Services... 57 Table 22: Uralvagonzavod Alliances... 57 Table 23: Sagem product focus... 58 Table 24: Sagem: Alliances... 58 Table 25: Astrium Product Focus... 59 Table 26: Astrium Alliances... 59 Table 27: Thales Product Focus... 60 Table 28: Thales Recent Contract Wins... 62 8
1. Executive Summary Kazakh defense budget is expected to increase at a CAGR of %, primarily to counter terrorist threats and enhance defense capabilities The budget of Kazakhstan s armed forces, which consist of Ground Forces, Air Forces, Air Defence Forces, Naval Forces, and the Republican Guard, stands at US$ billion in 2013, up from US$ billion in 2009 and registering a CAGR of % during the review period. The threats of attack from domestic terrorist groups have triggered increased expenditure on counter-terrorism and counterinsurgency efforts. Another major factor driving the country s future defense expenditure is Kazakhstan s efforts to upgrade military equipment acquired from the Soviet Union in the past. Over the forecast period, the defense budget is projected to increase from US$ billion in 2014 to US$ billion by 2018, at a CAGR of %. However, as a percentage of GDP, defense expenditure is forecast to drop from % in 2014 to % in 2018. During the review period, the Kazakh government allocated an average of % of its defense budget for capital expenditure, which includes the purchase of new equipment and upgrade programs for existing ones. The rest of the budget was allocated for revenue expenditure, which includes salaries, planning, administration, and training expenditure. On a cumulative basis, Kazakhstan allocated US$ billion for its capital expenditure over the review period, which is expected to be US$ billion over the forecast period. While capital expenditure is forecast to increase at a CAGR of %, revenue expenditure will increase at a CAGR of %. 9
2. Market Attractiveness and Emerging Opportunities As one of the emerging powers in Central Asia, Kazakhstan displays a strong potential for growth compared to its neighboring nations. While the country invested US$ billion cumulatively over the period 2009-2013, the defense budget is expected to increase to US$ billion cumulatively in the forecast period. This growth is stimulated by the government s initiatives to procure new defense systems and combat the rising threat of domestic terrorism. Per-capita defense expenditure is expected to grow during the forecast period from US$ in 2014 to US$ in 2018 The capital expenditure budget is forecast to increase from US$ billion in 2014 to US$ billion in 2018, recording a CAGR of %, due to the government s modernization plans. The country s budget for HLS is also projected to increase over the forecast period, driven by increasing threats from human trafficking, drug smuggling, and internal security. Demand for equipment over the forecast period is mainly expected to revolve around multi-role helicopters, corvettes and small patrol boats, air defense systems, and transport armored vehicles. 10
Defense Expenditure Future of the Kazakh Defense Industry Market Attractiveness, Competitive Landscape and Forecasts to 2018 2.1. Defense Market Size Historical and Forecast 2.1.1. Kazakh annual defense expenditure to reach US$ billion by 2018 Over the period 2009-2013, Kazakhstan s defense expenditure increased from US$ billion in 2009 to US$ billion in 2013, registering a CAGR of %. The majority was directed toward the ongoing modernization program of its armed fleet that primarily consists of equipment brought from the Soviet Union. In the last few years, Kazakhstan has consistently imported advanced arms and ammunitions such as armored vehicles, aircraft, missiles, and ships to strengthen its armed forces. This trend is expected to continue over the forecast period, with the country s defense budget increasing from US$ billion in 2014 to US$ billion by 2018 and reflecting a CAGR of %. Kazakhstan s future procurement is expected to include helicopters, air defense systems, aircraft, and naval vessels along with C4ISR upgrades. The following table and figure show the Kazakh defense expenditure during the review period: Table 1: Kazakh Defense Expenditure, 2009-2013 Year Defense expenditure (US$ bn) Defense growth percentage 2009 2010 2011 2012 2013 CAGR 2009-2013 % Source: Kazakh Ministry of National Defense and SDI analysis Figure 1: Kazakh Defense Expenditure, 2009-2013 2009 2010 2011 2012 2013 Revenue Expenditure Capital Expenditure Growth Rate (%) Source: Kazakh Ministry of National Defense and SDI analysis 11
