Navigating the emerging markets: Singapore Obstacles to success, international relationships, offset procurement strategies and defence industrial intelligence Jon Grevatt - Asia Pacific Defence Industry Reporter/Analyst Nicholas De Larrinaga Analyst, Jane’s Defence Industry 8 December 2011

Singapore – Market summary Higher defence spending and variety of requirements but challenges remain

Higher spending ahead: Singapore’s defence budget expected to rise more than 30% between 2010 to 2015. Defence procurement expected to rise at about the same rate to USD3.3 billion.1 Economic growth: Following a surge of growth in 2010 Singapore’s economic growth is forecast to continue during 2011-15 at compound rate of 6.8%2

Requirements: Singapore’s military requirements are sophisticated and extensive and are expected to be fulfilled by Western foreign systems and platforms supplemented by indigenous products.

*1 Jane’s Defence Budgets – Jdb.janes.com *2 IHS Global

Major challenges…

Economy: Singapore facing headwinds that could influence defence spending strategy Evaluation: Selection criteria known to be some of the most testing Competition: Market has high level of well established local and foreign competitors High demands: Meeting technology transfer demands will be arduous

Singapore – In figures (materiel suppliers - nations)

*Based on SIPRI Trade Equivalent Units Source SIPRI/Jane’s

Suppliers of defence materiel (2000 to 2010 - by percentage total value of military imports* )

Australia/ Denmark

1%

France 21%

Germany 6%

Israel 5%

Sweden 3%

Switzerland 4%

United States 60% Source: IHS

Jane's and SIPRI Arms Transfer Database (some deals based on estimates)

Singapore – In figures (trade partners) Bilateral trade between Singapore and principal trade partners – US$ millions (total bilateral trade 2000 to 2010)

Source: IMF

0

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200000

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800000

Singapore – Procurement practices

Principles: Acquisitions underpinned by three guiding principles: competition, value for money and transparency. Administered by the Defence Science and Technology Agency Evaluations: DSTA employs complex evaluation and scoring system for procurement that covers a wide range of key factors. This evaluation process is known to be relatively arduous for industry and has resulted in some delays Partnerships: Required to ensure local industry is equipped to not only operate system but can also maintain and support and provide customisations with indigenous add-ons Competition: Considerable international defence industry presence in Singapore Public-Private-Partnership: Defence ministry has adopted PPP for capabilities where it wants industry to bear the risk of developing a capability Lease to own: A formula used in the past to procure US equipment against FMS to ensure early delivery of platforms Transparency: Hardly any corruption but procurement is not wholly transparent. Government offers little insight or information about procurement plans

Procurement decisions driven by the objective of equiping armed forces to a high standard at an appropriate cost while deriving national industrial benefits

Singapore – Defence Spending Trend

Defence spending (US$ bn v expenditure as % GDP)

GDP growth (%) v real GDP (USD bn)

IHS Global Insight Jane’s Defence Budgets – jdb.janes.com

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2008 2009 2010 2011 2012 2013 2014 2015

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Total Defence Budget Total Defence Budget as % GDP

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Nominal GDP (USD bn) Real GDP (% Change)

Singapore – Defence Spending Trends

Jane’s Defence Budgets – jdb.janes.com

Spending as % of GDP: Spending remains relatively high as a percentage of GDP and is forecast to remain between 4 and 4.5% of GDP over the 2011 to 2015 period. Spending USD: Defence spending is forecast to grow continuously from 2011, reaching US14 billion in 2015 as Singapore continues to place a high emphasis on defence spending. High growth: IHS Global Insight anticipates solid growth in Singapore’s nominal GDP over the next four years, at a CAGR of 6.8%. Singapore does however face economic headwinds owing to its dependence on levels of foreign trade. Total Defence: Singapore operates a policy of ‘total defence‘, which utilises high-technology force multipliers, national service, constant readiness and high spending to overcome the country’s strategic disadvantages.

