Key Export Markets for U.S. Defense Suppliers A quantitative - - PowerPoint PPT Presentation

PRIVATE & CONFIDENTIAL

A quantitative analysis of Vietnam

Key Export Markets for U.S. Defense Suppliers

Prepared for: EDITED FOR PUBLIC RELEASE

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Vietnam: Prioritization of maritime deterrence spurs spending on naval systems

Budget Transparency

Not Transparent Transparent

August 2016

Threat Environment and Spending Drivers GDP & Defense Spending (millions USD) Forecast Summary

Exchange Rate

21905

Defense spending growth outpaced GDP growth from 2005-2014; two rates will even out over the next five years Vietnam’s current rapid modernization plans will force O&M accounts to swell for new equipment, while personnel accounts steadily decline and investment remains steady GDP Growth

9.4%

Defense Growth

9.4%

Investment Growth

9.4%

Defense Spending Outlook Defense Accounts Outlook

• Commitment to expand maritime assets leads to marquee

acquisition projects for Vietnamese Navy — The Vietnamese Navy in 2015 received the first four of six Kilo- class submarines ordered from Russia in 2009, supplementing two Yugo-class midget submarines received from North Korea in 1997 and boosting undersea surveillance capabilities — The PAVN is also expected to receive its third and fourth Gepard- class guided missile stealth frigates in 2016 and 2017, respectively, for conducting anti-submarine warfare operations, and are in negotiation for two more — Four Sigma-class corvettes equipped with Exocet missiles from the Netherlands have been ordered in 2013, with deliveries expected beginning in 2018

• Diversification of arms supply sources

— Vietnam has mainly imported defense equipment from Russian suppliers in the past, but has begun turning to the United States and Japan for security assistance in the maritime domain — The lifting of the American arms embargo in 2014 will provide Vietnam with 25 used coast guard cutters over the next five years, and lead to the transfer of more maritime surveillance and patrol platforms through the out-years — Dutch patrol vessels, Russian anti-ship missiles, and Israeli rifles are now produced in Vietnam – possible Indian and Israeli agreements have suggested similar arrangements

NOTE: GDP is drawn from the IMF and all figures are nominal; growth rates are for 2016-2021

$- $50,000 $100,000 $150,000 $200,000 $250,000 $300,000 $350,000 $- $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000 $8,000 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Procurement GDP

• Buoyed by strong exports and foreign investment, Vietnam will likely

remain the strongest and fastest-growing economy in the ASEAN region in the near future

• State-owned enterprises (SOE) provide almost a quarter of GDP

growth, and planned structural reforms may introduce risk

Economic Outlook

EDITED FOR PUBLIC RELEASE Defense Budget

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Entrenched military production units may also affect transparent foreign supplier relations

Vietnam Armed Forces (People's Army of Vietnam) Organizational structure may obscure actual flows of influence in the defense procurement process

Arms Air Defense (Air Force) Lieutenant General Lê Huy Vịnh Border Guard Major General Hoàng Xuân Chiến Corps Military Regions

General Staff Department

Lieutenant General Phan Văn Giang

Ministry of National Defense

General Ngô Xuân Lịch

Discussion People’s Army of Vietnam Organizational Chart

• The organizational hierarchy of the People’s

Army of Vietnam (PAVN) largely follows the structural architecture of other communist governments, with the armed forces strictly subordinate to the Communist Party of Vietnam

• The president and prime minister are just

two of 21 members of the Central Military Commission, with the General Secretary of the Communist Party of Vietnam as secretary and Minister of National Defense (the country’s highest-ranked military

• fficer) as deputy secretary
• The procurement process, particularly from

foreign suppliers, is likely conducted and subject to approval at the highest levels

• The General Department of Defense

Industry, one of several “general departments” under the Ministry of National Defense, oversees a number of a state-owned domestic defense enterprises, while the General Department of Foreign Relations likely is tasked with coordinating matters related to defense and security cooperation with international counterparts General Political Department

Colonel General Lương Cường

General Logistics Department

Lieutenant General Duong Van Ra

General Technology Department

Lieutenant General Lê Quy Dam

General Department of Defense Industry

Lieutenant General Nguyen Duc Lam

General Department of Defense Intelligence

Lieutenant General Pham Ngoc Hung Navy Rear Admiral Phạm Hoài Nam

General Department of Foreign Relations

Lieutenant General Vu Chien Thang

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Under-developed domestic defense industry will prolong dependence on imports in the near-term

Vietnam Offsets & Defense Policy

Offset Policy

• The Vietnamese Ministry of Defense has not established formal defense
• ffsets requirements
• An under-developed, strictly state-owned domestic defense industry has

resulted in an historic dependence on imports, dominated by Russian sources but also increasingly open to Western suppliers in recent years

• A high reliance on imports has undermined the ability of the Vietnamese

government to demand offsets, favoring foreign suppliers

• Legislation passed in 2011 prohibits the sale of stakes in the country’s

state-owned defense sector, which effectively prevents private sector participation or foreign direct investment and therefore is likely to exacerbate the reliance on imports

• Vietnamese military customers appear to favor government-to-government

defense deals negotiated between heads of government rather direct commercial agreements

• Foreign suppliers that agree to co-production arrangements are also likely

to be preferred in future arms sales

Threshold

N/A

Obligation Percent

N/A

Indirect / Direct

N/A

Challenges Discussion

• The Vietnamese armed forces quadrupled

defense spending between 2005 and 2012 and doubled it between 2010 and 2015

• The Vietnamese naval and air forces have

benefited most from the increase in defense spending, following the identification of maritime domain awareness as a key strategic priority

• The gradual diversification of suppliers

away from Russian dominance provides significant opportunities for Western defense firms in the near- to mid-term

• Absence of clarity in procurement

strategy: the Vietnamese armed forces have not outlined a clear set of procurement priorities, with its latest national security strategy issued in 2009

• Absence of clarity in procurement process:

ambiguity in the decision-making process will likely result in confusion and inefficiencies in the near-term

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Vietnam Defense Summary

• Ambitious, double-digit year-on-year growth in defense spending over the past

decade signals commitment to upgrade defense capabilities, will persist through the forecast window

• Emphasis on maritime modernization will continue to drive spending on surface

combatants and advanced coastal and maritime surveillance systems

• Nascent, uncompetitive domestic defense industry will reinforce armed forces’

reliance on foreign imports through the near- and mid-term, historically of Russian

• rigin but increasingly from Western sources as geopolitical balance shifts
• Ambiguous, not clearly defined procurement process and strategy may introduce

uncertainty at the beginning of newly established buyer-seller relationships

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