(Above image - addressing the IDEX Organising Commitee during my key note session on disruptive emerging technology and innovation.)
One of the many notable elements of the IDEX 2017 exhibition has been the prominent “China Defence” presence. The size and variety of the Chinese delegation at this year’s event has stood out.
While the US, UAE and Western European pavilions all are larger, the sheer number and variety of Chinese companies at IDEX 2017 is intriguing: from large state-owned enterprises selling higher-end military capabilities, such as cruise missiles, unmanned systems, directed energy weapons, advanced torpedos, tanks and naval platforms to an array of smaller firms selling more mundane items such as military clothing.
China’s growing presence at one of the region’s largest and most influential shows reflects the intersection of a series of supply and demand-side trends that are slowly but surely reshaping the competitive dynamics of one of the most important export markets in the world.
On the supply side, China has actively sought to boost its defence exports during the 2010s. This effort is in part a means of injecting more cash into an already well-funded industry seeking to cut the innovation and technology gap with the most advanced Western defense industry organizations, especially those in the United States. More significantly, though, China’s efforts to build defense exports are primarily part of a broader effort to deepen geopolitical relationships with states and regions deemed to be strategically valuable. China’s growing demand for energy and general desire to play an enhanced role in geopolitics outside its immediate vicinity make building defense relationships in the Middle East a priority.
The region has mostly welcomed China’s initial attempts at market penetration—along with many other non-Western providers—as states in the Gulf Cooperation Council (GCC) attempt to balance multiple defense, security and budgetary exigencies.
The precipitous drop in oil prices from 2014 halted the forward momentum in defense spending of most – but not quite all, Qatar and Kuwait have been notable exceptions—of the GCC states. In the years leading up to the oil market crash, the GCC states had become the fastest growing export market in the world due in large part to the kaleidoscopically complex, overlapping and multi-dimensional threats facing the region and high oil prices. The GCC had a compelling need and it had the resources to meet its requirements. While Jane’s expects GCC defense budgets to return to growth in 2017 and to exceed pre-2015 levels by the end of the decade, the stabilization of energy prices between $50 - $60 has placed enhanced emphasis on some degree of fiscal responsibility in defense spending, where possible.
New competition, new threats
GCC states will continue to engage the United States and other advanced and established Western suppliers on a range of high-value procurements—especially areas where the highest-end and most reliable technologies are absolutely critical to national security and sovereignty (for example, layered missile defense). However, the market is increasingly marked by a growing threat environment and therefore by new levels of competition across a broader range of procurements. GCC defense and security organizations are diversifying their supplier base in response to the combination of growing demand and somewhat constrained budgets and in some cases procuring “good enough”, but more affordable, platforms and systems from a longer list of suppliers.
Saudi Arabia’s 2016 selection of a company from the Republic of Georgia to provide armored ambulances over several North American providers serves as an indicative example as does Saudi Arabia’s recent discussions with Pakistan about importing Pakistani made main battle tanks. China has been particularly successful in exporting unmanned aerial systems to the region as well.
Initial GCC efforts to diversify its defense supplier base where possible have been amplified by uncertainty of the US posture toward and commitment to the region as well as heightened political resistance in both the United States and Western Europe to arms sales to the region.
Strategic concern over US commitment began during the Obama Administration, especially after the announcement of the strategy to rebalance US naval forces to Asia. The election of Donald J. Trump as President of the United States in November of 2016 and the subsequent articulation of provocative and potentially destabilizing policies on region-relevant issues such as managing immigration from the Middle East, confronting Iran, negotiating peace between Israel and the Palestinians and combating Daesh and the broader radical Islamist extremist terrorist threat has intensified the overarching sense of uncertainty about U.S. policy among GCC states and the broader region.
Offsets and technology transfers key selling points
China and other exporters—both established and emerging—from Russia, Western Europe, Eastern Europe and across Asia have also been able to take advantage of the increasing efforts of several GCC states, particularly the UAE, but also Saudi Arabia and possibly others, to build their own indigenous defense industrial bases through offsets and technology transfers. China is near the top of the list of national industrial bases stressing flexibility in its approach to export markets, especially in the area of cost, workshare, technology transfer and training of local industrial bases.
The end result of these supply and demand trends is a GCC market coping with several transitions. As GCC states balance the need for more capabilities to mitigate against increased risk all while adjusting to a new, though far from desperate, fiscal environment, opportunities are likely to emerge for new suppliers. Commitment to the region is critical, and the GCC market is not one that will open up overnight. Established providers with established relationships and histories of successful delivery will maintain an advantage. But the “China Defence” presence at 2017 is a signal of intent of just one more national industry seeking to position itself in what may soon become a savagely competitive market.
Tate Nurkin, Senior Director, Strategic Assessments and Futures Studies, Jane's by IHS Markit
Posted 24 February 2017