*1 Malay Ministry of Finance Economic Reports *2 Jane’s Defence Budgets

Defence spending (US$ bn v expenditure as % GDP)

5.9

5%

4.8

2%

4.7

2%

4.6

3%

3.9

8%

0

2

4

6

8Forecast average annual GDP growth (2011-2015)

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Total Defence Budget

Total Defence Budget as % GDP

Singapore– In figures (procurement spending)

Procurement spending by service (US$ billions) FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15

Army 0.32 0.36 0.32 0.39 0.40 0.44 0.42 0.44

Navy 0.95 1.05 1.01 1.21 1.27 1.39 1.46 1.53

Air Force 1.10 1.22 1.17 1.40 1.47 1.62 1.69 1.77

Other/Joint 0.02 0.02 0.02 0.02 0.02 0.02 0.03 0.03

Total 2.39 2.65 2.51 3.02 3.16 3.47 3.61 3.77

Procurement spending by services (US$ bn - actual and forecast)

Source Jane's Defence Budgets. Figures FY11 + are forecasts

Procurement spending by services (% of forecast total – 2011 to 2015)

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2008 2009 2010 2011 2012 2013 2014 2015

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Army Navy Air Force Defence-Wide

Army 12%

Navy 40%

Air Force 47%

Defence-Wide 1%

Singapore – Market opportunities by sector: 2011 to 2020

*1 Assessment / forecasts based on known programmes and identified opportunities (eg, stated realisable procurement aims during coming spending period) *2 Other: Misc. areas beyond other headings (ranging from boots and textiles to ammunition) Source: Jane’s DS Forecast – Jane’s Defence Sector Budgets (jdsb.janes.com)

Forecast accessible market size 2011 to 2020 – USD46.5 billion. Chart shows forecast percentage spending by market sector*1

Aircraft 34.59%

Command & Control 3.97%

Electro-optical / infrared 1.79%

Ground Vehicles 10.93%

Intelligence 0.07%

Military Communication 4.98%

Missiles 5.55%

Other 24.95%

Precision Guided Weapons 0.94%

Radar 3.46%

Ships 6.63%

Sonar 0.16%

Space Systems 0.53%

Unmanned Systems 1.45%

Singapore – Defence industry development: Timeline

Late 1960s: Chartered Industries of Singapore was established two years after full independence - ambitions to manufacture materiel under licence for 1st Generation SAF

1970s: A number of other state owned industries were formed, all of which were absorbed by ST Engineering

1990s: Efforts to develop 2G SAF with emphasis on tri-service integration. Offset built indigenous capabilities

1997: ST Engineering was established as a USD2 million listed company when ST Aerospace, ST Electronics, ST Auto, and ST Marine merged as one

2000: Efforts to develop and establish the 3rd Generation SAF commenced at the turn of the millennium and have been focused on developments related to network-centric warfare and other futuristic concepts.

Singapore – Defence industrial development Social and economic drivers

Self sufficiency: The view that self-sufficiency is an important element of sovereignty has played an influential role

Economic driver: Defence industry development is also at the heart of many of the country’s policies for social/economic development. Employment: Continued high defence spending helped promote the creation of skills and meaningful employment. Protecting economic position: Singapore believes that its armed forces play an integral role in providing a secure harbour for its economy to flourish. Social priorities: Ensuring high levels of training; technologies developed indigenously, competitive manufacturing; exports

IHS Global Insight

0% 1% 2% 3% 4%

2007

2009

2011

2013

2015

Unemployment Rate

ST Kinetics’ Bronco

Singapore – Defence industrial development Strategic drivers Close links between industry and military mean objectives are aligned: “enhance Singapore's peace and security through deterrence and diplomacy, and should these fail, to secure swift and decisive victory over the aggressor”. Total Defence: Concept rooted in the belief that the disadvantages inherent in Singapore's geographical size, location and small population base can be countered through gaining human and technological advantages in all military, civilian, economic, social, diplomatic and even psychological areas.

*1 Jane’s Defence Industry News, “Indonesia establishes forum to drive offset reform”, 11 April 2001

People’s Republic of China:

Domestic terrorism

Securing sea lanes

Regional Separatism

ST Engineering dominance: ST Engineering owns 62 Singapore-based subsidiaries and supported by 20 private SMEs. Together they employ around 16,000 people; the vast majority of which are employed by ST Engineering and its subsidiaries Ecosystem: Close links between industry and military/R&D agencies have established a defence ecosystem. It is designed to give Singapore distinct military advantage

Self sufficiency: Ecosystem and industry development designed to attain high levels of self-sufficiency in particularly core capability areas. Core capabilities: Wide ranging across air, land, sea, electronics. Include command and control, manned ground vehicles, military communications, military ships and unmanned systems.

Weakness: No capability to undertake production of military aircraft. ST Engineering will maintain imported aircraft as well as undertake communications and weapon system integration and provide upgrades and customisations.

Singapore – Defence industrial capabilities Industry base: Industry base sophisticated although limited by scale. Unique in that industry activities are dominated by a single group of companies: ST Engineering.

