China Military Growth Spurs Asia Demand for Boeing, Lockheed
China’s surging defense budget, the world’s second-biggest, is helping spur military spending across Asia, offering U.S. and European suppliers a chance to offset slowing demand at home.
Lockheed Martin Corp. (LMT) and Boeing Co. (BA) fighters will be on display at next week’s Singapore Airshow as the two biggest U.S. defense contractors prepare to compete with Eurofighter and Saab AB (SAABB) for a $7 billion South Korean order. The contest follows similar competitions in Japan and India.
Asia-Pacific spending on fighters, missiles and other equipment is set to grow an average 4.2 percent annually to $114 billion in 2016, according to Frost & Sullivan, because of economic growth and tensions in areas including the South China Sea, the Korean peninsula and the Taiwan Strait. China’s defense budget, alone, may rise 14 percent each year through 2015, according to Goldman Sachs Group Inc.
“Increased government revenues means that more money is often available for defense spending,” said Tim Huxley, executive director at the International Institute for Strategic Studies Asia in Singapore. “Many parts of Asia are also insecure or governments have reasons to feel insecure.”
North Korean shelling and an attack on a warship killed 50 South Koreans in 2010. The Communist nation has an army of 1.2 million soldiers, ballistic missiles and enough plutonium for a half-dozen nuclear devices, according to U.S. military estimates.
China is working on its first aircraft carrier and the new J-20 stealth fighter. The country planned to increase military spending 13 percent to 601.1 billion yuan ($95 billion) last year, Li Zhaoxing, spokesman for China’s National People’s Congress, said in March. The nation is boosting the budget as it replaces aging fighters and places a greater emphasis on national security amid rising territorial tensions, Goldman Sachs analysts Ronald Keung and Tom Kim said in a Jan. 17 note.
Taiwan, which China considers to be a renegade province, is planning to upgrade 145 Lockheed Martin F-16s in a project that will cost about NT$110 billion ($3.7 billion), according to the Ministry of National Defense. The work may include installing new radars and navigation systems, according to a U.S. Defense Security Cooperation Agency statement last year.
South Korea is planning to purchase about 60 fighters, according to the Defense Acquisition Program Administration. The contenders will include Lockheed’s F-35, Chicago-based Boeing’s F-15, the Eurofighter Typhoon and Saab’s Gripen. The nation is also buying attack helicopters for its army and navy, as well as considering a purchase of unmanned aerial vehicles, according to the agency.
Lockheed, based in Bethesda, Maryland, won an order from Japan for 42 F-35 fighters in December. The jets may cost 1.6 trillion yen ($21 billion) to buy, operate and maintain over 20 years, according to the nation’s defense ministry. Singapore has also signed up as a development partner for the fighter jet. The U.S. has ordered about 2,440 in a $382 billion project that forms its biggest weapons program.
India last week named Paris-based Dassault Aviation SA as preferred bidder for a contract to supply 126 fighters. The planemaker’s Rafale was shortlisted with the Eurofighter Typhoon after the earlier rejection of offers from Lockheed, Boeing, Saab and Moscow-based United Aircraft Corp.
Eurofighter is now targeting the South Korean tender, along with opportunities in Malaysia and the Gulf, said Chief Executive Officer Enzo Casolini. The planemaker is a venture between BAE Systems Plc (BA/), Finmeccanica SpA and Airbus parent European Aeronautic Defence & Space Co.
Asia is “an important market,” Casolini said. “Exporting the Typhoon is also very important for the European industry and for the European economy.”
Eurofighter has slowed production as European governments cut military budgets amid austerity measures. Western European defense spending fell about 5 percent last year and may decline further this year, according to Fitch Ratings.
Asia-Pacific defense spending rose 14 percent last year, making it the fastest growing region, according to Frost & Sullivan. Japan is the biggest spender on defense in Asia behind China, with a $54.5 billion outlay in 2010, according to Stockholm International Peace Research Institute data. Third- ranked India spent $41.3 billion that year. The U.S. led global spending with a $698 billion budget.
China is also seeking to take advantage of growing defense budgets by selling domestically developed equipment overseas. At the Singapore show, the export arm of Aviation Industry Corp. of China, the nation’s biggest aerospace company, will promote the JF-17 Thunder fighter, nicknamed Fierce Dragon, which was developed with Pakistan. It will also be highlighting the L-15 Advanced Trainer Jet, and the Yilong, or Pterodactyl, drone.
“These airshows give China defense companies a global stage, which reflects their growing power,” said Ken Zhang, a Beijing-based defense-company analyst with Founder Securities Co. Companies like AVIC also need to boost exports to help pay for research costs as they probably don’t get “fat margins” from sales to the Chinese military, he said.
Lockheed also sees Asia-Pacific demand for missile-defense technologies, replicating a trend seen in the last decade in the Middle East.
“We’re watching the same or similar types of overall security risks,” Chief Executive Officer Robert Stevens said in a Jan. 26 conference call with analysts. “The proliferation of technologies, the desire to get missiles of greater performance, longer range, more precision, and the desire for governments to have some protection against that ballistic-missile threat.”
L-3 Communications Holdings Inc. (LLL), based in New York, has had interest from the region in its SPYDR manned, airborne intelligence, surveillance and reconnaissance system, as well as unmanned surveillance drones, Chief Executive Officer Michael Strianese said in a Jan. 31 conference call.
Raytheon Co. (RTN), the world’s largest maker of missiles, expects 30 percent of bookings and 26 percent of sales in 2012 to come from outside the U.S., Chief Executive Officer Bill Swanson told analysts last month.
“Asia and the Middle East are important and are still growing,” Swanson said.
In the U.S., the biggest military market, Defense Secretary Leon Panetta presented an outline on Jan. 26 for $613 billion in spending for fiscal 2013. The proposal is part of an effort to cut $487 billion, or 8.5 percent, from $5.62 trillion in defense spending that had been planned for 2012 to 2021. Automatic spending cuts could force an additional $500 billion in reductions over a decade.
“The strong growth in emerging-market demand for defense equipment is a welcome respite to western military manufacturers,” Fitch said on Feb. 1. “In the medium term, the reliance on emerging markets for the defense sector will continue to grow.”
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