By Janesh Janardhanan, Director, Defense at Frost & Sullivan APAC
Janesh: Ron, thank you for joining us in this session of Movers & Shakers. I’d like to start off by addressing the recent shifts in geopolitical trends globally. How do you see the scenario evolving in APAC?
Ron: Thank you, Janesh. We see increased instability in the region. There is a perception that American interest in APAC is declining, creating a possible power void and opportunity for countries in the region to respond to that perception. China could be looking to play a larger role in APAC, while Middle powers – Japan, Australia, and importantly, India – could take on a more visible role in the region. The new buzzword is Indo-Pacific. The oldest and largest military command – the US Pacific Command formed after WWII – was recently renamed the US Indo-Pacific Command, signifying the importance of India. We expect a higher level of bilateral and trilateral cooperation between Japan and Australia as well as among the US, Japan, and India in response to this shift.
Janesh: How do you see the impact of the recent US-North Korea dialogue in Singapore and what that means for defense investments in the region?
Ron: It raises hope for long-term stability on the Korean peninsula. A portion of the South Korean defense budget may be used to build infrastructure in North Korea, reducing MND’s overall buying power. In the short term, no significant impact is expected for other geographies. North Korea still has a lot of missiles and missile defense is likely to be a priority for the region. There is a common misconception that countries increase defense spending during times geopolitical tensions or conflict. On the contrary, it’s during times of peace and stability when countries spend on large acquisition programs—defense capabilities to act as a deterrent to untoward aggression. So, over the long-term, I expect defense investments in the region to grow.
Janesh: How do you see the role and influence of China, Russia, the US, and India in APAC in areas such source of infrastructure investment funds or as exporters of defense equipment?
Ron: China, Russia and India are regional economic and defense powers and are expected to remain so. APAC countries will continue to interact with regional powers in a manner in which they represent the best economic and security interests of their nations. What is changing though is the perceived level of interest the US has in the region, which is bringing about closer ties between Asian nations. I anticipate the traditional dual hegemony dominated by US and China to evolve into a multi-power scenario where Middle powers like India, Japan, and Australia increasingly exercise their leadership on key issues relating to defense – bringing more stability to the region.
Janesh: Do you see the changing geopolitical landscape in APAC, for example, Malaysia’s newly-elected government and the current political climate in the Philippines, having a significant influence on the defense sector in the region?
Ron: The election results in Malaysia could mean a temporary slowdown in defense expenditures as the new government reassesses its spending priorities. In the long term, it probably means prudent and more transparent use of taxpayer dollars spent on defense. Despite all the media hype, the Philippines remains a strong US treaty ally, and the US remains committed to the Philippines, in my opinion. Defense cooperation – exercises and acquiring defense equipment from the US – will likely continue more-or-less as it always has.
Janesh: How do you see Japan evolving as a defense player in the region?
Ron: I believe Japan will continue to exert influence through soft-power plays, such as donating old/excess equipment to Southeast Asian nations. Japanese industry is very slowly adapting to the relaxation of the Three Principles on Transfer of Defense Equipment and Technology, and as I expected a few years ago, it will continue to be a slow shift.
Japan has not really started exporting defense equipment at scale. Japanese defense companies are unique in that defense is a small part of their overall business. It’s quite unlike US defense companies who are primarily focused on defense. So, the Japanese have many considerations on how they want to expand their defense business overseas in the overall context of what the companies and their brands stand for. Japanese trading companies–who are value-added partners—are expected to emerge as frontrunners as the scenario evolves. The Government of Japan is undoubtedly committed to supporting the growth of Japan’s defense and space industry, and continues to proactively promote defense articles overseas. The government is also continuously evolving its defense export policy on a case-by-case basis instead of prescribing an arbitrary set of rules, which gives industry a lot of leeway to propose ideas to the government, but also creates a bit of ‘paralysis’ since most companies don’t want to the be “the nail that sticks out…and gets hammered” (borrowing from a Japanese proverb.) So the approach has its good points and bad points, depending on your perspective. Japan’s national space policy has also seen significant changes in recent years, with an increased focus on national security space and a concerted effort by the government to grow the overall size of Japan’s space industry. It’s amazing to see how many new space startups have sprung into existence in the past few years, including some that are tackling the space debris problem—which has positive implications for Space Situational Awareness and other space-related mission areas.
Janesh: How do you see defense spending evolving in APAC in 2019?
Ron: Honeywell expects APAC customer nations to spend about $180 billion on defense in 2018. As countries in the region modernize their defense capabilities in coming years, Honeywell sees great potential in replacing and upgrading aging aircraft platforms – such as the C-130 Hercules and F-16 Fighting Falcon – and equipment to improve overall operational efficiency and mission readiness. Another key transformation Honeywell sees as largely beneficial for the region’s defense forces is the connected battlefield.
