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

PRIVATE & CONFIDENTIAL

A quantitative analysis of Indonesia

Key Export Markets for U.S. Defense Suppliers

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• Maritime security concerns surrounding the South China Sea spurs

naval modernization — The "Global Maritime Fulcrum” initiative calls for a naval procurement strategy that focuses on securing littorals and surrounding waters — Earlier this year, South Korea delivered the first of three modified Chang Bogo-Class Submarines while Indonesia proceeds with plans to modernize the KCR-60M fast attack boats

• Aging airborne fleet revitalizes need for updated squadrons to

secure sovereign airspace — Negotiations with Russia to acquire eight SU-35s continue to move forward in an effort to update aging F-5 squadrons and increase defense industrial cooperation — The US recently approved a sale of 36 AIM-120C-7 AMRAAMs to re-arm Indonesia's F-16s

• Domestic security requirements drive ground vehicle procurement

— Despite concerns from European nations, Indonesia will acquire upgraded third-gen Leopard 2 MBTs and Marder 1A3 IFVs from Germany to modernize mechanized brigades in an effort to enhance island border security

• Diversifying suppliers to access military hardware that better fits

national security needs — Relations with non-Western suppliers such as South Korea and Russia drive interest in technology transfer to develop the indigenous defense industry

Indonesia: Regional security concerns spur ambitious defense modernization plan

Budget Transparency

Not Transparent Transparent

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

Exchange Rate

13,478

Recent economic growth and regional security goals have fueled state ambitions to grow defense spending to 1% of GDP by early 2020s Naval and airborne acquisition plans to increase procurement account in the near-term, but give way to increased O&M spending as new platforms are absorbed over time GDP Growth

8.8%

Defense Growth

14%

Investment Growth

17%

• Plans to infrastructure funding and lower interest rates will boost

economic expansion while stimulating private investment and trade

• Decreasing inflation and GDP growth will promote recovery since

2015 slowdown Defense Spending Outlook Defense Accounts Outlook

Economic Outlook

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

$- $200,000 $400,000 $600,000 $800,000 $1,000,000 $1,200,000 $1,400,000 $1,600,000 $- $2,000 $4,000 $6,000 $8,000 $10,000 $12,000 $14,000 $16,000 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Procurement GDP EDITED FOR PUBLIC RELEASE Defense Budget

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Discussion

Indonesian Ministry of Defense Democratic reforms have separated the armed forces and MoD, creating a modern civilian-military dichotomy

Government & MoD Organizational Chart (June 2016) President

Joko Widodo

Minister of Defense Ryamizard Ryacudu

MoD: Ministry of Defense, Source: Indonesia: A Country Study, Library of Congress Special Advisors

• Historically, the armed forces have played

a large role in MoD policy, including procurement decisions

• In 2004, the Indonesian legislature passed

a series of reforms designed to separate the civilian government and the military

• These reforms kept the combatant

commands intact, but placed the newly- reformed MoD in charge of policy, procurement, and the budgetary process

• Reforms have had a large impact on

procurement policy and the defense industrial base—there is more emphasis

• n developing domestic capabilities while

creating a space for foreign competition when appropriate (e.g. joint ventures and technology transfers)

Secretary General Inspector General Defense Strategy Directorate Defense Facilities Directorate Defense Strength Directorate Defense Potential Directorate Defense Planning Directorate Education and Training Agency Research and Development Agency Data and Information Center Fiscal Center Codes Center Casualty Rehabilitation Center

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Newly-established offset policy indicates that growing the domestic defense industry is a priority

Indonesian Offsets & Defense Policy

Offset Policy

• Indonesia’s offset policy was launched in 2014. However, it is still waiting

for clearance from the President and provisions, such as the minimum threshold and indirect/direct contribution obligation, remain unclear

• Policy will be implemented by the Defense Industrial Policy Committee
• An initial 35% must be offset through domestic industry
• Offsets increase 10% every five years until 85% of the contract is reached
• Regulations are vague, providing little direction as to how the policy will be

applied only to suggest that joint-ventures, counter-trade agreements, and technology transfers are also viable methods to satisfy the law

• Key focus areas include (previously closed to foreign investment):
• Raw materials for explosives (foreign investment limit: 49%)
• Explosive materials and subsequent components (foreign

investment limit: 49%)

• Weapons, ammunition, explosive devices, and war equipment

(foreign investment limit not yet available)

Threshold

TBD

Obligation Percent

≥35%

Indirect / Direct

TBD

Challenges Discussion

• Traditionally, foreign suppliers dominate

imports for advanced defense requirements, however, recent investments in facilities for complex platform construction indicate that this dynamic may change

• Key procurement laws are being revised to

stimulate the creation of small and medium defense enterprises in an effort to establish a formal supply chain

• Indonesian procurement has been mired

in corruption and budget woes as the nation tries to establish a domestic industry - creating a transparent defense market will be a critical priority

• The lack of an industrial base has

previously stifled foreign investment— efforts to create a domestic infrastructure will be paramount in establishing a healthy partnership with foreign firms

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Indonesian Defense Summary

• Regional security concerns drive naval modernization, with a heavy focus on littoral
• perations and undersea warfare
• Indonesia continues to expand its relationship with non-traditional defense

suppliers such as South Korea

• 35% offset requirement aimed at growing domestic industrial base and spurring new

foreign partnerships

• Government reforms of key procurement laws will help grow small and medium

domestic defense suppliers, creating an established local supply chain

• As inflation slows and economic expansion continues, the MoD expects to

significantly grow defense expenditure to position itself as a larger power in S.E. Asia

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