Defense Expenditure Future of the Kazakh Defense Industry Market Attractiveness, Competitive Landscape and Forecasts to 2018 The following table and figure show projected defense expenditure of the Kazakh over the forecast period: Table 2: Kazakh Defense Expenditure, 2014-2018 Year Defense expenditure (US$ bn) Defense growth percentage 2014 2015 2016 2017 2018 Source: Kazakh Ministry of National Defense and SDI analysis CAGR 2014-2018 % Figure 2: Kazakh Defense Expenditure, 2014-2018 2014 2015 2016 2017 2018 Revenue Expenditure Capital Expenditure Growth Rate (%) Source: Kazakh Ministry of National Defense and SDI analysis 12
2.2. Analysis of Defense Budget Allocation 2.2.1. Capital expenditure budget expected to increase during the forecast period Kazakhstan s defense capital expenditure steadily increased over the review period, registering a CAGR of %. During the forecast period, capital expenditure is expected to increase from US$ billion in 2014 to US$ billion in 2018 at a CAGR of %, with an average expenditure of US$ billion per year. During this period, the country is expected to invest in the procurement of multi-role and utility helicopters, patrol ships, high-mobility vehicles, and hi-tech arms and ammunitions as well as C4ISR upgrades for the Kazakh armed forces. The following table and chart display the Kazakh defense budget share of capital and revenue expenditure during the review period: Table 3: Kazakh Defense Budget Split Between Capital and Revenue Expenditure (%), 2009-2013 Year Capital Expenditure Share Revenue Expenditure Share 2009 2010 2011 2012 2013 Source: Kazakh Ministry of National Defense and SDI analysis Figure 3: Kazakh Defense Budget Split Between Capital and Revenue Expenditure (%), 2009-2013 %Percentage of Defense Expenditure 100% 80% 60% 40% 20% 0% 2009 2010 2011 2012 2013 Revenue Expenditure Capital Expenditure Source: Kazakh Ministry of National Defense and SDI analysis 13
Percentage of Defense Expenditure % Future of the Kazakh Defense Industry Market Attractiveness, Competitive Landscape and Forecasts to 2018 The following table and chart display the Kazakh defense budget share of capital and revenue expenditure over the forecast period: Table 4: Kazakh Defense Budget Split Between Capital and Revenue Expenditure (%), 2014-2018 Year Capital Expenditure Share Revenue Expenditure Share 2014 2015 2016 2017 2018 Source: Kazakh Ministry of National Defense and SDI analysis Figure 4: Kazakh Defense Budget Split Between Capital and Revenue Expenditure (%), 2014-2018 100% 80% 60% 40% 20% 0% 2014 2015 2016 2017 2018 Revenue Expenditure Capital Expenditure Source: Kazakh Ministry of National Defense and SDI analysis 14
Homeland Security Expenditure Future of the Kazakh Defense Industry Market Attractiveness, Competitive Landscape and Forecasts to 2018 2.3. Homeland Security Market Size and Forecast 2.3.1. Homeland security budget projected to increase at a CAGR of % during the forecast period Kazakhstan s homeland security (HLS) lies in the hands of the Ministry of Internal Affairs, the Ministry of Justice, the National Security Committee, and the Agency for Fighting Economic and Corruption Crimes (Financial Police).The country s HLS budget increased from US$ billion in 2009 to US$ billion in 2013, and recorded a CAGR of % over the review period. Expenditure is expected to be US$ billion in 2014 and increase to US$ billion in 2018. The growth will be driven by efforts to combat cybercrime, human trafficking, and drug smuggling. In order to counter the threats, Kazakhstan is expected to invest heavily in surveillance and intelligence technologies, such as metal detectors, intrusion detection systems, motion sensors, and CCTV (closed circuit television) systems. The following table and figure show the Kazakh HLS budget during the review period: Table 5: Kazakh HLS Budget (US$ Billion), 2009-2013 Year HLS budget (US$ bn) 2009 2010 2011 2012 2013 Source: Ministry of Public Safety, Kazakhstan and SDI analysis Figure 5: Kazakh HLS Budget (US$ Billion), 2009-2013 2009 2010 2011 2012 2013 Source: Ministry of Public Safety, Kazakhstan and SDI analysis 15
Homeland Security Expenditure Future of the Kazakh Defense Industry Market Attractiveness, Competitive Landscape and Forecasts to 2018 The following table and figure show the Kazakh HLS budget over the forecast period: Table 6: Kazakh HLS Budget (US$ Billion), 2014-2018 Year HLS budget (US$ bn) 2014 2015 2016 2017 2018 Source: Ministry of Public Safety, Kazakhstan and SDI analysis Figure 6: Kazakh HLS Budget (US$ Billion), 2014-2018 2014 2015 2016 2017 2018 Source: Ministry of Public Safety, Kazakhstan and SDI analysis 16