Tuesday, 31 January 2012

The Taiwanese Defense Industry - Market Opportunities and Entry Strategies, Analyses and Forecasts to 2015

With a strained relationship with China, aging defense hardware and an underdeveloped domestic defense industry, Taiwan’s defense industry is under pressure. Equipment upgrades and homeland security issues are two key issues set to drive spending until 2015.

London, January 31, 2012 – Taiwan’s military expenditure is expected to be driven by factors such as a strained relationship with China and the acquisition of advanced defense systems. Rapid defense modernization plans being pursued by China have also compelled the nation to enhance the capabilities of its armed forces.

According to detailed ICD research, the country’s defense budget as a percentage of GDP is likely to increase from 2.0% in 2011 to 2.2% in 2015, and during the 2011–2015 research forecast period the country’s defense spending growth rate is expected to correlate closely with the nation’s GDP growth rate. Taiwan’s defense budget has grown at a compound annual growth rate (CAGR) of 5.02% since 2006, and is projected to grow at a CAGR of 7.77% from 2011 – 2015.

Revenue expenditure dominates Taiwan’s defense budget, but capital expenditure is set to increase during 2011-2015

During the 2006–2010 research review period, the country spent over 90% of its total defense budget on revenue expenses, while less than 10% allocated for capital expenditure. However, during the forecast period, capital expenditures share is expected to increase to an average of 12%, largely due to the country’s focus on acquiring advanced defense systems and plans to reduce its troop size by 20% by 2014. As a consequence, defense equipment suppliers will experience a surge in demand for advanced systems such as fighter aircraft, military helicopters, missiles, warships and submarines.

The country’s homeland security spending is expected to increase at a CAGR of 11.95% during the forecast period.

The country’s homeland security spending recorded a CAGR of 1.69% during the review period, and is expected to record a CAGR of 11.95% during the forecast period. The nation’s homeland security budget is driven by an increase in human trafficking, illicit drug trading and maritime security threats. Over the next five years, significant investment is expected in equipment capable of countering maritime as well as security threats. Consequently, demand for surveillance equipment such as CCTVs and biometric identification systems is expected to increase during the forecast period.

The US accounts for the majority of arms supply to the country

Taiwan’s domestic defense industry is unable to manufacture advanced defense systems, as a result of which the country depends on foreign OEMs to meet its military requirements. However, as the country focuses on enhancing the capabilities of its domestic defense industries, its overall level of expenditure on arms imports is not expected to increase significantly during the forecast period. Over the past five years the US has emerged as the largest supplier of defense equipment to the country. While ships accounted for the highest expenditure on imported military hardware in 2010, investment in aerial defense systems is expected to increase during the forecast period.

Foreign OEMs venture into the market through defense exhibition and direct commercial sales
The country has hosted the biennial Taipei Aerospace and Defense Technology Exhibition since 1991, which provides overseas investors with an opportunity to access the country’s defense market. In 2009, an estimated 97 exhibitors participated in the exhibition, including Saab, Northrop Grumman, ITT, Raytheon, L-3 and Lockheed Martin, among others. The nation’s domestic defense capabilities are largely underdeveloped, as a result of which a large number of foreign suppliers have entered the market by directly selling arms.

Defense budget cuts, corruption and lack of transparency hamper the Taiwanese defense industry

Lack of transparency and corruption within the government’s procurement process hamper the entry of foreign investors into Taiwan’s defense sector, and there have been instances where foreign investors have resorted to paying bribes in order to win procurement contracts. Additionally, government policy requires all foreign defense procurements within the country to be finalized through local agents, who receive a commission for every deal they finalize, and the bribing of these local agents by suppliers is common. This type of malpractice within the government procurement process discourages other investors from entering the country’s defense market.

The growth of the Taiwanese defense industry is hindered by project delays caused by financial shortages. The global economic slowdown has reduced the country’s military spending, with certain defense procurement programs either postponed or cancelled. All these factors impede the entry of foreign OEMs into the country’s defense sector.

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