- Japan has a 1% of GDP rule-of-thumb cap on its defense spending, but there has been year-on-year growth over 6 to 7 consecutive years. Japan is a huge defense market and among the top 5 to 6 defense spenders in the world.
- There is a possibility that Korea’s defense budget may reduce by as much as $1 billion following the Trump-Kim summit if the Korean government shifts its focus to public infrastructure programs in the North.
- Thailand is one of Southeast Asia’s bigger defense spenders, with the Thai government recently approving its defense budget of $6.5 billion for 2018 – amounting to 7.7% of total government spending for 2018. Thailand’s 5% increase in defense spending in 2018 is more than double the 2% rise in 2017, underscoring the importance of developing advanced defense capabilities in the country.
- The Malaysian government announced a 5% increase in defense spending under the 2018 budget, from $3.6 billion to $3.75 billion. Despite the sizable increase, the defense budget allocation is still 7% less than that in 2015, following a large cut in the following year. The short-term situation in Malaysia remains uncertain due to the change in government.
- Indonesia revised its budget for 2017, which included a marginal increase in defense expenditure to $8.17 billion – a 1.2% increase over the approved budget in 2016, and 4.6% boost compared with the draft budget. Notably, Indonesia is projected to continue progressing toward meeting its goals of Minimum Essential Force – a concept aimed at delivering Indonesia’s minimum force structure and operational readiness requirements to improve border security and support the local defense industry.
- Singapore is forecast to spend about $10 billion in 2018.
- In the Philippines, Duterte’s administration is earmarking $3.7 billion to enhance the country’s military capabilities in 2018 as it grapples with the threat of terrorism. The amount is 7.5% higher than the budget allotted for the military upgrade program this year. Of the amount, 18% will be allocated to the revised Armed Forces of the Philippines modernization program to fund the purchase of armaments, surveillance, mobility, and communications equipment.
Janesh: How do you see technology and new digital platforms influencing the defense shopping list of APAC countries? For example, Connected Soldier, Unmanned Systems (aerial, land, surface, underwater), and AI?
Ron: Advanced technology is making certain capabilities available to budget shoppers that were not accessible before. Rapidly evolving technologies can enable these countries to leapfrog development in certain areas; for instance countries without proper telephone landline infrastructure are able to access phone services nationwide by installing cell towers cheaply, allowing them to skip a generation of phone technology. The shopping list of countries with budget constraints may move toward C4ISR, UAVs, and less traditional hardware. But, it must be noted that more shiny toys does not mean more combat power. There has to be an underpinning doctrine, a clear Concept of Operations (CONOPS) and well defined Tactics Techniques & Procedures (TTP) to employ high-tech platforms in a way that yields tactical advantage.
Janesh: Do you see OEM offerings adapting to the changing shopping lists?
- There could be a shift toward regional OEMs (e.g., Hanwa, AIDC, the Heavies in Japan, ST Aero, PTDI)
- Developed countries are working to develop indigenous capabilities with OEMs in APAC moving up the tech value-chain to achieve the national objectives of greater independence and security.
- In Southeast Asia, we are seeing growing capabilities in the development and production of ground combat and support vehicles that are more nimble and achieve the government objective of spending tax dollars locally.
- There are still good prospects for global OEMs, it’s just that the nature of the opportunities have changed.
- I also see greater potential for system/sub-system OEMs to effectively play the role of first tier suppliers by partnering with local OEMs and system integrators.
- Global defense OEMs such as Honeywell will seek stronger strategic partnerships and perhaps shift toward more co-development opportunities.
Janesh: Where would you say are the key pockets of growth in the region?
Ron: In ASEAN, primarily Indonesia, Vietnam, Thailand, and the Philippines.
Janesh: What would you imagine is a priority area for OEMs to address in APAC defense requirements?
Ron: Key areas for Honeywell will be to offer better value, innovation, partnerships, licensed production to provide more local content opportunities, modernization of aircraft fleets in Southeast Asia, and to enhance connected battlefield capabilities. Honeywell plans to strengthen investment in the region. In 2017, Honeywell opened its new aftermarket headquarters and a separate regional distribution hub in Kuala Lumpur to support the region’s aviation sector across military, commercial, and business aircraft. In addition, Honeywell has a 220,000 sq. ft. manufacturing facility in Penang that produces integrated avionics systems and offers repair and overhaul operations.
Janesh: Thanks so much for your time Ron, and all the best to Honeywell in APAC.
Ron: Thanks very much.