RDT&E expenditure as percentage of total defence spending – Singapore vs regional peers

Singapore – R&D investment / skills

Spending: R&DTE investment has driven development of industry and military R&D system: Strengthened by strong obligation to education and training Skilled workforce: Among most technically competent and productive in the world. Corporate partnerships: Aim of partnerships with foreign suppliers to ensure Singapore acquires technologies and knowledge

Jane’s Defence Budgets – jdb.janes.com

0.00%

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12.00%

Indonesia Malaysia SouthKorea

Singapore Thailand

FY08 FY09 FY10 FY11

Singapore – Offset and industry collaboration Singapore sees itself as a developed nation and seeks to develop its defence industries to a level comparable with those of the West. Self-sufficiency a key goal.

Absorptive abilities: As industry reached higher levels of capability, ability to absorb new technologies had reduced: “absorptive ability” of Singapore’s industry had become limited. No offset: Singapore does not recognise offset; no official guidelines. However, it does seek to secure industry collaboration as it strives to meet high levels of self-sufficiency Target: Aim of strategy is to ensure indigenous participation in system integration and customisation activities involving locally developed technologies. Threshold & Quota: Collaboration expected on all major programmes but set on a case-by-case basis. No official quota but contractors can be expected to discharge at least 30% DSTA: Defence Science and Technology Agency will encourage overseas suppliers to participate in discharging maintenance and support obligations to ST Engineering. Focus: Industry collaboration agreements enhance sophisticated capabilities through technology transfer, involvement in research and development and particularly training.

Singapore – technology focus Singapore’s industry collaboration programme is focused on the acquisition of knowledge and technologies to enable local maintenance and training. Two examples stand out ...

DCNS Formidable-class frigates: Under a contract signed in 2000, Singapore ordered six frigates. Partnership and technology transfer considered a key part of deal. First boat built in France; other five vessels built in Singapore. A joint venture has also been created to provide support and training.

M-346 trainers: In September 2010, Singapore ordered Alenia Aermacchi M-346 trainers. In June 2011, another deal signed to allow ST Engineering to provide 20-year training, maintenance and logistics services for the aircraft, which will be based in France. Alenia Aermacchi

Singapore – industry collaboration

Local Success: Key indicators suggest offset/collaboration programmes have been successful. Industry sells considerable quantities of materiel each year to the SAF Limited export success: Beyond the sale of surplus materiel from Singapore’s inventories, sizable foreign sales of indigenously produced materiel have been very limited (with the 2007 sale of the 120mm Super Rapid Advanced Mortar system to the UAE one of the few examples of note). Bronco: Export of the Singapore-designed and built Bronco vehicles to British Army regarded as a particular success as it marked the first major sale to an advanced defence market New focus: Objective to enhance capabilities that Singapore’s defence industry can offer the SAF but also – in line with a government commitment to expand international sales for all industry sectors – to engender greater export success

Singapore’s industry collaboration programme – in tandem with cohesive R&D strategy – has had considerable success in boosting indigenous capability but exports are new focus

Singapore – Final thoughts

Singapore is an attractive defence market...

Investment: Strong defence spending expected over forecast period Requirements: Long list of requirements of largely sophisticated defence articles required, favouring US and EU contractors Strategic threats: Regional concerns - related to China, piracy, local insurgency – unlikely to recede in short-to-mid term Local capabilities: High levels of industry capabilities enables relatively painless technology transfer Skills: Singapore boasts high levels of skills, education and training Transparency: Singapore’s commitment to transparency and open-market principles is conducive to competition

Singapore – Final Thoughts

Challenges, risks and requirements...

Evaluations: Singapore is demanding of industry in terms of trials and evaluations Competition: High local presence of international companies in Singapore generates high levels of competition Economy: Headwinds facing economic growth Partnerships: Industry tie-ups with local industry (ST Engineering) considered a prerequisite to success in Singapore ToT and Knowledge: The ability to transfer high levels of technologies that fill local capability gaps will be favourably considered but are demanding on industry. Focus on maintenance, support and training

Navigating the Emerging Markets Singapore

Thank you for your attention

Questions?

Jon Grevatt

Jane’s Asia Pacific Industrial Analyst

jongrevatt@gmail.com

Nicholas De Larrinaga

Defence Industry Reporter/Analyst

Nicholas.DeLarrinaga@janes.com

With thanks to:

Jane’s DS Forecast / Jane’s Defence Budgets

(London and Washington DC)