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Defense industry hitting the target

Article - April 3, 2012
Military spending among ASEAN nations is running at $25 billion a year. Malaysia is putting itself forward as a regional leader in the defense industry, setting its sights on profit and cutting its import bill
Lightweight, reliable, and accurate, the Colt M4 is the weapon of choice of the United States armed forces, and the only 5.56mm carbine in the world that meets their exacting performance specifications. The same assault rifle is carried by thousands of members of Malaysian service personnel and police officers, but it does not have to be imported – it is made by a Malaysian company.

SME Ordnance Sdn Bhd (SME), a subsidiary of National Aerospace & Defense Industries (NADI), first produced the M4 under license from Colt Defense in 2007. Last year, SME signed a new contract to produce an additional 116,000 carbines, a deal that also gives it the right to market the weapon to other countries in the Association of Southeast Asian Nations (ASEAN).

Malaysia is keen to tap into the massive military spending in the region, seeing itself as a future hub for the ASEAN defense market. The government is promoting the country to international defense companies as a base for regional activities through strategic alliances in manufacturing, co-manufacturing, outsourcing, or research and development.

“We are planning to turn the defense sector into a profit sector. We are not just going to spend in order to acquire the assets and equipment, we want also to contribute to the development of Malaysia.”

Dato’ Seri Dr. Ahmad Zahid Hamidi Minister of Defense

Forty years after Malaysia took its first steps towards creating its own defense industry in the 1970s, indigenous companies have developed capabilities that make them regionally competitive, especially in system integration, in maintenance, repair and operations (MRO), and in manufacturing and catering to the requirements of foreign original equipment manufacturers (OEMs). The industry continues to develop through the transfer of technology, an offset program, and innovation (R&D).

“We are planning to turn the defense sector into a profit sector,” says Dr. Ahmad Zahid Hamidi, the Minister of Defense. “We are not just going to spend in order to acquire the assets and equipment, we want also to contribute to the development of Malaysia.”

At Sungkai, in Perak State, the Malaysia Defense and Security Technology Park is being established. The first of its kind in the region, the 3,115-acre zone is dedicated exclusively to providing hi-tech manufacturing facilities and services for local, regional, and global defense and security companies, and has attracted substantial international investment.

Military expenditure by ASEAN states is rising and currently amounts to around $25 billion per year. Malaysia is one of four ASEAN countries with established defense industries—the others are Thailand, Indonesia, and Singapore—but, like the region as a whole, is a net importer of weapons and systems.

The government is budgeting to spend marginally less on defense this year, but the bill will still total $4.41 billion. With a commitment to modernize the armed forces, spending is set to reach $5.6 billion annually by 2016—some of it on major procurements, notably a new multi-role combat aircraft (MRCA) and for the navy’s new second-generation patrol vessel (SGPV).

At the ASEAN Defense Ministers Meeting held in Jakarta last May, Minister Zahid put forward a plan for collaboration between ASEAN defense industries, which it is hoped could lead to a halving of spending on regional defense imports to $12.5 billion a year.

“We are collaborating with other ASEAN countries to manufacture and market products,” he says. It has been suggested, for example, that Indonesia and Thailand could share in the production of the Colt rifles they buy from Malaysia by supplying component parts.

Defense trade between ASEAN nations is currently at only a modest level. However, Dr. Zahid says the members of the regional bloc face common threats and challenges, and should aim to be self-sufficient in defense by 2030.

He wants ASEAN companies to develop niche capabilities, enter the global supply chain, and engage in offset programs. The minister acknowledges that it will be challenging, requiring uniformity of operation and common production standards in defense industries across the region.

It could also require guarantees of a balanced quid pro quo in terms of defense trading between ASEAN nations. Dr. Zahid points out that while Malaysia has bought CN-235 aircraft and Super Puma helicopters from Indonesia, the latter has bought only 200 of the 2,000 Proton Saga sedans it promised to purchase from Malaysia in return.

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