Southeast Asian Defence Markets: Opportunities for India

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Akash Sahu
Archive data: Person was Research Analyst at MP-IDSA Mr Akash Sahu was a Research Analyst with the Centre for Southeast Asia and Oceania at Manohar Parrikar Institute for Defence Studies… Continue reading Southeast Asian Defence Markets: Opportunities for India read more

The Philippines is set to buy from India at least seven Dhruv Advanced Light Helicopters (ALH) and eight Dornier 228 aircraft under a recently concluded deal.1 The bilateral defence relations received an impetus after the ‘Implementing Agreement’ was signed earlier this year, which would facilitate legal framework for Philippines’ defence acquisitions from India.2 The Philippines defence secretary had also been quoted saying that his country will purchase BrahMos missiles, jointly developed by India and Russia.3 Meanwhile, talks are in progress regarding the export of BrahMos to Indonesia.4

These developments are reflective of growing interest in Southeast Asia to purchase arms from India. India will therefore need to upgrade its domestic defence manufacturing capabilities, perhaps in conjunction with friendly advanced nations, to sustain this interest from Southeast Asia. An overview of their defence markets and demands will help India develop these capabilities accordingly. A larger exchange of defence business between India and Southeast Asia may consolidate India’s position in the regional security architecture, and also forge greater political alignment with important ASEAN partners.

Increased Spending and Military Modernisation

Southeast Asian countries have shown an expansion in their defence spending, particularly over the last decade with an increase of 36 per cent.5 In 2020 alone, the military spending in the region increased by 5.2 per cent. Many ASEAN nations have also adopted medium to long term military modernisation plans to improve their defence. Under its Minimum Essential Forces (MEF) programme, Indonesia has earmarked US$ 79 billion from a total of US$ 125 billion (rest for sustenance and interests) for modernisation of its defence forces in the next 25-year-period.6 Philippines has allocated US$ 4.3 billion to its defence budget in 2021, under the Revised Armed Forces of the Philippines Modernization Program (RAFPMP)7. There has also been talk about Philippines’ interest in acquiring submarines as the conflict in the region is primarily over disputed maritime claims.8 The largest military spender in the region, Singapore’s defence modernisation plans may see the next-generation Singapore Armed Forces (SAF) using Artificial Intelligence in weaponry, automation, data analytics, cyber and space-based assets for “multi-domain operations”.9

In its 2019 defence white paper, Vietnam set the goal of full military modernisation by 2030. The case of Vietnam is, however, a special one. Its geographical proximity and territorial dispute with China have both aggravated tension in their bilateral relations, and also restrained Hanoi’s actions that may be interpreted by Beijing as provocative. The tendency to opt for political action instead of military action10 will likely put any major defence spending plans, especially acquisitions, on the back-burner for Vietnam. Thailand has shown a resolve to upgrade its arsenal with the 10-year “Modernization Plan: Vision 2026” adopted in 2017. However, its defence purchases have been mired in controversies around questions of strategic relevance and high expense. For instance, the three diesel-electric submarines (valued US$ 1.03 billion) that Thailand has decided to buy from China are unsuitable to be operated in its own coastal zones due to large size.11 Although the government seems determined to procure more, internal corruption in Thailand’s defence ecosystem may affect the decision-making process.

Indigenous Industry and Intermediate Goods Market

Even though China’s not-so-peaceful military and economic rise factors strongly into the trend of defence spending in the region, some analysts believe that there are other formidable reasons as well. Much of the defence budgets of ASEAN countries is spent in maintaining large armies and old arsenals, and threats of piracy, illegal fishing, smuggling, etc., pull their own share from these already constrained budgets.12 As a consequence of limited spending in Research & Development and lack of infrastructure for defence manufacturing, import of arms is the most suitable choice for many ASEAN nations.

There is considerable realisation of this handicap in all major ASEAN capitals, and governments aim to keep importing vital defence items while at the same time enhance indigenous capabilities. This means Southeast Asia will continue to be an attractive market for finished defence products as well as intermediate products. For instance, Indonesia passed a law in 2012 requiring its armed forces to acquire arms domestically as much as possible.13 PT Pindad, PT Digantara Indonesia, PT PAL Indonesia and PT Dahana are some state-owned Indonesian companies that are involved in production of naval vessels, propeller aircraft, helicopters, explosives, artillery and land combat vehicles.14 Similarly, Malaysia’s Bousted Heavy Industries is working with French DCNS to build six coastal combat ships for Malaysian Navy. Singapore’s state-owned ST Engineering has sold arms to a number of countries including armoured troop carriers to Britain under a deal in 2008.15

India in the Mix

India aspires to radically boost its indigenous defence industry and become a major exporter. The Indian government has also encouraged foreign players to manufacture in India. Defence Minister Rajnath Singh has set goals of US$ 25 billion of domestic defence production and US$ 5 billion of defence exports for India.16 Naturally, Southeast Asia is a lucrative market for India’s defence exports given the cordial relations with ASEAN partners, and growing political alignment over issues of international importance. Apart from aiming to deliver high-end strategic assets in the region, India may also exploit the promising segment of intermediate goods in the defence sector.

In a roundtable discussion on defence industry cooperation organised jointly by Manohar Parrikar Institute for Defence Studies and Analyses (MP-IDSA) and US-India Business Council (USIBC)17 in October 2021, a key takeaway was to boost Indian manufacturers of defence intermediate goods. Major industry players such as Lockheed Martin and Boeing India expressed that fulfilling requirements of Indigenous Content (IC) becomes difficult due to lack of forthcoming Indian companies involved in production of intermediate goods. As a consequence, much of these items are imported. On similar lines, India’s dependence on intermediate goods from foreign nations limits its autonomy to export defence products abroad.18 Asia-Pacific is likely to witness substantial growth in aerospace and defence sector, and the demand for titanium and alloys, aluminium and alloys, steel and alloys, and composites will drive the intermediate goods market for a long time.19 By investing to build a base in this segment, not only will India be equipped to host more Original Equipment Manufacturers (OEMs)20 for manufacturing in India, but also provide a resilient and reliable supply chain for large-scale production in aerospace and defence sector.

Policy Options

Policymakers may like to focus exclusively on attracting investment for intermediate goods industry. A starting point can be encouraging foreign OEMs to discharge offset obligations by investing in these industries. A thriving intermediate goods industry will achieve three-pronged objectives of sufficient supply to locally operating OEMs, export to foreign markets, and incentivise more foreign OEMs to set shop in India. While it is ideal for India to increase number of defence production units that deliver ‘final goods’ like finished aircraft, it may be difficult feat to achieve given many structural constraints. Allowing ‘intermediate goods’ industry to flourish will naturally attract more foreign OEMs that can eventually deliver final goods and strengthen India’s defence exports.

In this scenario, it may be important to foster dialogue among potential investors, entrepreneurs in the aerospace and defence sector, and policymakers. Think tanks and advocacy groups can bring these parties together to reach consensus on the road ahead. Since the restructuring of supply chains is happening now, inaction at this time could mean losing out to aptly-located other suppliers that will eventually emerge in the global market.21 India has the advantage of a political class that is interested in boosting defence exports, creating infrastructure for large-scale production, and addressing issues faced by private players involved in the sector. It must make use of this window of opportunity.

Views expressed are of the author and do not necessarily reflect the views of the Manohar Parrrikar IDSA or of the Government of India.