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Analysis: China military growth to boost arms sales to Asia

Rescuers dangle from a helicopter during a maritime and aerial joint emergency drill at Waigaoqiao dock in Shanghai
Rescuers dangle from a helicopter during a maritime and aerial joint emergency drill at Waigaoqiao dock in Shanghai

By Rhys Jones

LONDON (Reuters) - China's military build-up is forcing its Asian neighbors to ramp up their defences, offering a new source of growth to western arms makers keen to offset belt-tightening in their home markets.

At a time when many western defense budgets are falling, China's military spending is still growing. This, along with Beijing's firm diplomatic stance on recent regional issues, has made neighboring nations nervous.

"We expect to see a sharp increase in spending on defense and security from many Asian nations who are keen to protect their borders, in part due to the growing influence of China in the region," said Adam Thomas, a spokesman for UKTI DSO, a government department which oils the wheels for Britain's 35 billion pounds arms industry.

"We've been busy meeting delegations from Asia all week. Malaysia, Japan and Korea are big markets, as is India obviously," added Thomas, speaking at last week's DSEi arms fair in London, one of the world's largest weapons shows.

China's defense budget grew by 12.7 percent to $91.5 billion this year. This follows a rise of 7.5 percent in 2010 and double-digit growth in recent years to help fund programs to develop aircraft carriers, stealth jets and surface-to-air missile technology.

The country's growing military clout has coincided with a more assertive diplomatic tone, evident in spats last year with Japan and southeast Asia over disputed islands, and in rows with Washington over trade, the yuan currency and human rights.

"Many Asia-Pacific nations are looking to defend their interests in the face of a rising China. The likes of Thailand, Malaysia and Indonesia are vying for their regional position -- they want credible defences and also to be taken seriously by China," said Guy Anderson, chief analyst at military intelligence group Jane's Defense Industry.

"Asia Pacific is right in the target zone for western defense companies now -- there are export controls but no absolute barriers -- and there have been massive marketing efforts going on in the region in the last couple of years."

Britain's BAE Systems Plc and Italy's Finmeccanica SpA, as well as U.S. firms Lockheed Martin Corp and Northrop Grumman Corp, are just a few of the defense companies pushing aggressively into the region.

China, which is now the world's second-largest economy, often points out that its defense spending pales in comparison with that of the United States -- budgeted at $553 billion for 2012 -- and that its military upgrades are for defensive purposes.

ASIAN RAMP-UP

Delegations from Japan and South Korea, who are in the market for new radar-evading fighter jets, were especially prominent at DSEi, while representatives from Hong Kong, Indonesia, Malaysia, Philippines, Singapore and Thailand were busy discussing deals.

Large groups of Asian army captains in full uniform could be seen flitting in and out of meeting rooms and stalking the exhibition halls crammed full of missiles, tanks, armored vehicles, machine guns and unmanned aircraft at DSEi, which was part-funded by the UK government.

"We've been talking to numerous delegations from Asian countries at the show," said a major U.S. defense firm executive who asked not to be named. "There's interest across the board in everything from armored vehicles to cyber security products to border control systems."

With Western defense spending being cut at a time of economic crisis, the planned end of military operations in Afghanistan will provide another headache for arms companies.

The United States - the world's biggest arms market - is cutting at least $350 billion from previous project spending, while the UK plans to reduce defense spending by 8 percent by 2015.

Such cuts mean there may not enough work to go around for western defense firms. As such, competition will be fierce to win contracts in emerging markets to make up for the shortfall.

French aero and defense company Thales expects Asia to lead the way in defense spending over coming years.

"Defense spending goes along with the economic growth of a country. I think Asia will be the top (spender)," said Thales Chief Executive Luc Vigneron. "Those markets will be addressed by many competitors...the cake will have to be shared among competitors as well as local champions."

The U.S. government is pushing hard to make sure its big defense contractors get a large piece of the action.

Washington is lobbying to help Lockheed Martin win a deal to supply Taiwan with 66 F-16 fighter jets. It is also helping Northrop Grumman to secure a contract to sell Global Hawk spy planes to South Korea - a deal which would require a waiver for an arms control pact involving about 30 countries.

"In terms of competition between the U.S. and Europe - it will be an absolute blood bath," said Jane's Anderson.

Although the Eurofighter Typhoon jet - part made by BAE Systems along with firms from Germany, Spain and Italy - is on the shortlist to be picked by Japan and Korea, BAE's emerging market radar has, in recent years, been fixed on India, which now accounts for around 12 percent of its sales.

BAE, which displayed a tank fitted with an invisibility cloak at DSEi, classes India as a 'home market' - a place where its goods are developed, manufactured and serviced.

This is a model that emerging market nations are keen to replicate to help develop their own defense industries.

"Asia is -- probably all of Asia, not just north or south," Lockheed Martin's Vice President for international business development said.

(Editing by David Cowell)

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