The Malaysian Defense Industry - Market Opportunities and Entry Strategies, Analyses and Forecasts to 2017

Dec 17, 2012 - ICD-Research - 115 pages - USD $1,250
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This report is the result of SDI's extensive market and company research covering the Malaysian defense industry, and provides detailed analysis of both historic and forecast defense industry values including key growth stimulators, analysis of the leading companies in the industry, and key news.

Introduction and Landscape

Why was the report written?
The Malaysian defense Industry Market Opportunities and Entry Strategies, Analyses and Forecasts to 2017 offers the reader aninsight into the market opportunities and entry strategies adopted by foreign original equipment manufacturers (OEMs) to gain a market share in the Malaysian defense industry.

What is the current market landscape and what is changing?
The Malaysian defense industry is expected to record a CAGR of 7.5% over the forecast period, and the country has a limited presence in the global defense industry. The primary reason for the strong growth anticipated in Malaysian defense expenditure is the country's previously inadequate levels of spending, and the need to therefore invest significant amounts in order to possess effective armed forces. Consequently, the country's defense expenditure is expected to increase throughout the forecast period, with the capital expenditure allocation of the Malaysian defense budget expected to increase from 22% in 2012 to 25% by 2017. Despite this, as a percentage of GDP, Malaysia's defense expenditure is expected to decline from an average of 1.7% to an average of 1.5%, as a result of the increasing deficit reduction efforts of the Malaysian Government. Over the forecast period, the country's homeland security expenditure is expected to be driven by increasing criminal activity and religious tensions.

What are the key drivers behind recent market changes?
Malaysia is expected to invest a total of US$26.23 billion to meet its defense requirements, this expenditure isdriven by the country's politically unstable location, its involvement in an arms race with Singapore, the strained relationship with Indonesia, participation in peacekeeping missions, and accumulated demand for defense equipment due to historically low levels of defense expenditure. Furthermore, the Malaysian economy is expected to record strong growth during the forecast period, enhancing the country's ability to replace obsolete weaponry.

What makes this report unique and essential to read?
The Malaysian Defense Industry Market Opportunities and Entry Strategies, Analyses and Forecasts to 2017 provides detailed analysis of the current industry size and growth expectations from 2013 to 2017, including highlights of key growth stimulators. It also benchmarks the industry against key global markets and provides a detailed understanding of emerging opportunities in specific areas.

Key Features and Benefits
The report provides detailed analysis of the current industry size and growth expectations from 2013 to 2017, including highlights of key growth stimulators, and also benchmarks the industry against key global markets and provides a detailed understanding of emerging opportunities in specific areas.

The report includes trend analysis of imports and exports, together with their implications and impact on the Malaysian defense industry.

The report covers five forces analysis to identify various power centers in the industry and how these are expected to develop in the future.

The report allows readers to identify possible ways to enter the market, together with detailed descriptions of how existing companies have entered the market, including key contracts, alliances, and strategic initiatives.

The report helps the reader to understand the competitive landscape of the defense industry in Malaysia. It provides an overview of key defense companies, both domestic and foreign, together with insights such as key alliances, strategic initiatives, and a brief financial analysis.

Key Market Issues
The Malaysian defense budget, which is estimated at US$4.4 billion for 2013, is lower than the majority of Malaysia's neighbors, with the Philippines being one of the few countries with a lower defense budget; this relatively small defense budget size frequently deters investors from venturing into the country. Moreover, the Malaysian government has also made offsets mandatory for all defense procurements exceeding US$13.2 million. In an attempt to encourage domestic defense development, the Malaysian government awards additional significance to direct offsets; however, due to the lack of sufficient investment and a shortage of skilled Malaysian labor, foreign OEMs are unable to transfer sophisticated technology to domestic defense companies. The combination of the factors outlined above reduces the attractiveness of the Malaysian defense industry for foreign OEMs.

The growth of the Malaysian defense industry is restricted by high levels of corruption and a lack of transparency throughout the military procurement process;for example, a number of contracts awarded by the Malaysian Ministry of Defense raise suspicion, as in the case of DCN, an arms manufacturer based in France, in its dealing with the Malaysian Government. DCN is accused of paying US$151.1 million as commission to a company called Perimekar, during the Scorpene class submarines deal in 2002;it is also alleged that Perimekar, the company that received this money, was established in 2001 for the purposes of receiving coercion money, and was wholly controlled by a close friend of Najib Tun Razak, the then Defense Minister of Malaysia. Although the scandal surfaced in Malaysia in 2006, no action has been taken against any people involved;an inquiry is currently in progress in the French courts.

Malaysian government policy requires all foreign defense procurements be executed by a company registered as a Bumiputera company, Bumiputera being the term used to refer to the Malay ethnic group. Bumiputera companies must be established under the Companies Act 1965, they must have a paid-up capital of at least RM25,000 (US$7,120), the shareholders must be 100% Bumiputera, and the board of directors, managerial, professional, and supporting staff must be 51% Bumiputera. As a result, the procurement of new equipment and spare parts has to be performed through domestic defense dealers;consequently, offset deals within the country are executed by local brokers rather than Malaysian government officials and, to ensure commission, these representatives ensure that the Malaysian government does not purchase domestic arms. With negligible defense exports, the domestic arms industry relies solely on contracts from the Malaysian Ministry of Defense, and the existence of defense brokers such as these damages the growth of domestic military hardware manufacturers.

Key Highlights
During the review period, Malaysian military expenditure recorded a CAGR of -1.53% and stood at a total of US$4.12 billion in 2012. Over the forecast period, the country's defense spending is expected to record a CAGR of 7.5% to reach a projected value of US$5.96 billion in 2017;this anticipated increase in defense expenditure will be driven by the fact that Malaysia is located in an unstable region, the country's involvement with Singapore in competitive arms procurement, its strained relationship with Indonesia, and its involvement in peacekeeping missions. Furthermore, to compensate for historically low levels of defense expenditure, Malaysia is expected to make a significant investment in the modernization of its armed forces over the forecast period.

Despite the global economic slowdown in 2009, Malaysian defense imports registered an annual volume increase of 191.5%. During 2007-2011, Russia was the country's largest arms supplier, followed by Germany, France, and Spain. As Malaysia maintains good relations with the world's arms supplying countries, the Malaysian defense industry is accessible to foreign companies worldwide, which is vital as, thanks to Malaysia's low defense budget and limited scope for investment in research, development, and the acquisition of new technology, the country's military industrial base is severely undeveloped, with negligible defense exports. This situation is expected to continue over the forecast period and result in Malaysia continuing to rely on defense imports;these imports are expected to be concentrated on ships and aerial surveillance systems as a result of an increased focus on combating maritime security threats.

To aid the development of the domestic defense industry, the Malaysian government encourages foreign investors to enter the country's defense industry through partnerships with domestic defense companies;consequently, a number of foreign companies have entered the Malaysian defense industry through the establishment of a wholly-owned Malaysian subsidiary, with a notable example being Rohde and Schwarz, an electronics manufacturer based in Germany, which used this entry route to enter the country in 2004. In 2010, the company formed an alliance with a domestic company; furthermore, the country hosts two defense exhibitions biennially, providing foreign manufacturers the opportunity to market and sell products within the country.

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